COVID-19 Legal Issues in Japan - Q&AAug 2020
|Update||Aug 11, 2020|
The spread of COVID-19 is continuing worldwide, and this has had an unprecedented impact in Japan and overseas.
There are many legal issues related to COVID-19. To assist clients in their efforts to prevent COVID-19 infections, AMT has provided a Q&A on various legal issues.
The Q&A will be added to and updated as needed.
We are constantly collecting the latest information in order to provide our clients with prompt and diversified advice. In particular, in light of the recent need to closely monitor developments overseas, including in Europe, North America and other Asian countries, we are also able to tackle the many complex cross-regional legal considerations raised by this international pandemic through close cooperation with our overseas offices and our partnerships with external law firms.
A. Issues that should be considered from the viewpoint of the Business Continuity Planning (“BCP”) and Personnel Management in light of the possibility that the spread of the coronavirus infection is likely to continue for an uncertain period of time are as follows.
Therefore, it is essential to establish a system to promptly confirm the safety of employees in an emergency situation, including when a state of emergency is declared in accordance with the Novel Flu Special Measures Act. So, companies should acknowledge that the establishment of a communication system and a communication network and the introduction of a safety confirmation system should be promoted as a minimum requirement.
Depending on the type of work involved, companies should also consider establishing a communication system and a communication network to develop a safety confirmation system for, not only employees but also companies and individuals involved in the companies’ business, such as affiliated companies, dispatched workers and partner companies.
The “Act on Special Measures concerning Countermeasures against Novel Influenza, etc.” (the “Novel Flu Special Measures Act”) was amended on March 13, 2020 and was enforced on the 14th of the same month. Pursuant to this amendment, the novel coronavirus infection has been included within the scope of a Novel Influenza, etc. as stipulated in the Novel Flu Special Measures Act. Article 32 of the Novel Flu Special Measures Act provides that a state of emergency may be declared when a situation is found to have occurred in Japan that has or is likely to have an enormous impact on the lives of the people and the national economy due to the nationwide outbreak and rapid spread of a Novel Influenza, etc. In the event of such a situation, companies are required to take appropriate measures after confirming the implementation area and other details of the declaration.
An optimized personnel system is required for the maintenance of critical business operations. For example, if there is an urgent need to maintain critical business operations and there is a shortage of human resources in those operations, it is necessary to make a decision to suspend personal transfers from such critical operations while having proper personnel continue to engage in those operations, and to promptly dispatch support personnel to such critical operations at an early stage.
On the other hand, if there is a situation where a personnel transfer to a certain critical business operation is a hindrance to the maintenance of other critical operations, suspension of such transfer should be considered.
In an emergency situation such as when the novel coronavirus infection continues to spread, it is necessary to establish a system that enables the continuation of critical business operations (i.e. core business). Since the resources necessary for maintaining critical business operations are to be invested, special consideration should be given to, for example, minimizing periodic personnel transfers and reorganization scheduled before the spread of infection so as not to cause confusion or stagnation, in order to establish an emergency response system for employees and ensure that it functions effectively.
- Please refer to Q5.
- As the outbreak of the novel coronavirus infection continues to spread rapidly, it is advisable to postpone recruitment presentations; extend the deadline for entry sheets; or take any other relevant measures. Or, from the perspective of investing the resources necessary to maintain critical business operations, one of the options could be to postpone recruitment activities and focus on maintaining critical business operations first.
- In an emergency situation, it is important for companies to share information with their suppliers, consumers, shareholders, citizens and local governments, not to mention last but not the least, its employees. In addition, depending on the situation in particular, it is necessary to promptly share information on the safety of employees’ lives and health, and to establish a system that enables the top management to make decisions clearly and communicate such decisions promptly.
A. In the event that the novel coronavirus infection were to occur in a company or in a building in which a company is located, or in the event that a state of emergency is declared in accordance with the Novel Flu Special Measures Act, it may be necessary to issue an order for the employees to go home and stay at home as part of the safety consideration obligation from the viewpoint of preventing the spread of the infection. The safety consideration obligation (under Article 5 of the Labor Contract Act) is an obligation to give necessary consideration to enable workers to work while ensuring the safety of their lives and bodies.
A judicial precedent also states that it is “an obligation to give consideration so as to protect the lives and bodies of workers from danger in the course of using places, equipment or instruments, etc. installed by the workers for the purpose of providing labor or in the course of providing labor under the instruction of the employer” (Supreme Court, judgment of April 10, 1984 (Hanrei Jiho No.1116, P33)).
Therefore, in the event of an emergency, if a company collects necessary information and after a timely and appropriate evaluation, concludes that it is appropriate to promptly have its employees go home and order them to stay at home instead of coming to work, the company should immediately issue an order to its employees to go home and stay at home until further instructions are given.
Obligations to pay wages, etc. in the event of issuance of an order to go home or an order to stay at home will be determined as specified in Q3.
A. Depending on the cause of the absence, an employer’s obligations to pay wages in the event of its employees being absent from work are classified as follows:
|Cause of leave of absence|| Payment obligations
under the Civil Code
Article 536 of the Civil Code
| Obligation to pay allowances
for leave of absence
Article 26 of the Labor Standards Act
|Due to force majeure||× (No)
Article 536, Paragraph 1 of the Civil Code
|Due to operational or
Article 536, Paragraph 1 of the Civil Code
|Due to intentional act or
anegligence on the part of the employer
Article 536, Paragraph 2 of the Civil Code
- ＜Leave of absence due to force majeure＞ If the employee is instructed to be absent from work due to a force majeure event, the company is not obligated to pay any wages to its employees (Article 536, Paragraph 1 of the Civil Code), nor is it obligated to pay any allowances during the leave of absence period (Article 26 of the Labor Standards Act). According to the “Q&A on Coronavirus Disease 2019 (COVID-19) (Information for the Companies)” (April 17, 2020 version) posted by the Ministry of Health, Labor and Welfare, in order for an event to qualify as an event of force majeure, the two following requirements must be satisfied:
- (1) the cause of that event is an accident that has made business operations difficult and has occurred outside the business; and
- (2) that event is an accident that cannot be avoided even with the utmost care taken by the employer as an ordinary manager.
In addition, in relation to the factor in (2) above, the Q&A states that the employer is required to have made the utmost effort to avoid imposing the leave of absence, taking into consideration individual and specific circumstances. For example, if an employer intends to implement the leave of absence based on the reason that overseas suppliers have suspended their business due to the spread of COVID-19, in making such a judgment call, it is necessary to comprehensively consider the degree of the company’s dependence on such suppliers, the possibility of other alternative means of obtaining supplies, the period after the suspension of business, and specific efforts taken by the employer to avoid imposing leaves of absence on its employees.
The above Q&A also states, “For example, in cases where it is possible to have employees engage in work by pursuing alternative options such as working from home, and if it is determined that the employer has failed to make best efforts that should be made as an ordinary employer to avoid imposing leaves of absence on its employees by fully considering such alternative measures, the employees’ leaves of absence may then fall under the category of “leave of absence for reasons attributable to the employer”, and the employer must pay for such leaves of absence.”
Therefore, employers must be aware that the declaration of a state of emergency, a request or an instruction based on the Novel Flu Special Measures Act do not necessarily exempt them from the obligation to pay allowances for leaves of absence under the Labor Standards Act.
- ＜Leave of absence due to operational or administrative difficulties＞ If the employees are placed on leaves of absence due to a cause that can be said to have occurred due to the employer’s incapacity (operational or administrative difficulties), the employer is not liable to pay 100% of the employees’ wages (Article 536, Paragraph 1 of the Civil Code), unless there is an intentional act or negligence on the part of the employer or any cause that could be deemed to be equivalent to the same by virtue of principles of good faith and trust. However, the employer must pay allowances for leaves of absence amounting to at least 60% of the employees’ average wages (Article 26 of the Labor Standards Act). For example, difficulties in obtaining funds and materials due to financial difficulties of the parent company is said to constitute a cause that can be said to have incapacitated the employer.
- ＜Leave of absence due to an intentional act or negligence on the part of the employer＞ If the employees are placed on leaves of absence due to an intentional act or negligence on the part of the employer or any cause that could be deemed to be equivalent to the same by virtue of principles of good faith and trust, the employer is, in principle, liable to pay 100% of the employees’ wages, unless otherwise provided in the rules of employment (Article 536, Paragraph 2 of the Civil Code).
This provision on risk bearing under Article 536, Paragraph 2 of the Civil Code is a voluntary provision, and its application may be excluded by a special provision. However, even if the application of Article 536, Paragraph 2 of the Civil Code is excluded by the rules of employment, payment of allowances for leaves of absence equivalent to 60% of the employees’ average wages is required because Article 26 of the Labor Standards Act is a mandatory law which will override any rules of employment in force. In light of this, if the rules of employment stipulate that “the company shall pay only 60% of the employee’s average wage in the case of a leave of absence due to a reason attributable to the company”, then in principle the company shall only be obligated to pay wages equivalent to 60% of the employees’ average wages (application of Article 536, Paragraph 2 of the Civil Code is excluded. However, in a Yokohama District Court judgment dated December 14, 2000 (Rodo Hanrei No.802, p27) (Ikegai case), it was stated that the court denied the reasonableness of the adverse modification of working conditions in the rules of employment, and ordered payment of 100% of the employees’ wages pursuant to Article 536, Paragraph 2 of the Civil Code).
A. Even if the company does not implement a period of leave of absence for its employees, due to the effects of the novel coronavirus infection, the employees may not be able to come to work because they have to look after their children since they have no place to leave their children while they can be at work (i.e. at schools and after- school care centers). Since such absence is when labor is not provided based on the personal situation of the worker, the company is not liable to pay wages for such absence (Article 536, Paragraph 1 of the Civil Code), nor is it under any obligation to pay allowances for the leaves of absence (Article 26 of the Labor Standards Act). This is where the so-called no-work no-pay principle applies.
Furthermore, there is a system to subsidize employers that allow their employees (whether regular or non-regular) to take paid leave (in addition to statutory annual paid leave) during the period from February 27, 2020 to June 30, 2020 in order to look after their children who attend temporarily closed elementary schools, special support schools, kindergartens, day care centers and authorized day care centers for children with the amount equivalent to 100% of wages paid during such leave period (up to 8,330 yen per day).
*Ministry of Health, Labour and Welfare website (in Japanese only)
In addition, even if an employee is absent from work for any of the reasons mentioned above, it will not amount to a failure in performing his/her work duties due to reasons attributable to the employee, and therefore no disciplinary action or other disadvantageous dispositions can be implicated on such an employee.
A. An increasing number of employers are introducing flexible working hours and work styles to prevent the spread of infection of the novel coronavirus. The following is a list of possible measures that can be implemented by companies to cope with the pandemic.
- Workers and employers may change the starting and finishing times of work in accordance with the rules of employment that stipulate moving up and delaying the starting and finishing times or by individual agreement. Depending on the degree of congestion caused by commuting, it is possible to introduce staggered commuting pursuant to sufficient discussions and trials between labor and management on the method of staggered commuting.
In addition, as a measure against the novel coronavirus infection, the government has established a subsidy for improvement of overtime work (telework course) to support small and medium business owners who have newly introduced telework.
As the novel coronavirus infection continues to spread, establishing a teleworking system is also an important issue to take into consideration. According to the “Guidelines for the appropriate introduction and implementation of off-site work using information and communications technology” issued by the Ministry of Health, Labor and Welfare, teleworking refers to the “off-site work carried out by workers using information and communications technology” and includes homeworking, satellite office working and mobile working. The use of information networks is a prerequisite, so it is essential that the infrastructure for information networks is fully established. Short-term telework can be handled by business orders, but considering medium- to long-term situations, rules including time management should be established as soon as possible to ensure a smooth transition to telework (See the “Guidelines concerning measures employers should take to adequately ascertain employees’ working hours” (established on January 20, 2017) issued by MHLW), and problems should be sorted out and solved by conducting tests in preparation for emergencies (See the “Guidelines for appropriate labor management in telework” and the “Q & A on Labor Management for Introduction of Telework” both issued by MHLW)
When introducing the flextime system, it is necessary to stipulate in the rules of employment or any similar rules that the starting and finishing times shall be determined by the workers themselves, and to stipulate in a labor-management agreement the scope of eligible workers, the settlement period, the total working hours during the settlement period, and the standard daily working hours, etc., in accordance with Article 32-3 of the Labor Standards Act.
The flextime system is a system in which the starting and finishing times of work can be determined by workers. Under the flextime system, the settlement period and the total working hours during that settlement period are stipulated in a labor-management agreement, and workers can decide on the starting and finishing times so that working hours per week on average during the settling period do not exceed the legal working hours and, as a result, they can work efficiently while maintaining a balance between their personal lives and work. For example, companies can divide workers’ daily working hours into hours that they must work (core time) and hours that they can come to office or go home at any time during those hours (flexible time), or companies can make all of the workers’ working hours flexible. Or, in combination with telework, workers can work longer hours on office days while working shorter hours on telecommuting days to spend more time at home.
A. Considering the impact of the spread of the novel coronavirus infection on businesses, it is conceivable for companies to integrate or abolish their offices (selection and optimization of existing businesses) in their management decisions. We will examine the problems related to the integration and abolition of offices etc.
If an office is abolished, employees who worked at the office will be transferred to other appropriate offices. Generally, the rules of employment or other similar rules provide the basis for a transfer order and a transfer order may be issued in accordance with such rules. However, attention must be paid to the possibility that the transfer order may become an abuse of right and therefore invalid from the perspective of
- (1) existence of a business necessity,
- (2) existence of an unjust motive or purpose, or
- (3) existence of disadvantages which greatly exceed the level that an employee should normally suffer
(Article 3, Paragraph 5 of the Labor Contract Act; Supreme Court judgment of July 14, 1986 (Hanrei Jiho No.1198, p149))
Employees who do not comply with transfer orders will eventually have to be considered for dismissal. In this case, dismissal may be disciplinary dismissal by reason of violation of transfer order or ordinary dismissal by reason of redundancy (seiri kaiko). Of these, disciplinary dismissal requires reasonableness based on the premise of the validity of the transfer order. The effectiveness of ordinary dismissal by reason of redundancy that are not based on reasons attributable to employees will be determined comprehensively by considering the following four factors:
- (1) reasonableness of management judgment for the abolition of the office (namely, the necessity to reduce surplus personnel),
- (2) efforts to avoid dismissal,
- (3) reasonableness of personnel selection, and
- (4) adequacy of procedures.
- Meanwhile, some transfers are subject to restrictions under a labor contract, and it is not possible to order a change of work place of an employee whose work place is limited by his/her labor contract. In such a case, the company should first sufficiently explain the necessity to change his/her work place to the employee, hear his/her wishes and then inform him/her about the change of the work place. There is no problem if the employee agrees to the change of his/her work place, but if he/she does not agree and the office is abolished, the employer will have no choice but to consider dismissal in the same way as (2) above.
A. In a situation where a significant decline in business performance is expected to continue for the foreseeable future due to the impact of the novel coronavirus infection, it is conceivable that even if companies make every effort, they might fall into a severe situation in terms of financing and other aspects of business. In such a case, wage cuts may be considered as a measure to control the situation. However, wage cuts that are not based on leaves of absence due to closure of business or employees’ personal reasons are not something that an employer is free to make unilaterally. Such wage cuts must be made with the sincere agreement of the employee (Article 8 of the Labor Contract Act), or in the absence of such an agreement, by following the procedures such as to make reasonable amendments to the rules of employment (wage regulations) (Article 10 of the Labor Contract Act).
A. According to the Ministry of Health, Labor and Welfare, 58 students who were planning to be employed this spring had their job offers rescinded by 23 companies due to the spread of novel coronavirus infection as of April 19, 2020.
In this regard, once a job offer has been accepted by a candidate, a labor contract with a right of early termination reserved is considered to be in effect even before the date of commencement of employment. The“Q & A on Coronavirus Disease 2019 (COVID-19) (Information for the Companies)” (April 17, 2020 version) posted by the Ministry of Health, Labor and Welfare also explains that once a job offer has been accepted by a new school graduate, any cancellation of a job offer that lacks objectively reasonable grounds and is not considered appropriate in general societal terms is invalid. In particular, when the reason is the significant deterioration of management due to the spread of novel coronavirus infection, it is not the fault of the prospective employee, and therefore the legality of the cancellation of the job offer should be determined strictly and careful actions are required to be taken.
If a company intends to terminate a job offer or postpone the date of employment of a new school graduate, it is necessary to notify “Hello Work” and the school of the new graduate in advance using a prescribed form (Article 54 of the Employment Security Act; Article 35, Paragraph 2, Items 2 and 3 of the Ordinance for Enforcement of the Employment Security Act; and the Guidelines on the Employment of New School Graduates).
A. First, in order to secure employment, companies should make utmost management efforts and proactively utilize various subsidies. However, there may be a case where companies have no choice but to consider terminating the employment of fixed-term workers or undertake dismissal for redundancy of such workers in the middle of their employment term due to a significant deterioration in its business management.
Generally, the employment of fixed-term employees such as contract employees, part-timers and casual staff can be terminated at the expiration of their term.
However, (1) if such fixed-term labor contract has been renewed in the past repeatedly and can be regarded as being the same as a labor contract with no fixed term in general societal terms, or (2) if there is a reasonable reason for such workers to expect that the fixed-term labor contract will be renewed, employment cannot be terminated simply because the contract term has expired, and the validity of such termination will be determined based on strict criteria similar to the doctrine of abuse of right of dismissal (Article 19 of the Labor Contract Act; Supreme Court judgment of July 22, 1974 (Hanrei Jiho No.752, p27); Supreme Court judgment of December 4, 1986 (Hanrei Jiho No.1221, p134).
Dismissal of fixed-term workers not upon the expiration of the contract term but “in the middle of” the term is not permitted unless there are “unavoidable circumstances” (Article 17, Paragraph 1 of the Labor Contract Act). In this context, the term “unavoidable circumstances” refers to the occurrence of a situation that is so serious that continuing employment until the expiration of the term of employment is considered to be unjust or unfair, and it is construed more strictly than the dismissal requirements under the doctrine of abuse of right of dismissal (Article 16 of the Labor Contract Act) in labor contracts with no fixed term, and a careful handling of the matter is required.
A. First, in order to secure employment, companies should make utmost management efforts and proactively utilize various subsidies. However, there may be a case where companies have no choice but to consider dismissing their employees due to a significant deterioration in management of its business. Since those dismissals for redundancy are not based on reasons attributable to employees, their effectiveness will be determined by comprehensively considering the following four factors: (1) necessity of personnel reduction, (2) efforts to avoid dismissal, (3) reasonableness of personnel selection, and (4) adequacy of procedures (see Article 16 of the Labor Contracts Act.).
Necessity of personnel reduction
|It is unavoidably necessary for the reasonable operation of the company (The need to reduce the number is recognized).|
Efforts to avoid dismissal
|To make sincere and reasonable management efforts to avoid dismissal in the individual and specific circumstances of each company.|
|To select workers subject to dismissal for redundancy based on non-arbitrary, objective and reasonable criteria.|
Adequacy of procedures
|In undertaking dismissal for redundancy procedure, to give full explanations and consult with employees and labor unions about the company’s situation (necessity of personnel reduction), background (efforts to avoid dismissal), selecting criteria, etc.|
A. Under Japanese law, companies have an obligation to consider the safety of their employees (Article 5 of the Labor Contracts Act). As such, if an employee is confirmed to be infected, it would be necessary to take certain measures in cooperation with the relevant local public health center, such as identifying any infected persons and any close contacts, giving instructions to employees to work from home and to monitor their health, disinfecting work areas and common areas, notifying everyone in the company of the situation, and closing the office for a certain period.
Furthermore, there is the question of whether or not a company should disclose to the public the fact that its employees have been found to be infected. Public disclosure is not required by law, but an examination of the responses of various companies shows that the number of cases of companies making public disclosures has been increasing since February 2020.
Specifically, in some cases, after confirming cases of infection, some companies have disclosed the following information and have continued to update such information as necessary:
- (1) the date of confirmation of the infection;
- (2) the name and location of the building where the infected person was discovered;
- (3) the attributes of the infected person (regular employee or temporary employee, or employee of a group company, etc.);
- (4) the circumstances of the infection (event participation, etc.);
- (5) the number of infected persons;
- (6) whether or not the person was engaged in the business of contacting customers;
- (7) the status of the infected person after the infection; and
- (8) the status of the company's measures after the confirmation of the infection.
A. In response to the former outbreak of severe acute respiratory syndrome (SARS) (in 2002–2003) and the Great East Japan Earthquake (in 2011), many companies have established Business Continuity Plans (i.e. procedures that enable companies to continue and quickly restore their core businesses in the event of an emergency, such as a natural disaster, terrorism, or serious infectious disease, etc.; hereinafter referred to as "BCP").
Before activating a BCP in the current COVID-19 pandemic, it is necessary to understand the characteristics of the risks of infectious diseases, including COVID-19. Unlike natural disasters such as earthquakes and fires, infectious diseases do not directly damage corporate facilities, means of communication, and various types of infrastructure, but instead cause losses in manpower (eg. employees, business partners and customers). Specifically, (1) companies’ workforces are reduced due to infections and measures to prevent the spread of infections, (2) the spread of infections in Japan and overseas has resulted in the disruption of supply chains, which has had an impact on business activities, and (3) even if employees and customers are not infected with the COVID-19 virus, businesses such as hotel businesses, restaurants and other hospitality businesses may face financial difficulties due to a loss of customers.
With regard to (1) above, in the event that an infection is discovered at your company, it is important to establish an emergency task force in line with the BCP and take initial measures to prevent the spread of infections as described in Q1 above. In addition, regardless of whether or not cases of infection have been found at their premises, many companies have implemented teleworking or have established or utilized IT systems which facilitate teleworking, in order to enable the continued utilization of their manpower, and have made public announcements to that effect on their websites. There are also some companies that have not experienced any significant impact on their core businesses in Japan at present (as of April 13, 2020) due to their implementation of teleworking.
Regarding (2) above, with Europe and the United States becoming the center of COVID-19 infections and with various governments all over the world declaring states of emergency, it has been reported that many overseas plants will be closed or temporarily shut down. For example, Japanese manufacturers that are expanding globally need to ensure a smooth supply of materials and parts from upstream to downstream in their supply chains in line with their BCPs in order to protect their core businesses, and also need to consider alternative suppliers in order to prevent supply chain bottlenecks from forming. In addition, it is uncertain how the COVID-19 situation in Japan will develop, and so it is necessary to prepare for any possible shutdowns of domestic supply chains.
In relation to (3) above, in the event that a company suffers a serious loss of customers and there is a risk of falling into financial difficulties, it is necessary to follow the BCP and make financial projections for the future, secure working capital for the time being as a financial measure (companies may wish to consider using the emergency loan systems and credit guarantee systems offered by government-affiliated financial institutions), make efforts to pay suppliers and salaries, and consider measures for business restructuring (companies may wish to consider using the special consultation services provided by the Chambers of Commerce and Industry and the Societies of Commerce and Industry).
(Please refer to the pamphlet "To Business Operators Affected by COVID-19" (Japanese only) , which is prepared by the Ministry of Economy, Trade and Industry ("METI") on how to deal with damages to supply chains as described in (2) above, and for assistance in improving cash flow and the business environment for companies described in (3) above. Regarding any other assistance measures offered by METI, please refer to its website titled “METI’s Support Measures for Companies Concerning the Impacts of the Novel Coronavirus Disease”.)
On April 7, 2020, Japan declared a state of emergency in seven prefectures (Tokyo, Kanagawa, Chiba, Saitama, Osaka Prefecture, Hyogo and Fukuoka) based on the revised Act on Special Measures for Pandemic Influenza and New Infectious Diseases Preparedness and Response, which is currently set to last until May 6, 2020. Although the government’s requests for people to refrain from going out and to restrict the use of facilities are not mandatory, the future remains uncertain. Therefore, in addition to (1) above, we believe it is necessary for companies to diagnose, maintain and renew their BCPs on the assumption that your company may experience (2) and (3) above and your other core businesses may be damaged.
A. You should approach the financial institution(s) to request for a grace period for repaying the principal (i.e. reschedule the payment) and engage in discussions with them to come to an agreement. Financial institutions will typically only agree to reschedule the payment of the principal if you agree to continue making interest payments.
In response to the effects of COVID-19, on March 6, 2020, the Financial Services Agency issued a statement to all public and private financial institutions, stating that "Financial institutions should promptly and flexibly respond to changes in the terms of repayment of existing debts, including principal repayments and interest rates, while carefully following up on the situation of business operators. In addition, financial institutions should also report on the status of these measures." Financial institutions are expected to take measures in accordance with the FSA’s statement.
In addition, at a press conference held on March 28, 2020, Prime Minister Shinzo Abe announced the following guidelines: "Following this press conference, the Novel Coronavirus Response Headquarters will be convened and instructions will be given on the formulation of emergency economic measures. This is unprecedented since the collapse of Lehman Brothers, but we will compile a supplementary budget for the next fiscal year and submit it to the Diet as soon as possible. We intend to formulate and implement an unprecedentedly powerful policy package by mobilizing all kinds of policies, including reductions and exemptions of national and local taxes and financial measures.", "We have already implemented bold funding support measures for small and medium sized businesses, such as the provision of interest-free loans without collateral and the deferment of principal payments for up to five years. We will make this interest-free loan available to private financial institutions as well (Prime Minister’s speech)." It is hoped that these measures will lead to an early improvement in the financial status of business operators.
In general, the following points should be taken into consideration when negotiating with financial institutions.
- • Although it is uncertain when the COVID-19 pandemic will end, it is necessary to obtain a full understanding of the prospects for business continuity through measures such as closing or downsizing unprofitable businesses and reducing fixed costs.
- • When requesting for the rescheduling of payments from multiple financial institutions, it is necessary to take measures to ensure there is no unfairness among the financial institutions and to disclose sufficient information on your business conditions to each financial institution.
- • In order to negotiate with financial institutions on the repayment of debt obligations in a manner that gives due consideration to fairness, impartiality and transparency and that minimizes the risks of deposit offsets and enforcement of security interests, in many cases, lawyers represent the debtor company in negotiations with the financial institutions, including sending "stand-still" notices to the financial institutions to the effect that the debtor company will temporarily cease making principal repayments and the financial institutions should refrain from collecting the debts (set-offs, exercise of security interests, filing of petitions for bankruptcy, etc.), and proposing restructuring plans. In particular, when it is necessary to stop not only principal payments but also interest payments to a financial institution, or when it is necessary to request for the discharge of debts, it is appropriate to promptly consult with a lawyer. AMT has a wealth of experience in assisting with such cases.
- • Taking into consideration factors such as the fairness, impartiality and transparency of procedures, advantages in tax treatment, and the economic rationality of financial institutions, it is desirable that the debt restructuring negotiation with financial institutions be conducted through officially systematized out-of-court workout procedures, such as "Financial Restructuring ADR" or "Small and Medium Enterprise Financial Restructuring Support Council" procedures, with lawyers acting as representatives. However, in cases where it is difficult to find the time and money required for utilizing the systematized procedures, in many cases, a lawyer acting as a representative will not follow the aforementioned official procedures but simply initiate negotiations with the financial institutions in a fair and impartial manner and request the rescheduling or discharge of debts (so-called "pure out-of-court workouts").
- • Negotiations for out-of-court workouts with financial institutions are carried out in strict confidence with creditors other than financial institutions. This is because it is assumed that in out-of-court workouts with financial institutions, the risk of business deterioration and damage will be minimized if payments to creditors other than financial institutions can continue to be made in full (especially to trade creditors such as vendors). Consequently, out-of-court workouts with financial institutions generally require that there is a likelihood that the company being restructured is able to pay for its liabilities other than those owed to financial institutions (accounts payable, salaries, retirement allowances, taxes, public dues, etc.). If there is no prospect for the payment of accounts payable, it may be necessary to consider filing a petition for civil rehabilitation, etc.
- • In the case of out-of-court workouts with multiple financial institutions, such out-of-court workouts cannot be made by way of majority vote, and it is instead necessary to obtain the consent of all the financial institutions.
- • It is necessary to fully explain to and seek the understanding of financial institutions regarding the fact that it would be more favorable to them (from an economic rationality viewpoint), in terms of the ultimate repayment amounts and repayment rates, for your company to continue operating your business while undergoing financial restructuring rather than to liquidate your business and close the company now.
A. If you are experiencing cash flow problems and it is difficult for you to pay taxes and public dues by the due date, you may wish to consult with the tax office etc. and request to make payments in installments.
In addition, there is a payment postponement system for the payment of national taxes and employees' pension premiums, etc. (National Tax Agency website (in Japanese only)), so you may wish to consult with the relevant tax office and pension office (Japan Pension Service website (in Japanese only)). (Even if you do not meet the eligibility requirements for the aforesaid system, you may still wish to make a separate request to make payments in installments.)
As mentioned above, in response to the effects of the COVID-19 pandemic, the Government of Japan has announced that it will implement measures on an unprecedented scale, including the handling of taxes and public dues. It is therefore hoped that the Government of Japan will continue to pay close attention to the details and trends of these measures, and utilize them as much as possible to improve the financial conditions of business operators in Japan.
A. In cases where it is difficult to resolve problems through discussions with financial institutions due to time constraints or tight finances, or due to the disapproval of financial institutions, you may wish to consider legal insolvency proceedings supervised by the courts.
A typical example of a court-led reorganization is the "civil rehabilitation proceeding". Civil rehabilitation proceedings are available to any legal entity. In other words, it can be used not only by joint stock corporations (kabushiki kaisha), limited liability companies (yugen kaisha), or limited liability companies (godo kaisha), but also by any legal entity such as medical corporations, educational corporations, or general incorporated associations.
With the spread of COVID-19, there are concerns that companies in a variety of industries will face difficulties and predicaments. However, civil rehabilitation proceedings can be used in any industry.
The key points of civil rehabilitation proceedings are as follows.
- • The amount of advance payment to the court in filing the petition depends on the court of jurisdiction and the total amount of liabilities. For example, in the Tokyo District Court, if the total amount of liabilities is between 1 billion yen and 5 billion yen, you will need to pay 6 million yen in principle. In addition, you will also have to pay professional fees, such as the legal fees of the lawyer making the petition.
- • Upon the filing of a petition for civil rehabilitation proceedings, in principle, the settlement of any debts arising from causes that exist up to the day immediately preceding the date of filing of the petition (“Old Debts”) is prohibited and temporarily suspended. In this sense, cash flow is temporarily improved in relation to Old Debts (however, consideration should be given to the possibility that financial institutions will offset deposits against Old Debts). On the other hand, the petitioner is not exempted from paying its debts arising from causes that occur on or after the date of filing of the petition (“New Debts”). In some cases, the petitioner may find that some trade creditors may require the petitioner to take certain measures such as shortening payment maturities, making simultaneous cash payments (eg. cash on delivery), or paying deposits in order to continue transacting with them.
- • In civil rehabilitation proceedings, in principle, the current management (i.e. officers) will continue to perform their duties in civil rehabilitation proceedings. However, as certain important acts are subject to the permission of the court or the consent of a supervisor, who is a lawyer appointed by the court, the management will perform their duties under the supervision of the court or the supervisor. In the event of any problematic conduct by the management, the court may appoint a trustee, in which case the trustee will conduct the civil rehabilitation proceedings from then on.
- • In civil rehabilitation proceedings, it is necessary to formulate a civil rehabilitation plan and obtain the approvals of the majority of the ordinary unsecured creditors and confirmation by the court. Usually, the debtor company will plan to undergo rehabilitation by selecting a “sponsor” who obtains the debtor’s business through a transfer of business, company split or issuance of new shares, etc. After the court’s confirmation becomes final and binding, payments to the creditors may be made based on the rehabilitation plan. According to the standard schedule of the Tokyo District Court, it will take five months from the filing of the petition to the approval of the rehabilitation plan. If the petitioner’s business is deteriorating rapidly, it is possible for the petitioner to quickly transfer the business to the sponsor if permitted by the court even before formulation of the rehabilitation plan.
- • In the case of out-of-court workouts with financial institutions as mentioned above, creditors other than the targeted financial institutions are not subject to the workouts and will therefore be paid 100% as per normal. In civil rehabilitation proceedings, however, creditors' claims are, in principle, reduced and paid according to the rehabilitation plan. The repayment rate is determined based on a comprehensive review of various factors such as the amount of support received from the sponsor and, if there is no sponsor, the amount of proceeds that can be expected from the voluntary restructuring. As a general rule, the same repayment rate is uniformly applied to ordinary unsecured creditors. In exceptional cases, trade creditors may receive 100% repayment, but this is limited to cases where the petitioner’s cash flows can be estimated and certain conditions are met.
- • In civil rehabilitation proceedings, labor and tax creditors are protected as preferred creditors (i.e. claims with general priority). In other words, since labor claims and tax claims cannot be reduced under the rehabilitation plan, it is necessary to set targets for the payment of salaries, retirement benefits, taxes and public dues.
- • In civil rehabilitation proceedings, creditors who hold security interests may in principle exercise their security interests. Accordingly, in the case where security interests are established on material assets and such exercise of security interests is likely to cause difficulties to the continuation of the business, it is necessary to urgently consult with the security interest holders immediately after the filing of the petition for civil rehabilitation proceedings to seek an early settlement (i.e. Agreement on Right of Separate Satisfaction). In particular, if security interests have been established on material current assets such as accounts receivable and inventories, the petitioner should consider filing a petition with the court for an order to suspend the procedures for the exercise of the security interests, and enter into an Agreement on Right of Separate Satisfaction within the period of suspension.
- • In addition to civil rehabilitation proceedings, restructuring-type legal proceedings in courts also include "corporate reorganization proceedings". As stated above, civil rehabilitation proceedings are (1) available to all legal entities, (2) in principle, the current management is able to carry out the civil rehabilitation procedures, and (3) in principle, secured creditors can exercise their security interests. By contrast, corporate reorganization proceedings are (1) limited to joint stock corporations (kabushiki kaisha) and limited liability companies (yugen kaisha), (2) subject to the mandatory appointment of a trustee by the court (however, if there is no problem of illegal management responsibility and the major creditors agree, a trustee may be appointed from among the officers), and (3) subject to strict restrictions on the exercise of security interests by secured creditors. The requirements for filing a petition are generally the same for both civil rehabilitation proceedings and corporate reorganization proceedings, including the risk of inability to pay debts and the risk of liabilities exceeding assets. A petitioner should carefully consider which type of proceeding to choose based on various factors, and in particular the factors relevant to (1) to (3) above. AMT has a wealth of experience in assisting with both civil rehabilitation proceedings and corporate reorganization proceedings.
- • While the goal of civil rehabilitation proceedings and corporate reorganization proceedings is to restructure businesses, there are two types of proceedings where liquidation is the goal from the very beginning: "bankruptcy proceedings" and "special liquidation proceedings". These procedures always result in the eventual liquidation of the business and company shell of the petitioner, except that in the case of a transfer of business to the sponsor in the course of bankruptcy proceedings, the business will be assigned to and carried out by the sponsor. In civil rehabilitation proceedings or corporate reorganization proceedings, if there is a failure in obtaining the approval of the creditors by a majority vote on the proposed plan or a failure to settle debts according to the plan, the proceedings will be discontinued and bankruptcy proceedings will be commenced. Therefore, in civil rehabilitation proceedings and corporate reorganization proceedings, the petitioner’s cash flow is the most important point. In general, from before the time of filing a petition and until a certain level of restructuring is achieved, relevant procedures should be conducted while carefully examining the daily cash flow.