In brief
On 7 June 2024, the National Diet of Japan enacted the Act on the Promotion of
Cash Flow-Based Lending (“Act”). The effective date of the Act will be separately
determined within two and half years from its promulgation on 14 June 2024.
The Act will bring into effect a new type of security interest called the “Enterprise
Value Charge” (“EVC”) by which the entire assets (including future assets) of a
corporate debtor can be collateralised.
In this article we provide a brief overview of the EVC, which is anticipated to have a
significant impact on both financing and debt restructuring in Japan.
Background
- Bank financing and indirect financing have traditionally played a major role in Japanese financial markets, with mortgages over real estate and personal guarantees often being used to provide credit support for such debts. In practice, this has made it difficult for certain companies such as SMEs and start-ups to access financing in Japan due to (i) their limited ownership of tangible assets to offer as collateral for mortgages; and (ii) the potential liabilities of individuals (typically, business owners) personally guaranteeing a company’s debts often being excessively onerous.
- Given such realities and in response to the growing demand for a breakthrough in conventional lending practices to facilitate financing to those companies without depending on real estate mortgages and personal guarantees, lawmakers toiled and hammered out the idea of the EVC. A concept like the EVC is unprecedented in the history of Japan’s transactional legal system, because it enables the entire value of a company’s business (including the value of intangible assets such as know-how, customer base and future cash flows) to serve as collateral, whilst traditional secured creditors have been heavily dependent on the aggregate value of the specific assets subject to their security interests.
- EVCs are expected to energize the provision of financing to start-ups with limited tangible assets and to business owners hesitant to take on potentially devastating liability in their personal capacity. The use of EVCs may also incentivise financiers to monitor the borrowers’ day-to-day business and future projections in order to provide aid in a timely manner, which could have a positive impact on Japan’s business environment as a whole.
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