Update on Insolvency of Takefuji Corporation
There have been notable updates with respect to the insolvency proceeding of Takefuji Corporation ("Takefuji").
On October 31, 2010, the Tokyo District Court formally issued the commencement order with respect to Takefuji's corporate reorganization procedure. In such commencement order, the court appointed Mr. Eichi Obata, the provisional trustee, to serve as the formal trustee in the corporate reorganization proceeding (the "Trustee") and Mr. Hideaki Sudo was re-appointed by the court as the investigator in the proceeding.
On the same date, the court issued a separate order to make a determination on the validity of the claims of creditors and provided the following schedule:
1) Deadline for the Submissions for the Notification of Proof of Claims: February 28, 2011;
2) Deadline for the Determination by the Trustee on the Validity of Claims: April 28, 2011;
3) Deadline for the Submission of the Reorganization Plan by the Trustee: July 15, 2011; and
4) Deadline for the Submission of the Reorganization Plan by the Creditors/Shareholders (if any): July 8, 2011.
It is critical for Mr. Obata to notify all potential Takefuji creditors of the commencement of the corporate reorganization proceeding and the deadline for the submissions of each creditor's proof of claim against Takefuji. Under Japanese law, as a general matter, a bona fide creditor who was not aware of the deadline for the submissions of claims may be permitted to submit his/her claim subsequent to the deadline. For the purposes of limiting the number of such bona fide creditors, the Trustee has employed various methods (e.g. advertisements in daily newspapers) to notify the public of the deadlines, and 1.3 million notice letters were issued to known creditors of Takefuji.
As mentioned in the previous Client Alert, the central point of interest in the proceeding is the treatment of Kabarai creditors (i.e. creditors which made interest payments to Takefuji which were later held to exceed the cap on interest rates as set forth under Japanese law, "Kabarai Creditors"). While there are some precedents in Japan whereby Kabarai Creditors were treated differently and received more distributions over other general creditors, Mr. Obata has insisted that he does not intend to give preferential treatment to Kabarai Creditors in the present case. As unsecured banks creditors and bondholders are classified as "general creditors" of the insolvent company, any preferential treatment of Kabarai Creditors of Takefuji will reduce the amount of funds available to be distributed to all of the other general creditors.
However, it should be noted that a representative of a group of lawyers representing Kabarai Creditors has indicated that they are carefully monitoring the results of the proof of claim notifications process. If there are a significant number of claims submitted by Kabarai Creditors, then they, as a group, would take action to pressure the Trustee to provide preferential treatment to the Kabarai Creditors. This is a significant point because if claims made by the Kabarai Creditors constitute a majority of the total claims of all of the general claims against Takefuji and the lawyers for Kabarai Creditors follow through with their proposed action for preferential treatment, it will be difficult for the Trustee to attain the necessary creditor approval regarding any proposed Reorganization Plan at the creditors' meeting as the Reorganization Plan is among one of the items which must be approved by the majority of general creditors. In fact, it is possible that the lawyers acting for the Kabarai Creditors may even put forward their own Reorganization Plan.
Takefuji has also started the process of finding a sponsor. Shinsei Bank Limited has been appointed as the financial advisor to find a sponsor for Takefuji and solicit bids for companies interested in acting as a sponsor. Fourteen candidates, including domestic and foreign investment funds, as well as financial institutions have made bids. According to news sources, the following five bidders have passed the first stage and are moving to the second bid stage:
1) J Trust Co., Ltd. ("J Trust")
2) Tokyo Star Bank ("Tokyo Star Bank")
3) Cerberus ("Cerberus")
4) TPG Capital ("TPG")
5) A&P Financial ("A&P")
Cerberus and TPG are US based private equity firms and A&P Financial is a Korean consumer finance company. J Trust is an Osaka based consumer finance company and Lopro Corporation is one of its wholly owned subsidiaries (Lopro also filed for corporate reorganization proceedings with the same Mr. Obata as its trustee in November of 2009 with J Trust acting as its sponsor). Tokyo Star Bank was formerly a regional bank, but due to difficult financial situation, it was purchased by the Lone Star Fund in 2001 and then sold to Advantage Partners in 2008. J Trust and Tokyo Star Bank entered into a business alliance agreement with respect to the mortgage loan guaranty business in December 2010. According to news sources, the second bid process will be concluded by the end of February 2011 and the sponsor will be selected by the end of March 2011. Once the sponsor is selected, the Trustee will draft the Reorganization Plan with the sponsor and submit to the court by mid July, 2011.
Lastly, it is said that the amendment of the Money Lending Business Law of Japan (the "MLBL") was one of the major reasons leading to Takefuji filing for corporate reorganization. The Financial Services Agency of Japan recently formed the Amended MLBL Follow Up Team with the cooperation and participation of relevant governmental sections. At this stage, the team is listening to opinions from various sectors and industries impacted by the amendment to the MLBL, and according to the materials disclosed, there has been a sharp decline in the number of licensed money lenders in Japan since the Supreme Court judgment ruling that charging of "grey zone" interest was illegal and amended the MLBL. However, the team has so far made no clear indication that the MLBL will be amended again to rescue the diminishing consumer finance industry in Japan. The next event that must be monitored carefully is the total amount and types of claims resulting from the submission by the creditors of their proof of claims against Takefuji as this will have significant impacts on the manner and success of any corporate rehabilitation proceeding.
We will issue further updates as soon as the results are made publicly available.
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