Bankruptcy of defendant while proceedings are pending

Kenji Kuroda

Partner, Kuroda Law Offices

One of the parties, namely the defendant, may file for bankruptcy during the proceedings. For example, when a lawsuit is filed to recover debt, the defendant, being the debtor, might file for bankruptcy.

If the defendant goes bankrupt during the proceedings, the progression of the proceedings will differ depending on what is being disputed in the case.

  1. In the case of litigation regarding bankruptcy claims

The right to file financial claims against bankrupt parties include claims on the estate (Article 148 of the Bankruptcy Act) and bankruptcy claims (Article 97 of the Bankruptcy Act), of which the proceedings for bankruptcy claims are suspended by the decision to start bankruptcy proceedings (Article 44.1 of the Bankruptcy Act). Loans, sales price, and proceedings for damage compensation, which are problems in debt collection, are generally considered to be included in bankruptcy claims.

After the suspension, the bankruptcy claims will be processed in the bankruptcy proceedings, but at the Tokyo District Court, they will be treated as ending the bankruptcy proceedings with the trustee’s approval or disapproval of the claims withheld if an estate that can pay dividends is not formed. Therefore, if an estate that can pay dividends is not formed, the suspended proceedings will not be inherited by the trustee (see Article 44.2 of the Bankruptcy Act). If an estate that can pay dividends is formed, the bankruptcy trustee will approve or reject the claims. If the bankruptcy trustee approves the total amount of the claims reported by a bankruptcy creditor and there are no objections from other bankruptcy creditors, the bankruptcy creditor will be paid proportionally distributed dividends (dividends are made by multiplying the divisible property with a ratio where the creditor’s bankruptcy claims are the numerator and the total amount of claims are the denominator). Bankruptcy creditors cannot recover more than the dividend amount in a proceeding. If the bankruptcy trustee or another bankruptcy creditor objects to all or part of the bankruptcy claims reported by a bankruptcy creditor, the bankruptcy creditor that objected will consider the reasons for the objection, and if it can be disputed, will take the procedures to dispute it. If an objection is raised against a bankruptcy claim and the proceedings for the bankruptcy claim are pending at the start of the bankruptcy proceedings, the bankruptcy trustee (and the other bankruptcy creditor that objected) will take over the suspended proceedings (Article 127.1 of the Bankruptcy Act), and the suspended proceedings will be resumed (note that if the proceedings are not pending at the time the bankruptcy proceedings begin, a petition for a claim assessment will be filed (Article 125.1 of the Bankruptcy Act)). Proportionally distributed dividends will be paid based on the claim amount recognized in the decision allowing the claims in the proceedings and in the settlement following the proceedings.

In normal proceedings for monetary claims, the plaintiff states, “The defendant must pay the plaintiff JPY XX and a corresponding amount of money at a rate of XX percent per year from [MM] [DD], [YY] until payment is complete.” However, if the bankruptcy trustee takes over the proceedings, the plaintiff (creditor) will make an amendment of claim. We have investigated what kind of claim should be made before, but as shown below, there were more variations than expected (as of our investigation in September 2016). The main text of the Supreme Court precedent states that “We have determined that the appellant has a bankruptcy claim of JPY XX against the bankrupted for the bankruptcy case of XX District Court Heisei XX (Fu) No. XX”. (However, one of the two Supreme Court precedents stated that there was a “bankruptcy claim of JPY XX for the objection”, probably because there was some objection). In the case of partial monetary objections (for example, when only JPY 500,000 out of JPY 1M is recognized and an objection is made to the JPY 500,000), it is thought to be identified as a “bankruptcy claim of JPY XX for the objection”. When only one of multiple claims is objected to (for example, when a creditor has filed a claim for the right to the purchase price and the right to claim a refund, only the right to claim a refund is objected to), it is thought to be possible to specify the right to claim by describing the nature of the claim, or to identify it as “bankruptcy claim of JPY XX yen for the objection”, but we have not conducted a deep analysis of this. Of course, we have not covered all judicial precedents, and some may be misunderstood or misclassified, but if you are interested, please see (here).

[Breakdown of 56 judicial precedents]

  1. Main text says “determined” (51 cases)
  2. No nature of claims for the case number against bankrupted (11 cases, of which 2 were at the Supreme Court)
  3. Nature of claims for the case number against bankrupted (7 cases)
  4. No case number and no nature of claims against bankrupted (5 cases)
  5. No case number, nature of claims against bankrupted (12 cases)
  6. Has the words “in between” (7 cases)
  7. Does not say anything about claims for the bankrupted (2 cases)
  8. Other (7 cases)

2. In the case of proceedings related to bankruptcy estates and proceedings related to claims on the estate

In the case of legal procedures related to bankruptcy estates (for example, proceedings related to benefits based on property rights such as ownership) and proceedings related to claims on the estate, legal procedures are suspended by the decision to start bankruptcy proceedings (Article 44.1 of the Bankruptcy Act). After the suspension, the bankruptcy trustee may take over the proceedings him or herself, but if the bankruptcy trustee does not take over voluntarily and the plaintiff wants to continue with the proceedings, he or she will need to submit a petition to take over the proceedings and have the bankruptcy trustee take them over (Article 44.2 of the Bankruptcy Act).

Previously, when proceedings were filed to inspect or make copies of financial statements and accounting books, the judge stated his or her opinion that the defendant was bankrupt and the proceedings were suspended, so the proceedings were sometimes handed over to the trustee at the creditor’s request (not listed in publications). Although not all judicial bodies treat them the same way, a similar judgment may be made if the proceedings are related to corporate property such as financial statements and accounting books.

3. Proceedings not included in “legal procedures related to bankruptcy estates”

What is suspended due to bankruptcy is “procedures related to bankruptcy estates” (Article 44 of the Bankruptcy Act), and proceedings not related to bankruptcy estates are not suspended. For example, non-proprietary proceedings such as personal proceedings like marriage or a parent-child relationship where the bankrupted is a natural person, or proceedings to invalidate the incorporation of a company or to oppose a resolution of a general shareholders meeting are not interrupted even if the parties are declared bankrupt.

During the proceedings, the defendant, being one of the parties, may file for bankruptcy. For example, when the defendant, being the debtor, files for bankruptcy when an action to collect the debt is filed.

If the defendant goes bankrupt during the proceedings, the progress of the proceedings thereafter will differ depending on what is being disputed in the proceedings.