1 Written with assistance from Reiko Omachi, a counsel, and Yosuke Unami, an associate, of Morrison and Foerster/Ito and Mitomi.
3 Eg S Wagatsuma, Shintei Saiken Soron (Minpo Kogi IV) (Revised General Theory on Claims (Lecture on Civil Code IV)) (1964) 319–21.
4 Civil Code Art 505 para 1.
5 Regarding the case where the parties have agreed to prohibit or restrict set-off, the Revised Civil Code will clarify that such prohibition or restriction can be asserted only against a third party who has knowledge or is grossly negligent of such prohibition or restriction.
6 For example, a set-off of the obligation to pay cash against the obligation to deliver securities is not allowed, unless the latter obligation is converted into a monetary obligation. However, there is no requirement for the obligations to arise out of the same event, to be the same amount, to have the same maturity date, or to be performed in the same place.
7 However, it is commonly interpreted that only a claim held by a party who wants to effect set-off must be due and payable, and that the counterparty’s claim does not need to be due and payable. See the Basic Principle of Reform of Law of Obligations (the ‘Basic Principle’) published by the Reform Commission (the ‘Commission’) on 31 March 2009. Also see below para 19.10.
8 The fourth requirement will exclude, inter alia, obligations that are subject to any defences, or have been attached or pledged. Also excluded are any obligations whose purpose will not be achieved if they are not specifically performed. For example, A’s obligation to provide certain service to B for five days may not be set off against B’s obligation to provide the same service to A for three days so as to enable B to work only for two days.
9 But see the ‘Contractual set-off’ section below.
12 Judgment of 24 June 1970, Saiko Saibansho (Supreme Court), 24–6 Saiko Saibansho Minji Hanreishu (Compilation of Supreme Court Civil Cases) 587 (‘Minshu’).
13 Hasanho (Bankruptcy Act), Act No 75 of 2004 (‘BA’).
14 Minji Saiseiho (Civil Rehabilitation Act), Act No 225 of 1999 (‘CIRA’).
15 Kaisha Koseiho (Corporate Reorganization Act), Act No 154 of 2002 (‘CRA’).
16 BA arts 65 and 67; CIRA arts 88 and 92; CRA arts 48 and 135.
19 If a trustee has been appointed by the court under BA, CIRA, or CRA, the notice of intention to exercise the set-off right must be given to the trustee.
20 The term ‘insolvent’ (shiharai funo) is defined under each of BA, CIRA, and CRA as the condition of a debtor who, due to lack of payment ability, is unable to pay its debts generally and continuously as they become due.
21 Under BA art 71 para 1, a bankruptcy creditor may not effect a set-off in any of the following cases:
22 Under BA art 72 para 1, no person owing an obligation to a bankrupt debtor may effect a set-off in any of the following cases:
23 BA art 71 para 2 makes items (ii) to (iv) under art 71 para 1 not applicable in any of the following cases:
BA art 72 para 2 makes items (ii) to (iv) under art 72 para 1 not applicable in any of the following cases:
24 CIRA arts 93 and 93-2; CRA arts 49 and 49-2.
25 Case cited in n 12 above. In this case, the tax authority of Japan attempted to attach a bank deposit of a company that had been delinquent in the payment of taxes and, in response to such attachment, the bank with which that bank account was held asserted a defence of set-off, attempting to set off its claim against the company under a loan against the company’s claim against it under the deposit.
26 But see Judgment of 23 December 1964, Supreme Court, 18–10 Minshu 2217. Until the 1970 decision, which is referred to in n 25 above, the decision of this case had been the highest court decision on the issue of the enforceability of a set-off against an attaching creditor. The court in this case took a narrower approach, limiting the availability and scope of set-off, and held that where neither claim has become due at the time when one of them is attached, if the due date of the claim of the party who intends to exercise a set-off will come later than the other claim, such person shall be precluded from exercising the set-off. The court found it contrary to good faith for any person to refuse to make payment on the claim against itself until its claim against the other becomes due. Another rationale for this decision is that in cases where such person’s claim becomes due after the other person’s claim, such person’s expectation that, because of the security function of set-off, the other party’s claim may be used in reduction of its claim against the other cannot be considered legitimate. However, it is fair to say that this decision was overridden by the 1970 decision.
27 This is a standard form of master agreement called ‘Agreement on Bank Transactions’ (Ginko Torihiki Yakujosho) that customers of banks are, in almost all cases, required to enter into with the banks when they first enter into a transaction whereby the banks extend credit or provide funds to the customers. It is very common in Japan that banks put a set-off clause in this standard form of master agreement, and banks manage customer’s credit risk by holding the right to set-off against customers.
28 Saiko Saibansho Hanrei Kaisetsu Minjihen (Annotations of Supreme Court Cases (Civil Cases)), vol 1, 1970, at 478.
30 Judgment of 8 December 1975, Supreme Court, 29-11 Minshu 1864.
31 The court itself limited the applicability of the holding to cases where such particular fact exists.
32 Annotations of Supreme Court Cases (Civil Cases), 1975, at 658.
33 Kin’yu Shohin Torihiki Ho (Financial Instruments and Exchange Act), Act No 25 of 1948 (‘FIEA’).
34 Judgment of 18 July 1995, Supreme Court, 176 Saiko Saibansho Saibanshu 415. The court in this case examined the effectiveness of the set-off of a claim of a subsidiary of company A against company B (‘A claim’) and a claim of company B against company A (‘B claim’) made by the subsidiary pursuant to a set-off agreement between the subsidiary and company B as against an attaching creditor. The court viewed the set-off by the subsidiary of A claim and B claim as consisting of two transactions, namely a transfer of A claim from the subsidiary to company A and a subsequent set-off by company A of A claim and B claim. The set-off against the attaching creditor was disallowed on the ground that notice of the set-off of A claim and B claim, which, according to the court, also served as notice to company B of the transfer of A claim from the subsidiary to company A for the purpose of perfection, was given after the attachment by the attaching creditor had taken effect.
35 Judgment of 8 July 2016, Supreme Court, 70-6 Minshu 1611. The court in this case examined whether the netting arrangement that sets off the claims held by company Y against the indebtedness by its affiliated company was enforceable pursuant to art 92 para 1 of the CRA. In this case, Company X and Company Y agreed the ISDA Master Agreement including a specific provision which allows tri-party netting by using the claims of its affiliates. When the civil rehabilitation procedure against Company X was commenced, Company Y gave the notice of intention to set off a claim of its affiliated company against Company X (‘Y claim’) and claim of Company X against Company Y (‘X claim’). At the same time, the affiliated company of Company Y gave a notice to Company X that specifically agreed with this triangular set-off. The court ruled that this netting arrangement was unenforceable after the commencement of the Company Y’s rehabilitations proceeding. The reason was that, according to art 92 of the CRA, a creditor would be able to set off on the condition that the creditor owes a debt to the rehabilitation debtor at the time of commencement of rehabilitation proceedings. Art 505 para 1 of the Civil Code also requires that the claims be mutual. Considering the purpose of such provisions, a person who owes an obligation to the rehabilitation debtor must not be allowed to set off claims held by others against its obligations, because such set-off arrangement does not satisfy the requirements under art 92 of the CRA and violates the principle of equal treatment among general creditors. Even when such arrangement has been agreed amongst all relevant parties before the commencement of the rehabilitation procedures, the requirement for set-off would not yet be met.
36 Also, there are other several arguments that ‘mutuality’ may be satisfied depending on the case, for example in view of facts such as how much the relevant party has expected set-off and what kind of rights a competing third party has against the set-off (K Yamamoto, ‘Sanshakan Sosai no Saisei Tetsuzuki ni okeru Kouryoku’ (Enforceability of Triangular Set-off in the Rehabilitation Procederes), 2053 Kinyu Homu Jijo 6). Further, some scholars consider that multi-party netting should be deemed a kind of settlement agreement that is significantly different from and does not need to subject to requirement for set-off in the Civil Code and insolvency laws of Japan (T Uchida ‘Sanshakan Sosai no Minji Saiseiho jo no Yukosei’ (Validity of Triangular Set-off under the Civil Rehabilitation Act), 1093 NBL 13).
37 Financial institutions are globally required to satisfy the capital adequacy ratio requirement to promote financial stability and efficiency in economic systems throughout the world. While the trade exposure determination shall be calculated basically on a gross basis, it can be calculated on a net basis on the condition that the financial institution demonstrate that the netting agreement is legally enforceable.
38 Kin’yuu Kikan tou ga Okonau Tokutei Kin’yuu Torihiki no Ikkatsu Seisan ni kansuru Horitsu (Act on Collective Liquidation of Specified Financial Transactions Conducted by Financial Institutions, etc), Act No 108 of 1998 (‘Netting Act’).
39 Under the Netting Act, the term ‘close-out netting’ means a procedure by which, upon occurrence of a close-out event with respect to a party to the specified financial transactions entered into under a master agreement, the value at such occurrence of each of the specified financial transactions under the master agreement shall be computed, and the aggregate net balance shall become a single claim or obligation arising between the parties. This definition has its theoretical basis in the understanding that close-out netting under the Netting Act is not merely contractual set-off (sousai) of existing obligations but instead is a contractual creation of a single legal obligation occurring upon close-out, which replaces the terminated transactions.
40 Art 63 of the CRA and art 51 of CIRA.
41 Yokin Hokenho (Deposit Insurance Act), Act No 34 of 1971.
43 Ho no Tekiyou ni Kansuru Tsuusokuho (Act on General Rules for the Application of Laws), Act No 78 of 2006 (‘Conflict Laws Act’).
44 K Koide, Chikujo Kaisetsu Ho no Tekiyo ni Kansuru Tsusokuho (Explanatory Notes for the Conflict Laws Act) (2014) 299.
45 Conflict Laws Act arts 17 and 20. See Koide (n 44 above) 238.