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Q_iconIf our domestic business in Japan does not go well and it unfortunately goes bankrupt, we want it to be bankruptcy remote from the foreign company. In this case, between a Japan subsidiary company and a Japan branch office, which would be preferable?
A_iconIn terms of the bankruptcy remoteness of the foreign company, a setting up a subsidiary company would be more advantageous.
★ Explanation ★

1. Bankruptcy remoteness

A bankruptcy remote company is a company within a corporate group whose bankruptcy would have as minimal impact on the parent company and other entities within the group. When a company becomes bankrupt, it has to go through various processes to settle outstanding debts and liabilities to its creditors. Though this includes proceedings such as those bankruptcy, company reorganization, civil rehabilitation, and the like, responsibility for the settlement of these debts falls ultimately on the company, so there may be a need to sell off assets such as stocks and real estate. Such settlements have various effects on the head company depending on what type of business expansion in Japan became bankrupt.

2. The Difference between a Branch Office and a Subsidiary Company

For a branch office, since it is a part of the foreign (head) office, the effects of the branch office’s business failure will inevitably have an effect on the foreign office. If, for example, a bankrupt Japan branch incurs a debt of 100 million yen and pays of 60 million yen through the selling of its assets, the remaining liability of 40 million yen that the branch office can no longer settle will ultimately be the responsibility of the head office.

On the other hand, a Japanese corporation (subsidiary company) is considered a separate business entity from the parent company. As long as the foreign (parent) company is not a guarantor of the subsidiary company, it basically does not have any liability when the subsidiary company files for bankruptcy. Even in cases where the foreign company is a stockholder of the Japan company, as provided in Article 104 of the Companies Act, their liability is limited to the amount of the subscription price of their held shares. As such, they are not responsible for the bankruptcy of the Japanese corporation. However, they are often responsible when it comes to moral responsibility and reputational risks.

Companies Act – Article 104 (Shareholders’ Liabilities) A shareholder’s liability is limited to the amount of the subscription price of the shares the shareholder holds.

You may also refer to Chapter 1, 3-4 (Q6).