Japan: A Restructuring/Insolvency Overview

Against a backdrop of increasing financial pressure on businesses in Japan, early and effective business restructuring has become an increasingly important policy and practical issue. This article provides an overview of Japan’s existing restructuring tools, the limitations of out-of-court workouts illustrated by the Marelli case, and the framework introduced under the Early Business Recovery Act, which will be implemented by the end of 2026 (the “Act”).

The Financial Backdrop to Business Restructuring in Japan

According to the Bank of Japan, the outstanding debt of Japanese companies increased by approximately JPY110 trillion, from JPY570 trillion in December 2019 (before the COVID-19 pandemic) to JPY680 trillion in December 2025. Debt accumulated through pandemic-related financing and other support measures, together with rising costs, labour shortages and an environment of higher interest rates, is constraining companies’ ability to improve profitability and make new investments. Indeed, according to a Japanese research company, the number of corporate bankruptcies in Japan exceeded 10,000 in 2025, surpassing this threshold for the first time in 12 years. Looking ahead, an increasing number of companies may miss the opportunity to commence business rehabilitation at an early stage because their debt burdens impede profitability-enhancing business activities, and may ultimately become insolvent as cash flow deteriorates or credit confidence is lost.

Overview of Existing Frameworks for Business Restructuring

In Japan, the available methods for business rehabilitation and insolvency proceedings include in-court insolvency proceedings, such as for civil rehabilitation, corporate reorganisation and bankruptcy, as well as out-of-court workouts, such as business turnaround alternative dispute resolution (ADR).

In-court insolvency proceedings can be powerful in that, under court supervision, they impose strong legal effects on creditors as a whole, including dissenting creditors. On the other hand, the commencement of such proceedings is made public, and all claims, including trade claims, are subject to debt adjustment. As a result, in-court insolvency proceedings are relatively more likely to impair business value and profitability.

By contrast, out-of-court workouts are useful in that they are conducted privately and usually alter only financial indebtedness while limiting the impact on commercial transactions. However, because the consent of all relevant creditors is generally required in out-of-court workouts, even a small number of dissenting creditors may prevent the process from proceeding and may become an obstacle to early and smooth business rehabilitation.

Marelli’s 2022 Restructuring as a Catalyst Case

A typical example illustrating the problems inherent in out-of-court workouts in Japan was the Marelli case, in which the authors’ firm acted as counsel. Marelli, one of the world’s leading automotive parts manufacturers, had fallen into financial distress due to a decline in automobile production caused by the COVID-19 pandemic and semiconductor shortages. Marelli utilised turnaround ADR and proposed a restructuring plan to its financial creditors that included substantial debt forgiveness and debt-to-equity conversion.

Although approximately 95% of Marelli’s financial creditors supported the proposed restructuring plan, the company failed to obtain the consent of certain financial institutions. As a result, the turnaround ADR process, which requires unanimous consent, was unsuccessful.

Anticipating this outcome, Marelli immediately filed for a civil rehabilitation proceeding (more precisely, its expedited version), an in-court insolvency process, in order to implement the restructuring plan through majority approval. As a result, a restructuring plan substantially identical to the one proposed in the turnaround ADR was approved by majority vote at a historically unprecedented speed.

The Marelli case once again highlighted the inherent issue of Japanese out-of-court workouts – namely, the absence of cram-down mechanisms – and this ultimately led to the enactment of the Act.

Overview of the Act

In essence, the Act introduces cram-down and court-supervised moratorium mechanisms into the Japanese-style out-of-court workout framework, as a confidential debt restructuring process limited to financial creditors. An overview is set forth below.

Debtors and creditors subject to the proceeding

The entities eligible to utilise the proceeding under the Act (the “Proceeding”) are “business operators that are likely to fall into economic distress”. Compared with civil rehabilitation and corporate reorganisation proceedings, both of which are in-court insolvency processes, the eligibility requirements are more relaxed, allowing businesses to commence restructuring efforts at an earlier stage before their financial condition has significantly deteriorated.

The term “business operator” is not specifically defined under the Act. Foreign corporations are eligible to use the Proceeding; however, in order to obtain court involvement – namely, court approval for cram-down where unanimous consent is not obtained, or a court-ordered moratorium – the debtor must have a business or other office or their assets located in Japan.

Only financial institutions may become participating creditors under the Proceeding, and trade creditors are excluded. It should be noted that only unsecured claims may be subject to modification by majority vote.

Involvement of a third-party organisation

The Proceeding is supervised by an organisation that is “fair and neutral” (the “Third-Party Organisation”), which is a characteristic feature of Japanese out-of-court workout procedures.

Standstill request and moratorium

Promptly after commencement of the Proceeding, the Third-Party Organisation requests, in its own name, that participating creditors refrain from taking collection actions with respect to participating claims. The standstill period continues until the proposed restructuring plan is either approved or rejected, and applies to all participating claims, including secured portions thereof.

Although the standstill request is merely a voluntary request by the Third-Party Organisation and has no legally binding effect, the court may, upon petition by the debtor or a participating creditor, order:

• the suspension of ongoing compulsory execution proceedings based on participating claims; and
• the suspension of enforcement proceedings with respect to security interests securing participating claims.

Submission, voting and approval of the restructuring plan

The debtor must submit a restructuring plan within six months from the commencement of the Proceeding. The restructuring plan must include provisions setting forth general standards for modification of the rights of participating creditors with respect to the unsecured portions of participating claims, including debt forgiveness, extensions of maturity, and other modifications of creditors’ rights.

The Third-Party Organisation reviews whether the submitted restructuring plan complies with the statutory requirements. Once such confirmation is made, the debtor convenes a creditors’ meeting. Participating creditors are granted voting rights based on the amount of unsecured portions of participating claims, and the restructuring plan is approved upon the consent of creditors holding at least three quarters of the total voting rights. However, where a single participating creditor holds at least three quarters of the total voting rights, approval by a majority in number of voting creditors is also required.

Where all participating creditors consent to the restructuring plan at the creditors’ meeting, the modification of rights becomes effective immediately upon approval, without the need for court confirmation.

Where unanimous consent is not obtained, but the restructuring plan is approved by creditors holding at least three quarters of the total voting rights, the court may, upon petition by the debtor, approve the restructuring plan. An approved plan becomes binding even on dissenting participating creditors and on participating creditors that did not participate in the Proceeding.

Conclusion

By introducing a Japanese version of a pre-insolvency regime, the Act is expected to fill a long-standing gap in Japan’s restructuring toolkit and promote more timely and effective business rehabilitation. Going forward, it is expected to develop into a third pillar of Japan’s restructuring framework.