Explanation of Corporate Liquidation Procedures under Japanese Company Law

When a company ceases its operations under the Japanese Companies Act, it does not necessarily signify a failure in management. Excluding specific reasons such as decisions to merge or initiate bankruptcy proceedings, the dissolution of a company does not immediately extinguish the corporate entity. Instead, the company enters a legally defined process known as “liquidation.” The purpose of this process is to conclude the company’s remaining operations, liquidate assets, settle all debts, and then distribute any remaining property (residual assets) to the shareholders. A company in this process is referred to as a “Liquidating Corporation,” and its legal activities are limited to the scope necessary to achieve the purpose of liquidation. This liquidation procedure refers to the “ordinary liquidation” that takes place when the company’s assets are in a state of surplus, capable of fully settling its debts. It is not uncommon for this to be chosen as a result of strategic management decisions, such as voluntary closure due to the absence of a successor or the planned termination of a business following the completion of a specific project. Therefore, liquidation is a managed process for ending a company while maintaining legal order. This article will provide a detailed explanation of the ordinary liquidation procedures as defined by Japanese corporate law, from the roles of the liquidator and the board of liquidators, through the specific administrative workflow, to the completion of the procedure, based on the provisions of the law.

Liquidators: The Executing Body of Liquidation Procedures

Methods of Appointing a Liquidator

After the dissolution of a company, the central institution responsible for carrying out the liquidation affairs is the “liquidator.” The liquidator takes over the business execution and representation of the liquidating company, replacing the board of directors or the representative director before dissolution.

Article 478, Paragraph 1 of the Japanese Companies Act stipulates three ranks for the appointment of a liquidator. Firstly, if the company’s articles of incorporation designate a person to become the liquidator, that person will assume the role. Secondly, even if the articles do not specify, a particular individual can be appointed by a resolution of the shareholders’ meeting. In practice, many companies appoint a liquidator at the same shareholders’ meeting where the dissolution is resolved. If a liquidator is not appointed by either of these methods, the third option is that the directors at the time of dissolution automatically become the liquidators. This is referred to as the statutory liquidator, which is common especially in small and medium-sized enterprises. In the rare case where a liquidator is not determined by these methods, interested parties such as shareholders can petition the court, which will then appoint a liquidator. Once a liquidator is appointed, it is necessary to register the dissolution and the liquidator, including the representative liquidator, with the Legal Affairs Bureau within two weeks from the date of dissolution.

Duties of a Liquidator

The duties of a liquidator are varied, but the central ones include “completion of existing business,” “collection and liquidation of claims and property,” and “payment of all debts” of the company. In performing these duties, the liquidator is obligated to act with the care of a prudent manager (duty of due care) and to be faithful to the company (duty of loyalty), similar to a director. This legal obligation is not merely formal. If a liquidator neglects their duties and causes damage to the company, such as neglecting to collect receivables or selling company assets at an unfairly low price, they may be held personally liable for damages due to dereliction of duty. Therefore, directors who automatically become liquidators must recognize that their role involves significant legal risks and must execute their duties with caution. After appointment, the liquidator must promptly investigate the company’s financial situation and prepare an inventory of assets and a balance sheet, which must be approved by the shareholders’ meeting. This is an obligation stipulated by Article 492 of the Japanese Companies Act and is a crucial step that establishes the foundation for the entire liquidation process.

Liquidation Committee: Decision-Making and Supervision of Business Execution

Establishment of the Liquidation Committee

A liquidating corporation in Japan is not always required to establish an organ equivalent to a board of directors. However, to address situations that demand stricter governance, Japanese Corporate Law provides the option to establish an institution called the “Liquidation Committee.”

According to Article 477, Paragraph 2 of the Japanese Corporate Law, a liquidating corporation may voluntarily establish a Liquidation Committee as stipulated in its articles of incorporation. Conversely, if the company had an Audit & Supervisory Board before dissolution, the establishment of a Liquidation Committee becomes a legal obligation (Article 477, Paragraph 3). When establishing a Liquidation Committee, there is a requirement that the committee must consist of three or more liquidators (Article 331, Paragraph 5, applied mutatis mutandis by Article 478, Paragraph 8).

Authority of the Liquidation Committee

The Liquidation Committee is composed of all the liquidators (Article 489, Paragraph 1), and its authority is mainly divided into three categories. First is the decision-making regarding the execution of the liquidating corporation’s business. Second is the supervision of each liquidator’s performance of duties. Third is the selection and dismissal of the representative liquidator who represents the company. This structure of authority is similar to that of a board of directors of an active company, with the purpose of ensuring careful deliberation through a collective decision-making process for significant business execution. In particular, Article 489, Paragraph 6 of the Japanese Corporate Law emphasizes the importance of organizational decision-making by prohibiting the Liquidation Committee from delegating decisions to individual liquidators on particularly significant matters such as the disposal of important assets or incurring substantial debt.

The establishment of a Liquidation Committee is not merely a procedural choice but a strategic decision that determines the governance approach during the liquidation process. In cases where complex liquidations are anticipated, such as when there are multiple shareholders or potential conflicts of interest regarding the disposal of assets, establishing a Liquidation Committee can enhance the transparency of the decision-making process and strengthen the supervision over the actions of each liquidator. This contributes to the prevention of future disputes and the smooth progression of the liquidation proceedings.

The Specific Process of Liquidation Procedures

After the appointment of a liquidator, the liquidation process in Japan follows the specific procedures set out by the Japanese Companies Act. This process aims to settle the company’s assets fairly and efficiently while protecting the interests of stakeholders, especially creditors.

Approval at the General Shareholders’ Meeting

First, as mentioned earlier, the liquidator must prepare an inventory of assets and a balance sheet as of the date of dissolution and obtain approval at the general shareholders’ meeting (Japanese Companies Act, Article 492).

Creditor Protection Procedures

Next, a critical step in the liquidation process is the “creditor protection procedures.” Based on Article 499, Paragraph 1 of the Japanese Companies Act, the liquidating company must promptly publish a notice in the Official Gazette after dissolution. This notice calls on all creditors to declare their claims within a specified period of not less than two months. This two-month period cannot be shortened and is a determining factor for the minimum duration of the entire liquidation process. In addition to the Official Gazette notice, the company is also obligated to send individual notices to “known creditors.” Neglecting this procedure could unjustly harm the rights of creditors, so strict compliance is required. Creditors who do not declare within the period are generally excluded from the liquidation process, but known creditors must be paid their debts even if they do not declare.

Distribution of Remaining Assets

Once the claim declaration period has expired and all claims have been settled, the liquidator will pay off the company’s debts from its assets. If there are assets remaining after all debts are paid, these become the “remaining assets” to be distributed to shareholders. Article 504, Paragraph 3 of the Japanese Companies Act stipulates that these remaining assets should be distributed fairly according to the number of shares each shareholder holds (principle of shareholder equality). However, if the company has issued different classes of shares with different provisions for the distribution of remaining assets in its articles of incorporation (for example, preferred shares for certain shareholders), the distribution will follow those provisions.

There is an interesting court case that demonstrates the validity of agreements among shareholders, particularly in private companies. The Tokyo District Court’s decision on September 7, 2015 (Heisei 27), ruled that an agreement to distribute remaining assets in a manner different from the shareholding ratio, based on the unanimous consent of all shareholders (a personal provision), was valid even though it was not formally reflected in the articles of incorporation. This case suggests that flexible arrangements among shareholders, especially in closely-knit companies with a small number of shareholders, can be legally respected, providing a significant implication for business practices.

Completion of Liquidation and Dissolution of a Company

Once all liquidation affairs are concluded, the company enters the final phase of legally dissolving. This process consists of three main steps: approval of the final liquidation report, registration of the completion of liquidation, and the last obligation, which is the preservation of accounting records.

Approval of the Final Liquidation Report

Firstly, as soon as all collections of claims and payments of debts are completed, and the distribution of the remaining assets is finished, the liquidator must promptly prepare a “final liquidation report” in accordance with Article 507, Paragraph 1 of the Japanese Companies Act. This report includes details such as income and expenses during the liquidation period and the amount of remaining assets distributed to shareholders, as stipulated by the regulations of the Companies Act Enforcement Rules. The prepared final liquidation report must be submitted to the shareholders’ meeting and receive approval by an ordinary resolution as per Article 507, Paragraph 3 of the same act. With the approval of this shareholders’ meeting, the liquidation of the company is legally considered “completed.” Furthermore, this approval generally exempts the liquidator from liability for negligence in their duties, except in cases of fraudulent conduct in the execution of their duties (Article 507, Paragraph 4).

Registration of the Completion of Liquidation

Secondly, within two weeks from the date the final liquidation report is approved by the shareholders’ meeting, the liquidator must apply for “registration of the completion of liquidation” at the Legal Affairs Bureau with jurisdiction over the location of the company’s head office (Article 929 of the Japanese Companies Act). Once this registration is completed, the company’s registration records are closed, and the corporate personality of the company is fully extinguished. As a result, the company ends its existence as a legal entity.

Preservation of Accounting Records

Thirdly, even after the company has been dissolved, the liquidator has one last important duty: the “preservation of accounting records.” Article 508, Paragraph 1 of the Japanese Companies Act obligates the liquidator to preserve the accounting books and important documents related to the business and liquidation of the liquidated company for a period of 10 years from the date of registration of the completion of liquidation. This obligation is imposed on the liquidator as an individual, not on the company, and involves a long-term personal responsibility. Considering this long-term burden, the appointment of a liquidator should be made with caution, and in some cases, it may be wise to appoint a professional. Additionally, upon application by an interested party, the court may appoint someone other than the liquidator to preserve the documents (Article 508, Paragraph 2).

Summary

The ordinary liquidation of a company under Japanese Corporate Law is a legal procedure for an orderly and planned conclusion of a company, distinct from business failure. This process begins with the appointment of a liquidator and proceeds through stages including a rigorous creditor protection procedure that takes at least two months, repayment of all debts, and distribution of the remaining assets to shareholders. Ultimately, the company’s corporate status is extinguished with the approval of the final accounts at the shareholders’ meeting and the registration of liquidation completion at the Legal Affairs Bureau, but the liquidator retains the obligation to preserve the books and records for ten years thereafter. This series of procedures is an important system for fulfilling the company’s social responsibilities while protecting the rights of all stakeholders.

Monolith Law Office boasts a wealth of experience representing a multitude of domestic and international clients in liquidation proceedings as defined by Japanese Corporate Law. Our firm is staffed with experts, including English-speaking professionals with foreign legal qualifications, capable of handling complex international cases. We provide comprehensive legal support at every stage, from advising on the appointment of a liquidator, executing specific liquidation tasks, assuming the role of a liquidator, to the long-term obligations after the completion of liquidation. If you require the support of reliable experts during the critical phase of company liquidation, please consult with our firm.