Japan’ s Financial Restructuring Reform: Forthcoming Legislation and Its Implications
By Hiroyasu Ueda and Zentaro Nihei Anderson Mori & Tomotsune
In recent years, Japan has been actively discussing reforms to its financial restructuring framework. As part of this effort, we introduce in this article two key developments in the forthcoming legislation: the Act on the Promotion of Cash Flow-Based Lending and the Introduction of a New Majority-Based Outof-Court Workout.
I. Overview of the Act on the Promotion of Cash Flow-Based Lending
10 1. Background and Purpose of the Act In June 2024, Japan enacted the Act on the Promotion of Cash Flow-Based Lending, introducing a new collateral framework called the Enterprise Value Charge( EVC). This system is scheduled to come into effect by December 2026. Traditionally, Japan’ s financing system has relied heavily on physical assets, such as real estate, as collateral. This practice made it difficult for startups and small- to mediumsized enterprises( SMEs), which often lack such assets, to access financing. Moreover, the value of a business itself, including its cash flow, intellectual property, or growth potential, was often overlooked in the lending process. The Act aims to address these issues by promoting financing practices that prioritize a business’ s operational value and future potential.
2. Mechanism of the Enterprise Value Charge
The Enterprise Value Charge( EVC) enables companies to use their entire enterprise value as collateral, including their cash flow and potential future income. This system is designed to help businesses with limited physical assets secure financing based on their operational value. Importantly, the EVC applies to a company’ s total assets rather than individual business units. The system initially limits eligibility to corporations, such as stock companies and partnerships, while also imposing qualification requirements on chargeholders to prevent misuse.
3. Execution and Impact on Bankruptcy Proceedings
The EVC’ s execution process is overseen by the courts, ensuring that business continuity is not compromised. For example, certain claims necessary for ongoing operations can be paid during the execution process. It is anticipated that the EVC will encourage smoother reorganizations to address financial challenges.
In formal bankruptcy proceedings, the EVC integrates with existing processes such as liquidation and civil rehabilitation. This tries to ensure consistency and avoids conflicts between collateral execution and bankruptcy proceedings.
4. Challenges and Future Prospects
The EVC system has not yet been implemented, and uncertainties remain regarding its practical operation. The government plans to issue detailed operational guidelines by spring 2025, but additional challenges may emerge as the system is put into practice.
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