Debt collection in Japan

The process of debt collection in Japan begins with a legal and practical assessment of the debtor, the debt evidence and the realistic recovery route. At this stage, it is important to verify the debtor’s exact name, registered address, business activity, corporate status, available assets, ongoing court cases, enforcement risks, insolvency indicators and the likelihood that the debt will be disputed. For Japanese corporate debtors, useful checks may include the Corporate Number, the name and address of the head office or principal place of business, available company data, changes in registered details and whether the documents identify the correct legal entity for court or enforcement purposes.

The evidence should also be reviewed from the perspective of Japanese proceedings. In commercial debt cases, the creditor should preserve the contract, invoices, delivery notes, acts of performed works, correspondence, payment reminders, partial payment records, debt acknowledgements, calculation of principal debt, interest or penalties, and documents showing that the goods or services were actually supplied. If the debtor is located in Japan but the creditor is foreign, the assessment should also cover the language of documents, governing law, jurisdiction clause, method of service, debtor’s place of business and whether a foreign judgment already exists.

If the debtor continues business activity, has no visible insolvency procedure and there are no enforcement obstacles that make voluntary recovery unrealistic, the creditor may start with out-of-court recovery. This stage usually includes a documented payment demand, verification of invoices and delivery documents, communication with authorised representatives, negotiations on payment, return of goods, transfer of debt, set-off, instalment schedule or another settlement solution that can be recorded in writing.

Communication with the debtor should be lawful, documented and proportionate. The purpose of the pre-court stage is to confirm the debt, clarify the debtor’s position, preserve evidence of the creditor’s demand and reach a payment arrangement where this is commercially realistic. If the debtor ignores the demand, disputes the debt without sufficient evidence, avoids service, transfers assets, shows signs of insolvency or refuses a workable settlement, the creditor should proceed to court recovery or another legally available route.

Before initiating judicial debt collection in Japan, the creditor should assess the limitation period. Under the Japanese Civil Code, a claim is generally extinguished by prescription if the creditor does not exercise the right within 5 years from the time when the creditor came to know that the right was exercisable, or within 10 years from the time when the right became exercisable. The consequences of prescription are applied only if the debtor invokes prescription in the proceedings. If the debtor acknowledges the right, a new prescription period begins from the time of acknowledgement. A demand for payment made to the debtor may postpone expiry of the prescription period for 6 months, but a second demand during that postponement does not create the same additional postponement effect. A right determined by a final and binding judgment, or by anything having the same effect as a final and binding judgment, is subject to a 10-year prescription period even if the original claim had a shorter period.

Japanese law provides several routes for judicial debt collection: ordinary court proceedings, simplified proceedings before a summary court, small claims proceedings and demand for payment proceedings. The choice of procedure depends on the amount of the claim, the debtor’s address or place of business, the quality of evidence, the need for witness examination, whether the debtor is likely to object and whether the demand can be properly served in Japan. As a general jurisdictional rule, a summary court is the court of first instance for civil claims of 1.4 million yen or less, while a district court is the court of first instance for other general civil litigation.

The ordinary court proceedings are commenced by filing a complaint with the competent court. The complaint should identify the judgment sought, the object of the claim and the facts giving rise to the claim, and the creditor must pay the court fee prescribed by law. If the complaint has no formal defect, the court designates a date for oral arguments and summons the parties.

During oral arguments, the parties present their allegations and evidence, respond to the opposing party’s allegations and submit documents or other materials supporting their position. In a debt dispute, this may include the contract, invoices, delivery evidence, correspondence, payment records, debt acknowledgement documents, calculation of the outstanding amount and documents proving the debtor’s identity or place of business.

If the case requires arrangement of issues and evidence, the court may use proceedings to narrow the points in dispute and prepare the later examination of evidence. These proceedings may include preliminary oral arguments, preparatory proceedings or preparatory proceedings by means of documents. Where the case is complex, the court may consult with the parties and develop a trial plan.

The trial plan may include time limits for arranging disputed issues and evidence, time limits for examining witnesses and the parties, expected time limits for completing oral arguments and rendering a judgment, and deadlines for filing a written answer or a written summary of allegations on a specific issue. It may also set time limits for submitting allegations or evidence on particular issues and include other matters necessary for the planned course of the trial.

If the defendant does not appear, the court may still proceed with the case. Where the defendant has not clarified an intention to dispute the claim in a written answer or other submitted document, a judgment may be rendered in favour of the plaintiff’s claim. If the defendant is required to be examined and fails to appear without good cause, refuses to take an oath or refuses to make a statement, the court may treat the plaintiff’s allegations on the matters to be examined as true.

After the trial plan or the arrangement of issues and evidence has been completed, and the case has been sufficiently developed to allow the court to decide, the court renders a final judgment. The Code of Civil Procedure provides that the court shall render a judgment within two months from the date on which oral arguments conclude, but this rule does not apply where the case is complex or other special circumstances exist.

If one or both parties fail to appear or leave the court without presenting oral arguments on the appointed date, and the court considers it appropriate in light of the status of the proceedings and the conduct of the parties, the court may render a final judgment upon the request of the interested party.

The simplified proceedings before a summary court are intended for less complex civil cases where the dispute can be handled more quickly and with fewer formalities. In this procedure, an action may be filed orally, and when filing the action it may be sufficient to state the main points of the dispute instead of preparing a fully detailed written claim.

In an action for payment of money, if the defendant does not deny the facts alleged by the plaintiff during oral arguments and does not submit allegations or evidence, the court may issue a ruling in lieu of settlement where it considers this appropriate after taking into account the defendant’s financial resources and other circumstances. Such a ruling may order payment of the claimed amount, set a payment period or provide for instalment payments, with the payment or instalment period not exceeding five years.

A party may file an objection against this ruling within two weeks from the day on which the party receives notice of the ruling. If an objection is filed within that period, the ruling loses its effect. If no timely objection is filed, the ruling has the same effect as a final and binding judgment.

During oral arguments in simplified proceedings, the parties’ arguments do not always need to be prepared in writing. After identifying the essential points of the claim and examining the evidence, the court may render a final judgment.

The small claims procedure is available in a summary court for monetary claims where the value of the subject matter does not exceed 600,000 yen. The case is designed for a simple and expeditious hearing, and the trial should generally be completed on the first day of oral argument. The examination of evidence may be limited to evidence that can be examined immediately, and the court usually renders a judgment immediately after the conclusion of oral arguments unless it finds this inappropriate.

There are important procedural limits. The plaintiff must indicate that a small claims trial is sought when filing the action and must report the number of small claims actions filed in the same summary court during the same year. A counterclaim is prohibited. The defendant may request transfer to ordinary proceedings, and the court must also transfer the case to ordinary proceedings in certain situations, including where the requirements for small claims are not met or where it is impossible to summon the defendant to the first oral argument date by a method other than service by publication.

If the court enters a judgment upholding the claim, it may set a payment period or instalment payments where this is necessary in light of the defendant’s financial resources and other circumstances; in small claims proceedings, this period may not exceed three years from the date of judgment. A party may file an objection against the small claims judgment with the same court within two weeks from service. If a lawful objection is filed, the litigation returns to the stage before the conclusion of oral arguments and then proceeds under the ordinary procedure.

The demand for payment procedure may be used for the collection of a specific amount of money, other fungible things or securities. The creditor files an application with the court clerk of the competent summary court, and the court clerk may issue the demand for payment without hearing the debtor. This route is especially useful for monetary claims supported by documents where the creditor expects that the debtor may not object.

This procedure depends on service in Japan. A demand for payment may be issued only where it can be served in Japan by a method other than service by publication. If service is impossible because the debtor’s domicile, residence, business office or other proposed place of service does not exist, the court clerk notifies the creditor. If the creditor does not propose another place of service within two weeks from receiving that notice, the application is deemed withdrawn.

The demand for payment becomes valid when it is served on the debtor. If the debtor does not object within two weeks from service, the court clerk may, upon the creditor’s petition, issue a declaration of provisional execution. The creditor must file the petition for provisional execution within 30 days from the time when it becomes permissible to file it; otherwise, the demand for payment ceases to be valid.

If the debtor files a lawful objection before the declaration of provisional execution, the demand for payment ceases to be valid to the extent of the objection. In that case, an action is deemed to have been filed at the time of the application for the demand for payment, and the case proceeds in the competent summary court or district court depending on the value of the claim. If an objection is filed after the declaration of provisional execution, the debtor may not object after the two-week period from service of the demand bearing the declaration of provisional execution has expired.

A judgment of the court of first instance may be appealed to the court of second instance within two weeks from service of the judgment document or the relevant electronic statement containing the parties, the main text, the claims and the gist of the reasons. If the first-instance judgment was rendered by a district court, the appeal is filed with a high court, and a further final appeal may be filed with the Supreme Court of Japan. If the first-instance judgment was rendered by a summary court, the appeal is filed with a district court, and a further final appeal from the district court as second instance is filed with a high court. A special appeal to the Supreme Court may be available only exceptionally, for example where a constitutional issue is involved. The decision of the Supreme Court is final and may not be appealed further.

For international creditors, recognition and enforcement of foreign judgments in Japan may be relevant where the creditor already has a final judgment from another country and the debtor or the debtor’s assets are connected with Japan. A foreign court judgment is valid in Japan only if the requirements of Article 118 of the Code of Civil Procedure are met: the foreign court’s jurisdiction is recognised under Japanese laws, regulations, conventions or treaties; the defeated defendant was properly served with the summons or order commencing the litigation, excluding service by publication or similar service, or appeared without such service; the content of the judgment and the proceedings are not contrary to public policy in Japan; and reciprocity exists.

For compulsory enforcement of a foreign judgment, the creditor must obtain an execution judgment from a Japanese district court. The action is brought before the district court having jurisdiction over the debtor’s general venue, or, if there is no such venue, before the district court having jurisdiction over the location of the subject matter of the claim or the debtor’s seizable property. The Japanese court does not review whether the foreign judgment was correct on the merits. The action is dismissed if the foreign judgment is not proved to be final and binding or if the Article 118 requirements are not satisfied.

After the judgment has become final and binding, or after the creditor has obtained another enforceable title of obligation, the creditor must initiate enforcement proceedings. A right determined by a final and binding judgment, or by anything having the same effect as a final and binding judgment, is subject to a 10-year prescription period. In practice, the enforcement strategy should be prepared before the judgment becomes enforceable, because recovery depends not only on the existence of the judgment but also on the identification of assets that can be seized in Japan.

As part of enforcement, the creditor’s claim may be satisfied through seizure of funds, claims against third parties, movable property, immovable property, securities, company bonds or income from the debtor’s assets. Enforcement against bank accounts, receivables or other claims is more effective where the creditor can identify the relevant debtor asset or third-party obligor with sufficient precision. Where the creditor cannot obtain full performance through known property, Japanese law also provides a property disclosure procedure in certain cases for a creditor with an enforceable title of obligation for a monetary claim.

Another legally available route is bankruptcy of the debtor. A creditor may petition for commencement of bankruptcy proceedings where the debtor is unable to pay debts. If the debtor has suspended payments, the debtor is presumed to be unable to pay debts. For a corporate debtor, inability to pay debts may also be assessed together with insolvency, meaning a condition in which the debtor is unable to pay its debts in full with its property. Bankruptcy should be assessed as a collective insolvency procedure, especially where ordinary enforcement is unlikely to produce full recovery or where the debtor’s assets have been transferred before enforcement.

After commencement of bankruptcy proceedings, the bankruptcy trustee may seek avoidance of certain acts in the interest of the bankruptcy estate. These may include acts conducted by the debtor with knowledge that they would prejudice bankruptcy creditors, acts prejudicing bankruptcy creditors after suspension of payments or after filing of a bankruptcy petition where the statutory knowledge requirements are met, gratuitous acts or acts equivalent to gratuitous acts conducted after or within six months before suspension of payments or filing of the petition, acts of disposing of property while receiving reasonable consideration where the statutory concealment or disposal requirements are met, and certain acts concerning security or extinction of debt to specific creditors.

Related-party transactions may be especially important because Japanese bankruptcy rules contain presumptions of knowledge for certain connected persons, including directors, company directors, executive officers, company auditors, liquidators, persons holding majority voting rights, parent corporations and certain equivalent persons, as well as relatives or persons living together with an individual debtor. A transaction should therefore be assessed not only by its date and value, but also by the identity of the counterparty, the debtor’s financial condition, the purpose of the transfer and whether other creditors were prejudiced.

The right of avoidance may be exercised by the bankruptcy trustee by filing an action, making a request for avoidance or filing a defence. It may not be exercised if two years have elapsed from the commencement of bankruptcy proceedings, and it is also unavailable when 20 years have elapsed from the date of the act to be avoided. If avoidance is successful, the bankruptcy estate is restored to its original state, which may increase the assets available for distribution to creditors and for covering bankruptcy costs.

In corporate bankruptcy, the court may also consider measures concerning the liability of officers. When an order of commencement of bankruptcy proceedings is made against a corporation, the court may issue provisional orders on the property of directors, company directors, executive officers, company auditors, liquidators or equivalent officers where this is necessary in relation to claims for damages based on their liability. The court may also make an officer’s liability assessment order upon the petition of the bankruptcy trustee or by its own authority, and such an order may become a basis for compulsory execution if it is not successfully challenged.

If you need support with debt collection in Japan, Grandliga can assist at each stage of the recovery process: assessment of the debtor and documents, lawful out-of-court demand, negotiations, preparation of a court strategy, support in ordinary proceedings, simplified proceedings, small claims or demand for payment proceedings, recognition and enforcement of foreign judgments, enforcement against assets in Japan, and analysis of bankruptcy-related recovery options. The appropriate route depends on the debtor’s status, the evidence, the limitation period, service possibilities, available assets and whether the claim is disputed.

# DEBT COLLECTION AGENCY JAPAN

03.10.2024

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