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Lending and borrowing

Are there any other notable risks or issues around lending?

Japan

Japan

Generally

Loan agreements and other finance documents are subject to several Japanese laws, including the Interest Rate Restriction Act and the Civil Code. The maximum interest rate permitted is between 15% and 20% depending on the lending amount. The maximum rate allowed for liquidated damages in the case of the borrower's default is 1.46 times the applicable maximum interest rate allowed.

Specific types of lending

When lending to individuals, the Total Volume Control which limits the amount that may be outstanding by reference to an individual's salary will apply. For this purpose, the lender is required to use credit information held by a designated credit bureau to check the individual borrower's financial credibility.

Standard form documentation

The Japan Syndication and Loan-Trading Association has standard form documentation often used by Japanese lenders. Foreign lenders typically use their own standard form documentation.

Last modified 5 Dec 2019

Are there any restrictions on lending and borrowing?

Lending

Lending is a regulated activity. In general, a lender will need to obtain a moneylending business license or certain other licenses such as a banking license. Though the application of the Money Lending Business Act (for instance, the requirement to hold a moneylending business license) to a foreign company lending money from outside Japan to a party inside Japan is not very clear, it would be prudent for a foreign company to obtain a moneylending business license.

To obtain a moneylending business license, an entity must satisfy certain requirements. For instance, a company must:

  • have minimum net assets of JPY50 million;
  • have at least one office in Japan;
  • have at least one director with at least three years of experience in moneylending operations;
  • not conduct any operations against public benefits;
  • in respect of each office it operates, have ‘full-time chiefs of moneylending operations’ who have passed a required examination and registered with the relevant regulatory authorities (the ratio of the ‘number of chiefs of moneylending operations’ against the ‘number of persons engaged in money lending operations’ must be 0.02 or more); and
  • in respect of each office it operates, have at least one full-time director or employee who has at least one year of experience in moneylending operations.

Certain of the requirements above can restrict the ability of a foreign company to obtain a moneylending business license.

Borrowing

Borrowing is generally not regulated.

What are common lending structures?

Lending in Japan can be structured in a number of different ways to include a variety of features, depending on the commercial needs of the parties.

A loan can either be provided on a bilateral basis (a single lender providing the entire facility) or a syndicated basis (multiple lenders each providing parts of the overall facility). Facilities can be divided into tranches for instance, with senior and mezzanine loans.

Syndicated facilities in tranches by their nature involve more parties (such as agents, trustees and senior lenders and/or mezzanine lenders), are more highly structured and involve more complex documentation. Larger financings will typically be done on a syndicated basis with one of the syndicate or an independent agent taking the lead in coordinating and arranging the financing.

Loans will be structured to achieve specific funding objectives. Types of loans include term loans, working capital loans, bridge loans, project facilities and letter of credit facilities.

Loan durations

The duration of a loan can vary between:

  • a term loan, provided for an agreed period of time;
  • a revolving loan or commitment line, provided for an agreed period of time, which may be used multiple times up to the maximum outstanding amount agreed;
  • an overdraft, provided on a short-term basis to solve short-term cash flow issues; or
  • a bridge loan intended for use in exceptional circumstances when other forms of finance are unavailable and often attracting a higher margin.

Loan security

A loan can either be secured, unsecured or guaranteed. For more information, see Giving and taking guarantees and security

Loan commitment

A loan can be:

  • committed, meaning that the lender is obligated to provide the loan if certain conditions are fulfilled; or
  • uncommitted, meaning that the lender has discretion as to whether or not to provide the loan.

In most cases, loans are made available as committed facilities.

Loan repayment

A loan can be repayable on demand, on an amortizing basis (in instalments over the life of the loan) or on a scheduled basis (usually in full at maturity).

What are the differences between lending to institutional / professional or other borrowers?

There are no notable differences between lending to institutional or professional companies such as qualified institutional investors (as defined in the Financial Instruments and Exchange Act) and lending to other companies.

Lending to individuals is subject to the requirement that the ratio of the outstanding amount of total lending against an individual's annual salary must be one third or less, unless certain exemptions apply (for instance, relating to the purchase of real estate by an individual). This is referred to as the Total Volume Control.

Do the laws recognize the principles of agency and trusts?

Yes, both principles are recognized as a matter of Japanese law.

For instance, it is possible to appoint an agent (dairinin) to act on behalf of other parties or a trustee (jutakusha) to hold rights and other assets on trust for trust beneficiaries (juekisha), such as lenders or secured parties.

Are there any other notable risks or issues around lending?

Generally

Loan agreements and other finance documents are subject to several Japanese laws, including the Interest Rate Restriction Act and the Civil Code. The maximum interest rate permitted is between 15% and 20% depending on the lending amount. The maximum rate allowed for liquidated damages in the case of the borrower's default is 1.46 times the applicable maximum interest rate allowed.

Specific types of lending

When lending to individuals, the Total Volume Control which limits the amount that may be outstanding by reference to an individual's salary will apply. For this purpose, the lender is required to use credit information held by a designated credit bureau to check the individual borrower's financial credibility.

Standard form documentation

The Japan Syndication and Loan-Trading Association has standard form documentation often used by Japanese lenders. Foreign lenders typically use their own standard form documentation.

Are there any other notable risks or issues around borrowing?

There are none to highlight for the summary purposes of this site.

Are there any restrictions on giving and taking guarantees and security?

Some key areas affecting giving and taking of guarantees and security are as follows.

Capacity

It is important to check the constitutional documents of a company giving a guarantee or security to ensure it has an express or ancillary power to do so and there are no restrictions on the powers of directors that would otherwise restrict the provision of security. For instance, a decision to borrow and/or to give a guarantee in respect of a significant amount must be made by the board of directors and may not be entrusted to any individual director. Furthermore, a transaction giving rise to a conflict of interest (such as a guarantee by a company for the obligations of its directors) must be approved by the board of directors, with the director in conflict abstaining from the vote on the relevant resolution. Each director of a company owes the duty of care of a good manager and a duty of loyalty to the company. As such, a director must be able to demonstrate that adequate corporate benefit is derived from the giving of a guarantee or security.

Insolvency

Guarantees and security may be at risk of being set aside under Japanese insolvency laws if they are:

  • provided with little or no consideration within six months of or after the company's suspension of payment;
  • provided after the company becomes unable to pay its debts generally and the creditor is aware of the suspension of payment or the company's inability to pay its debts generally; or
  • provided after the application for commencement of bankruptcy proceedings and the creditor is aware of such application.

Guarantees and security may also be challenged on other grounds relating to insolvency.

Provision of profit

A company may not provide any benefit to its shareholders in relation to or in connection with the exercise of shareholder rights by a shareholder.

Obligation of a lender taking a guarantee from an individual

A lender taking a guarantee from an individual is required to use credit information held by a designated credit bureau to verify the individual's credit worthiness. However, the Total Volume Control lending requirement (that the amount of total lending against the individual's annual salary must be one third or less) does not apply to guarantees given by an individual.

Upstream guarantees

Upstream guarantees are possible. However, if there is no adequate consideration for or corporate benefit derived from such guarantee, a breach of the directors' duties would be an issue.

What are common types of guarantees and security?

Common forms of guarantees

Two types of guarantees may be given.

(Normal) guarantee (hosho)

A guarantor has the right of defense of demand which permits a guarantor to require that the beneficiary first demand performance by the principal obligor. The further right of defense of reference permits a guarantor to require that the beneficiary first enforce against the principal obligor's property by demonstrating that the principal obligor has sufficient financial resources to satisfy the debt and that the satisfaction of the obligation could be easily performed by enforcing against the principal obligor.

Joint and several guarantee (rentai-hosho)

A joint and several guarantor does not have the right of defense of demand or the right of defense of reference. Under this type of guarantee, the guarantor owes the same obligation as the primary obligor.

Under the amended Civil Code that is effective as of 1 April 2020, regardless of the type of the principal obligation, if the guarantor of such obligation is an individual, the amount guaranteed by such individual much be subject to a clear cap. As a result, in the case of a guarantee of any type of principal obligation, including tenant’s obligation under a lease agreement or purchaser’s obligation under a continuous sales and purchase agreement, as long as an individual is the guarantor, the guarantee must specify the maximum amount of the guarantor’s obligation. Otherwise, such individual guarantee would be invalid.

Common forms of security

Three basic types of security interest can be created under Japanese law.

Mortgage (teitouken)

A mortgage may be created on rights to real property and certain other types of property such as automobiles, aircraft and factories.

Pledge (shichiken)

A pledge may be created on an asset that can be assigned to others such as chattels, real property and rights. For a pledge (other than a pledge on right without a deed) to be effective, the asset must be ‘delivered’ (hikiwatashi) to the pledgee. In the case of a pledge on movable property, the pledgee must continuously possess the pledged asset for the pledge to remain valid.

Security by way of transfer (joto-tampo)

A security by way of transfer is not a statutory security. It is commonly used to avoid the potentially stringent requirements for a pledge on a movable property, in particular, that the pledgee must continuously possess the pledged asset. A security by way of transfer enables the pledgor to possess and use the pledged asset even during the security period.

Are there any other notable risks or issues around giving and taking guarantees and security?

Giving or taking guarantees

To be valid, a guarantee must be in writing.

There is a further risk that a guarantee may be set aside if improperly obtained, for instance, by undue influence. It is best practice for a party taking the benefit of a guarantee to take steps to avoid claims of undue influence by, for example, requiring the guarantor to obtain independent legal advice.

Giving or taking security

Once granted, security must be properly perfected. Perfection formalities may include:

  • 'delivery' of the pledged assets to the security holder (e.g. a pledge on a movable property);
  • registration of the security (e.g. a mortgage on a real property); and
  • notification to the obligor of the right pledged.
Kaoru Umino

Kaoru Umino

Partner
DLA Piper Tokyo Partnership Gaikokuho Kyodojigyo Horitsu Jimusho
[email protected]
T +81 3 4550 2813
View bio

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