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4 February 2010
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Not just a haircut, but a shaved head – the radical restructuring of Japan Airlines
Japan is well-known for its extremes, in every aspect. This is particularly true in cases of the insolvency. The stigma of having failed in Japan in comparison to other countries is still so enormous that the actual figures of opened insolvency proceedings are comparatively low.

A major part of the company restructuring takes place outside of the judicial system and is pursued (if not dictated) by the banks. In doing so, a lack of transparency and persuasiveness can often be observed.
Dr. Annerose Tashiro
Annerose Tashiro
In order to shed a positive light on insolvency proceedings for participants in the Japanese economy, Japan started to modernize its insolvency regimes ten years ago hoping to illustrate that insolvency means a stay in the hospital but is by no means a death sentence. The goal was to make insolvency proceedings attractive so that they would be used. In typical Japanese fashion, elements from the US Chapter 11 and pure focused restructuring proceedings were integrated into the local model of the old German Bankruptcy Act (German abbreviation: KO (Konkursordnung)) which was adopted at the turn of the 20th century.  Judicial restructurings take account of prior proceedings, provide the self-administration by the management as a rule and facilitate considerably the discharge of security interests. However, the new Japanese restructuring law is founded primarily on the principle that the rights of the creditors can only be impaired if the owners of the ailing company suffer at least to the same degree.

In contrast to German insolvency law which protects the shareholders of an insolvent company virtually until an unknown day in the distant and uncertain future, Japanese law describes the maxim that if a company is indeed heavily indebted, the shares will be worthless too, and therefore the shareholders will not be entitled to exercise their owner rights any more. This fact makes it possible for the debtor company or the appointed insolvency administrator to collect all issued shares with authorization of the court, to reduce the capital to up to 100% and to assign it to a new third so-called sponsor, i. e. buyer. Thus, the company keeps its legal integrity and can continue as licensee or in case of a reduction of the capital to 99% even its listing on the stock exchange.

It is exactly that which seems to be provided by the restructuring plan for the biggest Japanese airline, Japan Airlines which filed for the opening of restructuring proceedings (kaisha kousei) on January 19.

The ETIC (Enterprise Turnaround Initiative Corporation), a half publicly- half privately-founded company, succeeded in convincing 25 of the biggest financial institutions, which had always been against regular proceedings, to be satisfied with a quota of 17% on the unsecured claims in advance of the filing. The ETIC will buy the non-performing loans and invest 48,000,000,000 JPY of fresh capital into the company.

The airline has 380,000 shareholders – or rather had. The restructuring plan provides that the new owner will invest 300,000,000,000 JPY of fresh capital. Over a period of three years, 15,700 jobs are supposed to be cut and within ten years, the number of affiliates will be reduced from 110 to 57. Furthermore, old age pensions (pensions which are paid at the time of retirement) are to be reduced by a third according to the plan and in the week prior to filing retired former employees, the so-called “OB” (Old Boys) agreed that they will only receive 1.5% interest on their pensions, usual in the market and not excessive interest rates. This will also apply for the current employees according to the restructuring plan. This correction of the cashplan was a condition for ETIC.

The government has announced at the end of the year that a new law will be created in case of need in order to enforce those cuts upon the OBs, should the majority of them not agree to them.

The radical cutback of the Japan Airline’s debts, however, will not help to solve the structural problem, namely that each middle-sized town in Japan has an airport to which it flies. The closing of such non-profitable routes cannot be found in the insolvency plan. It merely states that it is planned to sell 37 Boeing 747-400s by 2014.

The time schedule provides that ETIC will buy non-performing loans already in March. In July, the restructuring plan will be submitted to the Court and confirmed in August. With the authorization, the capital reduction and the assignment of new shares to the buyer can already be effected in September.

This time schedule is very ambitious, but the preparations, as well as the approval of most of the creditors to this pre-packaged plan, give hope that this can be done. In the end, however, the burden of the restructuring plan is shouldered by the Japanese taxpayer who is not going to be thrilled about it.

Dr Annerose Tashiro, Rechtsanwältin (Attorney at Law in Germany), Registered European Lawyer (London)

Berlin News
More than ten years after the Insolvency Code came into effect and in view of the biggest recession of the post-war period, a discussion about the necessity of further wide-ranging reforms has gotten under way.
Thus, the coalition agreement of the black-yellow government envisages a broad reform of the Insolvency Law. Next to the creation of restructuring proceedings for banks, the restructuring and continuation of remediable companies is supposed to be facilitated, with an underlying target of the preservation of jobs not previously outlined in the Insolvency Code. Out of court restructuring proceedings are also planned.

Dr. Volker Beissenhirtz
Volker Beissenhirtz
The Coalition will simplify insolvency plan proceedings and increase the prevalence of early restructuring of companies, particularly by amending restructuring rights. Additionally, the preferential treatment of social security funds (which was only introduced during the last period) is supposed to be abolished again, and the necessity for regulation when it comes to over-indebtedness, consumer insolvency proceedings and the selection of the administrator will be examined as well.

The last point in particular – the selection of the administrator – has been a topic of heated discussion for some time now. Accordingly, the German Chamber of Commerce Day (DIHK) has focused in his first of ten proposals on a stronger influence for creditors on the selection of the insolvency administrator for the reform of the Insolvency Law.

On the other hand, the association of insolvency administrators of Germany is urging for the creation of a Chamber of insolvency administrators and the implementation of a commonly-binding regulation concerning the access to the profession as insolvency administrator. If and to which extent such a request can be accomplished in view of the European legal framework remains to be seen. However, those considerations demonstrate clearly that the professionalization of restructuring increases – this will not be a disadvantage to the creditors, because in the end they are the ones who should benefit from improved insolvency proceedings.

Next to the increased influence on the appointment of the administrator, the DIHK claims a strengthening of the self-administration, regulations to get so-called accord interferer under control, and the possibility to implement a so-called debt-equity swap also without the consent of the shareholders of the insolvent company.

Those and further proposals which could lead to the strengthening of insolvency plan proceedings are in accordance with the proposals for modification submitted by the government coalition. This applies also to the introduction of a “protective shield” for companies for the preparation of insolvency plan proceedings, equally proposed by the DIHK, which could possibly result in regulated out-of-court restructuring proceedings.

Not only in the opinion of the DIHK, but also of the Insolvency Law Board of the German Lawyer’s Society and the Association for Restructuring TMA Germany e. V. (TMA), the improvement of the instruments of insolvency law shall be flanked by an extensive taxation indemnity of a possible restructuring profit. We have often addressed the issue restructuring and taxes in our publications and hope that despite the bleak budgetary situation a solution to the restructuring tax question can be found. Especially when it comes to restructuring companies with several subsidiaries in the federal territory, financial administration does not always act consistently – which does not necessarily facilitate the restructuring of companies and groups.

Dr Volker Beissenhirtz LL.M., Rechtsanwalt (Attorney at Law in Germany), Registered European Lawyer (London)

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