What is "Bankruptcy"? Vol.72 - Corporate Reorganization Law (12)

Treatment of Security Rights (1)

The previous description that secured creditors are forced to be incorporated into the reorganization procedure also means they are given opportunities to state their opinions about the contents of the reorganization plan. Financial institutions, which are large creditors, usually hold security such as liens. Along with having powerful sponsors, the successful turnaround of a company depends on cooperation from holders of security rights, that is large creditors, and whether they accept the reorganization plan, claim waiver, DES (Debt Equity Swap) or DIP financing (debtor-in-possession financing).

Demand system for termination of security interests

Under the Corporate Reorganization Law, secured creditors such as holders of liens can receive reimbursement only based on the reorganization plan. However, time and management cost can be wasted waiting for the formulation of the reorganization plan while retaining unutilized assets, closed sales offices, or forest in which development was derailed. This can be an obstacle for business transfer at the early stage. Therefore, the revised corporate reorganization law introduced the same system as the Civil Reorganization Law; appeal to the court for the approval of termination of security interests. This enables the termination of security interests immediately and retains the proceeds from the sale, and then reimburses based on the reorganization plan after its approval.

However, the Civil Reorganization Law and the Corporate Reorganization Law have a different purpose for the extinguishment of security interests. Under the Civil Law, secured creditors are holders of the right of separate satisfaction that allow them to sell by auction regardless of the reorganization procedure. This results in an obstacle to continue business, which needs to be avoided by the termination of security interests. On the other hand, under the Corporate Law, secured creditors are incorporated into the reorganization procedure, and therefore there is no concern about such an obstacle observed in the Civil Law. The most important purpose for the Corporate Law is rather to terminate security interests as promptly as possible.