2003 JAPAN LAW: BANKRUPTCY
Keywords: Bankruptcy, Corporate Law, Guarantees
Copyright 2004. All rights reserved Attorney Roderick H. Seeman
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Some are calling the reliance on personal guarantees of corporate debts, particularly for small corporations,   a violation of human rights in Japan. Instead of relying on an analysis of the financial condition of the companies, the banks are instead relying on guarantors when they make loans to small corporations. When the corporations fail, a particular problem in recent years, the banks turn on the guarantors. Seizure of private homes, suicides and heart problems are the result. A survey by the Small and Medium Enterprises Agency found that 86.8% of firms with employees of 30 or fewer received loans only with personal guarantees, while this was the case in 30% of cases for companies with 300 employees or more. Creditors can seize everything apart from clothing, furniture and kitchen ware and a minimal 210,000 yen in cash. The government has announced plans to introduce new legislation to increase this to 900,000 yen. Yet many believe that some of the suicides are not just due to their own business failure but the troubles brought on to others by the failures and the guarantees. In contrast to the USA where about half of all those pushed into personal bankruptcy based on business failure were able to restart their business, the same figure in Japan was 13.7%. Many contrast this with massive bailouts for the big firms like Daiei Department Stores and the big banks themselves. Others note however, that because of the guarantees, banks charge only 2% interest and that without them the banks would have to charge the small firms well over 10%.

In one recent case, in October 2003, the Tokyo District Court ordered the 91 year old former chairman of the Sogo Group to pay 12.8 billion yen due to  Mizuho Bank’s execution on the personal guarantee the chairman had given on bank financing in December 2000.  The same court had issued an order canceling a sale of some land held by the chairman to a relative, made just prior to the company’s filing for corporate rehabilitation, with the court saying it was an attempt to avoid the collection of the debt. The Chairman defended that when he signed the guarantee, the bank officials assured him that it was just a formality and the bank would never make trouble for him.

In early June 2003 Prosecutors filed their first case of criminal fraud against the president of hotel-entertainment firm Holidaytower, which sought  protection under the corporate rehabilitation law in May 2002. The company had 43.4 billion yen in liabilities at that time. Around the same time it is believed that the former president of the company and a CPA for misappropriating about 61 million yen of company assets for themselves.  It may have been the first, but shortly thereafter, in late the June, the former president of Wakodenki was arrested in June for bankruptcy fraud. Prosecutors claim that he hid 50 million yen in company assets for himself around the time the company filed for corporate rehabilitation. The Osaka based company failed with 30 billion yen in debts.