2016.07.08

2014 (Ju) 865

Minshu Vol. 70, No. 6

Judgment concerning whether a set-off effected by a party that owes a debt to the rehabilitation debtor, between a claim relating to its debt and a rehabilitation claim held by another stock company that is owned wholly by the same parent company as said party's, can be regarded as an equivalent to a set-off permitted under Article 92, paragraph (1) of the Civil Rehabilitation Act

Case to seek settlement money

Judgment of the Second Petty Bench, quashed and decided by the Supreme Court

Tokyo High Court, Judgment of January 29, 2014

A set-off effected by a party that owes a debt to the rehabilitation debtor, between a claim relating to its debt and a rehabilitation claim held by another stock company that is wholly owned by the same parent company as said party's, cannot be regarded as an equivalent to a set-off permitted under Article 92, paragraph (1) of the Civil Rehabilitation Act, even if the parties have reached an agreement in advance to permit this sort of set-off.

(There is a concurring opinion.)

Article 92, paragraph (1) of the Civil Rehabilitation Act



Civil Rehabilitation Act

Article 92

(1) Where a rehabilitation creditor owes a debt to the rehabilitation debtor at the time of commencement of rehabilitation proceedings, the rehabilitation creditor, when his/her claim and debt become suitable for a set-off prior to the expiration of the period for filing proofs of claims prescribed in Article 94(1), may effect a set-off only within said period for filing proofs of claims, even if it is not provided for in a rehabilitation plan. The same shall apply where a rehabilitation creditor's debt is subject to a due date.

1. The judgment in prior instance is modified as follows:

The judgment in first instance is modified as follows:

(1) The appellee of final appeal shall pay the appellant of final appeal 431,675,585 yen, with an amount compounded on 431,508,744 yen on a daily basis at a daily interest rate of 2% divided by 365 for the period from October 2, 2008, until the day preceding the date of full payment.

(2) The remaining part of the claim filed by the appellant of final appeal is dismissed.

2. The total court costs are divided into five, three parts of which shall be borne by the appellant of final appeal, and the rest by the appellee of final appeal.

Concerning the reasons for petition for acceptance of final appeal argued by the appeal counsel, TANAKA Nobutaka and FUKUMORI Ryoji (except for the reasons excluded)

1. In this case, the appellant of final appeal, which received an order of commencement of rehabilitation proceedings, alleges that the currency options transactions, etc. that it had conducted based on the master agreement entered into with the appellee of final appeal were terminated on September 15, 2008, and accordingly, it seeks against the appellee payment of settlement money of 1,108,111,192 yen with the agreed delay damages based on the master agreement. The appellee contends that it effected a set-off under the master agreement, after receiving the order of commencement of rehabilitation proceedings, between a claim against the appellant held by another stock company that is wholly owned by the same parent company as the appellee's (rehabilitation claim) and a claim for payment of said settlement money held by the appellant against the appellee, and as a result, the appellant's claim for payment of said settlement money has been extinguished.

2. The outline of the facts legally determined by the court of prior instance is as follows.

(1) The appellant, which is a securities company, was a subsidiary of Company A, a U.S. corporation. Both the appellee, which is a trust bank, and Company B, which is a securities company, are wholly-owned subsidiaries of Company C.

(2) On February 1, 2007, the appellant entered into a master agreement with the appellee (hereinafter referred to as the "Master Agreement"), and since then it was engaged in currency options transactions and currency swap transactions (hereinafter referred to as the "Transactions").

(3) The Master Agreement contains the provisions as summarized below.

A. If the credit support provider for either party institutes a proceeding seeking a judgment of insolvency or bankruptcy or any other relief, such event shall be grounds for forfeiture of benefit of time (an event of default) with respect to said party, and all transactions existing between the parties shall be terminated as of the time immediately preceding the institution of the relevant proceeding or the presentation of the relevant petition that may take place upon the occurrence of the event of default (hereinafter the termination of all transactions existing between the parties under this provision is referred to as "early termination" and the day of such termination is referred to as the "early termination date").

B. If an event of default occurs and early termination takes place with respect to either party (X), the other party (Y) may effect a set-off between claims held by Y and its affiliates (meaning a legal entity that is directly or indirectly controlled by Y, that directly or indirectly controls Y, or that is directly or indirectly under common control with Y ("control" means ownership of a majority of the voting rights of the entity or Y; the same applies hereinafter); the same applies hereinafter) against X, and claims held by X against Y and its affiliate (hereinafter referred to as the "Set-off Clause"). The Set-off Clause stipulates that even in the event that X becomes a rehabilitation debtor, Y may effect a set-off between claims held by its affiliate against X and claims held by X against Y.

(4) On September 15, 2008, Company A, the credit support provider for the appellant under the Master Agreement, filed for Chapter 11 of the United States Bankruptcy Code, upon which early termination took place with regard to the Transactions pursuant to the provisions mentioned in (3)A. above. Under the Master Agreement, the appellant acquired claims against the appellee to seek payment of settlement money of 431,508,744 yen, with fixed agreed delay damages for the period from said day (the early termination date) until October 1, 2008, and agreed delay damages compounded on said settlement money on a daily basis at a daily interest rate of 2% divided by 365 for the period from October 2, 2008, until the day preceding the date of full payment (hereinafter referred to as the "Settlement Money Claim").

(5) Company B had entered into a master agreement that was similar to the Master Agreement with the appellant on November 26, 2001, and engaged in transactions since then. Upon the termination of these transactions as of September 15, 2008, Company B acquired claims against the appellant under the relevant master agreement to seek payment of settlement money of 1,711,686,829 yen regarding said transactions (hereinafter referred to as "Company B's settlement money claim").

(6) On September 19, 2008, the appellant received an order of commencement of rehabilitation proceedings.

On October 2, 2008, a day during the period for filing proofs of rehabilitation claims, the appellee manifested its intention to the appellant to effect a set-off at the corresponding amount between the Settlement Money Claim held by the appellant against the appellee and Company B's settlement money claim held by Company B, which is the appellee's affiliate, against the appellant, in accordance with the Set-off Clause (hereinafter referred to as the "Set-off"). On the same day, Company B notified the appellant of its consent to the Set-off.

3. Given the facts mentioned above, the court of prior instance determined that the whole amount of the Settlement Money Claim was extinguished by the Set-off, and dismissed the plaintiff's claim, holding as follows.

Although the Set-off is not a set-off between the parties that owe debts to each other, it is appropriate to construe that the Set-off is not equivalent to a set-off restricted under the Civil Rehabilitation Act if the parties concerned with the Set-off are deemed to have reasonable expectations for a set-off of their claims in the same manner as when a rehabilitation creditor owes a debt to the rehabilitation debtor at the time of commencement of rehabilitation proceedings, and the Set-off is not prejudicial to fairness and equity among rehabilitation creditors. When the appellant and the appellee agreed to the Set-off Clause, they intended to comprehensively manage risks between the corporate groups including their respective affiliates. In addition, it is presumed that a type of agreement permitting a set-off involving three parties, as with the case of the Set-off Clause, was used widely as if it were customary practice in derivatives transactions conducted by financial institutions, many of which have carried out company splits. In view of such circumstances, the parties concerned with the Set-off are deemed to have reasonable expectations for a set-off of their claims in the same manner as when a rehabilitation creditor owes a debt to the rehabilitation debtor at the time of commencement of rehabilitation proceedings, and the Set-off cannot be held to be prejudicial to fairness and equity among rehabilitation creditors. Accordingly, it is appropriate to construe that the Set-off is not equivalent to a set-off prohibited under Article 93-2, paragraph (1) of said Act but it is permissible under Article 92 of said Act.

4. However, we cannot affirm the holdings of the court of prior instance mentioned above, on the following grounds.

A set-off is a system designed to enable the parties who have the same type of claims against each other to settle their mutually opposed claims and debts in a simplified method, so as to process their creditor-debtor relationships in a smooth and fair manner. The creditor, by exercising the right of set-off, is able to receive the same benefit as receiving payment of his/her claim with certainty and sufficiently, even when the debtor's funds are insufficient, and to this extent, from the standpoint of the creditor, the right of set-off functions in such a manner as if the right holder holds a security right in the form of a debt. Protecting the rehabilitation creditor's expectation for such security function of a set-off generally does not run counter to the purpose of rehabilitation proceedings, wherein fair and equal treatment of rehabilitation creditors who hold rehabilitation claims is the fundamental principle. This may be the reason why Article 92 of the Civil Rehabilitation Act in principle permits a set-off sought by a rehabilitation creditor who owes a debt to the rehabilitation debtor at the time of commencement of rehabilitation proceedings so that such rehabilitation creditor is able to collect his/her claim in preference to general rehabilitation creditors even if it is not provided for in a rehabilitation plan, and treats the right of set-off in the same manner as the right of separate satisfaction (see 1964 (O) No. 155, judgment of the Grand Bench of the Supreme Court of June 24, 1970, Minshu Vol. 24, No. 6, at 587, 2009 (Ju) No. 1567, judgment of the Second Petty Bench of the Supreme Court of May 28, 2012, Minshu Vol. 66, No. 7, at 3123).

Thus, Article 92 of the Civil Rehabilitation Act provides that a rehabilitation creditor may effect a set-off even if it is not provided for in a rehabilitation plan. As a condition for permitting a set-off, paragraph (1) of said Article requires that a rehabilitation creditor "owes a debt to the rehabilitation debtor," applying the requirement for a set-off as prescribed in the main clause of Article 505, paragraph (1) of the Civil Code---the parties owe debts to each other---in the case of a set-off sought by a rehabilitation creditor as well. If a party that owes a debt to the rehabilitation debtor is permitted to effect a set-off using a claim against the rehabilitation debtor held by another party, it is equal to permitting a set-off between the parties that do not owe debts to each other, which goes against said wording of Article 92, paragraph (1) of the Civil Rehabilitation Act and ignores said fundamental principle of fair and equal treatment of rehabilitation creditors and therefore is inappropriate. This holds true even in cases where an agreement has been reached in advance between the parties to the effect that if multiple stock companies wholly owned by the same parent company respectively hold claims against or owe debts to the rehabilitation debtor, each such company and the rehabilitation debtor may effect a set-off of their claims and debts.

Consequently, it is appropriate to construe that if a stock company that owes a debt to the rehabilitation debtor effects a set-off between the claim relating to its debt and a rehabilitation claim held by another stock company that is wholly owned by the same parent company as its own, such set-off is not equivalent to a set-off permitted under Article 92, paragraph (1) of the Civil Rehabilitation Act even where an agreement permitting a set-off in this manner has been reached between the parties in advance.

This reasoning can be applied in this case as follows. The Set-off is intended by the appellee that owes a debt to the appellant, which is the rehabilitation debtor, in relation to the Settlement Money Claim, to effect a set-off between the Settlement Money Claim and Company B's settlement money claim, which is a rehabilitation claim held by Company B that is wholly owned by the same parent company as the appellee's. Thus, the Set-off is not equivalent to a set-off permitted under Article 92, paragraph (1) of the Civil Rehabilitation Act.

5. For the reasons stated above, the determination of the court of prior instance that permitted the Set-off under Article 92 of the Civil Rehabilitation Act contains a violation of laws and regulations that apparently affects the judgment, and the appeal counsel's arguments are well-grounded. According to the explanation given above, we should uphold the appellant's claim against the appellee to the extent to seek payment of settlement money of 431,508,744 yen, with fixed agreed delay damages for the period from September 15, 2008 (the early termination date), until October 1, 2008, and agreed delay damages compounded on said settlement money on a daily basis at a daily interest rate of 2% divided by 365 for the period from October 2, 2008, until the day preceding the date of full payment, while dismissing the remaining part of the claim, and hence we modify the judgment in prior instance as indicated in paragraph 1 of the main text.

Therefore, the judgment has been rendered in the form of the main text by the unanimous consent of the Justices. There is a concurring opinion by Justice CHIBA Katsumi.

The concurring opinion by Justice CHIBA Katsumi is as follows.

I would like to give some comments in connection with the court opinion.

1. Settlement by a constructive set-off under the Set-off Clause and its effect in civil rehabilitation proceedings

(1) The Set-off Clause stipulates an agreement between the parties to cause claims held by the appellant against the appellee and claims held by the appellee's affiliate (Company B in this case) against the appellant to be extinguished through settlement by a constructive set-off on condition that the appellee's affiliate consents to such settlement (hereinafter referred to as the "Settlement by a Constructive Set-off"). Since this sort of settlement is different from acts resulting in extinguishment of claims as prescribed by law, such as payment and set-off, a question arises as to whether it is appropriate to recognize the Settlement by a Constructive Set-off as being completely effective during rehabilitation proceedings, a type of insolvency proceedings.

(2) Rehabilitation proceedings are subject to the fundamental principle of fair and equal treatment of rehabilitation creditors in terms of settlement of rehabilitation claims except for those holding priority claims (hereinafter this principle is referred to as the "principle of equality among creditors"). Evidence of this lies in the fact that Article 85 of the Civil Rehabilitation Act (hereinafter referred to as the "Act") in principle prohibits any act resulting in extinguishment of rehabilitation claims if it is not provided for in a rehabilitation plan. As exceptions to this principle, the Act provides for rules for "set-off" in Articles 92 to 93-2 because, in light of the nature of a set-off, these exceptions do not run counter to the principle of equality among creditors in relation to other rehabilitation claims.

(3) The Settlement by a Constructive Set-off is to cause a claim held by the appellant, which is supposed to be property reserved for the benefit of all of its creditors, to be extinguished under the Set-off Clause that is established by agreement between the parties. Under the Set-off Clause, if an event of default occurs with respect to the appellant, and the appellee's affiliate later gives consent, the Settlement by a Constructive Set-off is to be made retroactively as of the time of the occurrence of the event of default. As explained in (2) of the written opinion regarding the reasons for petition for acceptance of final appeal submitted by the counsel for the appellee, UCHIDA Takashi (Professor Emeritus of the University of Tokyo), it may be possible to argue that the Settlement by a Constructive Set-off based on an agreement among three parties, namely, the parties to the Master Agreement and an affiliate of one of the parties, is not subject to regulations concerning rehabilitation proceedings because it represents the fact that the parties' claims and debts have already been completely settled by netting before the commencement of rehabilitation proceedings, and therefore it can be deemed to be effective, without needing to question whether it is equivalent to a set-off permitted under Article 92 of the Act.

There are views and laws that permit this sort of settlement by a set-off involving three parties under certain conditions such as that the claims and debts of these parties are closely related (as explained in (2) of the written opinion regarding the reasons for petition for acceptance of final appeal mentioned above), and it is true that such a settlement can be effective as an agreement among the parties concerned for the net settlement of their claims and debts. The question that arises here is whether or not such an agreement is recognized as being effective and whether or not the settlement under such an agreement is permissible even in cases where an event that could lead to the failure of the rehabilitation debtor occurs and its property needs to be reserved for the benefit of all of its creditors, and even before the commencement of rehabilitation proceedings, by the time when a petition for commencement of rehabilitation proceedings is filed (early termination took place with regard to the Transactions at this point in time), the rehabilitation debtor has become insolvent, as shown by the fact that it has received an order of provisional remedy prohibiting payment of claims in substantially the same meaning as prohibition under Article 85 of the Act, in which situation the debtor is no longer permitted to dispose of its property of its own accord.

(4) In such a situation, the rehabilitation debtor is already subject to the same legal regulations as it would be after the commencement of rehabilitation proceedings, and legal regulations prevail over the principle of freedom of contract. Therefore, it should be said that the Settlement by a Constructive Set-off would be effective only when it can be deemed to be permitted by law as an exception to the principle of equality among creditors. More specifically, since the Settlement by a Constructive Set-off would be permitted if it is equivalent to a set-off prescribed in Article 92, paragraph (1) of the Act, it must be deemed to be equivalent to a set-off prescribed in Article 505 of the Civil Code. In the present case, among the requirements for a statutory set-off, whether the parties hold claims against and owe debts to each other (hereinafter this requirement is referred to as the requirement of a "mutual creditor-debtor relationship") becomes an issue.

2. Existence of a "mutual creditor-debtor relationship" between the parties to the Settlement by a Constructive Set-off

(1) A mutual creditor-debtor relationship is required between the parties to a set-off, probably because the system of set-off is underpinned by the following notion: the parties that hold claims against and owe debts to each other would trust each other irrespective of the other party's financial conditions, and therefore, even if either party's financial conditions become worse, it would rather lead to inequality to prohibit the other party from asserting a set-off while destroying such relationship of trust among them, and hence it would be conducive to equality to permit their claims and debts to be extinguished at the corresponding amount (see WAGATSUMA Sakae, "Shintei Saiken Soron" [General theory of claims, new edition], p. 317, etc.). The parties are presumed to have reasonable expectations for the security function of a set-off and collection of claims by a set-off.

In the present case, the appellee did not hold a claim against the appellant when the event of default (business failure) occurred with respect to the appellant, but it was only allowed under the Set-off Clause to make a settlement by a constructive set-off using a claim held by its affiliate against the appellant, and thus the appellee cannot be deemed to meet the requirement of a mutual creditor-debtor relationship as a matter of form.

(2) In this respect, the appellee argues as follows.

(i) The Set-off Clause is a "contract for novation providing for the substitution of the creditor or a non-typical contract similar thereto," by which, with regard to a claim against the defaulting party (the party that has lost the benefit of time; the appellant in this case) held by an affiliate (Company B) of the non-defaulting party (the party that has not lost the benefit of time; the appellee in this case), the non-defaulting party shall be substituted for the affiliate as the creditor of the claim, on condition that the affiliate gives consent to this substitution. When the substitution of the creditor takes place with the consent of the affiliate, the non-defaulting party now meets the requirement of having a mutual creditor-debtor relationship with the defaulting party, and as a result, the Settlement by a Constructive Set-off is permitted under Article 92 of the Act.

(ii) Although the affiliate (Company B) gave consent after the order of commencement of rehabilitation proceedings was issued, this should not be interpreted as meaning that the affiliate transferred its rehabilitation claim at the time of giving consent, but rather the affiliate, by giving consent, authorized the non-defaulting party to make the Settlement by a Constructive Set-off, and based on such authorization, the settlement by a set-off is deemed to have been made retroactively as of the time before the commencement of rehabilitation proceedings. Thus, the Settlement by a Constructive Set-off does not fall under the case prescribed in Article 93-2, paragraph (1), item (i) of the Act in which a set-off is prohibited.

(3) However, in connection with the argument in (2)(i) above, it is necessary to carefully consider whether the Set-off Clause can be interpreted as providing for novation by substitution of the creditor. While the attribution and accrual of claims and the substitution of a party must be specified by a clear agreement, the wording of the Set-off Clause cannot be read as clearly specifying these matters, nor can it be deemed to be completely in line with the intentions of the parties, and hence such an interpretation should inevitably be judged to be unreasonable.

In connection with the argument in (2)(ii) above, even if the affiliate's consent is accounted for as its authorization for the non-defaulting party to make the Settlement by a Constructive Set-off, it is after all an attempt to create a situation as if the affiliate transferred its claim to the appellee in order to meet the requirement of a mutual creditor-debtor relationship, and therefore the Settlement by a Constructive Set-off cannot avoid regulations under Article 93-2, paragraph (1), item (i) of the Act.

3. Meaning of the Set-off Clause and scope of "affiliate," etc.

(1) The Master Agreement is based on the 1992 edition of the ISDA Master Agreement (a standard agreement for derivatives transactions created by the International Swaps and Derivatives Association (ISDA)). The Set-off Clause is attached to the ISDA Master Agreement in the name of Schedule and forms a part of the Master Agreement. As found by the court of prior instance, in derivatives transactions, claims and debts between the parties to the transactions change every day and every hour, and what is more, the state of their claims and debts does not become clear until the transactions are terminated. Therefore, it is important for the parties to the transactions to manage risks that may arise from early termination (business failure), and accordingly, they consider measures to reduce or avoid such risks by settling their claims and debts through a constructive set-off, as in the attempt disputed in this case.

(2) In the present case, one of the parties to the Set-off Clause is a securities company which was a member of a global financial group (Group D), and the other party is a 100% subsidiary of Company C which is a global investment bank/securities company. Thus, both parties are members of financial groups led by shareholding companies. From a management standpoint, this type of corporate group generally establishes a shareholding company at the top and carries out company splits to incorporate member companies, like the parties in this case, which engage in business activities in various fields as what is generally called sister companies. Such a corporate group is not a mere aggregate of individual member companies but rather the group as a whole operates as one complex, organic corporate entity, with its member companies carrying out their own business activities in various fields while cooperating and collaborating with one another. It may be a possible choice for the group to manage risks arising in relation to the member companies as risks faced by the whole group. The Set-off Clause should be understood as an attempt of Group E to manage risks of the corporate group as a whole from such viewpoint, by treating the companies under the direct or indirect control of the group as its "affiliates" and making the Settlement by a Constructive Set-off between the settlement money claim held by one of its affiliates, which was not a party to the agreement for transactions, against the defaulting party, and the settlement money claim held by the defaulting party against the non-defaulting party, to extinguish these claims at the corresponding amount, on condition of the consent given by the affiliate. It is presumed that this approach of settlement is popular to some degree in the derivatives transactions business among financial institutions, many of which have carried out company splits. At least for the parties to the agreement or the corporate groups to which they belong, said approach may be economically rational and appropriate, and these parties or corporate groups have had, from the beginning, reasonable expectations for the security function of a settlement by a constructive set-off or collection of claims by settlement by a constructive set-off.

In light of such nature of derivatives transactions and the viewpoint of risk management by the parties and the corporate groups controlling them, questions would arise as to the organizational relationship (in terms of capital and personnel) and business relationship (in terms of business policy, information, and management strategy) between the non-defaulting party and its affiliate, which could affect the evaluation of their unity, and depending on the substance of these relationships, there may be room to consider that the Settlement by a Constructive Set-off would in effect meet the requirement of a mutual creditor-debtor relationship, which is a fundamental requirement for a statutory set-off.

(3) However, the Set-off Clause forms a part of the Master Agreement to which the appellant and the appellee are the parties. Although the "affiliate" referred to therein is a subsidiary of one party which belongs to the same corporate group as the party's group and is under common control with the party, it is a third party that is outside the Master Agreement. Furthermore, the legal status of the "affiliate" is not initially specified in the Set-off Clause, etc., nor can any provision be found in the Master Agreement to the effect that claims that may arise between the affiliate and the appellant shall be limited to those arising from derivatives transactions similar to the Transactions. Moreover, with regard to the "affiliate's consent," it cannot be said that the affiliate was expected at the time of entry into the Master Agreement containing the Set-off Clause to give consent to the Settlement by a Constructive Set-off in the event of the appellant's business failure. This is because the affiliate, upon being notified by the appellee that the appellant was going to fail, would make a business decision at that point regarding whether or not it should give consent to such settlement, and if it were to give consent, what conditions it should assert against the appellee (since the appellee would gain a considerable profit from the Settlement by a Constructive Set-off, the affiliate would be eligible to demand a certain amount of consideration for offering the claim it holds for a set-off by the appellee).

As mentioned above, the parties that hold claims against and owe debts to each other would trust each other irrespective of the other party's financial conditions, and therefore, if either party's financial conditions become worse, it would be conducive to equality to permit their claims and debts to be extinguished at the corresponding amount. This is the reason why a mutual creditor-debtor relationship is required between the parties to a set-off. One should say that the Settlement by a Constructive Set-off under the Set-off Clause involving the affiliate that is not a party to the agreement is not based on such relationship of trust between the parties, and in this respect, said settlement cannot be deemed to meet the requirement of a mutual creditor-debtor relationship.

(4) However, further consideration would be necessary in cases where the appellee and its "affiliate" as defined in the Set-off Clause are sister companies in a sense that the affiliate is not merely a legal entity which belongs to the same corporate group as the appellee's and is under common control with the appellee but the appellee and the affiliate have a close organizational relationship or engage in cooperative business activities.

For example, let us suppose the following cases: (i) the appellee's affiliate conducts the same type of derivatives transactions with the appellant as those conducted by the appellee, has a cooperative and collaborative relationship with the appellee as its sister company in the course of conducting these transactions, shares with the appellee a certain range of information concerning transactions with the appellant, and thus the affiliate's claims and debts as well as those of the appellee in effect arise from one business relationship with the appellant, and in this respect, the appellee and the affiliate are literally sister companies, and what is more, the affiliate's company name is identified at the time of entry into an agreement or in due course; and (ii) in terms of the consent required in the Set-off Clause, the appellee and its affiliate have reached a separate agreement in advance to the effect that if a certain event occurs and the appellee needs to make the Settlement by a Constructive Set-off, the affiliate shall be obliged to give "consent" under predetermined conditions, and this has been made known to the appellant, etc.

Where an "affiliate" of one of the parties is limited and identified in this manner under the Master Agreement and the Set-off Clause, and the affiliate actually exists and operates as prescribed therein, it may be possible to deem the appellee and its affiliate as a united entity in organizational or business terms and recognize them as a single counterparty to the appellant in the derivatives transactions, if the doctrine of piercing the corporate veil is applicable to the affiliate (one of these sister companies) and also if said doctrine is not applicable but the affiliate can hardly be treated as a separate legal person, and in that case, there is room to consider that the requirement of a mutual creditor-debtor relationship is met.

There is the possibility that the relationship between the appellee and Company B and the realities of their derivatives transactions with the appellant can be recognized as mentioned above (although this point is not sufficiently alleged or proved in this case). However, the Set-off Clause itself does not prescribe such limitation and Company B, the appellee's affiliate, can originally be regarded as nothing but a third party with regard to the Transactions. Therefore, even if Company B has a settlement money claim against the appellant, it cannot be deemed to meet the requirement of having a mutual creditor-debtor relationship with the appellant as an entity united with the appellee.

(5) On this point, there may be a view that it may be appropriate to find a mutual creditor-debtor relationship in light of the circumstances of the case by narrowly and restrictively interpreting the provisions on an "affiliate" as explained above. However, unlike the approach to constitutional interpretation of laws and regulations, interpretation of contractual provisions is a process to inquire into the true intentions of the parties by analyzing the contractual wording and presuming the rational intentions of the parties. Through this approach, it is found that said provisions are intended to generally ensure risk management for the corporate group as a whole and cannot be interpreted as aiming for risk management only with regard to closely related member companies, such as the appellee and Company B. Since such restrictive interpretation, due to its nature, should be determined on a case-by-case basis, if this approach to interpretation is applied to the Set-off Clause, it would make the scope of "affiliate" ambiguous and undermine the predictability, which could result in increasing attempts to make an arbitral settlement by a constructive set-off among groups and causing the oligopoly of market by a few mega corporate groups that can easily manage risks. Furthermore, such situation could happen beyond a tolerable level under the principle of equity among creditors. Hence, in light of the wording of the Set-off Clause which does not specify any details of an "affiliate," I would say that it would be beyond the bounds of judicial interpretation for the court to apply such restrictive interpretation and recognize the Settlement by a Constructive Set-off, which involves an affiliate, as a set-off under Article 92 of the Act that provides for an exceptional settlement.

Apart from narrowly interpreting the provisions, there is another approach to interpretation: recognizing Company B as being united with the appellee only on condition that the Set-off Clause is applied to the company as the appellee's affiliate, or in other words, considering that the requirement of a mutual creditor-debtor relationship is met only on condition that said clause is applied to a specific case. However, it cannot be said that the parties, from the beginning, kept in mind the possibility of transactions with Company B, the appellee's affiliate, and had reasonable expectations for settlement by a constructive set-off of claims and debts among them (the Set-off Clause cannot be interpreted in this way), and hence this approach is also difficult to adopt.

(6) According to the above, the approach to interpretation toward limiting the scope of "affiliate" and recognizing the Settlement by a Constructive Set-off as being equivalent to settlement by a set-off, or in short, the approach of (analogically) applying Article 92 of the Act, cannot be adopted.

In the future, along with the substantial advancement of derivatives transactions in the financial industry, corporate groups may find it considerably necessary to manage risks of their entire groups, and accordingly, in the financial industry as a whole, including small business entities as well, a consensus may be widely developed to recognize the necessity and rationality of risk management through the Settlement by a Constructive Set-off or a broad range of similar options for settlement by a constructive set-off. In such situation, it will be necessary to consider taking such measures as permitting a settlement by a constructive set-off as an equivalent to a settlement by a set-off under Article 92 of the Act if the scope of "affiliate" is limited in a contract, or making a law to adopt a method for settlement by netting of claims and debts separately from a set-off permitted under Article 92, etc. of the Act, as an exception to the principle of equality among creditors. In this course, careful consideration would be required as to whether these measures are appropriate, or more specifically, whether the situation as presumed above actually exists, and what requirements should be prescribed by law as exceptions to the principle of equality among creditors under insolvency law.

Justice ONUKI Yoshinobu

Justice CHIBA Katsumi

Justice ONIMARU Kaoru

Justice YAMAMOTO Tsuneyuki