[version 1; peer review: 2 approved with reservations]
No competing interests were disclosed.
As is already known, the Japanese Civil Code (JCC), enacted in 1896, was formulated with reference to the discipline of many foreign laws, including the French Civil Code (FCC) and the draft of the German Civil Code (BGB) at the time. Among the objects of discipline stipulated in the JCC, the concept of German law was widely adopted for the provisions on set-off. However, in the interpretation of these provisions, the Japanese Supreme Court sometimes adopted views that differed from the provisions of BGB and its interpretation. This case law was clarified when the Law of Obligations of the JCC was revised in 2017. This paper explains the various set-off requirements stipulated by Japanese current law.
In Japan, the conditions under which the statutory requirements for set-off are satisfied are described as “eligibility for set-off” (Sousai-Tekijou), and the legal status of the parties in the set-off is called the right to set-off. Even if this eligibility for set-off arises, the parties may not exercise the right to set-off if there are circumstances that restrict the set-off. In addition, the Japanese Bankruptcy Act (JBA) modifies the requirements provided by the JCC to accommodate bankruptcy proceedings.
In this paper, we will review in order the affirmative requirements for creating eligibility for set-off, the negative requirements for restricting the exercise of the right to set-off, and the requirements for set-off in bankruptcy proceedings. Please note that under Japanese law, when A intends to extinguish B’s claim β against him by set-off against his claim α, A’s claim α is referred to as an active claim (Jido-Saiken, Aktivforderung), and B’s cross-claim β as a passive claim (Judo-Saiken, Passivforderung). This paper will also be described based on this terminology
1-1-1
The most basic requirement for set-off is that two persons are mutually responsible for the debts (JCC Art. 505 (1)). The law provides for the set-off system to enable simple settlement of debts to those who are thus mutually obliged and to ensure that both parties acquire fair satisfaction of each debt.
Therefore, for example, in a tripartite relationship in which A has an α claim against B and B has a β claim against C, the set-off between the α claim and the β claim is not allowed. In such a situation, in a case in which C insisted on a set-off between the α claim and the β claim under the agreement with B, the Supreme Court held that such set-off of the two claims did not fall under the set-off stipulated in Art. 92 (1) of the Japanese Civil Rehabilitation Act
1-1-2
However, set-off may be permitted if the tripartite relationship arises because of the assignment of claims. In particular, suppose that C originally had an α claim against B and B had a β claim against C, and both parties were mutually indebted. Subsequently, C transferred the α claim to A, resulting in the tripartite relationship.
In this situation, in order for A to exercise the α claim against B, it is basically necessary that either C gives notice of the assignment of the claim to B or that B consents it (JCC Art. 467 (1)). These are the requirements for perfection of the assignment of claim. In addition, even if any of the requirements for perfection is satisfied, B may duly assert against A any event that has taken place with regard to C by the time of completion of the perfection (JCC Art. 468 (1)). On the basis of this discipline, at the time of the assignment of the α claim, the obligor B may exercise the right to set off the α claim of the assignee A and the β claim against the assignor C and extinguish the α claim in the following cases:
Basically, if B acquires β claims before the requirements for perfection of the assignment of α claim between A and C are satisfied, B may exercise the right to set-off against A (JCC Art. 469 (1)). It is necessary for this set-off that neither the eligibility for the set-off had already arisen by the time of completion of the perfection nor that the due date of the β claim was earlier than that of the α claim
According to this rule, B cannot exercise the right to set-off against A if B acquires the β claim against C after the requirements for perfection of the assignment have been fulfilled. But the set-off of B is permitted in the following two cases.
The first case is when the β claim has arisen from a cause that existed before the time of the completion of the perfection (JCC Art. 469 (2) (i)). For example, B becomes a guarantor for C’s debt to D by C’s request. Subsequently, C assigns the α claim against B to A, and after the requirement for perfection of the assignment is satisfied, B performs the guarantee obligation to D and acquires a right to reimbursement β against C. In this situation, B can exercise the right to set-off against A because the β claim has arisen from the guarantee contract between B and D by C’s request that existed before the time of the completion of the perfection
The second case is one where the β claim has arisen from a contract under which the α claim acquired by the assignee A has arisen (JCC Art. 469 (2) (ii)). For example, a sales contract is concluded between buyer B and seller C after C has assigned the price claim α arising from the future sales contract between B and C to A in advance, and the requirement for perfection of the assignment has been satisfied. But B acquires a claim for damages β on the grounds of non-conformity with the sales contract for the object of sale. The set-off between the α claim and the β claim is available in this case
However, the set-off is not permitted in any case when B acquires β claim from another person (the proviso of JCC Art. 469 (2)). For example, in the former situation, if it is E, not B, who is requested by C to become a guarantor for C’s debt to D, and after the requirement for perfection of the assignment of α claims from C to A are satisfied, E performs the guarantee obligation to D and acquires a right to reimbursement β against C, then B acquires the β claim from E, in this case, B cannot invoke the set-off between the α claim and the β claim in relation to A.
1-2-1
Next, in order to carry out a set-off, which is a reason for extinguishing debt, it is necessary that the eligibility for set-off exists at the time of the manifestation of one party’s intention to set off. In other words, both claims to be set off must be in effect at the time of the exercise of the right to set-off
When the active claim is subject to a condition precedent and the condition has not been fulfilled, this claim cannot be set off because it has not yet been effective (JCC Art. 127 (1))
Furthermore, if the claim existed at the time of the manifestation of intention to set off, but the contract that gave rise to this claim is subsequently subject to voidance or cancellation, it is understood that the claim is retroactively extinguished; that is, it would have never existed at the time of the exercise of the right to set-off, and as a result, the set-off becomes invalid
1-2-2
However, JCC Art. 508 provides an exception to this “existing debt” requirement. According to this article, a claim that has been extinguished by prescription may be set off as an active claim. For example, even if A’s α claim against B is extinguished by prescription after the eligibility for set-off has occurred between the α claim B’s β claim against A, A can defend himself with the set-off against B’s exercise of the β claim. This provision intends to protect the reliance of the parties on the liquidation by set-off, although they may not pay attention to the prescription management as if the claims are substantially extinguished after the set-off becomes eligible
In this regard, the reliance on liquidation by set-off is exceptionally protected only when the eligibility for set-off has already occurred between the parties before the period of extinctive prescription of the active claim expired. Therefore, when a party acquires another person’s claim for which the prescription period has already expired and will set it off as an active claim, JCC Art. 508 cannot be applied because the debts lacked reciprocity at the time of the expiration of the prescription period and there was no eligibility for set-off
In addition, as will be seen later, the eligibility for set-off requires the arrival of the due dates of both debts. If the due date of the passive claim has not arrived at the time when the period of extinctive prescription of the active claim expired, there is no eligibility for set-off at this point. Even if the creditor of the active claim who asserts the set-off could previously waive the benefit of time stipulation to the passive claim and create an eligibility for set-off, the set-off is not permitted when this waiver had not been implemented by the time of the prescription period, because the eligibility for set-off had not yet been established and there had been no justifiable reliance on liquidation by set-off
Subsequently, as is clear from the text of JCC Art. 505 (1), the obligations to be set off must have “the same kind of purpose”. Liquidations of mutual debts for different purposes can be achieved by accord and satisfaction (JCC Art. 482), or mutual release (JCC Art. 519).
With regard to the set-off of monetary debts for currencies of different countries, there may be technically doubts about homogeneity. However, if it is possible to convert the amount of one of the debts at the rate in the foreign exchange market and calculate the balance of the debts, the set-off is regarded as available
The homogeneity requirement is satisfied if the subject matters of both debts are of the same kind. Since the place of performance is not normally included in the concept of the purpose of obligation, the set-off of debts for which the places of performance are different is not contrary to the homogeneity requirement. Therefore, the first sentence of JCC Art. 507, that states the availability of such a set-off, is only a cautionary provision
It is also necessary to set off that the due dates of both debts have already arrived (the main clause of JCC Art. 505 (1)). Therefore, basically, when A sets off his claim against B and B’s β claim against A, both claims must mature at the time. If the set-off by A were available before the α claim would fall due, B, the debtor of this claim, would be unilaterally stripped of the benefit of time stipulation (JCC Art. 136 (1)); otherwise he could refuse to perform the obligation until the due date. In order to protect the benefit of time of B, the arrival of the due dates of both debts is required
However, the debtor may waive the benefit of time at any time (JCC Art. 136 (2)). Therefore, when only A’s α claim matures, A, the debtor of the β claim, can immediately set off both claims by waiving the benefit of time for the β claim.
If no time limit is assigned to the performance of an obligation, the obligee can request the performance and the obligor can perform it at any time. In view of this, if no time limit is assigned to A’s α claim, A may set off both claims after the due date of the β claim or after waiving the benefit of time for the β claim. In that case, A doesn’t have to request preliminarily the performance in order to hold B liable for delay with respect to the α claims under JCC Art. 412 (3)
2-1-1
When all of the positive requirements of the eligibility for set-off described above are satisfied, the set-off is regularly available for parties. However, if there are other grounds for restricting the set-off, it is prevented.
First, if the nature of the obligation does not allow for set-off, it cannot be set off (the proviso of JCC Art. 505 (1)). The nature of the obligation that makes set-off possible is sometimes referred to as “permissivity of set-off”
Obligations that lack the permissivity of set-off typically are obligations of omission, such as not making noise, not setting up vibrations, not stinking, etc., or non-competition, or obligations to provide services when the obligee needs the action of others, such as third-party assessment or tasks that are difficult for one person to do
2-1-2
In relation to the permissivity of set-off, a right of defense attached to the active claim is also considered as a reason for limitation of set-off. The reason is that the set-off by such an active claim would deprive unilaterally the other party of the right of defense
However, there is an important exception to this set-off limitation. That is the case in a contract for work to set off a claim of a party ordering work for damages in lieu of the repair of defects and a contractor’s claim for remuneration. The right of defense of simultaneous performance is attached to both claims in this case. However, the Japanese Supreme Court has judged that the set-off of both claims is permitted. From its perspective, there is no special benefit that requires actual performance of these on the grounds that there is a consideration between the contractor’s obligation to deliver the object, which gives rise to the right to claim damages, and the obligation of the other party to pay the remuneration and that the right to claim damages in lieu of the repair of defects has the function of substantially and economically reducing the remuneration and providing an equivalent relationship between the mutual obligations of the parties. Then there is no disadvantage due to the loss of the right of defense as a consequence of the set-off. Instead, the liquidation by the set-off is convenient and fair for both parties and simplifies the legal relationship
Second, it is permissible for parties to prohibit or restrict a set-off (JCC Art. 505(2)). Even if a set-off is not prohibited by law, it can be limited in this way when the parties require actual performance.
An intention to limit a set-off may be manifested by an agreement of the parties when the cause of the obligation is a contract, or at the time of the act when it is a unilateral juridical act
However, the limitation of set-off may be duly asserted against a third party only if the third party knew it or did not know it owing to gross negligence (JCC Art. 505 (2)). If a prohibition of set-off is agreed upon for A’s α claim against B, then in order for B or A to assert non-set-off against C, who has acquired the α claim from A, or D, who has assumed the obligation with respect to the α claim in order to release B, C and D must be aware of this agreement or grossly negligent in not recognizing it. Nonetheless, if A wants to preserve the benefit of obtaining actual performance by the assumption of obligation releasing B, it is necessary not to agree or consent to D’s assumption (JCC Art. 472 (2) and (3)).
Third, set-off is prohibited when certain claims for damage are laid as a passive claim. This prohibition applies to the right to claim damages based on a tort committed in bad faith (JCC Art. 509 (i)) and the right to claim damages for death or injury to person (JCC Art. 509 (ii)). When A has a claim against B and B has any of these rights, A cannot set off B’s right.
The set-off prohibition for “tort committed in bad faith” applies to situations where B’s creditor A commits a tort against B. The main points of the prohibition in such a situation are not only that the victim B must be compensated by actual performance, but also that the perpetrator A deserves no benefit by set-off, and that it is necessary to prevent the creditor A from tortious acts against the debtor B
The reason why set-off is prohibited in the case of “death or injury to person” is primarily because there is a high need for relief of the victim by actual performance
Thus, both of these prohibitions of set-off are primarily aimed at providing actual performance to the victim, i.e., protecting the victim themself. It is not excluded that the victim waives such protection and sets off the claim for damages as an active claim
Fourth, set-off is not permitted if the passive claim is a claim exempt from attachment (JCC Art. 510)
2-5-1
Fifth, when a claim has been attached and the debtor of it acquires another claim against the creditor after the attachment, the debtor may not assert the set-off of both claims as defense against the attaching obligee (JCC Art. 511 (1)). In other words, for the debtor A, against whom the creditor B has the β claim, the set-off of the β claim as a passive claim is in principle not available when A acquires the α claim as an active claim against B after the β claim was seized by C.
Conversely, when A’s acquisition of the α claim precedes C’s attachment of the β claim, A may duly assert the set-off of both claims as defense against C (JCC Art. 511 (1)). Besides the requirement of an active claim acquired before the attachment of passive claim, no other factors about the claims such as temporal order of due dates, transactional connection or types of transaction are taken into consideration
2-5-2
There is an exception to this prohibition. Even if A acquires the α claim after the attachment of the β claim by C, A may duly assert a claim set-off against C when the cause that gives rise to the α claim existed before C’s attachment (the main clause of JCC Art. 511 (2)). For example, B has a β claim against A. And A becomes a guarantor of B’s debt to D by request from B. Subsequently, C attaches the β claim, and then A fulfills the guarantee obligation to D and acquires the α claim for indemnification against B. In this case, A acquires the α claim indeed after the C’s attachment of the β claim. But since the guarantee contract between D and A by request from B, which is the cause of the α claim, was concluded before the attachment, A may assert the set-off against C
However, even if A’s α claim arises owing to a cause that existed before the attachment of the β claim by C, A cannot assert the set-off against C when A acquired the α claim from another person after the attachment (proviso of JCC Art. 511 (2)). For example, B has a β claim against A, and E becomes a guarantor of B’s debt to D by request from B. Subsequently, C attaches the β claim, and then E assigns to A the α claim for indemnification against B that E will acquire if E fulfills the guarantee obligation in the future. Furthermore, E fulfills the guarantee obligation to D and A acquires the α claim. In this case, although the guarantee contract between D and E, which is the cause of the α claim, was concluded before the attachment, A cannot assert the set-off against C because it was after the attachment that A acquired the α claim from E
Sixth, there are legal provisions that prohibit set-off.
JCC Art. 677 is interpreted as a provision that prohibits a debtor of a partnership from set-off who is personally a creditor of one of the partners. This is because the partnership property would be reduced in order to fulfill the individual debt of the partner, if the debtor of the partner could set off the claim of the partnership against them and their claim against the partner
There are such provisions in laws other than the JCC: the prohibition on the grounds that the trust property is independent of the personal property of the trustee (Art. 22 of the Trust Act)
When a court commences bankruptcy proceedings, with the aim of equality of treatment for creditors, the bankruptcy creditors are prohibited from exercising their individual rights in principle (JBA Art. 100 (1)). On the other hand, the set-off has a similar function to a security interest when a debtor does not fulfill their obligation. The need for the collection of claims with security interest is greatest particularly when the debtor goes bankrupt. Therefore, in bankruptcy proceedings, the exercise of the right to set-off is widely permitted with the aim of protecting the creditor’s expectation of the security function of set-off. This paper mainly discusses the rules regarding the set-off by bankruptcy creditors in bankruptcy proceedings as liquidation-type proceedings.
In view of the security function of set-off, bankruptcy creditors are basically allowed to exercise their right to set-off without bankruptcy proceedings as the exception to the prohibition of exercising individual rights (JBA Art. 67 (1)). However, from the standpoint of other bankruptcy creditors, such set-offs allow for preferential debt collection by the bankruptcy creditor exercising their right to set-off, even though the passive claims of the bankrupt belong to the bankruptcy estates, which should be distributed equally among the creditors. Therefore, set-off is prohibited in certain cases where it is regarded as unfair from the viewpoint of equality of treatment for bankruptcy creditors (JBA Art. 71 (1) and Art. 72 (1)). In addition, even if a set-off falls formally under any one of the prohibitions, the prohibition can be lifted in certain situations (JBA Art. 71 (2) and Art 72 (2))
Bankruptcy creditors are allowed to exercise their right to set-off without bankruptcy proceedings by their bankruptcy claims as an active claim and claims of the bankrupt against themselves as a passive claim that there were at the commencement of bankruptcy proceedings. Even in this case, it is basically required that the suitability for set-off stipulated in the Civil Code already exists. However, as a result of the rules of bankruptcy law, the requirements for set-off under the Bankruptcy Act applicable in crisis time may be more relaxed than those under the Civil Code applicable in normal times.
3-2-1
One of the requirements for eligibility for set-off is the homogeneity of debts. As a general rule, when the passive claim is a monetary claim, the active claim must be also a monetary claim. However, in bankruptcy proceedings, even if the bankruptcy claim is a non-monetary claim, the amount of the claim is calculated based on the valuation at the time of commencement of the proceedings, and the claim is regarded as a monetary claim (monetization, JBA Art. 103 (2) (i)). From the viewpoint of eligibility for set-off, the homogeneity of debts is arranged as a result of the monetization of non-monetary claims. This rule allows bankruptcy creditors with non-monetary claims to set off monetary claims against themselves as passive claims in bankruptcy proceedings. However, the non-monetary claim subject to this monetization must be a property claim that can be evaluated financially. For example, it applies to the rights to demand delivery of goods, provision of services and fungible acts. On the other hand, the rights to demand non-fungible acts or omission are not property claims because they are unsuited for financial evaluation. Thus, they do not fall under bankruptcy claims and are not subject to monetization
And under ordinary circumstances, the eligibility for set-off requires that both claims mature. If the due date of the active claim has not arrived, the creditor cannot set it off. However, when bankruptcy proceedings are commenced, the bankruptcy claims with due dates are deemed to have become due at the time of commencement of bankruptcy proceedings, even if they have not yet matured (JBA Art. 103 (3)). Consequently, even when the bankruptcy claims have not yet matured before the bankruptcy proceedings are commenced, the creditors can set them off (the first sentence of JBA Art. 67 (2)).
In addition, the existence of claims is necessary for the eligibility for set-off. If the bankruptcy creditor holds a claim subject to a condition precedent or a claim which may arise in the future and the claim has not yet arisen, there is no eligibility for set-off. But the Bankruptcy Law assumes that the claim and the eligibility for set-off can arise between the commencement of bankruptcy proceedings and the period of exclusion concerning a final distribution and will assure the bankruptcy creditor of set-off in this situation. In concrete terms, when the bankruptcy creditor pays their debt to the bankrupt, they may request a contractual deposit of the amount of payment up to the amount of their claim in order to set off their debt later (the first sentence of JBA Art. 70). If their bankruptcy claim arises after the deposit, the deposited amount will be returned to the bankruptcy creditor, and they may exercise the right to set-off to extinguish their debt
Meanwhile, when the bankruptcy creditor holds a claim subject to condition subsequent, there is no hindrance to setting it off as an active claim from the viewpoint of eligibility for set-off because the claim exists until the condition is fulfilled (the first sentence of JBA Art. 67 (2)). However, if the conditions are fulfilled before the period of exclusion concerning a final distribution, the eligibility for set-off will disappear retroactively and the set-off deserves very little protection. Therefore, in order to ensure the performance of the obligation related to the passive claims belonging to the bankruptcy estate at the time of the fulfillment of the condition in the future, when the bankruptcy creditor sets off their claim subject to condition subsequent as an active claim, they must provide security for or make a contractual deposit of the amount of their debt to be extinguished by the set-off (JBA Art. 69)
3-2-2
When a bankruptcy creditor will set off a claim belonging to the bankruptcy estate as a passive claim in bankruptcy proceedings, the set-off is available even if the claim belonging to the bankruptcy estate is subject to a due date or condition (the second sentence of JBA Art. 67 (2)). If the due date of the passive claim has not yet arrived, the bankruptcy creditor may create an eligibility for set-off by waiving the benefit of the time stipulation attached to their debt (JCC Art. 136 (2)). Therefore, there is no special meaning in the treatment for a claim subject to a due date. On the other hand, with regard to a claim subject to condition, there is a dispute about whether the provision of the second sentence of JBA Art. 67 (2) is an exception under the Bankruptcy Law to the general principle of the Civil Code
Meanwhile, unlike with bankruptcy claims, the provision on the monetization of non-monetary claims (JBA Art. 103 (2) (i)) does not apply to claims belonging to the bankruptcy estate against bankruptcy creditors. Therefore, if a bankruptcy creditor who holds a monetary claim as bankruptcy claim will set off a claim belonging to the bankruptcy estate against them, this claim must be of the same type as their active claim, that is, a monetary claim
In this way, the right to set-off of bankruptcy creditors is widely protected under the Bankruptcy Law. But such a set-off also has a similar function to a security interest that allows for preferential debt collection by the bankruptcy creditor exercising their right to set-off. Therefore, in certain cases where the protection of the benefit by set-off shows unfair favoritism toward the bankruptcy creditor exercising the right to set-off, their set-off is prohibited in order to ensure equality of treatment among the bankruptcy creditors
In this section, we will show the prohibition rules in the situation where A who holds an α claim as a bankruptcy claim against the bankrupt B will set off a β claim belonging to the bankruptcy estimate against A.
3-3-1
3-3-1-1 Incurring of debts after the commencement of bankruptcy proceedings
To begin with, the Bankruptcy Law prohibits set-off with the object of how the bankruptcy creditor has incurred debt.
First, when the bankruptcy creditor A incurs a debt to the bankruptcy estate after the commencement of bankruptcy proceedings against B, A cannot set it off (JBA Art. 71 (1) (i)).
After this base point in time, individual payments to the bankruptcy creditors are impermissible in principle (JBA Art. 100 (1)). If the set-off based on changing situations after this time point were permitted, it would provide a back door for bankruptcy creditors to receive individual payments. If the set-off based on the par value of the bankruptcy claim were available, although this claim is certain to have a less economic value than the par value due to the order to commence bankruptcy proceedings, it would be substantially the same as creating a security interest for the specific bankruptcy claim after the commencement of bankruptcy proceedings and would prejudice equality among the bankruptcy creditors. These are the reasons for the prohibition of set-off
For example, if the bankruptcy creditor incurs a debt due to a juridical act with the bankruptcy trustee after the commencement of bankruptcy proceedings
However, when a claim belonging to the bankruptcy estate is subject to a condition precedent and the condition is fulfilled after the commencement of bankruptcy proceedings, the bankruptcy creditor who is the debtor of the claim is not prohibited from setting it off as a passive claim because a bankruptcy creditor may set off a claim belonging to the bankruptcy estate subject to condition (the second sentence of JBA Art. 67 (2))
3-3-1-2 Incurring of debts based on the contract after becoming unable to pay debts
Second, A enters into a contract before the commencement of bankruptcy proceedings against B, but after B became unable to pay debts. And A knows B’s inability of payment at the time of conclusion of the contract. If this contract is concluded with B and aimed at disposing of B’s property with the intent to offset any debt to be incurred by A under the contract exclusively against A’s bankruptcy claims, A is prohibited from setting off the debts after the commencement of bankruptcy proceedings against B. The prohibition applies too when the debt which A incurs under the contract was originally owed by another person to B (JBA Art. 71 (1) (ii)).
The time that the future bankrupt B becomes unable to pay debts is set as the base in the provision because B cannot pay even debts that are due and equality of treatment among B’s creditors should be required to the same extent as after B’s suspension of payment or the commencement of bankruptcy proceedings against B. If the set-off by A were permitted on these situations, it would be similar to giving A a security interest contrary to the principle of creditors’ equality
With regard to the relationship between A and B after B becomes unable to pay debts, it can be regarded as unfair favoritism similar to accord and satisfaction that A acquires B’s property and can set off the debt which is the consideration of it. On the other hand, it is also necessary to give care to the continuity of B’s business through ordinary transactions with A. Therefore, the applicability of “a contract with the bankrupt for disposing of the bankrupt’s property with the intent to offset any debt to be incurred by the bankruptcy creditor under the contract exclusively against bankruptcy claims” should be determined from the viewpoint of whether or not the contract between A and B evades the avoidance of provision of security to specific creditors (JBA Art. 162 (1) (i)), taking into account various circumstances before and after its conclusion
In addition, with regard to a contract to incur an existing debt owed by another person to B, the assumption of the debt after recognizing B’s inability to payment is considered to be for the purpose of debt collection and the set-off of the assumed debt is prejudicial to the equality among creditors. Even if the set-off is prohibited because of A’s assumption of the debt, ordinary transactions between A and B could not shrink. Therefore, the set-off by A is prohibited regardless of the cause or purpose of the assumption of the debt
3-3-1-3 Incurring of debts after suspension of payment
Third, when A incurs a debt to B after B suspended payments and A was aware of B’s suspension of payment at this time, A cannot set it off after the commencement of bankruptcy proceedings against B (the main clause of JBA Art. 71 (1) (iii)).
Because A is aware of B’s suspension of payment and also recognizes a high probability of B’s insolvency, A’s acquisition of the right to set-off is regarded as detrimental to equality among the bankruptcy creditors
However, even if A is aware of B’s suspension of payment at the time of incurring the debt, A is exempt from the prohibition of the set-off when they prove that B was not objectively insolvent at the time (proviso of JBA Art. 71 (1) (iii))
3-3-1-4 Incurring of debts after a petition to commence bankruptcy proceedings
Fourth, when A incurs a debt to B after a petition to commence bankruptcy proceedings against B is filed and A is aware of the petition at that time, the set-off of the debt is not available for A (JBA Art. 71 (1) (iv)).
After the filing of a petition for the commencement of bankruptcy proceedings, creditors who are aware of this should be restricted from individual debt collection. In this prohibition of set-off, it does not matter whether B was objectively insolvent or not
3-3-2
3-3-2-1 Acquisition of claims after the commencement of bankruptcy proceedings
On the other hand, the Bankruptcy Law prohibits set-off with the object of how the bankruptcy creditor has acquired claim.
First, when A acquires a bankruptcy claim from another person after the commencement of bankruptcy proceedings against B, A cannot use the claim for set-off (JBA Art. 72 (1) (i)).
When an eligibility for set-off is created after the commencement of bankruptcy proceedings, the set-off based on it is impermissible for the purpose of bankruptcy proceedings because of the principle of fairness and equality among bankruptcy creditors
Meanwhile, there is a case in which the judicial precedent applies this provision by analogy: In particular, B has a β claim against A, and A becomes a guarantor of B’s debt to C under a contract between A and C without a request from B. Subsequently, the bankruptcy proceedings are commenced against B, and then A fulfills the guarantee obligation to C and acquires the α claim for indemnification against B. In this case, the α claim of A is a bankruptcy claim. But A is a guarantor without entrustment and acquired the α claim after the commencement of bankruptcy proceedings. If A were nevertheless permitted to set off the α claim and the β claim, it would be equal to permitting the creation of a claim which may be treated preferentially during bankruptcy proceedings, independently of B’s intention or any statutory cause. A’s expectation for such a set-off is not reasonable. In addition, such a set-off is similar to a set-off which a debtor to the bankrupt seeks by acquiring another person’s claim after the commencement of bankruptcy proceedings. Both set-offs are impermissible for the purpose of bankruptcy proceedings because of the principle of fairness and equality among bankruptcy creditors. Therefore, “where a guarantor without entrustment pays a debt of the principle debtor after the commencement of bankruptcy proceedings against the principal debtor in accordance with the contract of guarantee concluded before the commencement of the proceedings, a set-off sought by the guarantor, on the basis of his/her right to indemnification acquired through such payment, against the claim held by the bankrupt (the principal debtor) against the guarantor, is impermissible pursuant to Article 72, paragraph (1), item (i) of the Bankruptcy Act as applied by analogy”. However, on the other hand, if A were a guarantor entrusted by the principal debtor B, the set-off of the α claim which A acquired by the payment to C after the commencement of bankruptcy proceedings would be “reasonable and deserves to be protected under Article 67 of the Bankruptcy Act”
3-3-2-2 Acquisition of claims after becoming unable to pay debts
Second, when A acquires a claim against B after B became unable to pay debts and A was aware of B’s inability of payment at the time of acquisition, A cannot set off the claim after the commencement of bankruptcy proceedings against B (JBA Art. 72 (1) (ii)).
In this case, the principle of equal treatment among bankruptcy creditors takes precedence over A’s expectation for a set-off. Unlike the similar prohibition of set-off by debts incurred after becoming unable to pay debts (JBA Art. 71 (1) (ii)), there is no limitation according to A’s purpose of acquiring the claims or the content of the contract that gave rise to the claim, because A undertakes the risk of no payment from B despite B’s inability by themself and there is no need to give care to ordinary transactions between A and B
3-3-2-3 Acquisition of claims after suspension of payment
Third, when A acquires a claim against B after B suspended payments and A was aware of B’s suspension of payment at the time of acquisition, the set-off of the claim is not available for A (the main clause of JBA Art. 72 (1) (iii)).
As with the rules on debts incurred after suspension of payment (JBA Art 71 (1) (iii)), this prohibition of set-off does not apply if A proves that B was not objectively insolvent at the time of acquisition of the claim (proviso of JBA Art. 72 (1) (iii)).
3-3-2-4 Acquisition of claims after a petition to commence bankruptcy proceedings
Fourth, when A acquires a claim against B after a petition to commence bankruptcy proceedings against B is filed and A is aware of the petition at the time of acquisition, the set-off of the claim by A is prohibited (JBA Art. 72 (1) (iv)).
It is a provision to the same effect as the prohibition of set-off in the case of debt incurred in the same situation (JBA Art. 71 (1) (iv)).
3-4-1
The Bankruptcy Law further lifts the prohibitions of set-off, when the debt incurred or acquisition of claims formally subject to one of the prohibitions is based on certain causes. This is because the expectation for set-off deserves to be protected in the relevant situation.
First, when the suspect incurring of debts or acquisition of claims are based on statutory causes, the set-off of these is available (JBA Art. 71 (2) (i) and Art. 72 (2) (i)).
In this case, the prohibitions of set-off are lifted because the eligibility for set-off here is not intentionally created by the bankruptcy creditor, the bankrupt or a third party. Therefore, even if a bankruptcy creditor incurs a dept or acquires a claim due to statutory causes, their set-off should not be permitted when their intention may intervene as in the case of company split or merger
3-4-2
Second, when the suspect incurring of debts or acquisition of claims are based on a cause that has occurred before the bankruptcy creditor comes to know the bankrupt’s inability of payment, their suspension of payment or the petition to commence bankruptcy proceedings against them, the set-off of these is not prohibited (JBA Art. 71 (2) (ii) and Art. 72 (2) (ii)).
When either an active claim of the creditor or a passive claim of the bankrupt had already occurred and there was already a cause to create the other before the crisis time, the bankruptcy creditor’s expectation for set-off is deemed reasonable and secured as is the case in a security interest
For example, financial institution A has entered into a transaction agreement with counterparty B before A awakes to B’s insolvency. The agreement includes clauses that A may collect or retire B’s bills in A’s possession in the event of B’s default and provide the collected amount for B’s debt. Under the clauses, A is entrusted by B to collect bills and obtains endorsements. Then, after A knows of B’s insolvency, but before the commencement of bankruptcy proceedings against B, A collects the bills and falls into debt to deliver the collected amount to B. In such a situation, A’s expectation for set-off of the debt incurred after the awareness of B’s insolvency deserves protection and the transaction agreement is said to be a cause here
In addition, when A acquires the right to claim payment of bills against B under the previous bill discounting agreement with B after A was aware of B’s suspension of payment, or when A and B are joint and several obligors and A acquires the right to reimbursement against B after A knew of the petition to commence bankruptcy proceedings against B, the bill discounting contract or the joint and several obligation can be considered as the cause
However, even if financial institution A has concluded a current account agreement or a savings account agreement with B before the crisis period of B, the agreements do not fall under “cause”. This is because it is uncertain whether A incurs a debt under the agreement. Therefore, A’s expectation for set-off of the debt lacks concreteness
Furthermore, the prohibitions of set-off are not lifted in the following case too: B enters into an agreement with a bank A to entrust A to conduct management of beneficial interests in an investment trust. According to the agreement, if B executes the cancellation of the trust agreement concerning the beneficial interests, the trust company C should transfer the cancellation money to A and A must pay the money to B. After B suspends payments, A files a request for execution of cancellation with respect to the beneficial interests with C, based on the obligee’s subrogation right (JCC Art. 423) and on behalf of B, in order to preserve their claim against B. Then, A receives the cancellation money from C and assumes the obligation to pay the money to B. In this situation, it was uncertain whether A incurred the debt against B or not, because B could transfer the beneficial interests to other book-entry accounts even during the time when A managed the beneficial interests under the agreement. Therefore, A’s expectation for set-off of the debt under the agreement was not reasonable
In this way, even if the legal relationship that gives rise to the passive claims or active claims has formally arisen before the bankruptcy creditor becomes aware of bankrupt’s inability of payment, etc., the prohibition of set-off may not be lifted when there are circumstances in which the expectation for set-off is not reasonable. However, in order for such an expectation to be evaluated as reasonable, it is not necessary that the active claim and the passive claim are based on the same contract
3-4-3
Third, when the suspect incurring of debts or acquisition of claims are based on a cause that occurred not less than one year before the filing of the petition for commencement of bankruptcy proceedings, the set-off of these is permitted (JBA Art. 71 (2) (iii) and Art. 72 (2) (iii)).
Otherwise, a creditor could not judge indefinitely whether they could set off their debt or claim when they had incurred the debt or acquired the claim after their debtor had become unable to pay debts or suspended payment. It is harmful to the credibility and safety of transactions to place the creditor in such a precarious position for more than one year
3-4-4
Fourth, when a debtor of a bankrupt acquires a claim on the basis of a contract with the bankrupt, they may set off their debt and claim, even if the contract is concluded in the crisis period of the bankrupt (JBA Art. 72 (2) (iv)).
For example, B has a claim against A. In this situation, A can expect that their future claims against B would be secured by the set-off against B’s cross-claim. So that means that A is in much the same position as if they has excess security interest against B. When A acquires a claim against B due to a contract with B and sets off the claim and B’s cross-claim, it is equal to a use of the security interest. Even if the contract is concluded in B’s crisis period, the set-off by A decreases their bad debt risk to lower than before, because A has not been an unsecured creditor, so to speak
According to the provision, the scope of JBA Art. 72 (1) (ii) to (iv) is practically limited to the case where a debtor of a bankrupt acquires a bankruptcy claim of another person
But this lifting of the prohibitions of set-off is not applicable when a creditor of a bankrupt incurs a dept on the basis of a contract with the bankrupt. It is essentially similar to an acquisition of new security interest.
As previously explained, the basic requirements for set-off in Japanese law have many things in common with other civil law countries. But it is observed characteristically that the expectation for set-off is widely protected and the set-off functions just as mighty security interests.
For example, B’s passive claim β against A is assigned to C or seized by C before an eligibility for set-off arises. In German law, A may assert the set-off of their active claim α and the β claim against C, only when A acquired the α claim before the assignment or the attachment and the α claim matures before the β claim (BGB Art. 392 and Art. 406). Comparatively speaking, in Japanese law, it does not matter which of the claims matures first when A acquires the α claim before the assignment or the attachment (JCC Art. 469 (1) and Art. 511 (1))
In addition, on the German Insolvency Act (InsO), a bankruptcy creditor, who has not yet a right to set-off before the commencement of bankruptcy proceedings, cannot set off their claim in the proceedings before an eligibility for set-off arises (InsO Art. 94 and the first sentence of Art. 95 (1)) or when a passive claim of the bankrupt matures before that (the third sentence of InsO Art. 95 (1)). Besides, the prohibitions of set-off can be lifted only in limited circumstances where the German Credit System Act applies (InsO Art. 96). On the other hand, JBA permits set-off immediately, even if active claims of bankruptcy creditors are not monetary or do not mature yet (the first sentence of JBA Art. 67 (2)), and if passive claims belonging to the bankruptcy estate are subject to a due date or condition (the second sentence of JBA Art. 67 (2))
The characteristics of Japanese law are strengthened by the revision of the JCC in 2017. The strong protection of set-off contributes to the stabilization and development not only of financial transactions but also of all other continuous transactions.
Ethical approval and consent were not required.
No data are associated with this article.
Judgement of the Great Court of Judicature, 13 November 1914, Minroku (Taishinin Minji Hanketsuroku) Vol. 20, p. 922.
Judgement of the Great Court of Judicature, 7 April 1920, Minroku Vol. 26, p. 458.
Judgement of the Great Court of Judicature, 23 December 1926, Shimbun (Horitsu Simbun) No. 2660, p. 15.
Judgement of the Great Court of Judicature, 24 October 1930, Minshu (Taishinin Minji Saibanreishu) Vol. 9, p. 1049.
Judgement of the Great Court of Judicature, 8 September 1934, Minshu Vol. 12, p. 2124.
Judgement of the Great Court of Judicature, 31 July 1936, Minshu Vol. 15, p. 1563.
Judgement of the Great Court of Judicature, 1 March 1938, Minshu Vol. 17, p. 318.
Judgement of the Great Court of Judicature, 28 September 1940, Minshu Vol. 19, p. 1744.
Judgement of the Great Court of Judicature, 26 November 1940, Minshu Vol. 19, p. 2088.
Judgement of the Great Court of Judicature, 19 November 1942, Minshu Vol. 21, p. 1075.
Judgement of Supreme Court, 22 February 1957, Minshu (Saikosaibansho Minji Hanreishu) Vol. 11, No. 2, p. 350
Judgement of Supreme Court, 14 April 1961, Minshu Vol. 15, No. 4, p. 765.
Judgement of Supreme Court, 24 March 1964, Hanji (Hanrei Jiho) No. 370, p. 30.
Judgement of Supreme Court, 2 November 1965, Minshu Vol. 19, No. 8, p. 1927.
Judgement of Supreme Court, 8 December 1975, Minshu Vol. 29, No. 11, p. 1864.
Judgement of Supreme Court, 4 March 1976, Minshu Vol. 30, No. 2, p. 48.
Judgement of Supreme Court, 21 September 1978, Hanji No. 907, p. 54.
Judgement of Supreme Court, 10 July 1979, Minshu Vol. 33, No. 5, p. 533.
Judgement of Supreme Court, 26 February 1985, Kinhou (Kinyu Houmu Jijo) No. 1094, p. 38.
Judgement of Supreme Court, 18 October 1988, Minshu Vol. 42, No. 8, p. 575.
Judgement of Supreme Court, 14 April 1998, Minshu Vol. 52, No. 3, p. 813.
Judgement of Supreme Court, 17 January 2005, Minshu Vol. 59, No. 1, p. 1.
Judgement of Supreme Court, 28 May 2012, Minshu Vol. 66, No. 7, p. 3123.
Judgement of Supreme Court, 28 February 2013, Minshu Vol. 67, No. 2, p. 343.
Judgement of Supreme Court, 5 June 2014, Minshu Vol. 68, No. 5, p. 462.
Judgement of Supreme Court, 8 July 2016, Minshu Vol. 70, No. 6, p. 1611.
Judgement of Supreme Court, 8 September 2020, Minshu, Vol. 74, No. 6, p. 1643.
Justice Ministry’s Legislative Council Civil Code (Obligation Law) Subcommittee Document 74A
Justice Ministry’s Legislative Council Civil Code (Obligation Law) Subcommittee Document 80-3
Justice Ministry’s Legislative Council Civil Code (Obligation Law) Subcommittee Document 83-2
Souya Aoki and Noboru Kataoka (eds.),
Makoto Arai,
Hiroto Dougauchi (ed.),
Kenjiro Egashira,
Ryohei Hayashi et al.,
Hiroyuki Hirano,
Tetsu Isomura (ed.),
Makoto Ito,
Makoto Ito, et al.,
Teiichiro Nakano and Toru Michishita (eds.),
Hiroyasu Nakata,
Hiroyasu Nakata,
Fujio Oho,
Masamichi Okuda,
Yoshio Shiomi,
Yoshio Shiomi,
Yoshio Shiomi et al. (eds.),
Morio Takeshita (ed.),
Mutsuo Tanaka and Kazuhiko Yamamoto (eds),
National Network of Lawyers for Insolvency Resolution (ed.),
Wataru Tanaka,
Takeo Tsutsui and Hideki Muramatsu (eds.),
University of Tokyo Collegium Labor Law,
Sakae Wagatsuma,
Sakae Wagatsuma,
Kazuhiko Yamamoto et al.,
Yutaka Yamamoto (ed.),
For the text of each law of Japan, please refer to the following website.
And for the judgment and decision of the Japanese Supreme Court, please refer to the following website.
Judgement of Supreme Court, 8 July 2016, Minshu Vol. 70, No. 6, p. 1611.
However, there has long been the opinion that some set-off among the three parties should be allowed under certain conditions.
Hiroyasu Nakata,
This discipline is based on the views of judicial precedents before the revision of the JCC in 2017. See Judgement of Supreme Court, 8 December 1975, Minshu Vol. 29, No. 11, p. 1864.
See also BGB Art. 406, FCC Art. 1347-7 and Art. 1348-1 (3).
Nakata (n. 3), p. 657.
Justice Ministry’s Legislative Council Civil Code (Obligation Law) Subcommittee Document 74A, p. 15; Nakata (n. 3), p. 659.
Justice Ministry’s Legislative Council Civil Code (Obligation Law) Subcommittee Document 74A, pp. 14 f.; Nakata (n. 3), pp. 659 f.
Yoshio Nakai, ‘Article 505 Civil Code’ in Tetsu Isomura (ed.),
Yoshio Shiomi,
Judgement of Supreme Court, 10 July 1979, Minshu Vol. 33, No. 5, p. 533; Sakae Wagatsuma,
Wagatsuma (n. 9), p. 324; Shiomi (n. 8), p. 295; Hiroyuki Hirano,
Judgement of the Great Court of Judicature, 7 April 1920, Minroku Vol. 26, p. 458; Sakae Wagatsuma,
Wagatsuma (n. 9), p. 325; Nakai (n. 7), p. 389; Shouzou Inui, ‘Article 508 Civil Code’ in Tetsu Isomura (ed.),
Judgement of the Great Court of Judicature, 28 September 1940, Minshu Vol. 19, p. 1744; Judgement of Supreme Court, 14 April 1961, Minshu Vol. 15, No. 4, p. 765; Nakai (n. 7), p. 389; Inui (n. 12), p. 425; Okuda (n. 9), p. 574; Ishida (n. 9), p. 336; Shiomi (n. 8), pp. 279 f.; Nakata (n. 3), p. 469.
Judgement of Supreme Court, 28 February 2013, Minshu Vol. 67, No. 2, p. 343; Shiomi (n. 8), p. 273.
Shiomi (n. 8), p. 271.
Shouzou Inui, ‘Article 507 Civil Code’ in Tetsu Isomura (ed.),
Nakata (n. 3), p. 470.
Judgement of the Great Court of Judicature, 19 November 1942, Minshu Vol. 21, p. 1075; Wagatsuma (n. 9), p. 327; Nakai (n. 7), p. 395; Okuda (n. 9), p. 574.
Judgement of the Great Court of Judicature, 8 September 1934, Minshu Vol. 12, p. 2124; Wagatsuma (n. 9), p. 328; Nakai (n. 7), p. 396.
Nakai (n. 7), p. 396.
Wagatsuma (n. 9), p. 329; Nakai (n. 7), p. 396; Okuda (n. 9), p. 574; Nakata (n. 3), p. 470.
Judgement of the Great Court of Judicature, 13 November 1914, Minroku Vol. 20, p. 922; Judgement of the Great Court of Judicature, 24 October 1930, Minshu Vol. 9, p. 1049; Judgement of the Great Court of Judicature, 1 March 1938, Minshu Vol. 17, p. 318; Judgement of the Great Court of Judicature, 26 November 1940, Minshu Vol. 19, p. 2088; Judgement of Supreme Court, 22 February 1957, Minshu Vol. 11, No. 2, p. 350; Wagatsuma (n. 9), p. 341; Nakai (n. 7), p. 396; Oho (n.9), p. 417; Okuda (n. 9), p. 574; Ishida (n. 9), p. 335; Shiomi (n. 8), p. 283; Nakata (n. 3), pp. 473 f.
Judgement of the Great Court of Judicature, 13 November 1914, Minroku Vol. 20, p. 922; Judgement of the Great Court of Judicature, 24 October 1930, Minshu Vol. 9, p. 1049; Judgement of Supreme Court, 22 February 1957, Minshu Vol. 11, No. 2, p. 350.
Judgement of the Great Court of Judicature, 26 November 1940, Minshu Vol. 19, p. 2088.
Judgement of the Great Court of Judicature, 1 March 1938; Minshu Vol. 17, p. 318.
Nakai (n. 7), p. 397; Shiomi (n. 8), p. 285; Nakata (n. 3), p. 474.
Judgement of Supreme Court, 4 March 1976, Minshu Vol. 30, No. 2, p. 48; Judgement of Supreme Court, 21 September 1978, Hanji No. 907, p. 54.
Wagatsuma (n. 9), p. 330; Okuda (n. 9), pp. 575 f.; Ishida (n. 9), p. 338; Nakata (n. 3), p. 473.
Nakai (n. 7), p. 398.
Nakata (n. 3), p. 473.
Justice Ministry’s Legislative Council Civil Code (Obligation Law) Subcommittee Document 80-3, p. 29; Nakata (n. 3), p. 475.
Justice Ministry’s Legislative Council Civil Code (Obligation Law) Subcommittee Document 80-3, p. 29; Takeo Tsutsui and Hideki Muramatsu (eds.),
Shiomi (n. 8), p. 290; Nakata (n. 3), p. 475. Hiroyuki Hirano insists that it should be interpreted widely as normal intention. See Hirano (n. 10), pp. 523 f.
Justice Ministry’s Legislative Council Civil Code (Obligation Law) Subcommittee Document 83-2, p. 33; Nakata (n. 3), p. 475.
Yuka Fukagawa, ‘Set-Off (2) - Prohibition of Set-Off’ in Yoshio Shiomi et al. (eds.),
Shiomi (n. 8), pp. 290 f.
Justice Ministry’s Legislative Council Civil Code (Obligation Law) Subcommittee Document 80-3, p. 29.
Nakata (n. 3), p. 476.
Justice Ministry’s Legislative Council Civil Code (Obligation Law) Subcommittee Document 83-2, p. 33; Tsutsui and Muramatsu (n. 32), p. 202; Nakata (n. 3), p. 476.
Nakata (n. 3), p. 477.
Tsutsui and Muramatsu (n. 32), p. 203; Nakata (n. 3), p. 477.
Art. 152 of the Civil Enforcement Act; Art 11 (3) of the Pension Act; Art. 24 of the National Pension Act; Art. 41 (1) of the Employees’ Pension Insurance Act; Art. 58 of the Public Assistance Act; Art. 15 of the Child Allowance Act; Art. 83 (2) of the Labor Standards Act, etc.
Wagatsuma (n. 9), p. 331; Yoshio Nakai, ‘Article 510 Civil Code’ in Tetsu Isomura (ed.),
Tsutsui and Muramatsu (n. 32), p. 204. See also BGB Art. 392, FCC Art. 1347-7 and Art. 1348-1 (3).
Nakata (n. 3), pp. 484 ff.
Nakata (n. 3), pp. 486 f.
Shiomi (n. 8), p. 281; Yasuto Nishiuchi, ‘Article 676 Civil Code’ in Yutaka Yamamoto (ed.),
Nishiuchi (n. 47), p. 571; Shiomi (n. 47), p. 442.
Makoto Arai,
Wataru Tanaka,
Masaru Noma, ‘Article 17 Labor Standards Act’ in Souya Aoki and Noboru Kataoka (eds.),
Makoto Ito, et al.,
Kanichiro Douzono, ‘Article 103 Bankruptcy Act’ in Morio Takeshita (ed.),
Katsumi Yamamoto, ‘Article 67 Bankruptcy Act’ in Morio Takeshita (ed.),
Ito, et al. (n. 52), p. 563.
Katsumi Yamamoto, ‘Article 69 Bankruptcy Act’ in Morio Takeshita (ed.),
Katsumi Yamamoto, ‘Right to Set-Off’ in Teiichiro Nakano and Toru Michishita (eds.),
Kazuhiko Yamamoto, ‘Lease Contract’ in National Network of Lawyers for Insolvency Resolution (ed.),
Ito, et al. (n. 52), pp. 556 f. See also Judgement of Supreme Court, 17 January 2005, Minshu Vol. 59, No. 1, p. 1.
Yamamoto (n. 54), p. 293; Oka (n. 54), p. 474; Ito, et al. (n. 52), p. 556.
Katsumi Yamamoto, ‘Article 71 Bankruptcy Act’ in Morio Takeshita (ed.),
Yamamoto (n. 61), p. 306; Obata (n. 61), p. 491; Ito, et al. (n. 52), p. 570.
Judgement of the Great Court of Judicature, 23 December 1926, Shimbun No. 2660, p. 15 (related to the old law).
Judgement of the Great Court of Judicature, 31 July 1936, Minshu Vol. 15, p. 1563; Judgement of Supreme Court, 24 March 1964, Hanji No. 370, p. 30 (both related to the old law).
Judgement of Supreme Court, 17 January 2005, Minshu Vol. 59, No. 1, p. 1 (related to the old law).
Yamamoto (n. 61), p. 307; Obata (n. 61), p. 493; Ito, et al. (n. 52), p. 570.
Yamamoto (n. 61), p. 308; Obata (n. 61), pp. 493 ff.; Ito, et al. (n. 52), pp. 574 f.
Yamamoto (n. 61), p. 309; Obata (n. 61), p. 495; Ito, et al. (n. 52), p. 575.
Yamamoto (n. 61), p. 309.
Yamamoto (n. 61), p. 309; Obata (n. 61), p. 495; Ito, et al. (n. 52), p. 576.
Ito, et al. (n. 52), p. 576.
Judgement of Supreme Court, 28 May 2012, Minshu Vol. 66, No. 7, p. 3123.
Judgement of Supreme Court, 28 May 2012, Minshu Vol. 66, No. 7, p. 3123.
Ito, et al. (n. 52), p. 582.
Yamamoto (n. 61), p. 309 and Katsumi Yamamoto, ‘Article 72 Bankruptcy Act’ in Morio Takeshita (ed.),
Yamamoto (n. 61), p. 310; Ito, et al. (n. 52), p. 577.
Obata (n. 61), pp. 496 ff.; Ito, et al. (n. 52), pp. 577 ff.
Judgement of Supreme Court, 18 October 1988, Minshu Vol. 42, No. 8, p. 575 (related to the old law).
Judgement of Supreme Court, 2 November 1965, Minshu Vol. 19, No. 8, p. 1927 (related to the old law); Judgement of Supreme Court, 14 April 1998, Minshu Vol. 52, No. 3, p. 813 (composition case).
Yamamoto (n. 61), p. 310; Obata (n. 61), p. 497; Ito, et al. (n. 52), p. 578. See also Judgement of Supreme Court, 26 February 1985, Kinhou No. 1094, p. 38 (related to the old law).
Judgement of Supreme Court, 5 June 2014, Minshu Vol. 68, No. 5, p. 462 (rehabilitation case).
Judgement of Supreme Court, 8 September 2020, Minshu, Vol. 74, No. 6, p. 1643.
Yamamoto (n. 61), p. 310; Obata (n. 61), p. 498; Ito, et al. (n. 52), p. 581.
Yamamoto (n. 75), pp. 315 f.; Eiichi Obata, ‘Article 72 Bankruptcy Act’ in Mutsuo Tanaka and Kazuhiko Yamamoto (eds),
Yamamoto (n. 75), p. 316; Ito, et al. (n. 52), p. 586.
See 1-1-2 and 2-5-1.
See 1-1-2 and 2-5-2.
See 3-2-1 and 3-2-2.
See 3-4.
This article concisely sets out the requirements for set-off under Japanese law, based on relevant case law and selected academic opinions. The author places particular emphasis on set-off in the case of insolvency. I am not aware of any comparable account in English. Therefore, this article represents a welcome addition to the literature and, once slightly revised, should also serve as a useful initial orientation for legal practitioners.
The rules of set-off under Japanese law distinguish between (1) positive requirements that must be met for set-off, and (2) negative requirements that may result in the debtor's right of set-off being excluded even if the positive requirements are met. The rules of set-off are (3) modified in the Bankruptcy Act for the case of insolvency. The structure of the article at hand is also based on this three-part structure, making it clear and logical.
The Abstract emphasizes at the beginning that the rules of set-off in Japanese law were created at the end of the 19th century based on foreign, in particular German, models, but have since been developed independently by the Japanese courts and revised by the legislator of the 2017 reform of the law of obligations. Looking at the abstract, it is surprising that the article discusses similarities and differences between current Japanese law and foreign legal systems, such as German law, only at the very end of the article in the Conclusion, and even there only briefly. In my view, the article would benefit if these comparative considerations were discussed in greater depth. If this turns out to be too cumbersome – the devil is in the details -, one might opt to shorten the reference to the genesis of current Japanese rules at the beginning of the Abstract to avoid raising false expectations.
The actual article begins somewhat abruptly with the positive requirements for set-off (1). It would be more reader-friendly to begin with a brief introduction that could, for example, emphasize the functions of set-off. The reciprocity of the claims is discussed as the first positive requirement. The decision of the Supreme Court of July 8, 2016, which the author cites as an illustration, is presented somewhat tersely at this point. One might add that the requirement of reciprocity under Art. 505 (1) Japanese Civil Code and Art. 92 (1) Japanese Civil Rehabilitation Act are similar in this respect. As a second positive condition, the author discusses the existence of both claims. In this respect, an important exception exists with regard to time-barred claims, which, while extinguished, can still be set off under certain conditions. The third positive requirement is the similarity of the claims with regard to their content. Remarkably, such similarity is assumed to exist even for monetary claims in different currencies. Finally, both claims must be due in principle, whereby the party making the set-off can fulfill its own claim prematurely.
Even if the positive conditions for offsetting are met, a set-off may be excluded under special circumstances (2). The author systematically presents these so-called negative requirements, explains their purpose, and briefly illustrates the various scenarios using examples from case law. There are certain claims which, by their nature, cannot be used for set-off, such as a right that another person refrain from doing something. Furthermore, set-off is generally excluded with a claim that is subject to a defense (the author points out an important exception recognized by the Supreme Court in the case of work contracts). A set-off can be contractually excluded, however, such an exclusion can only be asserted against third parties if they were either aware of the exclusion or were unaware of it due to gross negligence. It is not possible to make a set-off against certain claims for damages in tort or damages for the death or injury of a person. These latter rules are intended to ensure that the victims receive actual payment. If the passive claim has been attached, generally a set-off can no longer be made against it (again, some exceptions apply). Finally, a set-off may be excluded by special statutory provisions.
In the third part (3), the author specifically addresses set-off in the context of insolvency proceedings. Since I am not a true insolvency expert, I can assess this part only to a limited extent. However, the Overview at the beginning of the section seems to me to nicely illustrate the special interests involved in insolvency. The security function of set-off is particularly important where the other party has become insolvent. The Japanese Bankruptcy Code takes this into account by lowering the requirements for a set-off compared to the general rules of civil law, both for the claim to be set-off as well as the claim against which the set-off is to be made (e.g., the requirements of similarity and maturity of the claims). On the other hand, the Bankruptcy Act also restricts the setting off of insolvency claims in some respects in the interest of equal treatment of all creditors. Certain statutory prohibitions on set-off do not apply in the case of insolvency, as it is considered important to protect a creditor who has relied on the possibility of realizing his claim by way of set-off.
In his Conclusion, the author emphasizes that Japanese law provides particularly extensive protection for reliance on the possibility of set-off. At this point, the author returns to the German origins of the Japanese rules and cites two scenarios where German law seems more restrictive. The first example, I believe, does not quite accurately reflect the content of German law (BGB Art. 392 and 406 refer to the knowledge of the assignment, not the assignment as such). The author's overall conclusion is nevertheless plausible as a general trend.
The article is largely readable, with only a few passages becoming difficult to understand (third paragraph under 1-1-2, first sentence under 3-3-1-1, second paragraph under 3-4-1, and first paragraph under 3.4.2). A linguistic revision by a native speaker would help smooth out some of the wording. Some books cited are not cited in the latest edition (e.g., Egashira, Nakata, Tanaka). The translation of the Japanese book titles sometimes sounds a bit strange (“Law of Company Limited”, “General Theory of Obligation Law”, etc.).
I hope my comments can be helpful.
Is the review written in accessible language?
Partly
Are all factual statements correct and adequately supported by citations?
Yes
Are the conclusions drawn appropriate in the context of the current research literature?
Yes
Is the topic of the review discussed comprehensively in the context of the current literature?
Partly
Reviewer Expertise:
Japanese business law from a comparative perspecitve. However, I am not an insolvency expert.
I confirm that I have read this submission and believe that I have an appropriate level of expertise to confirm that it is of an acceptable scientific standard, however I have significant reservations, as outlined above.
I sincerely appreciate your peer review. As you kindly understand, this article as review aims to provide a concise introduction to the requirements for set-off under current Japanese law and the general understanding regarding them. For this purpose, the review is devoted to describing objectively the current state of Japanese set-off law without interjecting my humble opinion.
And I fully agree that comparative study holds high academic and practical significance. However, for comparative research, detailed explanations of other countries' legal systems are indispensable. For example, in order to compare Japanese law with German law, it is essential to address not only the set-off law itself but also the institutional differences regarding assignment of claims and attachment. These explanations may undermine the conciseness that this article prioritizes. Therefore, descriptions related to German and French law are kept to a minimum.
Nonetheless, as you indicate, the current version of the text may inadvertently set readers’ expectations about comparative research. Other reviewers have also pointed out the inadequacy of the comparative study. Therefore, I would like to revise the text in accordance with your advice.
Additionally, I will strive to rewrite the passages that are deemed difficult to understand. However, since they are based on the wording of Japanese legal texts and extremely difficult to translate into English, so I am unsure how much they can be refined. In particular, the passage concerning the assignment of claims is founded on the distinctive framework of Japanese law. Furthermore, this paper has been reviewed by a native speaker.
Review of Hiroki Okamoto, “Requirements for set-off in Japanese law”
By Matthias Lehmann and Emeric Prévost
This article offers a detailed presentation of the Japanese law of set-off currently in force. It also includes useful considerations on the functioning of set-off rules during bankruptcy proceedings. The different rules contained in the Japanese Civil Code and the Japanese Bankruptcy Act are carefully outlined by the author, with stylized examples to facilitate the understanding of their functioning and purpose. Helpful references are also made to authoritative analyses and case law. This said, visuals such as diagrams are lacking; these would have been particularly helpful to explain the complex functioning and interplay of rules, and to avoid the confusion that merely abstract descriptions may create.
The rules carefully examined by the author are the result of a reform of the Japanese Civil Code in 2017 (Act No. 44 of 2017 for the Partial Revision of the Civil Code) that notably aimed to modernise the law of obligations. Although the author often points out the purpose of each commented provision, there is no critical and systematic analysis of whether current rules represent a real and significant improvement compared to the previous state of the law. Such a diachronic analysis would have been particularly useful to the reader to better understand the underlying principles of the current Japanese rules on set-off.
The paper interestingly engages in some comparative law analysis, especially with some German law provisions. However, one may regret that the author does so only selectively and in a rather summary fashion. Adding to that, the few comparative observations of the paper only appear in the conclusion. One may thus be quite surprised by the fact that the author starts his concluding remarks by stating that “as previously explained, the basic requirements for set-off in Japanese law have many things in common with other civil law countries”. Although French law, for instance, is mentioned in the abstract, the paper does not actually contain any other reference to the French legal system. In sum, it would be worth undertaking a more consistent comparative study.
A proper comparative analysis would indeed allow for a better understanding of the comparative advantages or disadvantages of Japanese law in the broader context of the world’s legal systems. The insights gained from such a critical study would be particularly valuable not only for scholars but also for the legal practice, as transnational businesses are widely recognised across jurisdictions the freedom to choose the most suitable law to their contractual relationships.
Overall, the paper provides a detailed and interesting overview of the Japanese rules on set-off. One can hope, however, that this is only the first step of a more critical and comparative study.
Is the review written in accessible language?
Partly
Are all factual statements correct and adequately supported by citations?
Yes
Are the conclusions drawn appropriate in the context of the current research literature?
Partly
Is the topic of the review discussed comprehensively in the context of the current literature?
Yes
Reviewer Expertise:
private law, comparative law, private international law
We confirm that we have read this submission and believe that we have an appropriate level of expertise to confirm that it is of an acceptable scientific standard, however we have significant reservations, as outlined above.
I sincerely appreciate your peer review. The feedback and comments provided are generally understandable and ratiocinative. However, I am concerned that you have a different understanding of the article type “review” from my view.
This paper is written not as a research article, but as a review. This review aims to provide a concise introduction to the requirements for set-off under current Japanese law and the general understanding regarding them. The intended audience includes lawyers and business people who cannot read Japanese.
For this purpose, the review is devoted to describing objectively the current state of Japanese set-off law without interjecting my humble opinion. Consequently, critical study based on subjective evaluation is not included.
Additionally, conciseness has priority in this paper. Therefore, to avoid elaborating on peripheral information, it does not include explanations of the differences from the pre-revision law, the purpose of the revision, or comparative studies.
Especially when conducting comparative research, detailed explanations of other countries' legal systems are indispensable. For example, in order to compare Japanese law with German law, it is essential to address not only the set-off law itself but also the institutional differences regarding assignment of claims and attachment. Additionally, when comparing with French law, it is necessary to analyze unique French concepts such as judicial set-off and the interconnection of obligations. However, these explanations may not necessarily be beneficial to the intended audience who seeks information on Japanese law. Therefore, descriptions related to German and French law are kept to a minimum.
Taking the above into consideration, this paper has been published as a review that concisely summarizes a part of of Japanese set-off law. I would greatly appreciate it if you could understand the intent of the review. Finally, I fully agree that a more critical and comparative study holds higher academic and practical significance.