Mt. Gox has filed a civil rehabilitation proceeding under Japanese law, and subsequently filed a companion case in Dallas, Texas under Chapter 15 of the U.S. Bankruptcy Code. The U.S. Bankruptcy Court issued an initial stay (injunction) to protect Mt. Gox and its U.S. assets from actions by creditors and set a hearing for April 1 and 2 to consider whether Mt. Gox would receive the full protections allowed to foreign companies by Chapter 15. If the U.S. court allows the Chapter 15 case to be maintained, certain provisions of the U.S. Bankruptcy Code will apply to parties in interest. What are the implications of these cases for Mt. Gox’s creditors?

Similarities to U.S. Chapter 11 Bankruptcy

As is true with a case under Chapter 11 of the U.S. Bankruptcy Code, a civil rehabilitation proceeding under Japanese law is designed to provide for the rehabilitation of the debtor, not its liquidation. Another similarity is that Mt. Gox’s existing management is allowed to remain in place, at least until the court determines otherwise. However, unlike Chapter 11, under Japanese law, a supervisor and investigator is appointed by the court and plays an active role in the Japanese proceedings. In the Mt. Gox proceeding, Nobuaki Kobayashi, a Japanese attorney, was appointed as Mt. Gox’s supervisor and investigator.

Another similarity is that the filing of the Japanese proceeding bars Mt. Gox from paying pre-petition unsecured claims. Unlike a Chapter 11 case, under Japanese law there is no automatic stay preventing creditors from suing or taking other actions against Mt. Gox and its assets, although a temporary stay is now in effect in the U.S. The Japanese court has the power to enjoin creditors against enforcement of certain claims in order to preserve the status quo and protect the enterprise, and if the Chapter 15 in the U.S. is maintained, the automatic stay provisions of the U.S. Bankruptcy Code will prevent parties from taking or continuing actions against Mt. Gox in the United States.

Rehabilitation Plan

In Chapter 11, the debtor has the exclusive right to file a plan of reorganization for the first 120 days after the case is filed, which period can be extended by the court up to 18 months. This exclusivity period allows the debtor to retain control over the reorganization process. The debtor can file a plan at any time, and if it is not confirmed, the debtor can file another plan. Once the exclusivity period ends, other creditors can propose reorganization plans.

Significantly different rules apply in a Japanese rehabilitation proceeding. First, the investigator’s report detailing the investigator’s assessment of the probability of success of rehabilitation must be prepared and filed. The debtor is then given a short time period to prepare and file its rehabilitation plan. Next, the Japanese court must make a finding that it is probable the proposed rehabilitation plan will be performed successfully. Finally, the unsecured creditors must approve the rehabilitation plan by majority vote.

If the Japanese rehabilitation plan is found by the court to be unlikely to succeed, or if the unsecured creditors do not vote to accept it, the rehabilitation procedure comes to an end. In that event, the Japanese court may order liquidation of Mt. Gox (similar to a Chapter 7 case under the U.S. Bankruptcy Code) if the court finds that Mt. Gox is insolvent and unable to be rehabilitated.

Creditor Claims in the Rehabilitation Proceeding

Unless the Japanese court orders otherwise, secured creditors can enforce their security interests outside the Japanese rehabilitation proceeding, subject, however, to the temporary stay imposed by the U.S. court. If the Chapter 15 case in the U.S. is maintained, the automatic stay will apply and prevent such action in U.S. courts.

A creditor who wishes to share in distributions of assets from, or the continuation of the business of, Mt. Gox in Japan must file claims in the Japanese rehabilitation proceeding. Mt. Gox’s unsecured creditors (as in a Chapter 11 case), can file claims up until a court-imposed deadline. Mt. Gox can investigate and object to claims. Those claims to which Mt. Gox does not object are treated under the rehabilitation plan, if approved.

Outside Japan

Under Japanese law, the Japanese rehabilitation procedure does not purport to bind creditors outside of Japan. Thus, Mt. Gox’s assets outside Japan are subject to creditor enforcement efforts, except in the U.S., where enforcement is temporarily enjoined and will be subject to the U.S. Bankruptcy Code’s automatic stay if the Chapter 15 case is maintained.

What Does This Mean for Mt. Gox Creditors?

First, a creditor must ascertain if it is secured; that is, whether it has a lien in any of Mt. Gox’s assets to secure the obligations owed to it. As noted above, secured creditors can enforce their security interests outside the Japanese rehabilitation proceeding, subject, currently, to the stay imposed by the U.S. court in the Chapter 15 case.

Second, a creditor must determine what assets of Mt. Gox, if any, are located outside Japan. If there are valuable assets in the U.S., creditors should consider filing claims in the U.S. Bankruptcy Court as well.

Third, now that a Chapter 15 case is pending, parties who have transacted in bitcoins through Mt. Gox need to evaluate how their transactions occurred to see if they may be vulnerable to claims that such transactions were fraudulent transfers or preferences. If the Chapter 15 case is maintained in the United States, Mt. Gox, or its liquidator, will be able to use provisions of the U.S. Bankruptcy Code allowing avoidance of certain pre-filing transactions (such as preferences and fraudulent transfers) against creditors in the United States.

Fourth, consideration must be given to whether other areas of law may apply. If so, these could affect the ability of creditors to recover and might alter priorities otherwise typically in force in a Japanese rehabilitation proceeding.

Assistance from Shino Uenuma and Keiji Sugiyama. We gratefully acknowledge the assistance of Shino Uenuma and Keiji Sugiyama of the Tokyo office of South Toranomon Law Offices for explaining the law of Japanese civil rehabilitation proceedings to us.