In the excitement of incorporating a Japanese KK company, starting business in Japan, and recruiting Japanese employees, few if any foreign company executives consider what they would do with the KK company if sales don’t grow as expected, or a sudden unexpected event such as the coronavirus COVID-19 pandemic brings business to a standstill. That’s the time when many executives first realize that shutting down a Japanese KK company is not as straightforward as ending employment and walking away (which is what might be legally acceptable in the US or elsewhere).
A Japanese KK company and its directors (Board of Directors if it has one), continues to exist and is legally required to file annual financial statements and tax-returns, and pay statutory minimum annual corporate taxes, until it is either declared bankrupt or registered as liquidated on the Ministry of Justice’s registry of companies. Bankruptcy in Japan requires either the bankrupt company or a creditor to file a petition for its bankruptcy and to pay a substantial advance amount to cover court and trustee costs. The alternative, which most companies in such a predicament opt for, is statutory liquidation.
Liquating a KK company is governed by Japan’s Companies Act, comprises three legal filings and two tax filings, and takes 4 – 6 months (much longer if prior years’ financial statements need restatement, the National Tax Agency decides to audit, or unknown creditors object). The process is as follows:
- The KK company convenes a shareholder extraordinary general meeting (“EGM”) at which the shareholders resolve to dissolve the directors (or Board of Directors if applicable) and appoint one or more representative liquidators. The minutes of the dissolution EGM must be filed at the Legal Affairs Bureau (part of the Ministry of Justice) within 15 days of the dissolution EGM.
- Within 60 days of the dissolution EGM, the liquidator must prepare dissolution financial statements (general ledger, profit and loss statement, and balance-sheet) for the period from the KK company’s most recent financial yearend until the date of the dissolution EGM.
- The liquidator then convenes an EGM for shareholders to approve the dissolution financials, prepares and files tax-returns, and ensures the KK company pays taxes due. As an aside, the dissolution EGM resets the KK company’s financial year, thus the KK company’s first liquidation financial year starts on the day after the date of the dissolution EGM.
- Some time after the dissolution EGM, the liquidator must publish a formal notice in the Official Gazette announcing the KK company’s liquidation and advising creditors to file claims. Concurrent with publishing the formal notice, the liquidator must send creditor notices to all known creditors, including to parties to whom the KK company has outstanding warranty obligations.
- Two months after the formal notice is published in the Official Gazette, the liquidator settles valid creditor claims.
- After settling valid creditor claims, the liquidator closes the KK company’s bank accounts, agrees intercompany loan write-offs (if applicable), and decides a formal liquidation date.
- The liquidator then prepares the KK company’s liquidation financial statements (general ledger, profit and loss statement, and balance-sheet) which will show zero balances, for the period from the KK company’s dissolution EGM until the liquidation date.
- The liquidator then convenes an EGM for shareholders to approve the liquidation financials and liquidation expenses, prepares and files tax-returns, and ensures the KK company pays taxes due.
- The liquidator then files the final notice of liquidation at the Legal Affairs Bureau.
In the best-case scenario, where shareholders approve EGMs by return and there are no unknown creditor claims or National Tax Agency requests, we can complete a KK company’s liquidation in 4 months. Generally though, a liquidation takes about 6 months to complete.