According to LeMaster, Downey, and Brewerton's 2007 paper, Japan's current insolvency legal framework is based on several laws, including the Commercial Code, the Bankruptcy Law, the Company Reorganization Law, and the Civil Rehabilitation Law of 2000. Several sources including the U.S. Department of Commerce, the World Bank, and Ota and Tasaku, note that Japan's legal system offers five statutory insolvency procedures which can be divided in two groups: liquidation-type systems and reconstruction-type systems. Bankruptcy and special liquidation address corporate liquidation. The other three (company reorganization, civil rehabilitation and corporate arrangement) are employed in corporate reconstruction cases. As a result of a comprehensive reform of Japanese insolvency law most of the laws governing insolvency procedures in Japan were amended. Mori notes in his 2005 paper that as part of its insolvency law reform, Japan also introduced a new legal framework covering cross-border insolvency which was modeled on the UNCITRAL Model Law on Cross-Border Insolvency. There is, however, insufficient publicly available information as to Japan's compliance with the Principles and Guidelines for Effective Insolvency and Creditor Rights Systems developed by the World Bank.

General Overview

Various sources, including LeMaster, Downey, and Brewerton, the U.S. Department of Commerce, the World Bank, and Ota and Tasaku, indicate that Japan has five statutory insolvency procedures which can be divided in two groups: liquidation-type systems and reconstruction-type systems. Bankruptcy and special liquidation address corporate liquidation. The other three (company reorganization, civil rehabilitation, and corporate arrangement) are employed in reconstruction cases. According to LeMaster, Downey, and Brewerton, either of the two liquidation options can be filed under the following conditions: (1) if the debtor is unable to fulfill his obligations; and (2) if the liabilities exceed the total of the debtor's assets. The option of corporate reorganization allows an entity to find a resolution to its financial distress rather than liquidate the firm and is in general similar to the Chapter 11 of the United States bankruptcy code. Once the court determines that rehabilitation is the solution, then the creditors and debtors agree on discounting the debts and providing a schedule of payments. Under civil rehabilitation procedures, a firm does not lose control of its business as the objective is to continue administrating while disposing of the assets. The third alternative, company arrangements, involves an agreement between debtors and creditors to continue operations without liquidating the company. However, this option was abolished with the enactment of the Civil Rehabilitation Law. Describing the different options available for a company in financial distress in Japan, the World Bank Global Insolvency Law Database website notes that "these systems [insolvency procedures] lack mutual connections to some extent, and some of their provisions are insufficient. For this reason, generally speaking, in actual bankruptcy situations, informal negotiations among the related parties known as "private arrangements" (shiteki-seiri) are more frequently used, rather than these formal legal proceedings."

LeMaster, Downey, and Brewerton indicate in their 2007 paper that Japan's present insolvency legal framework stems from several laws, including the Commercial Code No. 48, of 1899, the Bankruptcy Law No. 48 of 1900, the Company Reorganization Law No. 172 of 1952, and most recently the Civil Rehabilitation Law of 2000. Bankruptcy procedures are governed by the Bankruptcy Law, while the law overseeing special liquidation is the Commercial Code. Corporate reorganization cases are governed by the Company Reorganization Law and civil rehabilitation is governed by the Civil Rehabilitation Law. Per Mori's 2005 paper, Japan's insolvency system went through a near 10-year reform program. Upon completion of the comprehensive reform, a new corporate law that offered provisions on special liquidation was established, the Company Reorganization Law was amended, and a Civil Rehabilitation Law was enacted. The Bankruptcy Law was amended in 2005 in order to, according to Ota & Tasaku 2006, simplify the insolvency process, provide greater flexibility by matching the size of the case with the necessary procedures, establish consumer bankruptcy, and to reform the system of priority claims. However, the authors note that the last objective has not been achieved, and as a result "the Bankruptcy Law currently falls short of reflecting the variety of working arrangements available in the modern Japanese workplace" (p. 89).

As noted above, corporate arrangement was abolished given that it was rarely used once the Civil Rehabilitation Law was implemented. The U.S. Department of Commerce indicates that Japan enacted the Civil Rehabilitation Law to replace the bankruptcy law that was governing small and medium size firm insolvencies. This new Law focuses on corporate restructuring as opposed to liquidation. In addition, the legislation, among other things, better protects assets of the debtor before restructuring procedures are undertaken, simplifies requirements for starting restructuring procedures, and improves procedures for approval of rehabilitation plans. When the Company Reorganization Law was amended, opting for corporate reorganization as a large entity became easier, faster, available at an early stage, and more cost-effective. These reforms, according to the U.S. Department of Commerce, allowed the new bankruptcy regime to accelerate the corporate restructuring process in Japan. Mori notes in his 2005 paper that as part of its insolvency law reform, Japan also introduced a new legal framework covering cross-border insolvency which was modeled on the UNCITRAL Model Law on Cross- Border Insolvency.

The World Bank's 2008 Doing Business in Japan snapshot of closing a business evaluates the effectiveness of the insolvency regime in Japan along three dimensions: the average time (in years) to complete a bankruptcy proceeding, the average cost of such proceedings (as a percentage of the estate), and the recovery rate to creditors (expressed in cents on the dollar). For Japan, the time averages 0.6 years, and the cost is, on average, 4% of the estate. Creditors recover, on average, 92.6 cents on the dollar. By comparison, member states of the Organization for Economic Cooperation and Development average 1.3 years, 7.5% of the estate in costs, and a recovery rate of 74.1 cents on the dollar.