Corporate Liquidation in Japan: Key Legal Aspects

Published on October 31, 2025 and written by Cyril Jarnias

Corporate liquidation in Japan involves unique legal complexities that reflect the delicate balance between tradition and modernity in the Japanese legal system. Navigating this process requires a thorough understanding of business laws and specific country regulations, where each step—from the liquidation decision to tax implications—demands methodical precision and strict adherence to established regulations. Indeed, in the face of a dynamic yet challenging economy, the legal aspects of liquidation become crucial, not only to ensure compliance but also to protect stakeholder interests and avoid potential disputes.

Understanding the Legal Steps of Corporate Liquidation in Japan

The corporate liquidation process in Japan progresses based on legal procedures and primarily takes two forms: “voluntary liquidation” and “court-supervised liquidation (special liquidation).” Here is an overview of each and their specific steps.

1. Forms of Liquidation

• Voluntary Liquidation:
  • Primarily decided at a general shareholders’ meeting, then liquidation proceeds according to the Companies Act.
  • Typically, directors are chosen to become liquidators.
  • Procedures are relatively simple, but this method cannot be adopted by joint-stock companies and limited liability companies.
• Court-Supervised Special Liquidation:
  • Conducted under court supervision in cases of over-indebtedness or inability to pay.
  • After filing with the court, it is executed following the development and approval of a composition plan with creditors.

2. Legal Steps of Liquidation

Here are the general steps for legal (ordinary) liquidation:

• Dissolution Decision: Dissolution is decided at the general shareholders’ meeting by a special resolution (at least two-thirds of present shareholders). Often, a “liquidator” is also appointed at this time.
• Registration and Notification: Registration regarding the dissolution and appointed liquidator is completed and notified to Japanese authorities. This notice also requires an inventory of assets and a balance sheet.
• Creditor Protection Procedure: Creditors are informed through an announcement in the official gazette and individual notifications. During this period (usually 2 months), filed creditor claims are verified.
• Asset Disposal and Liability Settlement: Accounts receivable are collected and assets sold for monetization, then all liabilities such as supplier debts and loans are fully repaid. Once repayment is complete, any remaining assets are distributed among shareholders, etc.
• Tax Filing Obligations: After the dissolution date, there is an obligation to submit tax returns for each fiscal year. At the final stage, it is necessary to submit corporate tax documents and fulfill tax obligations within one month of the date of determining residual assets.
• Closing Report and Registration of Legal Personality Extinction: After all steps are completed, a “closing report” is prepared and approval from the general shareholders’ meeting is obtained. Within two weeks of the approval date, a 2000 yen registration and license tax must be paid to complete the official closure notification!

Stakeholder Responsibility

1. Directors/Representatives: In many cases, the handover ceremony may include new appointments indicating the possibility of replacing representatives expediently.

The Role of Judicial Procedure in Business Cessation

In Japan, judicial procedures play a crucial role in business cessation. Here is an explanation of liquidation procedures, from initial filing to court decision, as well as their types and impacts.

Liquidation Process

• Ordinary Liquidation
  Ordinary liquidation is used when the company is dissolved and can fully repay its debts, without court supervision. This process involves a dissolution decision at the general shareholders’ meeting, followed by dissolution registration and creditor protection procedures, ultimately leading to asset distribution and the disappearance of the legal entity.
• Special Liquidation
  Special liquidation is employed in cases of suspected over-indebtedness or inability to pay. A petition to the court is then necessary, and the procedure proceeds under its supervision. Under special liquidation, a composition plan is developed and executed once approved.
• Bankruptcy Procedure
  Bankruptcy is a rigorous method chosen in cases of inability to pay or apparent over-indebtedness. It begins with preparing the petition by a lawyer, appointing a bankruptcy trustee, and proceeds entirely under court management for asset realization and distribution. All these procedures take some time (typically several months to over a year) and have their own requirements.

Impact on Stakeholders

• Creditors: In special liquidation and bankruptcy, court supervision aims to ensure fairness and maximize repayment.
• Directors and Shareholders: They have the responsibility to conduct activities as the liquidating entity. Fault or negligence may lead to compensation obligations.
• Employees: During layoffs, certain mechanisms like the unpaid wages protection system provide a degree of legal protection.

Deadlines and Legal Obligations

Each step imposes precise deadlines (e.g., within two weeks of dissolution registration) and obligations (e.g., announcements in the official gazette), with possible penalties for non-compliance. For example, recently, a medium-sized Company A, in a state of inability to pay, moved to special liquidation. After funding failed, it immediately consulted a lawyer, and this quick response minimized employee salary issues.

Analysis of Bankruptcy Laws in Japan

Legal Framework of Bankruptcy Laws in Japan

In Japan, when companies or individuals face financial difficulties, the following laws apply.

• Bankruptcy Act: Liquidation procedure applicable to insolvent or over-indebted debtors, aiming to realize their assets for equitable distribution to creditors.
• Civil Rehabilitation Act: Rehabilitation procedure aimed at supporting the continuation of economic activities for businesses and individuals through debt exemptions or repayment plans.
• Corporate Reorganization Act: Primarily for large companies, this rehabilitation procedure advances under the direction of the court and the administrator.
• Special Liquidation: Dissolution procedure by consent with creditors (applicable only to registered companies).

These are known as the “five bankruptcy laws” and are applied with distinct objectives and scopes.

Types of Bankruptcy Procedures and Their Characteristics

• Liquidation Type (Bankruptcy)
  – All assets are realized and equal distribution is made based on claim amounts. Business continuity is not considered.
• Rehabilitation Type (Civil Rehabilitation, Corporate Reorganization)
  – Under civil rehabilitation, existing management continues operations while developing a repayment plan. In contrast, corporate reorganization establishes a new structure under administrator supervision. Due to this difference, large companies more easily use corporate reorganization, while small and medium-sized enterprises prefer civil rehabilitation.

Civil Rehabilitation Process vs. Financial Reorganization Process

Element	Civil Rehabilitation Process	Financial Reorganization Process
Management Responsibility	Continuity of Management	Management by Administrator
Reason for Process Initiation	Majority Creditor Consent Required	Court Order
Repayment Plan Content	Flexibility Present	High Rigor

Court and Protection System

The court plays a central role in all bankruptcy cases and strives to ensure fair and efficient solutions. Additionally, Japan has the following specifics:

• Automatic Stay Effect: Suspension of certain enforcement measures from the time of petition (prevention of general security interests)
• Joint Guarantee System: Possibility for a third party to provide exceptions to defense, requiring particular attention without notable exception.

Recent Statistics and Trends

In 2024, an increase in bankruptcy cases is observed in Japan. Context: 1) Expiration of zero-interest loans 2) Labor shortage and rising raw material costs. Formally, an increase in the proportion of legal reorganizations is also observed.

Legal Implications for Creditors and Debtors

In Japan, the relationship between creditors and debtors during corporate liquidation is primarily governed by laws such as the Companies Act and the Bankruptcy Act, and liquidation procedures include ordinary liquidation and special liquidation. Below, we explain each process and legal framework in detail.

1. Liquidation Procedures and Creditor Protection

• Ordinary Liquidation: Conducted when the company can dissolve and repay its debts by selling its assets. This procedure is not under court supervision, and the appointed liquidator handles asset inventory preparation and asset conversion to cash, among other tasks. For creditor protection, an announcement in the official gazette or individual notice is made, and creditors who do not come forward within a period of over two months are not included in repayments.
• Special Liquidation: In cases of insolvency or special circumstances making ordinary liquidation difficult, a petition is filed with the court to be conducted under its supervision. This process requires the development and approval of a composition plan (content of the reconciliation), with a focus on ensuring impartiality.

2. Payment Priority Order

Under Japanese law, there are clear regulations on the payment order:

• Wage Claims (unpaid wages, etc.) and Tax Charges: Should be repaid with priority and in full.
• Secured Claims (mortgages, etc.): Can be recovered with priority from the secured assets.
• General Unsecured Claims (amounts owed to suppliers, etc.): Are handled after the aforementioned ones.

Due to this system, some general unsecured creditors may risk not recovering their entire claim. However, this hierarchy also ensures protection for socially important stakeholders such as workers or the tax authority.

3. Trends and Impacts

• The priority system causes disadvantages for non-priority general unsecured creditors. However, room for renegotiation may appear regarding partially exempted debt shares.
• During debt restructuring, duties of fairness and good faith are generally fulfilled by the court and the trustee, ensuring robust fraud prevention measures.

4. Role of the Court and Trustee (or Liquidator)

In special liquidation, the court plays a crucial role. Additionally, the appointed trustee or supervisory committee contributes to determining necessary expense allocation methods and drives progress under compliance with the impartiality obligation, thus achieving effective fulfillment of management responsibilities.