Ever since U.S. financial services giant Lehman Brothers Holdings Inc. collapsed in September, in what many have called the worst corporate failure in U.S. history, the global economy has been heading south.

Teetering on the edge, U.S. auto giant General Motors Corp. amply demonstrates that size is no guard against failure.

But what is the situation in Japan? And what steps must a company going through bankruptcy proceedings take?

Generally speaking, a business is considered bankrupt when it is unable to repay its creditors. But there are various paths a collapsing firm may take, depending on what nation’s laws it is following, including reorganizing or liquidating its assets.

How many companies have gone under lately?

Corporate bankruptcies in Japan rose 12.39 percent in the business year that ended on March 31 from the previous year to a six-year high of 16,146, with outstanding debts expanding 2.5-fold to ¥14.02 trillion, according to a survey by credit reporting agency Tokyo Shoko Research Ltd. on failed firms leaving debts of at least ¥10 million. The number of bankruptcies increased for the third consecutive year.

All 10 industrial sectors saw bankruptcies increase amid the worsening recession.

The transportation sector posted the fastest rise, followed by the real estate sector and the information and communications industry.

Twelve firms, including Lehman Brothers Japan Inc., the Japanese unit of the U.S. brokerage giant, failed with debts of ¥100 billion or more in the year, up from only three in fiscal 2007.

How many ways are there for a business to pursue bankruptcy proceedings in Japan?

There are six ways, including two out-of-court procedures, according to Japanese credit research firms.

If the company decides to revive its business, there are two legal routes available: filing for court protection from creditors under the Corporation Reorganization Law or under the Civil Rehabilitation Law.

“There are two big differences between the two laws — whether the court appoints an administrator to continue business and whether a creditor can pursue its claim against a failed firm,” said Kazuaki Nagai, a lawyer at Anderson Mori & Tomotsune.

Under the Corporation Reorganization Law, aimed at firms whose failure would have a big impact on society, the management must resign and a new team is brought in according to a reorganization plan devised by a court-appointed administrator.

Although this procedure allows the company to sever ties with executives deemed responsible for the collapse, recovery often takes longer under this process than via the Civil Rehabilitation Law.

“Under the law, creditors have limited ability to pursue claims,” Nagai said.

Companies that reorganized under the Corporation Reorganization Law include Kyoei Life Insurance Co., Chiyoda Mutual Life Insurance Co. and credit card operator Life Co.

Chiyoda, for example, was later bought out by troubled U.S. insurer American International Group.

The Civil Rehabilitation Law is often preferred because it allows the company to rebuild under its own management team, speeding up the reconstruction process.

Lehman Brothers Japan Inc., supermarket chain Mycal Corp. and department store chain Sogo Co. have taken this route.

During the reconstruction process, Sogo closed nine of its 22 stores and slashed more than 3,000 employees. Slimmed to a payroll of 6,000, Sogo then was merged with Seibu Department Stores Ltd.

When a company folds, there are two court procedures to follow: filing for bankruptcy protection or filing for special liquidation when the entity has excessive debts. A company can also reach an out-of-court settlement with creditors, credit research firms Teikoku Databank Ltd. and Tokyo Shoko Research Ltd. said.

A company is generally deemed bankrupt if it dishonors checks twice in six months, according to Teikoku Databank.

How is the legal code different in the United States?

The Civil Rehabilitation Law is similar to Chapter 11 of the code because it allows debtors, or company management, to draft a reconstruction plan.

Chapter 7 is generally a process of liquidation on nonexempt assets. Other chapters of the bankruptcy code are available, for example, for family farmers.

Many big-name companies, including Lehman Brothers Holdings Inc., Enron Corp. and Delta Air Lines Inc., filed for Chapter 11. Whether GM will file has also been a key focus in recent months.

Also, a growing number of companies are seeking “prepackaged” bankruptcies, in which a firm reaches an agreement with creditors before going to court. The process is usually shorter than that of an ordinary Chapter 11, lawyers say.

What was the largest bankruptcy in the postwar era?

Kyoei Life Insurance Co. filed for bankruptcy in October 2000 with record debts of ¥4.53 trillion, according to Tokyo Shoko Research.

Lehman Brothers Japan Inc., which failed last September, comes second with ¥3.43 trillion in liabilities.

The third-largest was Chiyoda Mutual Life Insurance Co., which went under in October 2000 with liabilities worth ¥2.94 trillion, Tokyo Shoko said.

The stunning collapses of Long-Term Credit Bank of Japan, now known as Shinsei Bank, and Nippon Credit Bank, now Aozora Bank, in 1998 are not defined as bankruptcies by Tokyo Shoko because the government stepped in and temporarily nationalized them.

Yamaichi Securities Co.’s failure in 1997 was also not defined as bankruptcy when it announced it would cease operations in November 1997 with debts reportedly worth more than ¥3 trillion. When it later filed for bankruptcy in 1999, it listed liabilities worth ¥510 billion, placing it 23rd on the list, according to Tokyo Shoko.

What are some of the signs that a company may go under?

A company on the verge of collapse may have trouble delivering products on time, or meeting payroll and other obligations, and executives may start to resign.

Even companies that log profits in the latest business year or quarter may collapse if they lose their cash flow. If a company has to pay back money before it receives cash due from accounts or lacks assets to liquidate, it may fall short of funds and go bankrupt.

What is the recent trend of bankruptcies in Japan?

The recent economic downturn has prompted large companies with more than ¥10 billion in debts to go under, said Masashi Seki, manager of information and publications at Tokyo Shoko.

Many construction companies are being propped up with government assistance, while failing export-oriented manufacturers are on the increase, he said.

The number of companies that failed despite logging profits in the latest quarter has increased, particularly in the real estate industry, Seki said.

“The trend demonstrates how corporate earnings have rapidly worsened lately,” he said.

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