What kinds of acts conducted by the debtor before the commencement of insolvency procedures may be deemed invalid after the commencement order is given, and thus shall be avoided in court?

A.    A court-appointed trustee (in bankruptcy proceedings and corporate rehabilitation proceedings) or a court-appointed supervisor (in civil rehabilitation proceedings) has the power to invalidate (avoid) acts taken by the debtor before the commencement of relevant insolvency procedures which are deemed to impair equality among the creditors and/or are against the concept of the insolvency proceedings.  The outline of the trustee’s/supervisor’s power to invalidate (avoid) such acts is as follows.

    First, any acts conducted by the debtor while knowing that it will prejudice its creditors, in other words, acts which reduce the debtor’s assets, may be avoided.  A typical example of this is the transfer of property with the aim of concealing or disposing of an asset at a low price.  However, if the beneficiary of such acts did not know, at the time of the act, that it would prejudice the creditors, the said act will not be avoided.  In that case, the beneficiary must prove that they had no knowledge of the possibility that such actions may be prejudicial to the creditor’s interests.

    Second, any gratuitous acts conducted by the debtor within six months prior to their becoming insolvent may be avoided.

    Third, any payment or provision of security interest to an existing creditor by the debtor after their becoming insolvent may avoided.  In other words, after becoming insolvent or the petition for commencement of insolvency procedures is filed, any payment or provision of security interest to an existing creditor by the debtor may be avoided if the creditor knew of the debtor’s insolvency at the time of the payment, or the provision of security interest.  In addition, any payment or provision of security interest to an existing creditor by the debtor within thirty days before their becoming insolvent may be avoided if the act is not a legal obligation at the time of the action.

    Where an act is avoided, the person who benefited from the act shall restore the assets of the debtor to its original state in principal, and their damage as a result of the avoidance shall be treated as an unsecured claim.  However, a right to claim for the counter-performance received by the debtor shall be paid prior to unsecured claims as administrative expenses.]Q12. What kinds of acts conducted by the debtor before the commencement of insolvency procedures may be deemed invalid after the commencement order is given, and thus shall be avoided in court?