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The role of case law in Japan : a comparative study of Japanese and Canadian company law Imai, Hiroshi 1983

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C 1 T H E R O L E O F C A S E L A W I N J A P A N : A C O M P A R A T I V E S T U D Y O F J A P A N E S E A N D C A N A D I A N C O M P A N Y L A W by HIROSHI IMAI LL.B., University of Tokyo A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF REQUIREMENTS FOR THE DEGREE OF MASTER OF LAWS i n THE FACULTY OF GRADUATE STUDIES (THE FACULTY OF LAW) We accept t h i s thesis as conforming to the required standard. THE UNIVERSITY OF BRITISH COLUMBIA October, 1983 © Hiroshi Imai, 1983 In presenting t h i s thesis i n p a r t i a l f u l f i l m e n t of the requirements for an advanced degree at the University of B r i t i s h Columbia, I agree that the Library s h a l l make i t f r e e l y available for reference and study. I further agree that permission for extensive copying of t h i s thesis for scholarly purposes may be granted by the head of my department or by his or her representatives. I t i s understood that copying or publication of t h i s thesis for f i n a n c i a l gain s h a l l not be allowed without my written permission. H i r o s h i Imai Department of Faculty of Law The University of B r i t i s h Columbia 1956 Main Mall Vancouver, Canada V6T 1Y3 D a t e October 10. 1983 (3/81) i i ABSTRACT The r e l a t i o n s h i p s between case law and s t a t u e law i n Japan are q u i t e d i f f e r e n t from that i n Anglo-Canadian law. Contrary t o the l i t e r a l i n t e r p r e t a t i o n adopted by the Anglo-Canadian c o u r t s , the Japanese c o u r t s use extremely f l e x i b l e i n t e r p r e t a t i v e t echniques. There are r e l a t i v e l y frequent changes i n precedents. Therefore, case law p l a y s an important r o l e i n the development of law i n Japan. This paper i s intended t o i n t r o d u c e the r o l e of case law i n Japan to f o r e i g n e r s who study or work w i t h Japanese law. F i r s t , the c h a r a c t e r i s t i c s of the Japanese case law are d i s c u s s e d . S t r e s s i s put on the p r i v a t e law area, where the c r e a t i v e f u n c t i o n of case law i s the most e v i d e n t . The h i s t o r i c a l background and problems of the Japanese approach are a l s o mentioned. Then t h i s paper compares and c o n t r a s t s Canadian and Japanese approaches on f i v e s e l e c t e d t o p i c s of company law, i n order to show the r o l e of the Japanese case law i n a c t u a l i s s u e s i n comparison to the frequency of Canadian l e g i s l a t i v e reforms. By combining the g e n e r a l d i s c u s s i o n of the Japanese case law and the d i s c u s s i o n s of s p e c i f i c i s s u e s , i t i s intended t o enable f o r e i g n readers to have a b e t t e r understanding of the r e a l i t y of Japanese case law and t o f a c i l i t a t e t h e i r f u r t h e r study. i i i TABLE OF CONTENTS Page Abbreviations v i i I. INTRODUCTION 1 II. CHARACTERISTICS OF CASE LAW IN JAPAN 5 A. Function of Case Law i n Japan 5 1. An Overview 5 2. Is the Japanese Company Law Exceptional? 10 B. H i s t o r i c a l Background 13 1. Pre-War Period 14 2. Post-War Period 16 C. Problems of the Japanese Approach 17 1. The delay i n Legislative Reform 17 2. The Japanese Predisposition towards Ambiguity in the Law 21 3. The Lack of E f f o r t to Create Any Eff e c t i v e Remedy Provisions 24 Footnotes 26 III. EXAMPLES - SOME TOPICS OF COMPANY LAW 30 Preliminary Comment 30 Footnotes 31 A. The Ult r a Vires Doctrine 32 1. Canada 3 2 (1) Common Law 32 (2) Statutory Reform 36 i v (a) Old OBCA 36 (b) BCCA, CBCA and New OBCA 37 2. Japan 39 (1) Codification of Doctrine 39 (2) Reform by Court Interpretations 40 (3) No Statutory Reform 45 Footnotes 47 B. Pre-Incorporation Transactions 50 1. Canada 50 (1) Common Law 50 (2) Statutory Reform 55 (a) Old OBCA 55 (b) CBCA 56 (c) New OBCA 58 2. Japan 58 (1) Statutory Framework 58 (2) Court Interpretations of A r t i c l e 168(1)(vi) 60 (3) Solution of Inconveniences by Court Interpretations 63 Footnotes 67 C. A Director's Transactions with His Company 70 1. Canada 70 (1) Common Law 70 (2) Statutory Reform 71 V Page (a) Scope of Interest 72 (b) Disclosure Requirement 74 (c) Prohibition on Voting 75 (d) Director's L i a b i l i t y and the V a l i d i t y of the Contract 76 2. Japan 80 (1) Scope of Transaction 80 (2) Disclosure Requirement 83 (3) Approval of the Board of Directors 83 (4) V a l i d i t y of Transaction 84 (5) Director's L i a b i l i t y 85 Footnotes 88 D. The Director's Duty of Care, Diligence and S k i l l 95 1. Canada 95 (1) Common Law 95 (2) Statutory Reform 99 (a) Standard of Duty of Care, Diligence and S k i l l 99 (b) Deemed Consent 102 (c) Sp e c i f i c Statutory L i a b i l i t i e s 102 (d) L i a b i l i t y of an "Agent" in the New Bankruptcy Act 103 2. Japan 106 (1) Statutory Provisions concerning Duty of Care 106 (2) Duty of Care concerning Corporate Business 108 v i Page (3) Duty of Care with respect to Monitoring the Execution of Corporate A f f a i r s 113 (4) The Duty of Nominee Directors 116 (5) Limitations on the Duty to Monitor 117 (6) 1981 Amendment to the Commercial Code 121 Footnotes 124 E. L i f t i n g the Corporate V e i l 129 1. Canada 129 (1) P r i n c i p l e of Salomon Case 129 (2) Some Solutions 130 (a) I d e n t i f i c a t i o n of the Party to a Contract 130 (b) Anti-Fraud Provisions concerning Winding-Up 134 (c) Bankruptcy Act 135 2. Japan 138 (1) Rise of the Doctrine 138 (2) Development of the Doctrine 141 (3) Is the Doctrine Overused? 144 Footnotes 146 Conclusion , 151 Footnote 158 Bibliography 159 v i i ABBREVIATIONS Canadian Company Legis l a t i o n BCCA: B r i t i s h Columbia Company Act, R.S.B.C. 1979, c. 59. CBCA: Canada Business Corporations Act, S.C. 1974-75-76, c. 33 Old OBCA: Ontario Business Corporations Act, R.S.O. 1980, c. 54, repealed by New OBCA. New OBCA: Ontario Business Corporatons Act, S.O. 1982, c. 4, in force as of July 29, 1983, except for s. 151(5). Japanese Courts G. C.J. The Great Court of Judicature, the predecessor of the Supreme Court in the pre-war period. S.C. The Supreme Court of Japan. H. C. High Court. D.C. D i s t r i c t Court. Sm. C. Summary Court. Japanese Companies K.K. Kabushiki Kaisha (stock company), often pronounced as "Kabushiki Gaisha". For other types of companies, their Japanese names are cit e d without modification: Yugen Gaisha (limited l i a b i l i t y company); Gomei Gaisha (partnership company); Goshi Gaisha (limited partnership company). I . INTRODUCTION There i s an i n c r e a s i n g i n t e r e s t i n the s t u d y o f Japanese law i n Canada, r e f l e c t i n g the development o f the c o n n e c t i o n between Canada and Japan. Among a number o f d i f f e r e n c e s between the l e g a l systems of b o t h c o u n t r i e s , i s t h e r e l a t i o n s h i p between case law and s t a t u t e s . The manner i n which the Japanese c o u r t s t r e a t s t a t u t o r y p r o v i s i o n s i s t o t a l l y d i f f e r e n t from t h a t i n common law c o u n t r i e s . The Japanese c o u r t s use e x t r e m e l y f l e x i b l e i n t e r p r e t a t i o n s o f s t a t u t o r y p r o v i s i o n s t o adopt new l e g a l c o n c e p t s . S u b s t a n t i a l p o r t i o n s of the law a r e formed by t h i s p r o c e s s . The Japanese law s t u d e n t s l e a r n t h i s p o i n t when th e y b e g i n t o s t u d y the law, and i t i s g e n e r a l l y a c c e p t e d by the Japanese j u r i s t s and l a y p r a c t i t i o n e r s as a r e a l i t y . Common l a w y e r s seem t o have had a g r e a t d e a l o f d i f f i c u l t y i n u n d e r s t a n d i n g t h i s p o i n t . The j u d i c i a l p r o c e s s o f i n t e r p r e t a t i o n i s q u i t e d i f f e r e n t from t h e approach i n which they have been t r a i n e d . Common l a w y e r s who d i s c u s s p a r t i c u l a r l e g a l q u e s t i o n s a r i s i n g i n Japanese law w i t h Japanese l a w y e r s seem t o be o f t e n p u z z l e d and f r u s t r a t e d , and most E n g l i s h language t e x t s do not d i s c u s s i t i n d e t a i l . I t i s o b v i o u s l y dangerous f o r common l a w y e r s t o g i v e o p i n i o n s on q u e s t i o n s o f Japanese law w i t h o u t u n d e r s t a n d i n g t h i s d i f f e r e n c e i n j u d i c i a l a p p roach. 2 -There are many E n g l i s h language t r a n s l a t i o n s of c o n s t i t u t i o n a l cases and a great many books have been w r i t t e n on t h a t area. The c o u r t s have evolved s p e c i a l p r i n c i p l e s of i n t e r p r e t a t i o n i n the l a s t t h i r t y y e ars and c o n s t i t u t i o n a l i n t e r p r e t a t i o n i s a d i s c r e t e and s p e c i a l i z e d area. Again, there are many E n g l i s h language m a t e r i a l s concerning p a r t i c u l a r areas of the Japanese law, such as a d m i n i s t r a t i v e law and antimonopoly law. Except f o r c o n s t i t u t i o n a l law, many of these are s u b j e c t s which the Japanese law students study as op t i o n s a f t e r l e a r n i n g the compulsory b a s i c law courses. Conversely, the E n g l i s h language m a t e r i a l s which i l l u s t r a t e the f u n c t i o n of case law i n the b a s i c laws, such as c o n t r a c t law, c r i m i n a l law and c o r p o r a t i o n s law, i n Japan are q u i t e r a r e . Therefore, there seems t o be a gap between the Japanese lawyers and the common lawyers with respect t o the knowledge of the f u n c t i o n of case law i n Japan. T h i s t h e s i s i s intended to a s s i s t common lawyers and other f o r e i g n e r s i n understanding the r o l e of case law i n Japan i n the b a s i c areas of p r i v a t e law, using examples drawn from c o r p o r a t i o n s law. In Chapter I I the c h a r a c t e r i s t i c s of Japanese case law are d i s c u s s e d . It i s s t r e s s e d that the d i s c u s s i o n i s mostly a p p l i c a b l e t o the p r i v a t e law areas, where the most c r e a t i v e i n t e r p r e t a t i v e techniques are used. Other areas of the law i n v o l v e some other c o n s i d e r a t i o n s . For - 3 example, r e l a t i v e l y s t r i c t i n t e r p r e t a t i o n s are used i n the c r i m i n a l law i n Japan, where the c i v i l law d o c t r i n e of n u l l i m  crimen, n u l l a poena s i n e lege governs. O b v i o u s l y i t i s impossible to d e s c r i b e a l l aspects of the Japanese case law i n t h i s l i m i t e d space. The f o l l o w i n g d i s c u s s i o n i s d e l i b e r a t e l y b r i e f , and i s not intended to be exhaustive. I have omitted other r e l e v a n t i s s u e s , such as the p h i l o s o p h i c a l arguments concerning " i n t e r p r e t a t i o n of law", or d e t a i l e d comparisons with the laws of Germany and France, which have a great d e a l of i n f l u e n c e on the Japanese law. In Chapter I I I , I w i l l compare the Canadian approach and the Japanese approach with r e s p e c t t o f i v e s e l e c t e d t o p i c s of company law. This i s to demonstrate how the Japanese case law works i n a c t u a l i s s u e s . I chose those t o p i c s f o r the f o l l o w i n g reasons: F i r s t l y , they show a s t r i k i n g d i f f e r e n c e between the Canadian approach and the Japanese approach. In Canada the reform of common law p r i n c i p l e s on these i s s u e s has r e l i e d on new l e g i s l a t i o n , whereas i n Japan the law reform i n r e l a t i o n to the same i s s u e s was achieved by case law. They a l s o show the problems of the Japanese approach. Secondly, v a r i o u s i n t e r p r e t a t i v e techniques are w e l l demonstrated i n the Japanese case law on those i s s u e s . T h i r d l y , these company law t o p i c s are f a m i l i a r to many people who have s t u d i e d company law. I t w i l l be p o s s i b l e f o r them t o grasp the p o i n t d i r e c t l y , - 4 -without t a k i n g pains to understand the nature of the t o p i c s themselves. A l s o , these t o p i c s are of some p r a c t i c a l value f o r those who are i n v o l v e d i n bu s i n e s s t r a n s a c t i o n s with Japan. I t i s not intended t o compare the company laws of both c o u n t r i e s o v e r a l l . Nor i s i t intended t o make any g e n e r a l argument that the Japanese c o u r t s work b e t t e r or worse than the common law c o u r t s , although c o n c l u s i o n s w i l l be drawn i n s p e c i f i c cases. The o b j e c t i s to e x p l a i n the j u d i c i a l p r ocess i n Japan through concrete examples, some of which have not been explored i n any depth i n E n g l i s h b e f o r e . With respect t o these t o p i c s , i t i s a l s o necessary t o mention the r o l e of s c h o l a r y arguments or debates i n Japan, which have f a c i l i t a t e d the subsequent development of case law. The arguments on each p o i n t are extremely d e t a i l e d and complicated, and I have omitted the arguments themselves t o make the d i s c u s s i o n of the law p l a i n and b r i e f . I w i l l mention the r o l e of s c h o l a r l y arguments i n the g e n e r a l development of the law i n Chapter I I . In s h o r t , I hope t h i s t h e s i s w i l l be understood as an i n t r o d u c t i o n to the r e a l i t y of the Japanese law which w i l l f a c i l i t a t e f u r t h e r s t u d i e s by f o r e i g n e r s . Any one of the company law examples d i s c u s s e d i n t h i s t h e s i s deserves t o be a t o p i c of a separate t h e s i s on the s u b s t a n t i v e law i n v o l v e d . 5 Here the focus i s on the c o u r t ' s r o l e i n d e v e l o p i n g the s u b s t a n t i v e law, a r o l e which has been n e g l e c t e d and c o u l d l e a d t o business misunderstandings and p o t e n t i a l l y great economic l o s s e s i n the context of t r a n s n a t i o n a l t r a n s a c t i o n s . I I . CHARACTERISTICS OF CASE LAW IK JAPAN A. F u n c t i o n of Case Law i n Japan 1. An Overview There i s the f o l l o w i n g b a s i c d i f f e r e n c e i n the r e l a t i o n s between case law and s t a t u t e s between Canada and Japan. In Anglo-Canadian law, r e l a t i v e l y great importance has been g i v e n to the common law as the primary source of law, as compared with s t a t u t e law. The c o u r t s have adopted a s t r i c t l i t e r a l approach i n i n t e r p r e t i n g s t a t u t e s , and a presumption t h a t only a p r e c i s e and e x p l i c i t s t a t u t o r y enactment can modify a common-law concept has been very powerful. Therefore, i n order to secure immediate c e r t a i n t y , . s t a t u t e s tend t o be complex and l e n g t h y . In Japan, p a r t i c u l a r l y i n the p r i v a t e law area, the s i t u a t i o n i s j u s t the o p p o s i t e . S t a t u t e s are c o n s i d e r e d t o be the primary source of law, but t h i s does not mean that the - 6 -c o u r t s s t i c k to the language of s t a t u t e s . On the c o n t r a r y , the co u r t s use extremely f l e x i b l e i n t e r p r e t a t i v e techniques. The Japanese c o u r t s have no e q u i v a l e n t t o the d e t a i l e d r u l e s of s t a t u t o r y i n t e r p r e t a t i o n i n common law c o u n t r i e s , such as the p l a i n meaning r u l e , the m i s c h i e f r u l e , the golden r u l e , canons of i n t e r p r e t a t i o n , use of the form of s t a t u t e s as g u i d e l i n e s , the r e s t r i c t i o n on the use of l e g i s l a t i v e h i s t o r y , or v a r i o u s presumptive r u l e s . In the p r i v a t e law area, c o u r t s o f t e n depart from the l i t e r a l meaning of s t a t u t o r y p r o v i s i o n s . While s t a t u t e s remain simple and a b s t r a c t , s u b s t a n t i a l p o r t i o n s of the law are c r e a t e d by c o u r t s through f l e x i b l e i n t e r p r e t a t i v e techniques. In a d d i t i o n , frequent changes i n j u d i c i a l precedents are a s u b s t i t u t e f o r amendments t o s t a t u t e s . I w i l l mention t h i s i n a l i t t l e more d e t a i l below. F i r s t l y , the j u d i c i a l i n t e r p r e t a t i o n of s t a t u t e s i n Japan i s t o t a l l y d i f f e r e n t from the s t r i c t l i t e r a l approach of the common law c o u r t s . The Japanese c o u r t s draw c o n c l u s i o n s which are d i f f e r e n t from the l i t e r a l meaning of s t a t u t o r y p r o v i s i o n s . T h i s i s seen i n the p r i v a t e law area. The Japanese c o u r t s do not have self-imposed r e s t r i c t i o n s on the s t a t u t o r y i n t e r p r e t a t i o n s comparable with those i n common law c o u n t r i e s . Words of s t a t u t o r y p r o v i s i o n s are i n t e r p r e t e d e i t h e r b r o a d l y or narrowly. T h e i r a p p l i c a t i o n i s l i m i t e d by the c r e a t i o n of exceptions by c o u r t s , or extended t o d i f f e r e n t 7 s i t u a t i o n s by analogy. They are supplemented with many r u l e s c r e a t e d by c o u r t s . A l s o gaps between s t a t u t o r y p r o v i s i o n s are f i l l e d i n by c o u r t s . Sometimes c o u r t s use "ippan joko" ( l i t e r a l l y , g e n e r a l c l a u s e s ) , i . e . broad d o c t r i n e s with sweeping e f f e c t , to o v e r t u r n the o r d i n a r y p r i n c i p l e s of law. Some of these g e n e r a l d o c t r i n e s are now c o d i f i e d , but i t does not mean that c o u r t s cannot r e s o r t t o them i f there are no express p r o v i s i o n s . For example, the "abuse of r i g h t " d o c t r i n e , perhaps the most popular example of g e n e r a l c l a u s e s among Japanese j u r i s t s , had a l r e a d y been reco g n i z e d by c o u r t s b e f o r e i t was c o d i f i e d i n the a r t . 1(1) of the C i v i l Code. Concrete examples of these c o u r t i n t e r p r e t a t i o n s are shown i n 2 P r o f e s s o r Tanaka 1s comprehensive textbook on Japanese law. They w i l l a l s o be shown i n the company law cases d i s c u s s e d i n Chapter I I I of t h i s t h e s i s . For Japanese lawyers and l e g a l academics, they are by no means e x c e p t i o n a l cases. There are a number of other cases adopting e q u a l l y f l e x i b l e i n t e r p r e t a t i o n s . In a d d i t i o n , there i s no r e s t r i c t i o n on the use of m a t e r i a l s i n making s t a t u t o r y i n t e r p r e t a t i o n s . However, the Japanese c o u r t s seldom admit the f a c t t h a t they are i n f l u e n c e d by other m a t e r i a l s . For example, although there i s no r e s t r i c t i o n on the use of l e g i s l a t i v e h i s t o r y i n the i n t e r p r e t a t i o n of s t a t u t e s , c o u r t s seldom r e f e r t o them i n 3 t h e i r d e c i s i o n s . It appears t h a t c o u r t s do not l i k e t o - 8 c u r t a i l t h e i r f r e e hand t o i n t e r p r e t s t a tues by r e f e r r i n g other m a t e r i a l s . T h i s approach i s aided by l e g a l academics. They engage i n great e f f o r t s t o b u i l d up i n t e r p r e t a t i v e arguments concerning each l e g a l i s s u e . T h e i r approach i s extremely c r e a t i v e . Court i n t e r p r e t a t i o n s of s t a t u t e s which look a l r e a d y f l e x i b l e f o r common lawyers are o f t e n viewed by Japanese academics as "too r i g i d " . Normally there i s a gre a t body of s c h o l a r l y arguments behind the case law on each l e g a l i s s u e . Courts are o f t e n guided by these s c h o l a r l y arguments, although t h e r e are cases i n which c o u r t s adamantly r e f u s e t o f o l l o w the w e l l - e s t a b l i s h e d s c h o l a r l y argument on a p a r t i c u l a r p o i n t . However, c o u r t s seldom i d e n t i f y the s c h o l a r l y source f o r a p r i n c i p l e they may be a c c e p t i n g . There are many debates and w r i t i n g s by Japanese academics concerning l e g a l i n t e r p r e t a t i o n i n g e n e r a l . However, at the r i s k of o v e r s i m p l i f i c a t i o n , I would say that these g e n e r a l arguments are h i g h l y p h i l o s o p h i c a l , and c o n s i s t of what l e g a l i n t e r p r e t a t i o n should be, r a t h e r than what c o u r t s are a c t u a l l y doing. F u r t h e r , as c o u r t s do not make g e n e r a l comments on s t a t u t o r y i n t e r p r e t a t i o n s , i t i s d i f f i c u l t t o f i n d out t o what extent c o u r t s are i n f l u e n c e d by these g e n e r a l arguments. Therefore, I would r e f r a i n from mentioning these - 9 -complex arguments. S u f f i c e t o say that there i s a p r e v a i l i n g tendency towards l i b e r a l i n t e r p r e t a t i o n s which c o i n c i d e s with 4 the f l e x i b l e approach adopted by c o u r t s . Secondly, there are frequent changes i n case law i n Japan. So f a r , I have used the word "case law" r a t h e r l o o s e l y . There i s a Japanese word " h a n r e i " which i s t r a n s l a t e d as " j u d i c i a l precedent". However, i t s i m p l i c a t i o n i s t o t a l l y 5 d i f f e r e n t from the common law e q u i v a l e n t . As a matter of law, Japan does not have a r u l e of s t a r e d e c i s i s . A cou r t d e c i s i o n i n one case i s not b i n d i n g i n a subsequent case, r e g a r d l e s s of the l e v e l of the c o u r t s concerned. Even the Supreme Court may render a d e c i s i o n which c o n t r a d i c t s i t s former d e c i s i o n , although the Courts Act (Law No. 59 of 1947) r e q u i r e s a more c a r e f u l procedure i n such cases; i . e . such a d e c i s i o n must be rendered by the Grand Bench of a l l f i f t e e n J u s t i c e s , not by any of i t s Petty Benches, each composed of f i v e J u s t i c e s . As a matter of f a c t , however, the l e g a l o p i n i o n s i n the Supreme Court d e c i s i o n s are normally r e s p e c t e d and fo l l o w e d by c o u r t s , i n c l u d i n g the Surpreme Court i t s e l f . Indeed, the Supreme cou r t o f t e n says " i t i s the j u d i c i a l precedent of t h i s c o u r t [ c i t a t i o n of d e c i s i o n ] t h a t ..." When the Supreme Court renders a d e c i s i o n on an i s s u e on which i n f e r i o r c o u r t - 10 -d e c i s i o n s a n d s c h o l a r l y a r g u m e n t s a r e c o n f u s i n g , l e g a l a c a d e m i c s s a y t h a t "now t h i s i s s u e was s e t t l e d b y t h e Supreme C o u r t . " N e v e r t h e l e s s , c o m p a r e d w i t h t h e common l a w c o u n t r i e s , c h a n g e s i n j u d i c i a l p r e c e d e n t s f r e q u e n t l y do o c c u r i n J a p a n . H e r e , a g a i n , s c h o l a r l y a r g u m e n t s p l a y an i m p o r t a n t r o l e . L e g a l a c a d e m i c s s e v e r e l y c r i t i c i z e c o u r t d e c i s i o n s w h i c h t h e y c o n s i d e r w rong, and s t r o n g l y u r g e c h a n g e s . T h i s a l s o o c c u r s when an o l d p r e c e d e n t becomes o b s o l e t e . A l t h o u g h t h e c o u r t s a r e more c o n s e r v a t i v e i n c h a n g i n g p r e c e d e n t s , a c a d e m i c s h a v e o f t e n b e e n s u c c e s s f u l i n h a v i n g c o u r t s make c h a n g e s . T h e r e f o r e , w i t h f l e x i b l e i n t e r p r e t a t i v e t e c h n i q u e s and t h e p o s s i b i l i t y o f c h a n g e s i n p r e c e d e n t s , c a s e l a w h a s p l a y e d an i m p o r t a n t r o l e i n t h e d e v e l o p m e n t o f t h e J a p a n e s e l a w . T h i s w i l l be shown i n t h e c o n c r e t e e x a m p l e s i n C h a p t e r I I I . 2. I s t h e J a p a n e s e Company Law E x c e p t i o n a l ? One may a r g u e t h a t t h e company l a w i n J a p a n i s e x c e p t i o n a l and d o e s n o t b e a r o u t my o b s e r v t i o n s t h u s f a r . I n t h e f i r s t p l a c e , t h e company l e g i s l a t i o n h a s b e e n f r e q u e n t l y amended. S i n c e t h e end o f t h e Word War I I , t h e f o l l o w i n g c h a n g e s h a v e b e e n made. 1948 The a b o l i t i o n of partly-paid shares. 1950 Broad amendments under the influence of the U.S. concerning share c a p i t a l , the organs of the company and the pos i t i o n of shareholders. 1951 Further amendment to the shareholders' d e l i v a t i v e action. 1955 Minor amendments to the pre-emptive right of shareholders, etc. 1962 Amendments to the accounting system for companies. 1966 Various p a r t i c a l amendments including conversion between par value stock and no par value stock, and r e s t r i c t i o n s on transfer of shares. 1974 Various amendments including changes to the audit system, interim dividend, cumulative voting, and convertible debentures. 1981 Broad amendments concerning stock, organs, accounting, and the creation of debenture with pre-emptive r i g h t . Again, i t may be pointed out that there are l e g i s l a t i v e amendments which have overturned court decisions just as in Anglo-Canadian law. ^  For example, i n the 1950 amendment, i t was provided that the a r t i c l e s of incorporation must contain a provision concerning shareholders' pre-emptive righ t s . However, the l e g i s l a t i o n did not make clear what kind of provision was adequate, and one i n f e r i o r court decision held 7 that the preva i l i n g style of provision was i n v a l i d . It caused a panic in the business world, which led to the 1955 amendment to the Commercial Code (Law No. 48 of 1899). By the - 12 amendment, the requirement f o r a pre-emptive r i g h t s c l a u s e i n the a r t i c l e s of i n c o r p o r a t i o n was d e l e t e d . By the amendment, pre-emptive r i g h t c o u l d be given to shareholders or o u t s i d e r s by a d e c i s i o n of the board of d i r e c t o r s . But, i n a d d i t i o n , a s p e c i a l r e s o l u t i o n of s hareholders was r e q u i r e d t o g i v e the r i g h t to o u t s i d e r s . It was not long b e f o r e another p a n i c occured. There was a widespread p r a c t i c e t o i s s u e new shares by means of a wholesale s u b s c r i p t i o n agreement with a s e c u r i t i e s d e a l e r . It was i n substance a p u b l i c o f f e r i n g . However, one i n f e r i o r c o u r t d e c i s i o n h e l d the p r a c t i c e i n v a l i d , because the agreement was to g i v e a pre-emptive r i g h t to an o u t s i d e r without a g s p e c i a l r e s o l u t i o n . S e v e r a l i n f e r i o r c o u r t s followed t h i s d e c i s i o n . Again, t h i s l e d to a request f o r an urgent amendment of the Commercial Code. In the 1966 amendment i t was p r o v i d e d that a s p e c i a l r e s o l u t i o n was r e q u i r e d o n l y i f new shares were i s s u e d to t h i r d p a r t i e s at an e s p e c i a l l y f a v o u r a b l e p r i c e , and the requirement f o r both a r e s o l u t i o n of a board of d i r e c t o r s and a s p e c i a l r e s o l u t i o n of s h a r e h o l d e r s was d e l e t e d . Another important case i n v o l v e d the manner of t r a n s f e r of a name-share. Before the 1966 amendment, endorsement of a share c e r t i f i c a t e was r e q u i r e d , and the p r e s c r i b e d form of endorsement was e i t h e r ( i ) a s i g n a t u r e or ( i i ) a stamp of the endorser's name p l u s a s e a l impression. As t h i s requirement 13 was useless and nothing but a nuisance, an endorsement by seal impression only was widely accepted. The Supreme Court held th i s practice i n v a l i d as i t did not meet with the statutory g requirement. In the 1966 amendment the requirmenet for endorsement was abolished, and now name-shares can be transferred simply by delivery of share c e r t i f i c a t e s . These examples do not negate the general observation I have asserted above. Those decisions, which provoked demand for amendments, were severely c r i t i c i z e d . However, the inadequate results actually stemmed from defective statutory provisions in the f i r s t place. In most cases the courts use f l e x i b l e interpretations to try to r a t i o n a l i z e the existing, defective provisions. In some cases, t h e i r conclusions did not accord with commercial practice and thus forced l e g i s l a t i v e action. The post-war amendments of the company law are mostly concerned with mechanical or s t r u c t u r a l matters, and are t o t a l l y incomparable with the o v e r a l l reform of the common law achieved i n Canadian company l e g i s l a t i o n . Many important issues s t i l l are l e f t to the case law i n Japan. B. H i s t o r i c a l Background The Japanese approach derives from the unique hi s t o r y of the development of Japanese law. As there are ample studies - 14 -on t h i s subject"*"^, I w i l l pass quickly through t h i s topic, focusing on the impact of foreign law and relations between case law and scholarly arguments. 1. Pre-War Period Subsequent to the a b o l i t i o n of the feudal system, Japan immediately commenced the unprecedented modernization of i t s whole p o l i t i c a l and legal system. It was a process of rapid Westernization to cope with the Western powers. Establishment of a modern legal system was one of the main tasks of the leaders of the government. It was also a prerequisite for a b o l i t i o n of the humiliating unequal t r e a t i e s with the Western powers. Under these pressing needs, the leaders of the government completed this task with remarkable speed, f i n i s i n g the f i r s t phase in ther period 1870-1900. In compiling basic codes, they studied the laws of many developed countries. Most i n f l u e n t i a l among these were the c o d i f i e d laws of France and Germany. Common law was not a convenient t o o l for t h i s quick transplantation. This process of transplantation thus determined the course of development of Japanese law as a c i v i l law system. - 15 The study of German law soon achieved overwhelming importance among Japanese j u r i s t s . If we take the C i v i l Code (Law No. 89 of 1896), as an example, although i t s provisions were not necessarily a carbon copy of the German equivalent, Japanese academics and courts applied German theory i n interpreting them. Professor Kitagawa c a l l s t h i s phenomenon "theory reception", and gives examples of the gap between the origins of the C i v i l Code and how i t has been construed in accordance with German c i v i l law theory."^ One notable example i s C i v i l Code ar t . 416 concerning the scope of damages 12 for non-performance of an o b l i g a t i o n . It i s widely acknowledged that this provision i s mainly derived, from the common law rule i n Had ley v. Baxendale, (1854) 9 Ex. 341. However, the provision was interpreted according to the German theories of "adequate causation" and "the concept of unitary H 13 damages . I n i t i a l l y , l e g a l academics paid r e l a t i v e l y l i t t l e attention to court decisions. This s i t u a t i o n was changed when two c i v i l law professors, Shigeto Hozumi and Izutaro Suehiro formed a case study group at the Faculty of Law of the Tokyo Imperial University i n 1921. Hozumi had studied i n England and Suehiro in the U.S. They strongly advocated creative function of court decisions through l i b e r a l interpretations of statutes. Their a c t i v i t i e s not only brought an increase i n - 16 c a s e s t u d i e s by a c a d e m i c s , b u t a l s o i m p r o v e d t h e manner o f law r e p o r t i n g . S i n c e t h e n , t h e d e v e l o p m e n t o f c a s e law and t h e s t u d i e s o f a c a d e m i c s h a ve c o n t i n u o u s l y s t i m u l a t e d e a c h o t h e r . 2. Post-War P e r i o d A f t e r t h e W o r l d War I I , J a p a n u n d e r t o o k a m a j o r r e f o r m o f i t s l e g a l s y s t e m under t h e i n f l u e n c e o f U.S. A number o f laws and r u l e s were i n t r o d u c e d f r o m t h e U.S. t o J a p a n . The d o m i n a t i o n o f German law came t o an end. The s t u d y o f common law became p o p u l a r . The s c o p e o f c o m p a r a t i v e j u r i s p r u d e n c e was s i g n i f i c a n t l y e x panded. However, t h e way o f t h i n k i n g i n h e r i t e d f r o m t h e German law f i r m l y r e m a i n s among J a p a n e s e j u r i s t s . Common law p r i n c i p l e s and r u l e s were i n t e r p r e t e d by them a c c o r d i n g t o t h e c i v i l law t r a d i t i o n . The s t u d y o f common law f u r t h e r 14 e n c o u r a g e d l i b e r a l i n t e r p r e t a t i o n s o f s t a t u t e s . The s t r i c t r u l e s o f s t a t u t o r y i n t e r p r e t a t i o n i n E n g l i s h law h a v e n e v e r had an o p p o r t u n i t y t o grow i n J a p a n . Today, s c h o l a r l y arguments h a ve been d i v e r s i f i e d and, i n c o m p a r i s o n w i t h c a s e law, have l o s t a g r e a t d e a l o f t h e a u t h o r i t y w h i c h t h e y e n j o y e d b e f o r e t h e war. As more and more new i s s u e s were b r o u g h t t o t h e c o u r t s , c a s e law i n c r e a s e d i n - 17 -i t s importance and p r e s t i g e . However, case law and scholarly-arguments s t i l l c ontinue to s t i m u l a t e each other's development. C. Problems of the Japanese Approach Needless to say, the Japanese approach has i t s own problems. I have s e l e c t e d s e v e r a l r e p r e s e n t a t i v e t o p i c s f o r d i s c u s s i o n here; namely, the d e l a y i n l e g i s l a t i v e reform, the Japanese p r e d i s p o s i t i o n towards ambiguity i n the law, and the l a c k of any e f f o r t t o c r e a t e e f f e c t i v e remedy p r o v i s i o n s . 1. The Delay i n L e g i s l a t i v e Reform The importance of case law i n Japan i s coupled with the notable delay i n l e g i s l a t i v e reform. There are s e v e r a l reasons f o r t h i s . Japan does not have a f e d e r a l system. The whole country, with one hundred and twenty m i l l i o n people, c o n s i s t s of one j u r i s d i c t i o n . While i t i s very d i f f i c u l t to o b t a i n a nation-wide consensus among people with d i v e r s i f i e d i n t e r e s t s and thoughts, there i s no p a r a l l e l t o the way i n which a l e g i s l a t i v e reform i n one j u r i s d i c t i o n s t i m u l a t e s the same i n another j u r i s d i c t i o n , as seen i n Canadian company law reform. (However, t h i s may occcur i n the l e g i s l a t i o n of m u n i c i p a l - 18 -governments i n Japan.) Fu r t h e r , as mentioned i n the f o l l o w i n g s e c t i o n , there i s a tendency among the Japanese people t o leave the law i n an ambiguous s t a t e . The i n t e r e s t s of l e g a l academics are mostly addressed to b u i l d i n g up a system or theory of i n t e r p r e t a t i o n w i t h i n the scope of e x i s t i n g s t a t u t e s . U n t i l r e c e n t l y , r e l a t i v e l y l i t t l e a t t e n t i o n was p a i d t o the c r e a t i o n of new s t a t u t o r y p r o v i s i o n s to s o l v e problems. The s i t u a t i o n has been aggravated by the f a c t t h at a change of the r u l i n g p a r t y has not oc c u r r e d f o r decades. The L i b e r a l Democratic Party has c o n t i n u o u s l y been i n the government f o r over t h i r t y y e a r s , and o p p o s i t i o n p a r t i e s do not appear to have the power t o r e p l a c e i t . T h i s p o l i t i c a l c l i m a t e discourages b o l d reform of laws. Therefore, the Japanese c o u r t s are expected not o n l y to improve and r a t i o n a l i z e e x i s t i n g s t a t u t e s , but a l s o t o t a c k l e new areas which lack l e g i s l a t i v e s o l u t i o n . U n l i k e common law judges, Japanese judges do not make g e n e r a l statements about the a p p r o p r i a t e methods of s t a t u t o r y i n t e r p r e t a t i o n i n t h e i r d e c i s i o n s . However, t h e i r ideas are d i s c u s s e d i n books and j o u r n a l s from time t o time. Dr. Matsuda, when he was a Supreme Court judge, made the f o l l o w i n g comment i n a speech at a study s e s s i o n of judges: - 19 -"In making judgments, of course we should not have an idea of drowning ourselves i n the trend of the times, which i s akin to the so-called purchase of futures. However, we should not stick to the words in statutory provisions for no purpose: we should interpret and operate the law i n accordance with s o c i a l conditions. Especially, a lot i s expected in case law in areas i n which statutes are l e f t to be outdated with almost no amendment, depite changes in s o c i a l conditions after i t s enactment, or areas i n which l e g i s l a t i v e reform i s neglected although i t i s required due to the rapid increase of new problems. I think i t i s quite natural that in the U.S., the creative function of case law i s often seen in those States where l e g i s l a t i o n tends to be delayed."15 Again, Judge Nozaki of the Tokyo High Court, in a round table talk with law professors, offered t h i s view of the process of inter p r e t a t i o n : "The style of provisions of Japanese statutes are very abstract. Very d i v e r s i f i e d interpreations are possible. Secondly, i n Japan l e g i s l a t i v e solutions in response to changes i n s o c i a l conditions are very seldom adopted. When attempts are made to amend something, big disputes often occur. This i s p a r t i c u l a r l y true in the case of fundamental laws. By the way, when I talk with Americal lawyers, they ask 'Is Japan a common law country?' When I say 'No', I am asked 'Why?' One Chinese professor suggested that I should answer l i k e t h i s : 'Common law i s a custom-made su i t , whereas continental law i s an off-the-rack s u i t . Therefore, we imported the off-the-rack s u i t . Common law cannot be imported to a place which lacks the s o i l for i t . ' I think i t i s a very neat explanation and often use i t . But I think what was imported i n the Mei j i era [1868-1912] was a r e a l l y over-sized s u i t . Therefore, at the time of passage of the l e g i s l a t i o n there was a great gap between the 20 s t a t u t e s and the f a c t s , and i t was i n e v i t a b l e t o c o n s i d e r how to f i l l i n the gap when i n t e r p r e t i n g the s t a t u t o r y p r o v i s i o n s . Moreover, as the l e g i s l a t i v e s o l u t i o n s were delayed, the i n t e r p r e t a t i o n became more and more important and d i f f i c u l t . . . There i s a tendency that while there i s the g r e a t e s t adherence t o the l e g i s l a t i v e i n t e n t at the time of enacting l e g i s l a t i o n , i t s i n t e r p r e t a t i o n descends - i n other words, becomes f l e x i b l e - as the law consciousness of people i n c r e a s e s . But when the r e occurs a problem which cannot be s o l v e d by o r d i n a r y techniques of i n t e r p r e t a t i o n , I t h i n k p r a c t i t i o n e r s [ i . e . judges] suddenly become b o l d - I mean, a b r u p t l y make a jump. For i n s t a n c e , the problems such as the p r e l i m i n a r y r e g i s t r a t i o n s e c u r i t y d e v i c e are s o l v e d by making j u d i c i a l d e c i s i o n s as i f i t was a common law country. But as they are very t i m i d u n t i l they reach that p o i n t , they t r y t o r e s o l v e the problem with i n t e r p r e t a t i v e arguments based on the s t a t u t o r y p r o v i s i o n s , and e a g e r l y look f o r the b a s i s to r e l y on. A problem which a r i s e s i s t h a t we are going out of the e r a i n which we can l i v e on t r a n s l a t i o n s of f o r e i g n m a t e r i a l s i n t o Japanese by academics through the study of comparative j u r i s p r u d e n c e . There i s an i n c r e a s e of cases i n which p r a c t i c e [ i . e . c o u r t s ] encounters new problems b e f o r e s c h o l a r l y o p i n i o n s do. I t h i n k labour l i t i g a t i o n , a d m i n i s t r a t i v e l i t i g a t i o n , p o l l u t i o n l i t i g a t i o n , medical l i t i g a t i o n and so on are p a r t i c u l a r l y areas where t h i s i s e v i d e n t . Then the q u e s t i o n i s what we should do where th e r e i s nothing? Even on t h a t o c c c a s i o n we have t o make up our minds. In t h i s sense, I expect t h a t from now on there w i l l be a s i g n i f i c a n t i n c r e a s e of cases i n which p r a c t i t i o n e r s [ i . e . judges] must make a jump."16 Th i s k i n d of view i s expressed by many other j u r i s t s i n Japan. 21 -However, the law reform by judges has i t s own 17 l i m i t a t i o n s . Moreover, law reform by s t a t u t o r y i n t e r p r e t a t i o n s i s r e s t r i c t e d by the g i v e n s t a t u t o r y framework. It would be wrong i f we use the e f f o r t s of judges as an excuse f o r the n e g l e c t of l e g i s l a t i v e reform. 2. The Japanese P r e d i s p o s i t i o n Towards Ambiguity of the Law There i s an o u t s t a n d i n g tendency i n Japanese l e g i s l a t i o n , case law and c o n t r a c t d r a f t i n g : they are a l l r a t h e r s h o r t and a b s t r a c t i n form, and tend t o l a c k c e r t a i n t y . As noted by Judge Nozaki, Japanese s t a t u t o r y p r o v i s i o n s are a b s t r a c t and allow a v a r i e t y of i n t e r p r e t a t i o n s . A l s o , as shown i n the t o p i c s of company law d i s c u s s e d below, there are o c c a s i o n s i n which l e g i s l a t o r s . d e l i b e r a t e l y leave the s o l u t i o n of c o n t r o v e r s i a l i s s u e s to case law. Court d e c i s i o n s which i n t e r p r e t s t a t u t o r y p r o v i s i o n s are a l s o a b s t r a c t i n Japan. As to the s t y l e of c o u r t d e c i s i o n s , conciseness i s p r e f e r r e d . Japanese judges do not c i t e s c h o l a r l y arguments at a l l , no matter how they are i n f a c t i n f l u e n c e d by those arguments. Former d e c i s i o n s are not c i t e d e i t h e r , unless they are important Supreme Court d e c i s i o n s . 22 They express t h e i r way of t h i n k i n g t o a l e s s e r extent than do common law judges. L i k e l e g a l academics, Japanese judges tend to deduce c o n c l u s i o n s from general p r i n c i p l e s , and pay not so much a t t e n t i o n t o f a c t s of cases as common law judges do i n d e c i d i n g l e g a l i s s u e s . Rules l a i d down by them are r a t h e r broad, and not so s p e c i f i c . For example, as d i s c u s s e d i n Chapter I I I , the Supreme Court set out two c r i t e r i a of d i s r e g a r d of the c o r p o r a t e e n t i t y i n Hoshihara v. K.K. Yamayoshi Shokai. Dr. Matsuda who was an advocate of the d o c t r i n e and j o i n e d t h i s d e c i s i o n , l a t e r commented i n h i s book t h a t : " . . . d i s r e g a r d of the c o r p o r a t e e n t i t y mentioned i n t h i s d e c i s i o n concerns cases i n which a c o r p o r a t e e n t i t y ' i s nothing but a s h e l l ' and cases i n which a c o r p o r a t e e n t i t y ' i s abused to circumvent the a p p l i c a t i o n of law' , and I expect the concrete a p p l i c a t i o n of these p r i n c i p l e s [ t o be s p e l t out] i n the accumulation of j u d i c i a l precedents h e r e a f t e r . " It may be s a i d t h a t h i s view r e p r e s e n t s t h a t of other Supreme Court judges. That i s , the Supreme Court does not make the c r i t e r i a more s p e c i f i c , and leaves t h e i r c o n c r e t e a p p l i c a t i o n to subsequent d e c i s i o n s . T h i s approach may be i n e v i t a b l e because the d o c t r i n e of d i s r e g a r d of the c o r p o r a t e e n t i t y i s i t s e l f broad i n i t s - 23 nature. However, t h i s k i n d of approach i s o f t e n seen i n a wide v a r i e t y of l e g a l i s s u e s . Whenever the Supreme Court s e t s out some broad p r i n c i p l e s , commentators say "we should wait and see the development of the cases." Even l e g i s l a t o r s take t h i s approach. Therefore, one o f t e n f a c e s d i f f i c u l t y i n a s c e r t a i n i n g the scope or tr u e meaning of c o u r t d e c i s i o n s . P r o f e s s o r Haley, i n h i s a r t i c l e concerning the Japanese case law on p r e l i m i n a r y r e g i s t r a t i o n s e c u r i t y d e v i c e , expresses h i s d i s s a t i s f a c t i o n as common lawyer: "These d e c i s i o n s a l s o i l l u s t r a t e a d i s c o n c e r t i n g p r o p e n s i t y by Japanese c o u r t s t o leave unanswered many of the most c r u c i a l i s s u e s i n a case. Too o f t e n the court speaks t o the g e n e r a l p r i n c i p l e and not the i s s u e of d e t a i l . In a system where the l i t i g a t e d answer i s s w i f t and e f f i c i e n t , perhaps t h i s would not be so t e l l i n g a concern. But i n Japan l i t i g a t i o n i s p r o t o r a t e d and c o s t l y , thus such as those here t h a t impose a duty by the secured c r e d i t o r upon f o r e c l o s u r e t o di s p o s e of the c o l l a t e r a l without o f f e r i n g any g u i d e l i n e s as to what standards s h a l l apply t o such d i s p o s i t i o n leave an u n c e r t a i n t y t h a t i s d i f f i c u l t t o j u s t i f y . " 1 9 A s i m i l a r phenomenon can be seen i n the p r a c t i c e of c o n t r a c t d r a f t i n g i n Japan. Japanese c o n t r a c t s are normally simple and a b s t r a c t . They l a c k d e t a i l e d mechanisms f o r d i s p u t e settlement which are common i n c o n t r a c t s i n North America. D r a f t i n g techniques are underdeveloped. L i t t l e e f f o r t i s made - 24 i n advance t o prevent p o s s i b l e d i s p u t e s by s k i l l f u l d r a f t i n g . An immediate answer i s that Japanese businessmen c o n s i d e r a c o n t r a c t as a ki n d of harmonious r e l a t i o n s h i p . They t h i n k h i g h l y of n e g o t i a t i o n as means of d i s p u t e s e t t l e m e n t . They are a f r a i d t h at the other p a r t y may f e e l d e t a i l e d c o n t r a c t terms o f f e n s i v e , p a r t i c u l a r y those t h a t a n t i c i p a t e d i s p u t e s between the p a r t i e s . However, there seems t o be one fundamental c h a r a c t e r i s t i c behind a l l l e g i s l a t i o n , c o u r t d e c i s i o n s and c o n t r a c t d r a f t i n g : a d i s t a s t e f o r d e t a i l e d r u l e s and a t o l e r a n c e (or even pr e f e r e n c e ) f o r ambiguity. This r e f l e c t s 20 the p e c u l i a r r o l e of law i n the Japanese c u l t u r e . 3. The Lack of E f f o r t t o Create Any E f f e c t i v e Remedy P r o v i s i o n s P r o f e s s o r Tanaka and Takeuchi s e v e r e l y c r i t i c i z e the f a i l u r e of the Japanese l e g a l system t o p r o v i d e p r i v a t e persons with adequate means of enforcement of law, and demonstrate t h i s f a i l u r e by comparing va r i o u s t o p i c s i n Japanese law and 21 American law. They p o i n t out that c h a r a c t e r i s t i c s of l e g a l s c h o l a r s h i p i n Japan i s one of the causes of t h i s f a i l u r e . Namely, the primary concern of l e g a l s c h o l a r s h i p i s t o expound on s t a t u t e s and to comment on cases without paying f u l l a t t e n t i o n t o the a c t u a l working of the law, and to b u i l d up a magn i f i c e n t system of one's own t h e o r i e s . - 25 The lack of remedies are also evidenced by comparing remedy provisions in Canadian Company l e g i s l a t i o n and t h e i r Japanese counterparts. In Canadian Company l e g i s l a t i o n , there are well-designed remedy provisions which contain various schemes to f a c i l i t a t e action by injured parties, such as expanding the range of possible p l a i n t i f f s (for example, the range of people who could challenge u l t r a vires acts), broad causes of action, wide remedial powers of the court, and other elaborate mechanisms for enforcement of law by private 22 actions. Those provisions are based on the following fundamental idea: "... we f e e l that the best means of enforcing a corporations statute i s to make i t la r g e l y self-enforcing, that i s , by giving aggrieved individuals a reasonable opportunity to i n i t i a t e private c i v i l action to resolve t h e i r complaints; i f t his i s done, we believe the need for administrative enforcement w i l l become largely residual."23 The s i t u a t i o n in Japanese company law i s quite the opposite. The remedy provisions are narrowly designed. There are many statutory and factual obstacles which discourage enforcement of the law by private persons (e.g. i n a shareholders derivative action, the court may order the 21 p l a i n t i f f to post a bond). As noted in the Tanaka and Takeuchi a r t i c l e , leading scholars s t i l l stress the need to put further r e s t r i c t i o n s upon shareholders' derivative actions, on - 26 -the grounds that there i s a " p o s s i b i l i t y " of abuse. Now, Japanese academics are changing t h e i r former approach. Yet I f e e l an enormous difference when looking at Canadian company l e g i s l a t i o n and the idea lying behind. Where the statutory framework discourages the private enforcement of law, i t i s impossible to expect much development of case law in that area, no matter how academics t r y to b u i l d elaborate theories. We cannot count on case law for law reform without p l a i n t i f f s . The necessary thing i s the conscious e f f o r t to provide for e f f e c t i v e remedies by l e g i s l a t i v e reform. FOOTNOTES (Chapter II) 1 The Law Commission and the Scottish Law Commission, The  Interpretation of Statutes (1969), 14-24; Renton Committee, Preparation of Legislation (1975), 57-59. 2 Tanaka ed., The Japanese Legal System (1976), 61 et seq. I received many suggestions from t h i s book. 3 Professor Tanaka notes that in a l l cases reported in Saiko  Saibansho Hanrei Shu, the o f f i c i a l reports of Supreme Court cases, for the years 1965 to 1972, the Supreme Court made no reference to l e g i s l a t i v e h i s t o r y except one i n a dissenting opinion: i b i d . , 97. - 27 4 One of such arguments available in English language i s Kato, "Logic and Balancing of Interests i n Legal Interpretation" i n 2 Law i n Japan: An Annual 80 (1968). Although his view i s not necessarily the same as that of other academics, i t r e f l e c t s the general tendency towards l i b e r a l l e g a l interpretation. 5 See Kawashima, "The Concept of J u d i c i a l Precedent in Japanese Law", Ius Privatum Gentium F e s t s c h r i f t Fur Max  Rheinshtein (1969), 85, for more complete discussion. 6 The following examples were taken from Tomiyama, "The Characteristics of Commercial Cases" 2 Law in Japan: An Annual 108, 118 (1968). 7 Furukawa v. Denki Kagaku Kogyo k.k., Tokyo D.C. February 28, 1955, 6 Kaminshu 361. 8 Nakaj ima v. Tokyo Shibaura Denki k.k., Yokohama D.C. December 17, 1962, 13 Kaminshu 2473. 9 Yanagihara et a l • v. Kokusai Kotsu k.k., S.C. October 1, 1963, 17 Minshu 1091. 10 E.g. Takayanagi, "A Century of Innovation: The Development of Japanese Law, 1868-1961", Law i n Japan, von Mehren ed. (1963) 5; Noda, "Comparative Jurisprudence in Japan: Its Past and Present", 8 Law i n Japan: An Annual 1 (1975), 9 i b i d . 1 (1976). 11 Kitagawa, "Theory Reception - One Aspect of the Development of Japanese C i v i l Law Science", 4 Law i n Japan: An Annual 1 (1970). 12 C i v i l Code art. 416 reads as follows: " A r t i c l e 416 (1) A demand of compensation for damages s h a l l be for the compensation by the obligor of such damages as would o r d i n a r i l y arise from the non-performance of an obligation. (2) The obligee may recover the damages which have arisen through special circumstances too, i f the parties had foreseen or could have foreseen such circumstances." (translation i n 2 EHS Law B u l l e t i n Series No. 2100) - 28 13 Supra, n. 11, 4-5; Kitagawa, "Damages i n Contracts for the Sale of Goods" 3 Law i n Japan: An Annual 43, 48-50 (1969). 14 For reference, I only mention two essays English translations of which are ava i l a b l e : (l) Kato, "The Concerns of Japanese Tort Law Today - In Comparison with American Law", 1 Law in Japan: An Annual 79 (1967) asserts the necessity of learning from the t o r t law of the U.S. for creative interpretation of tort provisions i n the C i v i l Code of Japan. (2) Shibuya, " F i d i c i a r y Duty of Directors -Fairness in Regulation of Corporate Dealings with Directors", 5 i b i d . 115 (1972), written before the 1981 amendment to art. 265 of the Commercial Code, sought to draw a reasonable scope of direct o r ' s dealings with his company regulated under that provision by examining the solutions i n Anglo-American law. 15 "Saikosai y o r i Mita Minji Saiban" ( C i v i l Justice Seen from Supreme Court) i n Matsuda, Watashi no Shosu Iken (My Dissenting Opinions) (1971) 435, 449 (translated by the author). 16 "Kenkyukai: Minjiho ni Okeru Gakusetsu to Jitsumu" (Study Session: Scholarly arguments and Practice i n Private Law), 756 Jurisuto 30, 35 (1982) (translated by the author). 17 Marsh, "Is the Law Too Rigid?" i n Devlin et a l . , What ' s  Wrong with the Law? (1970) 26, 29-31, points out following problems in law-reform by judges: (i) The reforming decision i s quire fortuitous in i t s operation. The public may have to wait many years before an appropriate opportunity arises in the courts to right an i n j u s t i c e or c l a r i f y an obscurity. ( i i ) Judge-made reforms, u n t i l f i n a l l y approved at the highest l e v e l of the courts, are of uncertain s t a b i l i t y . ( i i i ) The most minor changes i n the law often turn out to have much wider implications than was at f i r s t r e a l i z e d . However, a judge can only carry out a patching job, r e s t r i c t e d as he i s by the circumstances of the case before him. He i s seldom i n a p o s i t i o n to take account of a l l the implications of a new development of the law. (iv) Since the law-reform by judges has a retrospective e f f e c t , i t may be very unjust to one of the parties before the court. 29 -18 Watashi no Shosu Iken, supra, n. 15, 314 (translated by the author). 19 "The Preliminary Contract for Substitute Performance: A Reflection of Japanese J u d i c i a l Approach" 7 Law i n Japan: An Annual 133, 147 (1974). 20 For more d e t a i l s , see Kawashima, "Legal Consciousness of Contract i n Japan", 7 Law i n Japan: An Annual 1 (1974); Noda, "Nikon-jn no Seikaku to Sono Ho-kannen" (The Character of the Japanese People and t h e i r Conception of Law), 140 Misuzu 2, 14-26 (1971), translated i n Tanaka, op.  c i t . , n. 2, 295. 21 "The Role of Private Persons in the Enforement of Law: A Comparative Study of Japanese and American Law", 7 Law i n Japan: An Annual 34 (1974). 22 Iacobucci et a l . , Canadian Business Corporations (1977) 187 et seq. 23 Ibid., 187 (footnotes omitted). 24 Matsumoto, "Management Responsibility to Minority Shareholders in Japan: Derivative Suit in West-East Melting Pot" 18 New York Law Forum 377 (1972) analyzes various problems of derivative action in Japan. 30 -I I I . EXAMPLES - SOME TOPICS OF COMPANY LAW P r e l i m i n a r y Comments For the reasons mentioned i n Chapter I, I have s e l e c t e d f o l l o w i n g t o p i c s of company law f o r comparison between the Canadian approach and the Japanese approach:"*" A. The U l t r a V i r e s D o c t r i n e B. P r e - I n c o r p o r a t i o n T r a n s a c t i o n s C. A D i r e c t o r ' s T r a n s a c t i o n s with His Company D. The D i r e c t o r ' s Duty of Care, D i l i g e n c e and S k i l l E. L i f t i n g the Corporate V e i l I have t r i e d to d e s c r i b e the s t a t u s of case law and s t a t u t e law i n both c o u n t r i e s o b j e c t i v e l y and b r i e f l y . Therefore, I r e f r a i n e d from going i n t o a b s t r a c t d i s c u s s i o n s . For the d i s c u s s i o n of Canadian company l e g i s l a t i o n , I s e l e c t e d the F e d e r a l , B r i t i s h Columbia, and o l d and new O n t a r i o Acts (see the l i s t of a b b r e v i a t i o n s ) . The comparison between the o l d and new O n t a r i o Acts shows d r a s t i c l e g i s l a t i v e changes under the i n f l u e n c e of the F e d e r a l A c t . Such a s i t u a t i o n i s a l i e n to the Japanese company l e g i s l a t i o n . The d i s c u s s i o n of the Japanese company law i s p r i m a r i l y f o r the stock company, although some r e l e v a n t cases - 31 concerning other types of companies are also c i t e d . I d e l i b e r a t e l y omitted introductory explanations of Japanese company law, because they are r e a d i l y available in other English language materials, and t h e i r inclusion would make the discussion lengthy and complicated, due to the variety of topics. Therefore, I w i l l d i r e c t l y go into the discussion of s p e c i f i c topics, assuming that the readers may obtain a basic knowledge of Japanese company law elsewhere. FOOTNOTES (Preliminary Comments) 1 In completion of t h i s chapter, I generally referred to the following materials: Iacobucci et a l . , Canadian Business Corporations (1977); Beck et a l • , Business Associations Casebook (1979); Palmer et a l . , Canadian Company Law - Cases, Notes &  Materials (1978); Kitazawa ed., Hanrei to Gakusetsu (Case Law and Scholarly Arguments) Vol. 5, Shoho (Commercial Code) I (1977); Omori et a l . ed., Chushaku Kaisha-Ho (Commentary to Company Law) Zohoban (Supplemented Edition) Vols. 1, 2 & 4 (1980). Other materials I referred to are c i t e d i n disucssions of respective topics. A l l translations of the Japanese court decisions quoted below were prepared by myself. - 32 A. The U l t r a V i r e s D o c t r i n e In Canada, as w e l l as i n England, the u l t r a v i r e s d o c t r i n e i n the common law was r e l a x e d by the c o u r t s and circumvented by s k i l l f u l d r a f t i n g techniques, and f i n a l l y a b o l i s h e d by l e g i s l a t i o n . In Japan, the d o c t r i n e was c o d i f i e d from the beginning, but i t has been v i r t u a l l y a b o l i s h e d by court i n t e r p r e t a t i o n s . In both c o u n t r i e s a n i n e t e e n t h century concern t o l i m i t the a c t i v i t i e s of the "unnatural l e g a l persons" t o a s c e r t a i n a b l e o b j e c t i v e s has g i v e n way t o an acceptance that they can operate i n the economy to much the same extent as n a t u r a l persons. 1. Canada (1) Common Law Although there are s u b j e c t , ^ i t w i l l be worthwhile common law p o s i t i o n b r i e f l y f o r approach. abundant s t u d i e s on t h i s r e s t a t i n g the h i s t o r y of the comparison with the Japanese A f t e r some p r e l i m i n a r y case law h i s t o r y , the u l t r a  v i r e s d o c t r i n e was e s t a b l i s h e d with r e s p e c t t o a company i n c o r p o r a t e d by a s t a t u t e i n Ashbury Railway C a r r i a g e & Iron - 33 -2 Co. v. R i c h i e . The d o c t r i n e a s s e r t s that a company has only such powers as are a u t h o r i z e d i n the o b j e c t s c l a u s e s of the memorandum of a s s o c i a t i o n . Any act which a company does not have power t o do i s u l t r a v i r e s and v o i d . Even the unanimous consent of a l l shareholders cannot r a t i f y i t . The d o c t r i n e was developed to p r o t e c t both the shareh o l d e r s and c r e d i t o r s of a company. The d o c t r i n e would assure t h a t the a c t i v i t i e s i n which shareholders thought they were i n v e s t i n g would be maintained and that the a s s e t s of a company would not be used f o r a c t i v i t i e s which c r e d i t o r s d i d not a n t i c i p a t e . S h o r t l y a f t e r the Ashbury case, the House of Lords i n 3 Attorney-General v. Great E a s t e r n Railway Co. r e l a x e d the r u l e of i n t e r p r e t a t i o n of the memorandum of a s s o c i a t i o n . I t h e l d that the d o c t r i n e should not be unreasonably a p p l i e d , and that whatever may f a i r l y be regarded as i n c i d e n t a l t o , or co n s e q u e n t i a l on, the s p e c i f i e d o b j e c t s should not be h e l d u l t r a v i r e s , unless e x p r e s s l y p r o h i b i t e d . While the court d e c i s i o n s accumulated as t o the a p p l i c a t i o n of t h i s r u l e , p r a c t i t i o n e r s p r e f e r r e d to avoid the u n c e r t a i n process of r e s o r t s t o the c o u r t s f o r i n t e r p r e t a t i v e guidance. Therefore, i t q u i c k l y became common p r a c t i c e t o 34 -i n c l u d e a lengthy l i s t of a n c i l l a r y o b j e c t s i n the memorandum of a s s o c i a t i o n . The c o u r t s c o n f r o n t e d t h i s p r a c t i c e with the ejusdem g e n e r i s r u l e , i . e . t h a t g e n e r a l words or c l a u s e s must 4 be i n t e r p r e t e d i n the context of the main o b j e c t s . P r a c t i t i o n e r s t r i e d t o avoid the r u l e by an "independence c l a u s e " t o the e f f e c t that each of the o b j e c t s s p e c i f i e d s h a l l be construed independently and s h a l l i n no sense be l i m i t e d by r e f e r e n c e t o any other o b j e c t c l a u s e . The House of Lords, although r e l u c t a n t l y , approved the v a l i d i t y of such c l a u s e s . ~* In B e l l Houses L t d . v. C i t y Wall P r o p e r t i e s L t d . . 6 the E n g l i s h Court of Appeal upheld the v a l i d i t y of a s u b j e c t i v e c l a u s e i n the f o l l o w i n g terms: "to c a r r y on any other t r a d e or busi n e s s whatsoever which can, i n the o p i n i o n of the board of  d i r e c t o r s , be advantageously c a r r i e d on by the company i n connection with or as a n c i l l a r y t o any of the above businesses or the g e n e r a l business of the company" (emphasis added) The court h e l d that under t h i s c l a u s e the bona f i d e o p i n i o n of the d i r e c t o r s i s s u f f i c i e n t t o deci d e whether an a c t i v i t y of the company i s i n t r a v i r e s . In H. & H. Logging Co. L t d . v. 7 Random S e r v i c e s Corp. L t d . , the B r i t i s h Columbia Court of Appeal accepted the B e l l Houses d e c i s i o n as e x p r e s s i n g the law - 35 of the Pro v i n c e . T h i s d e c i s i o n was more f a r - r e a c h i n g than the B e l l Houses d e c i s i o n , because whereas i n B e l l Houses the cou r t h e l d that the act i n q u e s t i o n a l s o came w i t h i n the ambit of some other o b j e c t i v e c l a u s e s , i n H. & H. Logging the cou r t c o u l d only r e l y on the s u b j e c t i v e c l a u s e , whose wording was g s i m i l a r to t h a t i n the B e l l Houses case. Those d e c i s i o n s symbolize the v i c t o r y of s k i l l e d draftsmanship i n a v o i d i n g the d o c t r i n e . As a r e s u l t , the e f f e c t i v e n e s s of the d o c t r i n e i n a c h i e v i n g the purposes mentioned i n the Ashbury case has been undermined by c a r e f u l l y d r a f t e d o b j e c t s c a l u s e s . Yet the d o c t r i n e had become not only a nuisance t o the company i t s e l f , but a l s o a t r a p f o r a t h i r d p a r t y d e a l i n g with the company. It 9 had a perverse e f f e c t on c r e d i t o r s . Companies i n c o r p o r a t e d by l e t t e r s patent, such as an Ontar i o company, gave r i s e t o a d i f f e r e n t j u d i c i a l i n t e r p r e t a t i o n . Bonanza Creek Gold Mining Co. v. The K i n g ^ i s g e n e r a l l y taken as having h e l d that such a company had the c a p a c i t y of a n a t u r a l person and t h a t the u l t r a v i r e s d o c t r i n e was not a p p l i c a b l e t o i t i n the absence of s t a t u t o r y r e s t r i c t i o n s . However, the s i t u a t i o n a f t e r t h at case was confusing."'""'' Since there i s no Japanese e q u i v a l e n t to l e t t e r s patent companies, f u r t h e r d i s c u s s i o n s of the Canadian experience i n . t h i s respect i s unnecessary. 36 (2) S t a t u t o r y Reform The b a s i c scheme of the s t a t u t o r y reform of the d o c t r i n e i n Canada i s to c o n f e r on a company the power and c a p a c i t y of a n a t u r a l person (except f o r the o l d OBCA), t o p r o t e c t the v a l i d i t y of an act of a company which would be otherwise i n v a l i d under the d o c t r i n e , and to p r o v i d e i n t e r e s t e d p a r t i e s with a mechanism f o r r e s t r a i n i n g a company from doing an act i n c o n t r a v e n t i o n of the memorandum or a r t i c l e s . (a) Old OBCA The o l d OBCA adopted a compromise s o l u t i o n . Although i t d i d not a b o l i s h the d o c t r i n e completely, i t e l i m i n a t e d the inconveniences of p a r t i e s d e a l i n g with a company. Under the Act, the a r t i c l e s of i n c o r p o r a t i o n must set f o r t h the o b j e c t s 12 f o r which the c o r p o r a t i o n i s t o be i n c o r p o r a t e d . A lengthy l i s t of powers are pr o v i d e d as i n c i d e n t a l t o the c o r p o r a t i o n ' s o b j e c t s , but they can be w i t h h e l d or l i m i t e d by the . . , 13 a r t i c l e s . The Act p r o v i d e s that no act of a c o r p o r a t i o n , otherwise l a w f u l , i s i n v a l i d by reason o n l y t h a t the c o r p o r a t i o n was without c a p a c i t y or power to do such an 14 a c t . However, such lack of c a p a c i t y or power may be a s s e r t e d : 37 (i) in a proceeding by a shareholder for a restraining order mentioned below; ( i i ) in a proceeding by the corporation against a former or present d i r e c t o r or o f f i c e r ; or ( i i i ) as a cause for the cancellation of the c e r t i f i c a t e of incorporation of the 15 corporation. Upon an application of a sharesholder, a court may, when i t thinks i t to be just and equitable, r e s t r a i n or prohibit a corporation from doing any act on the grounds that i t lacks the capacity or power to carry out the purpose."''6 Only a shareholder i s e n t i t l e d to t h i s remedy. However, s. 252 of the Act, i f applied l i t e r a l l y , also allows a credi t o r to seek compliance r e l i e f . (b) BCCA, CBCA and New OBCA The BCCA and the CBCA went further and abolished the doctrine, and the new OBCA followed the CBCA approach. Those Acts provide that a company has the power and capacity of a 17 natural person. However, the BCCA excludes certain 18 prohibited types of business from th i s p r i n c i p l e . It i s unfortunate that the doctrine survives to thi s extent. 38 -None of these Acts require objects clauses to be 19 included in the memorandum or a r t i c l e s . A company cannot carry on any business or exercise i t s power i n contravention of 20 r e s t r i c t i o n s in i t s memorandum or a r t i c l e s . But no act of a company i s i n v a l i d by reason only that the act contravenes 21 22 i t s memorandum or a r t i c l e s , or the Act. The BCCA s p e c i f i c a l l y provides for a compliance remedy for a contravention of the r e s t r i c t i o n s included in the 23 memorandum. The CBCA and the new OBCA do not d i r e c t l y deal with the remedy for thi s type of breach, but have more general 24 compliance remedy provisions. The BCCA allows a member, a receiver, a receiver-manager, a li q u i d a t o r , or a trustee in bankruptcy of a company to apply to a court for a restraining order, an order requiring compensation, or any other order the court considers necessary. The CBCA and the new OBCA have s i g n i f i c a n t l y expanded the scope of applicants for the remedy, i . e . a creditor and a "complainant". The l a t t e r i s defined to include, inter a l i a , a registered holder or b e n e f i c i a l owner, former or present, of a security of a corporation or any of i t s a f f i l i a t e s , and any other person who, i n the d i s c r e t i o n of a 25 court, i s a proper person to make the applicat i o n . In the results a company incorporated under these Acts can engage in any a c t i v i t y unless s p e c i f i c a l l y prevented from - 39 -so doing i n i t s document of incorporation, a complete reversal of the old common law p o s i t i o n . Companies now have wide transactional d i s c r e t i o n s . 2. Japan (1) Codification of Doctrine The Japanese C i v i l and Commercial Codes were enacted in the 1890's, after the establishment of the u l t r a vires doctrine in Anglo-American law. The doctrine was included in the new Japanese laws by a circuitou s route. The C i v i l Code has a chapter concerning " j u r i s t i c persons," and art. 43 provides that a j u r i s t i c person s h a l l have rights only within the scope of objects set forth i n the a r t i c l e s of incorporation. The C i v i l Code j u r i s t i c persons are non-business e n t i t l e s . Although business companies must 2 6 specify t h e i r objects i n the a r t i c l e s of incorporation, there is no equivalent of the C i v i l Code provision i n the Commercial Code. But i t has been established by court interpretations that the C i v i l Code provision i s also 27 applicable to business companies. was This a r t i c l e enacted in 1896. was included i n the C i v i l Code when i t The Code was b a s i c a l l y modelled on the 40 c o n t i n e n t a l law of Germany and u l t r a v i r e s was taken from P r o f e s s o r Takeuchi contends: France, but the d o c t r i n e of the Anglo-American law. As " . . . we can f i n d no c l u e that . . . [the draftsmen of the Code] had compared and examined other l e g a l systems, e s p e c i a l l y those of Germany and France, which do not recog n i z e the d o c t r i n e ; and ther e seems to have been no weighing of the a c t u a l advantages. The p r o v i s i o n i s s a i d t o have been enacted because s u i t s had a r i s e n i n England and the U.S., but the t r u t h i s more that because t h i s d o c t r i n e was recognized, many s u i t s l a t e r arose, as i s w e l l known. The d e c i s i v e reason why t h i s d o c t r i n e was introduced i n t o Japan seems t o have been the chance circumstance that the chapter of C i v i l Code on j u r i s t i c persons was d r a f t e d by Dr. Nobushige Hozumi, who had s t u d i e d i n E n g l a n d . " 2 8 It was l e f t t o the c o u r t s t o e s t a b l i s h the a p p l i c a b i l i t y of t h e i r common law appendage t o the c i v i l law s t r u c t u r e i n concrete business s i t u a t i o n s . (2) Reform by Court I n t e r p r e t a t i o n s U n l i k e common law j u r i s d i c t i o n s , i n Japan no conscious e f f o r t was made t o avoid the inconvenience of the u l t r a v i r e s p r o v i s i o n by i n s e r t i n g s o p h i s t i c a t e d , exhaustive, o b j e c t s c l a u s e s . On the c o n t r a r y , i t has been a lo n g s t a n d i n g p r a c t i c e to d r a f t o b j e c t s c l a u s e s i n a very simple manner. A l l draftsmen, both laymen and lawyers, use the f o l l o w i n g s t y l e : - 41 ( i ) The main o b j e c t s are s t a t e d b r i e f l y , f o r example, "to manufacture and s e l l f u r n i t u r e " ; and ( i i ) A short i n c i d e n t a l o b j e c t s c l a u s e r o u t i n e l y i s added t o the end, i . e . "to do any other o b j e c t s i n c i d e n t a l or r e l a t e d t h e r e t o " . Thus, i t i s not r a r e t o see o b j e c t s c l a u s e s which c o n s i s t of only two or three l i n e s . This i s c h a r a c t e r i s t i c of 29 the underdeveloped Japanese d r a f t i n g technique i n g e n e r a l . Therefore, the c o u r t s assumed a l l r e s p o n s i b i l i t y f o r ren d e r i n g e q u i t a b l e r e s u l t s i n each case. At f i r s t , the c o u r t s s t r i c t l y a p p l i e d the u l t r a v i r e s p r o v i s i o n by l i m i t i n g the 30 power of a company to the o b j e c t s as e x p r e s s l y s t a t e d . As the inconvenience of t h i s approach was evident, the c o u r t s q u i c k l y changed t h e i r standard. In 1912, the Great Court of 31 J u d i c a t u r e h e l d : " A r t i c l e s of i n c o r p o r a t i o n of a company i n c l u d e fundamental r u l e s which set f o r t h p r o v i s i o n s concerning the company's busi n e s s o b j e c t s and management of the b u s i n e s s . Since they ought t o be c o n c i s e and avoid redundancy as such, i t i s usu a l that a r t i c l e s simply l i s t b a s i c p r i n c i p l e s without going i n t o d e t a i l s . Therefore, i n determining the nature and scope of busi n e s s o b j e c t s of a company i n accordance with c l a u s e s of i t s a r t i c l e s , the d e c i s i o n should not be made simply by using the words c o n c r e t e l y s t i p u l a t e d i n the a r t i c l e s as the standard. Rather, i t can be concluded that matters which can be l o g i c a l l y i n f e r r e d from the s t i p u l a t e d matters are i n c l u d e d i n the l a t t e r , even i f they are not c o n c r e t e l y r e f e r r e d t o i n the a r t i c l e s . A c c o r d i n g l y , a matter which i s not s t i p u l a t e d i n a r t i c l e s by corresponding words but which of i t s e l f can be con s i d e r e d t o be contained i n the matters of s t i p u l a t e d o b j e c t s , should compose the o b j e c t of the company. A l s o , a matter which i s necessary f o r achievement of o b j e c t s of a company should have the nature of the company's business w i t h i n the scope of the o b j e c t s , even i f i t i s not s t i p u l a t e d i n i t s a r t i c l e s . " The e f f e c t of t h i s approach was t o dissuade c a r e f u l d r a f t i n g and throw d o u b t f u l cases i n t o the c o u r t s f o r i n t e r p r e t i a t i v e s o l u t i o n s . T h i s d e c i s i o n was followed by a number of cases which b r o a d l y i n t e r p r e t e d s t i p u l a t e d o b j e c t s . In determining whether an act was necessary f o r the achievement of the s t i p u l a t e d o b j e c t s , the c o u r t s i n i t i a l l y t r e a t e d i t as a f a c t q u e s t i o n approach i n e v i t a b l y i n v o l v e d u n c e r t a i n t y , the c o u r t s l a t e r began t o c o n s i d e r the formal nature of the act as the standard f o r d e c i d i n g whether the act was necessary t o achieve the depending on the circumstances of each case. 32 As t h i s o b j e c t s of the company. 33 The Supreme Court confirmed t h i s i n Kurozumi v. Shiomi et a l . 34 as f o l l o w s : an act which i s not i n c l u d e d i n the o b j e c t s s t i p u l a t e d i n the a r t i c l e s but i s necessary f o r - 43 the achievement of the o b j e c t s should be c o n s i d e r e d to come w i t h i n the o b j e c t s of the a s s o c i a t i o n . The d e c i s i o n of whether an act i s necessary f o r the achievement of the o b j e c t should be done under the standard of whether i t can be necessary o b j e c t i v e l y and a b s t r a c t l y by examining i t i n l i g h t of the e n t r y of the a r t i c l e s i t s e l f , r a t h e r than the standard of whether i t i s i n f a c t necessary f o r the achievement of the o b j e c t s t i p u l a t e d i n the a r t i c l e s of the company....This i s because the q u e s t i o n such as whether or not the act i n q u e s t i o n i s i n f a c t necessary f o r the a s s o c i a t i o n t o achieve i t s o b j e c t s , i s a s i t u a t i o n i n s i d e the a s s o c i a t i o n , and a t h i r d p a r t y can by no means know i t p r e c i s e l y . I f a t h i r d p a r t y cannot enter i n t o a t r a n s a c t i o n with confidence unless he i n v e s t i g a t e s such an i n s i d e s i t u a t i o n , the s e c u r i t y of t r a d e cannot be maintained at a l l . " Under t h i s broad standard, almost a l l cases a f t e r the World War I I upheld the v a l i d i t y of a l l e g e d l y u l t r a v i r e s t r a n s a c t i o n s of companies. In so h o l d i n g , the c o u r t s b r o a d l y regarded those t r a n s a c t i o n s as necessary f o r the achievement of c o r p o r a t e o b j e c t s . For i n s t a n c e , i n Sekine et a l . v. Oguchi K.K., a company whose o b j e c t s were manufacture and s a l e of c e r t a i n goods such as wooden products guaranteed the o b l i g a t i o n s of another company as l e s s e e of l a n d . It was h e l d to be a necessary act i n the absence of any counter evidence. The r e l a t i o n s between the two companies, and the purpose of the guarantee, were not questioned. In Mizuno v. D a i i c h i Seimei 3 6 Hoken Sogo Gaisha, an insurance company accepted monetary 44 d e p o s i t s on a sporadic b a s i s , not as p a r t of i t s normal bu s i n e s s . The court h e l d that i t was a necessary act from the o b j e c t i v e and a b s t r a c t p o i n t of view, and that whether the act was i n f a c t necessary or not was i r r e l e v a n t . In K. K. 37 Takashimaya v. Tokyo S h o j i K.K., a company whose o b j e c t s were t o mine, and to buy and s e l l metals, engaged i n the purchase and s a l e of f l o o r board, because i t s mining businesses were not i n good shape. The court h e l d that t h i s was a necessary a c t , as the act was r e q u i r e d t o maintain the company. This seems t o be somewhat i n c o n s i s t e n t with the standard which i s not concerned with a c t u a l n e c e s s i t y . In K.K. 38 Toho Sogo Ginko v. Takechi et a l , a company whose o b j e c t s were t o supply land and houses by mutual loan, made a monetary loan t o u t i l i z e i t s funds. The loan was h e l d i n t r a v i r e s from the o b j e c t i v e , a b s t r a c t viewpoint, and not i n v a l i d , d e s p i t e the f a c t t h a t i t v i o l a t e d the r e s t r i c t i o n s on use of funds under 39 the law governing i t s b u s i n e s s . F i n a l l y , i n the most c o n t r o v e r s i a l of a l l modern company law cases known as "Yawata S e i t e t s u [or Yawata S t e e l ] 40 P o l i t i c a l Donation Case", the Supreme Court d e a l t with the d i r e c t o r s ' l i a b l i t y f o r a p o l i t i c a l donation made by t h e i r company. One of the i s s u e s was whether such a donation was u l t r a v i r e s . The c o u r t h e l d as f o l l o w s : a company can engage i n s o c i a l a c t i v i t i e s so long as they are expected or r e q u i r e d - 45 under the common notion s of s o c i e t y . Since such a c t i v i t i e s have c o n s i d e r a b l e value and e f f e c t concerning the smooth development of a company, they can be s a i d t o be i n d i r e c t l y necessary f o r the achievement of c o r p o r a t e o b j e c t s . Therefore, to make a donation to a reasonable extent i s w i t h i n the power of the company. A p o l i t i c a l donation, as a means of a s s i s t i n g development of a p o l i t i c a l p a r t y , cannot be s a i d t o be u l t r a  v i r e s , t o the extent that i t i s s o c i a l l y expected or r e q u i r e d . The e f f e c t of these d e c i s i o n s i s that there i s almost no room f o r a p p l i c a t i o n of the u l t r a v i r e s p r o v i s i o n , i n Japan today. (3) ' No S t a t u t o r y Reform While the c o u r t s c o n t i n u o u s l y rendered the u l t r a v i r e s p r o v i s i o n meaningless, i n f a c t no attempt was made t o r e p e a l the p r o v i s i o n , even i n the e x t e n s i v e 1981 amendment to the Commercial Code and other company l e g i s l a t i o n . S i m i l a r l y , the s a i d requirement that o b j e c t s be s p e c i f i e d i n a r t i c l e s of i n c o r p o r a t i o n s t i l l remains unchanged. There has been no formal l e g i s l a t i v e r e a c t i o n to the c o u r t s ' r o l e . The Commercial Code, i n a r t . 272, p r o v i d e s s h a r e h o l d e r s with an i n j u n c t i v e remedy with respect to a c o n t r a v e n t i o n of o b j e c t s c l a u s e s . If t h e r e i s a danger t h a t a d i r e c t o r w i l l perform an act which f a l l s o u t s i d e the scope of - 46 t h e company's o b j e c t s , o r any o t h e r a c t which c o n t r a v e n e s t h e law o r the a r t i c l e s of i n c o r p o r a t i o n , and t h e r e b y w i l l cause the company i r r e p a r a b l e l o s s , a s h a r e h o l d e r s who has c o n t i n u o u s l y h e l d s h a r e s f o r t h e p r e c e d i n g s i x months may sue f o r an i n j u c t i o n t o p r e v e n t t h e d i r e c t o r ' s a c t . T h i s p r o v i s i o n was en a c t e d i n 1950, but i t has never been i n v o k e d t o p r e v e n t an u l t r a v i r e s a c t . No change has been made t o e n l a r g e the scope of p o s s i b l e p l a i n t i f f s t o i n c l u d e , f o r example, c r e d i t o r s o r s h a r e h o l d e r s of more r e c e n t d a t e . The f o r e g o i n g h i s t o r y of the Japanese v e r s i o n of t h e u l t r a v i r e s d o c t r i n e i l l u s t r a t e s t h e c h a r a c t e r i s t i c s o f t h e Japanese l e g a l p r o c e s s : a b s t r a c t s t a t u t o r y p r o v i s i o n s which do not n e c e s s a r i l y conform t o s o c i a l needs, p u r p o s i v e l y e l a s t i c i n t e r p r e t a t i o n s of s t a t u t e s by the c o u r t s , underdeveloped d r a f t i n g t e c h n i q u e s , d e l a y i n s t a t u t o r y r e f o r m , and u n w i l l i n g n e s s t o c r e a t e e f f e c t i v e remedy p r o v i s i o n s . In c o n t r a s t , i n common law c o u n t r i e s d r a f t i n g t e c h n i q u e s were de v e l o p e d t o a v o i d the d o c t r i n e . T h e r e a f t e r , Canadian company l e g l i s a t i o n c o m p l e t e l y reformed t h e d o c t r i n e . There a r e now p r o v i s i o n s which a r e d e s i g n e d t o p r o v i d e s h a r e h o l d e r s and c r e d i t o r s w i t h e f f e c t i v e remedies. A l s o , t h e p o s i t i o n o f a t h i r d p a r t y who e n t e r s i n t o a t r a n s a c t i o n w i t h a company i s s p e c i f i c a l l y p r o t e c t e d . - 47 -In Japan, the C i v i l Code provision which was supposed to perform the same function as that of the u l t r a vires doctrine i s now l e f t in an ambiguous state, unlike the present „ . . . 41 Canadian p o s i t i o n . FOOTNOTES (A. The U l t r a Vires Doctrine) 1 See Getz, "Ultra Vires and Some Related Problems" 3 U.B.C.L. Rev. 30 (1968). 2 (1875), L.R. 7 H.L. 653. 3 (1880), 5 App. Cas. 473. 4 Re German Date Coffee Co. (1882), 20 Ch. D. 169 (CA.) 5 Cotman v. Brougham, [1918] A.C. 514. 6 [1966] 2 Q.B. 656 7 (1967), 63 D.L.R. (2d) 6. 8 Getz, op. c i t . , n. 1, 40. 9 In Re Introductions Ltd.; Introductions Ltd. v. National  Provincial Bank Ltd., [1970] Ch. 199, a bank made a loan to a company in connection with the company's sole business which was not expressly authorized by the memorandum but i n fact carried out by i t . The memorandum had a clause authorizing i t to borrow money and an "independence clause". However, the court held that the loan was u l t r a  vires the company notwithstanding those clauses, on the grounds that "borrowing i s not an end in i t s e l f and must be for some purpose of the company . . . you cannot convert a power into an object merely by saying so." - 48 -In Re Jon Beauforte (London) Ltd., [1953] Ch. 131, a company purchased coke and used i t for a business not authorized by the memorandum. The purchase was prima facie an i n t r a vires transaction. But the s e l l e r was fixed with the knowledge of the unauthorized business described i n the letterhead on which the company ordered the coke, and held d i s e n t i t l e d to recovery. 10 [1916] 1 A.C. 566 (P.C.). 11 Mockler, "The Doctrine of Ul t r a Vires i n Letters Patent Companies", 1 Studies in Canadian Company Law, Ziegel ed. (1967), 231. 12 S. 4(2)2. 13 S. 14(2)(3). 14 S. 15(1). 15 Ibid. 16 S. 15(2). 17 BCCA s. 21(1); CBCA s. 15(1); new OBCA s. 15. 18 S. 21(2); see Slutsky, "Ultra Vires - The B r i t i s h Columbia Solution", 8 U.B.C.L. Rev. 309 (1973). 19 The CBCA s. 16(1) and the new OBCA s. 17(1) expressly provide that i t i s not necessary to pass a by-law in order to confer any p a r t i c u l a r power on the corporation or i t s di r e c t o r s . 20 BCCA s. 22(1)(2); CBCA s. 16(2); new OBCA s. 17(2). 21 BCCA s. 22(3). 22 CBCA s. 16(3); new OBCA s. 17(3). 23 S. 25. 24 CBCA s. 240; new OBCA s. 252. 25 CBCA s. 231; new OBCA s. 2 4 4 ( b ) ( i i i ) . 26 As to stock companies, see Commercial Code a r t . 166(1)(i). - 49 27 E.g. Kyodochugyuba Gomei Gaiska v. Totsuka et a l . , G.C.J. December 21, 1901, 7 Minroku (11)76. 28 Takeuchi, "How Should We Abolish the U l t r a Vires Doctrine in Corporate Law?", 2 Law in Japan: An Annual 140, 144 (1968) (footnotes omitted). 29 Ibid., 147. 30 E.g. Maezaki v. K.K. Toyotama Ginko, G.C.J. February 12, 1907, 13 Minroku 99 (guarantee of a promissory note by a bank was held u l t r a v i r e s ) . 31 Dutch Gomei Gaisha Vanpelstein Endruperbossi (phonetic) v. K.K. E i j o Ginko, G.C.J. December 25, 1912, 18 Minroku 1078 (guarantee of a promissory notes by a bank was held to be included in the "loan" s p e c i f i e d in the objects clauses). 32 E.g. Unknown v. Unknown, G.C.J. December 17, 1931, 3364 Shinbun 17. 33 K.K. Fukuishi Shoten v. Muramoto Soko Goshi Gaisha, G.C.J. February 7, 1938, 17 Minshu 50. 34 S.C. February 15, 1952, 6 Minshu 77 (a company whose objects were "to maintian re a l estate and other property and to u t i l i z e and increase them" disposed of i t s sole important property to a t h i r d party. The transaction was held i n t r a v i r e s ) . 35 S.C. October 28, 1955, 9 Minshu 1748. 36 S.C. November 29, 1955, 9 Minshu 1886. 37 S.C. March 22, 1955, 56 Hanrei Jiho 17. 38 S.C. October 3, 1963, 17 Minshu 1133. 39 Mutual Loan Business Law (Law No. 42 of 1931), art 10. 40 A r i t a v. Kojima et a l . , S.C. June 4, 1970, 24 Minshu 625. 41 Professor Takeuchi, i n h i s a r t i c l e c i t e d in n. 28, examines Anglo-American l e g i s l a t i o n and strongly recommends l e g i s l a t i v e reform on t h i s issue i n Japan. But there i s no p o s s i b i l i t y that such a reform i s realized i n near future. - 50 B. P r e - I n c o r p o r a t i o n T r a n s a c t i o n s In the common law system, the c o u r t s a p p l i e d the laws of c o n t r a c t and agency i n d e a l i n g with p r e - i n c o r p o r a t i o n t r a n s a c t i o n s . I n e q u i t a b l e r e s u l t s u l t i m a t e l y were solved by company l e g i s l a t i o n i n Canada. In Japan, s t a t u t o r y p r o v i s i o n s impose s t r i c t c o n t r o l s on such t r a n s a c t i o n s . The c o u r t s have t r i e d t o m i t i g a t e t h e i r inconveniences by i n t e r p r e t a t i o n s , but, again, the l e g i s l a t u r e has not responded t o p e r c e i v e d d e f i c i e n c i e s i n the Code scheme. 1. Canada (1) Common Law The l e a d i n g case on t h i s matter i s Kelner v. Baxter."'" The p l a i n t i f f entered i n t o a w r i t t e n c o n t r a c t f o r s a l e of wine with the defendants, p r o s p e c t i v e d i r e c t o r s of a company which was to be formed. The defendants signed the c o n t r a c t "on b e h a l f of the proposed Gravesend Royal Alexandra Hotel Company L i m i t e d " . The p l a i n t i f f d e l i v e r e d the goods t o the defendants. L a t e r the company was formed, and purported t o r a t i f y the c o n t r a c t . As the company c o l l a p s e d b e f o r e payment, the p l a i n t i f f sued the defendants. The co u r t h e l d that the company co u l d not r a t i f y the p r e - i n c o r p o r a t i o n c o n t r a c t to be 51 bound by i t , and that the defendants who signed the c o n t r a c t were p e r s o n a l l y l i a b l e . F i r s t , as t o the q u e s t i o n of the company's l i a b i l i t y , the court used the laws of c o n t r a c t and agency; i . e . i f a person has made a c o n t r a c t on b e h a l f of a n o n - e x i s t i n g p r i n c i p a l , a st r a n g e r cannot step i n and r a t i f y the c o n t r a c t . When a c o n t r a c t was made on b e h a l f of a n o n - e x i s t i n g company, the company which l a t e r came i n t o e x i s t e n c e i s a t o t a l l y new c r e a t u r e , and t h e r e f o r e cannot r a t i f y the c o n t r a c t . Although t h i s i s f a i t h f u l t o the theory, the r e s u l t s may be c o n t r a r y t o the e x p e c t a t i o n of the p a r t i e s and c r e a t e i n e q u i t a b l e r e s u l t s . But the c o u r t s stuck f i r m l y t o the n o - r a t i f i c a t i o n r u l e . Few a l t e r n a t i v e t h e o r i e s were a v a i l a b l e to m i t i g a t e the ha r d s h i p of the r u l e . To use a d e v i c e such as "adoption" of a c o n t r a c t i s not e f f e c t i v e , as " r a t i f i c a t i o n " 2 and "adoption" are synonymous. A s o - c a l l e d " p r o v i s i o n a l 3 c o n t r a c t " i s not u s e f u l e i t h e r , as i t i s no c o n t r a c t at a l l . The c o u r t s were r e l u c t a n t t o i n f e r from the f a c t s a new c o n t r a c t between a newly-formed company and the other 4 p a r t y . In Re Northumberland Avenue Hotel Co. L t d . , the f a c t t h a t a company acted upon a p r e - i n c o r p o r a t i o n c o n t r a c t was h e l d i n s u f f i c i e n t t o e s t a b l i s h that a new c o n t r a c t was made, on the - 52 grounds that "the company never intended t o make any new c o n t r a c t , because they f i r m l y b e l i e v e d t h a t the [ o r i g i n a l c o n t r a c t ] was i n e x i s t e n c e , and was a b i n d i n g , v a l i d c o n t r a c t . " The c o u r t s a l s o r e f u s e d the c o n t e n t i o n that a company which has r e c e i v e d goods or s e r v i c e s p r o v i d e d by the other p a r t y a c c o r d i n g t o a p r e - i n c o r p o r a t i o n c o n t r a c t should be 5 l i a b l e i n e q u i t y . Therefore, unless the c o r p o r a t i o n decides to execute a new c o n t r a c t embodying the terms of the p r e - i n c o r p o r a t i o n agreement, the c o n t r a c t i n g p a r t y has l i t t l e chance of e n f o r c i n g the c o n t r a c t a g a i n s t the c o r p o r a t i o n , even though the c o r p o r a t i o n has had the b e n e f i t of the c o n t r a c t i n g p a r t y s performance. As t o the q u e s t i o n of p e r s o n a l l i a b i l i t y , the Kelner d e c i s i o n seemed to c r e a t e the r u l e t h a t a person who signed a c o n t r a c t f o r a n o n - e x i s t i n g company i s p e r s o n a l l y l i a b l e on the c o n t r a c t . However, the l i m i t a t i o n of the Kelner d e c i s i o n was c l a r i f i e d l a t e r by the E n g l i s h Court of Appeal i n Newborne v. 7 S e n s o l i d (Great B r i t a i n ) L t d . , and the High Court of g A u s t r a l i a i n Black v. Smallwood. In the former case, a c o n t r a c t f o r s a l e was signed by "Leopold Newborne (London) Ltd . , per Leopold Newborne, d i r e c t o r " as s e l l e r , and the defendant as purchaser. As the defendant r e f u s e d t o accept the d e l i v e r y , the s e l l e r company sued the defendant. But i t was - 53 d i s c o v e r e d t h a t the company had not yet been i n c o r p o r a t e d when the c o n t r a c t was made. Mr. Newborne took steps so t h a t he was s u b s t i t u t e d as p l a i n t i f f , but e v e n t u a l l y h i s a c t i o n was dismissed. It was h e l d that the Kelner d e c i s i o n d i d not apply, as he d i d not purport t o act as agent: r a t h e r , i t was the company that purported t o s e l l . The s i g n a t u r e on the c o n t r a c t was the company's s i g n a t u r e , and Mr. Newborne's s i g n a t u r e merely confirmed i t . As the company d i d not e x i s t at the time of the c o n t r a c t , the c o n t r a c t was a complete n u l l i t y . The Black case f u r t h e r c l a r i f i e d t h a t the d e c i s i v e f a c t o r should be the i n t e n t of the p a r t i e s . The f a c t s of t h i s case were s i m i l a r t o the Newborne case: the s i g n a t u r e of the purchaser on the c o n t r a c t f o r s a l e i n d i c a t e d a company name, and two i n d i v i d u a l s signed below with the t i t l e of " D i r e c t o r s " . A l l of the p a r t i e s b e l i e v e d t h a t the company had been i n c o r p o r a t e d at the time of the c o n t r a c t . In d i s m i s s i n g the p l a i n t i f f ' s a c t i o n a g a i n s t those s i g n a t o r i e s , the court r e f u s e d t o e x t r a c t from the Kelner case the p r o p o s i t i o n that where a person c o n t r a c t s on b e h a l f of a n o n - e x i s t i n g p r i n c i p a l he i s h i m s e l f l i a b l e on the c o n t r a c t . In Kelner both p a r t i e s knew th a t the proposed company d i d not e x i s t . But i t was not by reason of t h i s f a c t alone that the defendants were h e l d l i a b l e . The d e c i s i o n was t h a t , i n the circumstances, the w r i t t e n instrument d i s c l o s e d the i n t e n t i o n t h a t they should be - 54 -bound by the c o n t r a c t . That i n t e n t i o n c o u l d not be found i n the Black case, where both p a r t i e s thought t h a t the company d i d e x i s t . The c o n t r a c t was a n u l l i t y , as the supposed purchaser d i d not e x i s t when i t was made. It f o l l o w s that even i f both p a r t i e s knew that the p r i n c i p a l company d i d not e x i s t , a p a r t y who signed a c o n t r a c t f o r a n o n - e x i s t i n g company may escape l i a b i l i t y due t o a l a c k of i n t e n t i o n that he should be bound. In Dai r y S u p p l i e s L t d . 9 v. Fuchs, the defendants who were going t o form a company purchased goods from the p l a i n t i f f . There was an agreement t h a t the p l a i n t i f f was to look t o the new company, and not them, f o r payment. The company d i d not pay. The p l a i n t i f f ' s c l a i m a g a i n s t the defendants was b a r r e d by the agreement. When there i s no remedy i n c o n t r a c t , the c o n t r a c t i n g p a r t y may sue the i n d i v i d u a l a c t i n g f o r a n o n - e x i s t i n g company on l y by breach of warranty of a u t h o r i t y or d e c e i t . But these a c t i o n s r e q u i r e t h a t the c o n t r a c t i n g p a r t y not know the non-existence of the company. Further, the measure of damages are inadequate; namely, "... the warranty theory w i l l not always be a s a t i s f a c t o r y b a s i s f o r l i a b i l i t y , f o r the measure of damages i n these cases i s the value of the p l a i n t i f f ' s recourse a g a i n s t the p r i n c i p a l . I f the p r i n c i p a l ( i n t h i s case the company) i s i n s o l v e n t , or a mere s h e l l , the p l a i n t i f f w i l l - 55 o n l y be a b l e t o r e c o v e r f r o m t h e p r o m o t e r t h e amount t h a t w o u l d h a v e b e e n r e c e i v e d as an i n s o l v e n c y d i v i d e n d f r o m t h e company, h a d i t b e e n l i a b l e . " 1 D T h i s common l a w p o s i t i o n c a u s e d m a j o r p r o b l e m s f o r p e o p l e d e a l i n g w i t h p r o m o t e r s i n t h e h o n e s t b e l i e f t h a t a company h a d b e e n f o r m e d . S i n c e t h e c o u r t s h e l d f a s t t o t h e i r p o s i t i o n , l e g i s l a t i o n was n e c e s s a r y t o remedy t h e s i t u a t i o n . (2) S t a t u t o r y R e f o r m W h i l e t h e BCCA r e m a i n s s i l e n t on t h i s m a t t e r , t h e o l d and new OBCA and t h e CBCA h a v e p r o v i s i o n s t o r e f o r m t h e common l a w p r i n c i p l e s . " ' " ' ' " I n s h o r t , a p r o m o t e r who e n t e r s i n t o a p r e - i n c o r p o r a t i o n c o n t r a c t i s p r i m a r i l y l i a b l e . A company may a d o p t t h e c o n t r a c t t o b e b o u n d b y i t , a n d t h e p r o m o t e r w i l l be r e l i e v e d f r o m t h e l i a b i l i t y upon a d o p t i o n . However, i n o r d e r t o a v o i d i n e q u i t a b l e r e s u l t s , t h e c o u r t i s g i v e n a power t o a p p o r t i o n l i a b i l i t y b e t w e e n t h e p r o m o t e r and t h e company. (a) O l d OBCA Und e r t h e o l d OBCA, a c o r p o r a t i o n may a d o p t a p r e - i n c o r p o r a t i o n c o n t r a c t e n t e r e d i n t o e i t h e r i n i t s name o r on i t s b e h a l f . Upon a d o p t i o n t h e c o r p o r a t i o n w i l l become e n t i t l e d t o t h e b e n e f i t s and s u b j e c t t o t h e l i a b i l i t i e s u n d e r - 56 the c o n t r a c t , and the person who entered i n t o the c o n t r a c t w i l l cease t o be e n t i t l e d t o such b e n e f i t s or t o be s u b j e c t t o such l i a b i l i t i e s . If such adoption does not occur, that person remains e n t i t l e d to the b e n e f i t s and s u b j e c t t o the l i a b i l i t e s under the c o n t r a c t . But he i s e n t i t l e d t o recover from the c o r p o r a t i o n the value of any b e n e f i t which i t has r e c e i v e d under the c o n t r a c t . However, there may be cases i n which the f o r e g o i n g r u l e s c r e a t e i n e q u i t a b l e r e s u l t s f o r the other p a r t y t o the c o n t r a c t . For example, a company b e n e f i t i n g from the c o n t r a c t may r e f u s e t o adopt a c o n t r a c t and leave the other p a r t y o n l y with a c l a i m a g a i n s t an i n s o l v e n t person. On the other hand, a person b e n e f i t i n g from the c o n t r a c t may cause h i s sham company to adopt the c o n t r a c t and escape l i a b i l i t y . T herefore, the Act pro v i d e s that whether or not the c o n t r a c t i s adopted by the company, the other p a r t y may apply t o a cou r t t o f i x or ap p o r t i o n l i a b i l i t y between the company and a person who entered i n t o the c o n t r a c t i n i t s name or on i t s b e h a l f i n a 12 j u s t and e q u i t a b l e manner. (b) CBCA The CBCA approach i s e s s e n t i a l l y the same as that of the o l d OBCA. However, there are some s i g n i f i c a n t d i f f e r e n c e s . - 57 -( i ) The CBCA p r o v i s i o n s a p p l y o n l y t o a w r i t t e n c o n t r a c t • ( i i ) I f a company i s t o adopt t h e c o n t r a c t , i t must do so " w i t h i n a r e a s o n a b l e t ime a f t e r i t comes i n t o e x i s t e n c e . " ( i i i ) The a d o p t i o n of t h e c o n t r a c t may be done "by any a c t i o n o r conduct s i g n i f y i n g i t s i n t e n t i o n t o be bound t h e r e b y . " ( i v ) There i s no p r o v i s i o n t o t h e e f f e c t t h a t when t h e p e r s o n remains l i a b l e under t h e c o n t r a c t , he i s e n t i t l e d t o r e c o v e r from the company t h e v a l u e o f b e n e f i t i t has r e c e i v e d . (v) The A c t c o n f e r s on "a p a r t y t o t h e c o n t r a c t " a r i g h t t o a p p l y t o t h e c o u r t f o r an o r d e r f i x i n g o r a p p o r t i o n i n g l i a b i l i t y between t h e company and the p e r s o n a c t e d i n t h e name of or on b e h a l f o f t h e company. Presumably i t i n c l u d e s such a p e r s o n h i m s e l f . Whether a company which has adopted the c o n t r a c t i s i n c l u d e d o r not i s u n c l e a r . - 58 -( c ) New OBCA The new OBCA a d o p t e d t h e CBCA p r o v i s i o n s . The o n l y c h a n g e i s t h a t b o t h o r a l and w r i t t e n c o n t r a c t s a r e e x p r e s s l y i n c l u d e d . 2. J a p a n (1) S t a t u t o r y Framework W h i l e t h e common l a w r u l e c o n c e r n i n g p r e - i n c o r p o r a t i o n t r a n s a c t i o n s comes f r o m t h e s t r i c t a p p l i c a t i o n o f p r i n c i p l e s o f c o n t r a c t and a g e n c y , i n J a p a n s t r i c t c o n t r o l s a r e i m p o s e d on p r e - i n c o r p o r a t i o n t r a n s a c t i o n s b y s t a t u t o r y p r o v i s i o n s f o r d i f f e r e n t p u r p o s e s . Namely, c e r t a i n a c t s o f p r o m o t e r s w h i c h a r e l i k e l y t o i n j u r e t h e f i n a n c i a l c o n d i t i o n o f a new company a r e s u b j e c t t o s t r i c t d i s c l o s u r e and r e v i e w i n g r e q u i r e m e n t s , and t h o s e a c t s w h i c h do n o t c o m p l y w i t h t h e r e q u i r e m e n t s a r e v o i d . T h i s i s i n t e n d e d t o p r o t e c t t h e i n t e r e s t o f s h a r e h o l d e r s o f a new company. F o r a c o m p l e t e s t u d y , " i t w o u l d be n e c e s s a r y t o a n a l y z e a l l l i a b i l i t i e s a n d r e s t r i c t i o n s i m p o s e d on p r o m o t e r s . A l s o , i t w o u l d be n e c e s s a r y t o a n a l y z e t h e f i d u c i a r y d u t y o f p r o m o t e r s . However, i n t h e f o l l o w i n g d i s c u s s i o n I w i l l f o c u s - 59 on (i) what controls are imposed on pre-incorporation transactions which a promoter enters into for a proposed company> and ( i i ) what solutions were made by the Japanese courts to c u r t a i l the inconveniences. With respect to incorporation of a stock company, art. 168(1)(v) of the Commercial Code provides that "genbutsu shusshi" ( l i t e r a l l y , investment in kind, i . e . payment of shares in things other than money) i s i n v a l i d unless s p e c i f i e d in the a r t i c l e s of incorporation. .An investment i n kind i s subject to reviewing procedures, including inspection by a court-appointed 14 inspector. The purpose of those controls i s to prevent issuance of shares for unfair consideration. In order to prevent the circumvention of the above, art. 168(1)(vi) provides that an agreement i n which the company is to acquire property after i t s incorporation i s i n v a l i d unless i t i s specified i n the a r t i c l e s of incorporation. This agreement, c a l l e d "zaisan hikiuke" ( l i t e r a l l y , take-over of property), i s subject to the same regulations as an investment . . , 15 in kind. Further, art. 246 of the Code provides r e s t r i c t i o n s to prevent evasion of the rules concerning a take-over of property by a subsequent ac q u i s i t i o n . If a company makes an agreement w i t h i n two years from the date of i t s formation f o r the a c q u i s i t i o n of p r o p e r t y which has been i n e x i s t e n c e s i n c e a time p r i o r t o i t s formation, and which i s to be used f o r i t s bus i n e s s , and i f the c o n s i d e r a t i o n f o r the a c q u i s i t i o n amounts to one-twentieth or more of the p a i d - i n c a p i t a l of the company, i t must be a u t h o r i z e d by a m a j o r i t y of two- t h i r d s of the votes c a s t at a sh a r e h o l d e r s ' meeting. This k i n d of arrangement i s c a l l e d " j i g o s e t s u r i t s u " ( l i t e r a l l y , ex post f a c t o i n c o r p o r a t i o n ) . (2) Court I n t e r p r e t a t i o n of A r t . 1 6 8 ( 1 ) ( v i ) The "take-over of p r o p e r t y " i s more s p e c i f i c a l l y d e f i n e d by the Supreme Court as f o l l o w s : "The so-rcalled take-over of p r o p e r t y r e f e r s t o an agreement i n which a promoter a c q u i r e s c e r t a i n p r o p e r t y f o r a company i n the process of i n c o r p o r a t i o n from a s p e c i f i c t r a n s f e r o r of the p r o p e r t y (who can be a promoter), s u b j e c t t o the formation of the company. I t i s an agreement which i s entered i n t o i n the name of the company, and i t s content i s t h a t the r i g h t s and o b l i g a t i o n s under the agreement are to belong d i r e c t l y t o the company, s u b j e c t t o the formation of the company."^^ While i t i s c l e a r t h a t such an agreement i s b i n d i n g on company so long as i t meets with the Code's r e g u l a t i o n s , Commercial Code says nothing about the e f f e c t of other 61 p r e - i n c o r p o r a t o n t r a n s a c t i o n s entered i n t o by the promoters. The s t r i c t s t a t u t o r y c o n t r o l s caused the the Supreme Court t o take a narrow p o s i t i o n : "In l i g h t of the l e g i s l a t i v e i n t e n t of the Commercial Code a r t . 1 6 8 ( 1 ) ( v i ) , a promoter i s not allowed t o do anything other than the act necessary f o r i n c o r p o r a t i o n of a company i t s e l f , even the act of p r e p a r a t i o n f o r opening of b u s i n e s s : Only the take-over of p r o p e r t y which i s s p e c i f i e d i n the i n i t i a l a r t i c l e s of i n c o r p o r a t i o n and complies with other s t r i c t s t a t u t o r y requirements i s p e r m i t t e d . According to the f a c t s determined by the c o u r t below, the undertaking of l i a b i l i t y i n q u e s t i o n was not s p e c i f i e d i n the i n i t i a l a r t i c l e s of i n c o r p o r a t i o n of the bankrupt company. As i t i s needless t o say that t h i s undertaking of l i a b i l i t y cannot be construed as the act necessary f o r i n c o r p o r a t i o n of the company i t s e l f , i t must be s a i d t h a t the undertaking of l i a b i l i t y i n q u e s t i o n i s not e f f f e c t i v e on the bankrupt company, r e g a r d l e s s of whether i t i s i n c l u d e d i n the take-over of p r o p e r t y . " l ^ In other words, the "act necessary f o r i n c o r p o r a t i o n of a company i t s e l f " i p s o f a c t o becomes b i n d i n g on the company upon i n c o r p o r a t i o n . The scope of t h i s c a t e g o r y i s narrowly construed; f o r example, the act of r e c e i v i n g or d e p o s i t i n g 18 payments f o r shares. It should be noted that the Commercial Code i n a r t . 1 6 8 ( 1 ) ( v i i ) p r o v i d e s that c o s t s of i n c o r p o r a t i o n cannot be a t t r i b u t e d t o the company unless s p e c i f i e d i n the i n i t i a l a r t i c l e s o f i n c o r p o r a t i o n . Such c o s t s are s u b j e c t t o the same r e g u l a t i o n s as i n the case of 19 investment i n k i n d and take-over of p r o p e r t y . There are - 62 -o l d cases of the Great Court of J u d i c a t u r e t h a t t o the extent such c o s t s s a t i s f y the s t a t u t o r y requirements, the company a u t o m a t i c a l l y succeeds to the l i a b i l i t y f o r c o s t s which a 20 promoter owes to a t h i r d p a r t y upon i n c o r p o r a t i o n . Whether the Supreme Court w i l l f o l l o w t h i s or not i s u n c l e a r . A l l other a c t s of a promoter are not b i n d i n g on the company except f o r the take-over of p r o p e r t y which complies with the s t a t u t o r y r e g u l a t i o n s . Those a c t s i n c l u d e , f o r example, purchase of goods, and l e a s i n g of o f f i c e s , f o r busin e s s use a f t e r i n c o p o r a t i o n . Such a c t s are c a l l e d "acts of p r e p a r a t i o n f o r opening of b u s i n e s s . " The Supreme Court h e l d t h a t , i n l i g h t of the s t r i c t s t a t u t o r y r e g u l a t i o n s , a take-over of p r o p e r t y which does not comply with the s t a t u t o r y requirements cannot be rescued from a 21 n u l l i t y by r a t i f i c a t i o n of the company a f t e r i n c o r p o r a t i o n . The n u l l i t y i s not a f f e c t e d by the f a i r n e s s of the p r i c e of the 22 p r o p e r t y . While a company can enter i n t o a new agreement with the other p a r t y i n accordance with the "ex post f a c t o i n c o r p o r a t i o n " requirements, a company cannot v a l i d a t e an i n v a l i d take-over of p r o p e r t y by approving i t by a s p e c i a l 23 r e s o l u t i o n . The n u l l i t y of the take-over of p r o p e r t y can be a s s e r t e d e i t h e r by the newly-formed company or the oth e r . 24 p a r t y . - 63 Fur t h e r , the Supreme Court has h e l d that when a take-over of p r o p e r t y i s not b i n d i n g on the company due to noncompliance with the s t a t u t o r y requirements, a promoter w i l l not be p e r s o n a l l y bound by the agreement f o r the take-over of pr o p e r t y , unless there are s p e c i a l circumstances, e.g. the e x i s t e n c e of a s p e c i a l agreement between the p a r t i e s , or circumstances i n which s t a t u t o r y l i a b i l i t y f o r an agent without 25 a u t h o r i t y i s a p p l i c a b l e . (3) S o l u t i o n of Inconveniences by Court I n t e r p r e t a t i o n s As i n the case of the common law, inconveniences c r e a t e d by the f o r e g o i n g p r i n c i p l e s are e v i d e n t . The Supreme Court attempted t o minimize the per v e r s e e f f e c t s i n the f o l l o w i n g cases by f i x i n g p e r s o n a l l i a b i l i t y on the i n c o r p o r a t o r s . 2 6 In Daichu Bussan K.K. v. Nari t a et a l . , promoters engaged i n the s a l e and purchase of c o a l using the name of the proposed company, which had not been i n c o r p o r a t e d . The p l a i n t i f f s o l d c o a l t o them. (Whether the p l a i n t i f f was misle d by the company name or not i s uncl e a r from the r e p o r t ) . The p l a i n t i f f sued the promoters f o r the p r i c e of the c o a l , a l l e g i n g that they had engaged i n the busi n e s s as a p a r t n e r s h i p using the name of the company as a trade name, and as such entered i n t o the c o n t r a c t . The a c t i o n was allowed. - 64 -In D a i e i Yakyu K.K. v. T s u j i , the defendant (T. ) entered i n t o an agreement i n a company's name with the p l a i n t i f f . Although the company had not been i n c o r p o r a t e d , T. h e l d h i m s e l f out as the r e p r e s e n t a t i v e d i r e c t o r of the company. The p l a i n t i f f , unaware of the non-existence of the company, performed the o b l i g a t i o n under the c o n t r a c t , but T. d i d not pay c o n s i d e r a t i o n . The p l a i n t i f f sued T. under C i v i l Code a r t . 117 which p r o v i d e s s t a t u t o r y l i a b i l i t y f o r an agent without a u t h o r i t y . I f a person ente r s i n t o a c o n t r a c t as agent f o r another person and cannot prove h i s a u t h o r i t y nor o b t a i n a r a t i f i c a t i o n from the p r i n c i p a l , he i s l i a b l e f o r the performance of the o b l i g a t i o n or f o r compensation f o r damages, at the o p t i o n of the other p a r t y , p r o v i d e d t h a t the other p a r t y b e l i e v e d , without negligence, he had a u t h o r i t y . T. contended t h a t the language of the p r o v i s i o n shows t h a t i t i s a p p l i c a b l e o n l y when the p r i n c i p a l a c t u a l l y e x i s t s . The Supreme Court h e l d : "As the c o n t r a c t i n t h i s case d e s c r i b e d by the cour t below cannot be s a i d t o be an act necessary f o r i n c o r p o r a t i o n of the company, th e r e i s no reason why i t s e f f e c t i s i p s o f a c t o a t t r i b u t e d t o the company a f t e r i t s i n c o r p o r a t i o n . A f t e r a l l , the c o n t r a c t should be s a i d t o be analogous t o an act done by T. as agent without a u t h o r i t y . It i s tr u e that C i v i l Code a r t . 117 i s b a s i c a l l y a p r o v i s i o n f o r the case i n which one entered i n t o a c o n t r a c t as agent f o r another e x i s t i n g person, and t h a t T. who entered i n t o the c o n t r a c t as r e p r e s e n t a t i v e of a not-yet-formed company i n t h i s case does not come w i t h i n the category of an agent without a u t h o r i t y i n i t s o r i g i n a l sense. - 65 However, s i n c e the p r o v i s i o n i s based on the purpose of p r o t e c t i n g the other p a r t y who entered i n t o a c o n t r a c t with a person b e l i e v i n g t h a t he was an agent, with r e s p e c t to t h i s c o n t r a c t which has r e l a t i o n s analogous to the f o r e g o i n g i t i s reasonable to c o n s i d e r that T. i s l i a b l e under the c o n t r a c t by a p p l i c a t i o n of the s a i d p r o v i s i o n by analogy." There are some other i n f e r i o r court cases using the same approach. This p r o v i d e s a bona f i d e c o n t r a c t i n g p a r t y with an e f f e c t i v e remedy, as the c o u r t s do not have a theory comparable to that of the common law to reduce the amount of damages i n case of the i n s o l v e n c y of the p r i n c i p a l . 28 In Otsu v. Daiwa Kotsu K.K., the Supreme Court opened up a way to sue the company f o r unjust enrichment. The p l a i n t i f f was one of a group promoters who unanimously decided that a proposed company would a c q u i r e t a x i cabs from the p l a i n t i f f . He executed an agreement t o t h i s e f f e c t as the t r a n s f e r o r on the one hand, and as r e p r e s e n t a t i v e of the proposed company on the other hand. A f t e r i n c o r p o r a t i o n , he d e l i v e r e d the cabs to the company b e l i e v i n g t h a t the agreement was b i n d i n g on the company. The agreement was i n f a c t n u l l , because the Code requirements f o r take-over of the p r o p e r t y were not complied with. N e v e r t h e l e s s , the company used and disposed of the cabs. The Supreme Court a f f i r m e d the d e c i s i o n of the lower court that even i f the company's act amounted to r a t i f i c a t i o n , the i n v a l i d take-over of p r o p e r t y c o u l d not be - 66 v a l i d a t e d by r a t i f i c a t i o n . The Supreme Court a l s o h e l d that the other promoters were not l i a b l e because there was no agreement to h o l d them l i a b l e , nor was there a s i t u a t i o n i n which the s t a t u t o r y l i a b i l i t y of the agent without a u t h o r i t y would be a p p l i c a b l e . However, the Court h e l d that there was 29 room f o r a c l a i m f o r unjust enrichment, and ordered the r e t r i a l of the case by the lower c o u r t . (The outcome i s not rep o r t e d . ) There are i n f e r i o r c o u r t d e c i s i o n s which regarded the company as the successor t o a l e a s e agreement or a 31 membership agreement of a g o l f c l u b , when the company and the other p a r t i e s c o n t i n u o u s l y p urported t o act on the agreement. But the a u t h o r i t y of these cases w i l l be d o u b t f u l i f the n o - r a t i f i c a t i o n r u l e i s s t r i c t l y a p p l i e d i n f u t u r e . U n f o r t u n a t e l y , as i n the case of the u l t r a v i r e s d o c t r i n e , no l e g i s l a t i v e reform has been made t o the s t a t u t o r y framework. The fo r e g o i n g shows how the Japanese c o u r t s t r y to develop r u l e s and exceptions based on a g i v e n s t a t u t o r y framework which i s not n e c e s s a r i l y adequate by c r e a t i v e l y a p p l y i n g the a v a i l a b l e p r o v i s i o n s . Thus i n the p r e - i n c o r p o r a t i o n t r a n s a c t i o n s area the company, once formed, can be made l i a b l e i n l i m i t e d circumstances employing a r t . 168( 1 ) ( v i ) and the d o c t r i n e of unjust enrichment i n the C i v i l - 67 Code, and the promoters can be made personally l i a b l e by the statutory l i a b i l i t y for an agent without authority or on the grounds that they personally engaged in the business. Although th i s i s not a complete solution, the Japanese courts have reduced the incoveniences a r i s i n g from the existing statutory provisions. This contrasts with the i n f l e x i b i l i t y of the common lav; rules which ultimately necessitated l e g i s l a t i v e reform. FOOTNOTES (B. Pre-Incorporation Transactions) 1 (1866), L.R. 2 C P . 174. 2 Natal Land & Colonization Co. v. Pauline C o l l i e r y and  Development Syndicate Ltd., [1904] A.C. 120 (P.C.); Repetti  Ltd. v. Oliver-Lee Ltd. (1922), 52 O.L.R. 315 (C.A.). 3 Hudson-Mattagami Exploration Mining Co. v. Wettlaufer Bros.  Ltd. (1928), 62 O.L.R. 387. 4 (1886), 33 Ch. D. 16 (C.A.). See also Bagot Preumatic Tyre  Co. v. Clipper Pneumatic Tyre Co., [1901] 1 Ch. 196; Natal  Land Co. v Pauline C o l l i e r y and Development Syndicate Ltd., supra, n. 2. 5 Re Rotherham Alum & Chemical Co. (1883), 25 Ch. D. 103; Re  English & Colonial Produce Co., [1906] 2 Ch. 435 (CA. ); Re  National Motor Mail-Coaches Co. Ltd., [1908] 2 Ch. 515 (C. A. ) ; Van Hummel v~. International Guarantee Co. (1913), 10 D.L.R. 306 (Man. K.B.); Re Crown Mutual Hail Insurance  Co. (1908), 18 Man R. 51 (K.B.). 6 Iacobucci et a l . , Canadian Business Corporations (1977), 51. - 68 -7 [1954] 1 Q.B. 45 (CA. ) . 8 [1966] A.L.R. 744 (Aust. H.C). 9 (1959), 18 D.L.R. (2d) 408 (Sask. CA. ) . 10 Getz, "Pre-Incorporation Contracts: Some Proposals", U.B.C.L. Rev. - Cahiers de Droit 381, 398 (1967) (footnotes omitted). See Wickberg v. Shatsky (1969), 4 D.L.R. (3d) 540 (B.C.S.C); Delta Const. Co. v. Lidstone (1979), 96 D.L.R. (3d) 457 (Nfld. T.D.). 11 Old OBCA s. 19; CBCA s. 14; new OBCA s. 21 12 In Bank of Nova Scotia v. Williams et a l (1976), 12 O.R. (2d) 709 (H.C), the court refused to exercise t h i s power where the other party knowingly advanced money to the company i n accordance with the contract and was not led to believe that the contractor was assuming any personal l i a b i l i t y . 13 For more detailed discussion, see Iacobucci, op. c i t . , n. 6, 55-58. 14 Commercial Code arts. 173, 181, 185. 15 Ibid. 16 Otsu v. Daiwa Kotsu K. K. , S.C. September 26, 1967, 21 Minshu 1870. 17 The Bankrupt: Shinko Boeki K.K.; The Trustee of Bankruptcy:  Tamura v. K.K. Tokyo Ginko, S.C. December 24, 1963, 17 Minshu 1744. 18 Toyo Seikan K.K. v. K.K. Hyakusanjuhachi Ginko, G.C.J. December 23, 1910, 16 Minroku 982; Tamashiro Tanko K.K. v. Tatsuta Tanko K.K., G.C.J. June 14, 1922, 1 Minshu 310. 19 Supra, n. 14 20 K.K. Kyokasha v. Omura et a l . , G.C.J. July 4, 1927, 6 Mishu 428; K.K. Kyokasha v. Omura et a l . (different case), G.C.J. March 26, 1928, 2831 Shinbun 7. 21 Otsu v. Daiwa Kotsu K.K., supra, n. 16. 22 K.K. Meiko Kaikan v. Adachi, S.C. September 15, 1961, 15 Minshu 2154. - 69 -23 Maruyama v. Wako Seizo K.K., S.C. December 3, 1953, 7 Minshu 1299. 24 Ibid. 25 Otsu v. Daiwa Kotsu K.K., supra, n. 16. 26 S.C. December 9, 1960, 14 Minshu 2994. 27 S.C. October 24, 1958, 1 Minshu 3228. 28 Supra, n. 16. 29 C i v i l Code, a r t . 703. 30 Mita v. T s u j i , Tokyo H.C. March 20, 1958, 9 Kaminshu 457; Seki v. Shinagawa Daihatsu K.K., Tokyo H.C. May 30, 1969, 22 Kominshu 384. 31 Miyazaki et a l . v. Kaede Kaihatsu K.K., Tokyo H.C, Jury 28, 1976, 831 Hanrei Jiho 94. 70 C. A D i r e c t o r ' s T r a n s a c t i o n s with His Company In both Canada and Japan, there are c o n t r o l s on a d i r e c t o r ' s t r a n s a c t i o n s with h i s company i n order t o prevent abuse of h i s power. However, the process of law-reform i s q u i t e d i f f e r e n t . In Canada the common law p o s i t i o n on t h i s matter has been g r e a t l y a l t e r e d by d e t a i l e d s t a t u t o r y p r o v i s i o n s . In Japan simple s t a t u t o r y p r o v i s i o n s have been r a t i o n a l i z e d by court i n t e r p r e t a t i o n s . Only modest changes were made by l e g i s l a t u r e s , and important i s s u e s are s t i l l l e f t t o the case law. 1. Canada (1) Common Law The common law developed a s t r i c t r u l e by analogy t o the f i d u c i a r y p o s i t i o n of the t r u s t e e . A company can, at i t s op t i o n , a v o i d a c o n t r a c t i n which one of i t s d i r e c t o r s has a p e r s o n a l i n t e r e s t , and no q u e s t i o n i s allowed as t o the f a i r n e s s or u n f a i r n e s s of the contract."'" The i n t e r e s t e d d i r e c t o r i s l i a b l e t o account t o the company f o r the p r o f i t 2 a r i s i n g from the t r a n s a c t i o n . The scope of the i n t e r e s t has - 71 b e e n b r o a d l y d r a w n . I t i n c l u d e s , f o r e x a m p l e , an i n t e r e s t as s h a r e h o l d e r , d i r e c t o r o r t r u s t e e o f t h e o t h e r p a r t y t o t h e 3 c o n t r a c t , o r an i n t e r e s t i n t h e l a n d w h i c h a d i r e c t o r p u r c h a s e s and s u b m i t s t o t h e company t h r o u g h t h e s e l l e r a s 4 s e c u r i t y f o r a l o a n s o a s t o p a y o f f t h e p u r c h a s e p r i c e . However, t h i s s t r i c t r u l e c a n be a v o i d e d b y 5 e x c u l p a t o r y c l a u s e s i n t h e company's a r t i c l e s . M o r e o v e r , t h e c o n t r a c t c a n be r a t i f i e d b y t h e m a j o r i t y v o t e o f t h e s h a r e h o l d e r s . 6 When t h e i n t e r e s t e d d i r e c t o r i s a l s o a s h a r e h o l d e r , he i s n o t p r e c l u d e d f r o m t h e v o t i n g , e v e n i f t h e 7 m a j o r i t y v o t e i s o n l y a c h i e v e d b y i n c l u d i n g h i s v o t e . The common l a w r u l e i s f i r m l y g r o u n d e d i n t h e c o n c e p t o f t h e s h a r e h o l d e r s a s m a s t e r s o f t h e company. ( 2) S t a t u t o r y R e f o r m The BCCA, t h e o l d and new OBCA and t h e CBCA h a v e d e t a i l e d p r o v i s i o n s t o s o l v e p r o b l e m s i n t h e common l a w p o s i t i o n . They i m p o s e d i s c l o s u r e r e q u i r e m e n t o n an i n t e r e s t e d d i r e c t o r , p r o h i b i t h i m f r o m v o t i n g on t h e c o n t r a c t , p r e v e n t t h e s h a r e h o l d e r s ' r a t i f i c a t i o n o f an u n f a i r c o n t r a c t , and make i t p o s s i b l e t o r e l i e v e t h e d i r e c t o r f r o m t h e l i a b i l i t y t o a c c o u n t and t o p r o t e c t t h e v a l i d i t y o f t h e c o n t r a c t . W h i l e t h e r e a r e a number o f s m a l l d i f f e r e n c e s among t h o s e s t a t u t e s , new OBCA p r o v i s i o n s a r e q u i t e s i m i l a r t o t h e CBCA p r o v i s i o n s . - 72 (a) Scope of I n t e r e s t There are minor d i f f e r e n c e s among these Acts concerning the scope of i n t e r e s t . The p r o v i s i o n s of the o l d OBCA apply o n l y t o d i r e c t o r s . Those of the BCCA, the new OBCA and the CBCA apply t o both d i r e c t o r s and o f f i c e r s . Under the BCCA, the d i s c l o s u r e requirement i s a p p l i c a b l e o n l y t o a proposed c o n t r a c t , but under the o l d and new OBCA and the CBCA i t i s a p p l i c a b l e t o a c o n t r a c t , e i t h e r c u r r e n t or proposed. The CBCA merely r e f e r s t o " c o n t r a c t " , whereas the BCCA and the o l d and new OBCA use the term " c o n t r a c t and t r a n s a c t i o n " . The o l d and new OBCA and the CBCA r e q u i r e that both the i n t e r e s t and c o n t r a c t be m a t e r i a l . The BCCA has no such requirement. For convenience, the f o l l o w i n g d i s c u s s i o n w i l l simply use the words " d i r e c t o r " , " c o n t r a c t " and " i n t e r e s t " f o r a l l of the s t a t u t e s , d e s p i t e these d i f f e r e n c e s . The BCCA and the o l d OBCA e x p r e s s l y i n c l u d e both d i r e c t and i n d i r e c t i n t e r e s t s . Instead, the CBCA and the new OBCA p r o v i d e s f o r the cases where ( i ) a d i r e c t o r i s a p a r t y t o a c o n t r a c t with the company or ( i i ) he i s a d i r e c t o r or o f f i c e r o f , or has an i n t e r e s t i n , a person who i s p a r t y t o a c o n t r a c t with the company, and both attempt t o c l a r i f y the scope of an i n d i r e c t i n t e r e s t by v i r t u e of a broad d e f i n i t i o n of a l l II 9 person . 73 -The o l d OBCA i n c l u d e s a d i r e c t o r ' s i n t e r e s t i n a c o n t r a c t i n v o l v i n g the purchase or s a l e of a s s e t s by or to the s u b s i d i a r y of the company. The other s t a t u t e s have no such p r o v i s i o n . The s t a t u t e s have d i f f e r e n t exemption c l a u s e s . ^ The CBCA and the new OBCA s p e c i f y the f o l l o w i n g c o n t r a c t s : ( i ) an arrangement by way of s e c u r i t y f o r money l e n t t o or o b l i g a t i o n s undertaken by a d i r e c t o r f o r the b e n e f i t of the company or an a f f i l i a t e ; ( i i ) a c o n t r a c t f o r a d i r e c t o r ' s remuneration as a d i r e c t o r , o f f i c e r , employee or agent of the company or an a f f i l i a t e ; ( i i i ) a d i r e c t o r ' s indemnity or insurance c o n t r a c t ; or ( i v ) a c o n t r a c t with an a f f i l i a t e . The BCCA has s i m i l a r exemptions. However, the e f f e c t of the exemptions i s d i f f e r e n t . Under the BCCA, a d i r e c t o r w i l l not be deemed t o have an i n t e r e s t i n those c o n t r a c t s , whereas the CBCA and the new OBCA merely exclude those c o n t r a c t s from the p r o h i b i t i o n on an i n t e r e s t e d d i r e c t o r ' s v o t i n g . The o l d OBCA exempts from the d i s c l o s u r e requirement o n l y a c o n t r a c t f o r the d i r e c t o r ' s remuneration as d i r e c t o r , o f f i c e r or employee of the company. 74 -(b) D i s c l o s u r e Requirement The Canadian s t a t u t e s have c o d i f i e d the case law t h a t not only the e x i s t e n c e but a l s o the nature and extent of the 12 i n t e r e s t must be d i s c l o s e d . F u r t h e r , the o l d OBCA has a s p e c i f i c d i s c l o s u r e requirement f o r a c o n t r a c t i n v o l v i n g the purchase or s a l e of a s s e t s i n which a d i r e c t o r has an i n t e r e s t . I f the p r o p e r t y was a c q u i r e d by the s e l l e r w i t h i n f i v e years b e f o r e the date of the c o n t r a c t , the d i r e c t o r must d i s c l o s e the c o s t of the p r o p e r t y to the s e l l e r and the c o s t to the purchaser, and thereby d i s c l o s e the amount of g a i n from the t r a n s a c t i o n . But t h i s p r o v i s i o n was r epealed i n the new OBCA. The CBCA and the new OBCA s p e c i f i c a l l y r e q u i r e that the d i s c l o s u r e be made i n w r i t i n g to the company or t h a t there be a request f o r an e n t r y of the d i s c l o s u r e i n the minutes of a meeting of the d i r e c t o r s . A l l of those s t a t u t e s have d e t a i l e d p r o v i s i o n s as t o 13 the d e a d l i n e of d i s c l o s u r e . The CBCA and the new OBCA pr o v i d e separate d e a d l i n e s f o r an o f f i c e r who i s not a d i r e c t o r . The CBCA and the new OBCA impose a d i s c l o s u r e requirement on an i n t e r e s t e d person who l a t e r becomes a d i r e c t o r . Further, the CBCA and the o l d and new OBCA have a p r o v i s i o n concerning the d i s c l o s u r e of the c o n t r a c t which, i n - 75 the ordinary course of the company's business, does not come before directors or shareholders for approval. A l l of those statutes provide that i t i s s u f f i c i e n t for an interested director to give a general notice (e.g. that he i s a direc t o r of or has an interest in a party to the contract with h i s company), although there are minor differences. 15 (c) Prohibition on Voting As to the resolution of dir e c t o r s on a contract i n which a direc t o r has an interest, the BCCA and the Old OBCA provide that he must r e f r a i n from voting and must not be counted in the quorum. However, under the BCCA the exclusion from the quorum may be altered by the a r t i c l e s of the company. Under the CBCA and the New OBCA, an interested director i s excluded from the vote, but not from the quorum."*"^  None of those statutes prohibits an interested di r e c t o r from voting on the contract as a shareholder at the shareholders' meeting, but they have safeguards as discussed below. - 76 (d) Directors's L i a b i l i t y and the V a l i d i t y of the  Contract BCCA: An interested director must account to the company for the p r o f i t a r i s i n g from the contract, unless he takes one of the following steps: (i ) He complies with the disclosure requirement, abstains from voting on the contract, and the contract i s approved by the dir e c t o r s , or ( i i ) The shareholders approve the contract by spe c i a l resolution after f u l l disclosure, provided that the contract was reasonable and f a i r at the time 17 i t was entered i n t o . The f a i l u r e to comply with those requirements does not automatically make the contract i n v a l i d , but the court may, upon the application of the company or any interested person, enjoin the company from entering into the proposed contract, or set aside the contract, or make any other order i t considers • *. I 8 appropriate. Old OBCA: An i n t e r e s t e d d i r e c t o r w i l l not be l i a b l e t o account f o r the p r o f i t i f he acted h o n e s t l y and i n good f a i t h at the time the c o n t r a c t was entered i n t o , and the c o n t r a c t w i l l not be v o i d a b l e i f i t was i n the best i n t e r e s t of the company at the time i t was entered i n t o , where ( i ) he complies with the d i s c l o s u r e requirement and r e f r a i n s from v o t i n g on the c o n t r a c t , or ( i i ) the i n t e r e s t i s d i s c l o s e d i n a n o t i c e of meeting or an i n f o r m a t i o n c i r c u l a r t o the sh a r e h o l d e r s , and the c o n t r a c t i s confirmed by two- t h i r d s of the votes at the subsequent sh a r e h o l d e r s ' 19 meeting. However, u n l i k e the other three s t a t u t e s , the o l d OBCA does not p r o v i d e the requirement f o r an a p p l i c a t i o n f o r a court order t o set a s i d e the c o n t r a c t i n the case of noncompliance with the above requirements. CBCA: If ( i ) a d i r e c t o r complies with the d i s c l o s u r e requirement, ( i i ) the d i r e c t o r s or shareholders approve the 78 c o n t r a c t , and ( i i i ) the c o n t r a c t was f a i r and reasonable at the time i t was approved, the c o n t r a c t i s n e i t h e r v o i d or v o i d a b l e by reason on l y that the d i r e c t o r was i n t e r e s t e d i n the c o n t r a c t or present at or was counted i n determining the preence of a quorum at a meeting of the d i r e c t o r s or committee of d i r e c t o r s 20 that a u t h o r i z e d the c o n t r a c t . The CBCA does not have an express p r o v i s i o n f o r the i n t e r e s t e d d i r e c t o r ' s l i a b i l i t y t o account f o r the p r o f i t . The o r i g i n a l b i l l f o r the CBCA p r o v i d e d t h a t the d i r e c t o r w i l l be r e l i e v e d from l i a b i l i t y i f the f o r e g o i n g c o n d i t i o n s ( i ) ( i i ) ( i i i ) are met. But t h i s p r o v i s i o n was d e l e t e d i n the r e v i s e d b i l l f o r the reason that i t had become redundant by v i r t u e of what i s now s. 117 of the CBCA ( i . e . the g e n e r a l p r o v i s i o n f o r the d i r e c t o r ' s d u t i e s , i n c l u d i n g the duty t o comply with the A c t ) . 2 1 I f a d i r e c t o r f a i l s t o comply with the d i s l o s u r e requirement, a cou r t may, upon the a p p l i c a t i o n of the company or a shareholder, set a s i d e the c o n t r a c t on such terms as i t 22 t h i n k s f i t . U n l i k e the BCCA and the o l d and new OBCA, the CBCA does not have a c u r a t i v e p r o v i s i o n which uses the sha r e h o l d e r s ' approval t o remedy noncompliance with the d i s c l o s u r e requirement. New OBCA A d i r e c t o r i s not l i a b l e t o account and the c o n t r a c t i s not v o i d or v o i d a b l e by reason o n l y of h i s r e l a t i o n s h i p with the c o n t r a c t or by reason only that he was presen t at or was counted i n determining the presence of a quorum at the meeting of d i r e c t o r s that a u t h o r i z e d the c o n t r a c t , i f ( i ) he complies with the d i s c l o s u r e requirement and ( i i ) the c o n t r a c t was reasonable and f a i r to the company at the time i t was 23 approved. The new OBCA has a p r o v i s i o n f o r the approval of the c o n t r a c t by a s p e c i a l r e s o l u t i o n of the s h a r e h o l d e r s ' 24 meeting. I t s c o n d i t i o n s are s i m i l a r t o the e q u i v a l e n t p r o v i s i o n of the o l d OBCA. An important d i f f e r e n c e i s t h a t the s t r i c t term "the c o n t r a c t was i n the best i n t e r e s t of the c o r p o r a t i o n at the time i t was entered i n t o " was r e p l a c e d by the term "the c o n t r a c t was reasonable and f a i r at the time i t was approved". I f an i n t e r e s t e d d i r e c t o r f a i l s t o comply with the s t a t u t o r y requirement, the company, a shareholder or i n the case of an o f f e r i n g company, the O n t a r i o S e c u r i t i e s Commission, may apply t o the court f o r an order s e t t i n g a s i d e the c o n t r a c t and d i r e c t i n g the d i r e c t o r t o account, and the cou r t may so 25 order or make such other order i t t h i n k s f i t . - 80 2. Japan The b a s i c s t a t u t o r y scheme on t h i s m a t t e r i n Japan i s t h a t the t r a n s a c t i o n which i n v o l v e s a c o n f l i c t of i n t e r e s t between a d i r e c t o r and h i s company must be approved by t h e board o f d i r e c t o r s , and t h a t t h e d i r e c t o r and o t h e r d i r e c t o r s who approved t h e t r a n s a c t i o n a re j o i n t l y and s e v e r a l l y l i a b l e t o t h e company f o r the damages s u s t a i n e d by t h e company due t o the t r a n s a c t i o n . (1) Scope of t h e T r a n s a c t i o n A r t . 265(1) of t h e Commercial Code p r o v i d e s two t y p e s of t r a n s a c t i o n s which r e q u i r e an a p p r o v a l o f t h e board of d i r e c t o r s . The f i r s t i s where a d i r e c t o r e n t e r s i n t o a c o n t r a c t w i t h h i s company on h i s b e h a l f o r on b e h a l f o f a t h i r d p e r s o n ( " d i r e c t t r a n s a c t i o n " ) . The second i s a c o n t r a c t between the company and a p a r t y o t h e r t h a n a d i r e c t o r which i n v o l v e s a c o n f l i c t of i n t e r e s t between the company and a d i r e c t o r ( " i n d i r e c t t r a n s a c t i o n " ) . A t y p i c a l example of t h e i n d i r e c t t r a n s a c t i o n i s t h e case i n which a r e p r e s e n t a t i v e d i r e c t o r makes an agreement w i t h h i s p e r s o n a l c r e d i t o r on b e h a l f of h i s company and t h e r e b y has h i s o b l i g a t i o n undertaken o r gu a r a n t e e d by h i s company. B e f o r e - 81 the 1981 amendment to the Commercial Code, the language of a r t . 265 covered only d i r e c t transactions. The Supreme Court o r i g i n a l l y denied the extension of art. 265 to i n d i r e c t transactions, but l a t e r affirmed i t by using a purposive 27 interpretation as follows: "The l e g i s l a t i v e intent of Commercial Code a r t . 265 i s nothing but to prevent an act which i s designed to benefit a d i r e c t o r himself and i s p r e j u d i c i a l to his stock company from being done a r b i t r a r i l y , in the case in which a c o n f l i c t of interest exists between the d i r e c t o r and the company. Therefore, i t should be held that the transaction referred to in t h i s provision includes, as a transaction on behalf of the director himself, not only an act to be done d i r e c t l y between a d i r e c t o r and the company with a c o n f l i c t of interest, but also an act b e n e f i c i a l to the director himself and p r e j u d i c i a l to the company, such as an arrangement in which a director as a representative of h i s company agrees with h i s personal creditor to undertake his personal debt." The 1981 amendment co d i f i e d t h i s conclusion. According to the case law, when a representative dir e c t o r enters into a transaction which produces a c o n f l i c t of interest between his company and another company of which he i s also a representative director, the transaction comes under 29 a r t . 265. On the other hand, the p r e v a i l i n g view i s that the mere fact that two companies have a common direct o r i s not s u f f i c i e n t for applying a r t . 265 to the transaction between - 82 them. In addition, there i s a Supreme Court decision that a director's interest i n another company as a shareholder i s not s u f f i c i e n t . Although there are continuously held that the promissory note by a company 265. 3 1 many arguments, the courts have issuance or endorsement of a to i t s direc t o r comes under a r t . On the other hand, the courts have denied the application of art. 265 to ce r t a i n transactions between a company and i t s director which was not harmful to the company. They include, for example, the performance of an already fixed 32 l i a b i l i t y , a director's a c q u i s i t i o n of the company's assets 33 through auction proceedings, a di r e c t o r ' s donation to the 34 company, and a monetary loan by a direc t o r to the company 35 without interest and security. In so holding, the courts considered the formal nature of the transactions to be a decisive factor. However, there are a few cases where the courts held that the transactions were not harmful to the company by examining the substantial factors behind the formal 3 6 character of the transactions. « - 83 (2) Disclosure Requirement The 1981 amendment added an ex post facto disclosure requirement. A director who effected an art. 265 transaction must report important facts about the transaction to the board 37 of directors without delay. The f a i l u r e to do this i s 3 8 punishable by a non-criminal f i n e . Its purpose i s to l e t the board of directors know the outcome of the transaction so as to enable them to decide to hold an interested d i r e c t o r l i a b l e for damages, i f any, sustained by the company, and to ascertain that the actual transaction did not exceed the scope 39 of approval. Conversely, there i s neither an express Code provision nor any development of case law on the p r i o r disclosure requirement. While the existance of board approval often becomes the central issue of a r t . 265 cases, the extent of p r i o r disclosure i s not disputed. (3) Approval of the Board of Directors There i s a provision that a director who has a "special i n t e r e s t " i n a resolution of the board of directors i s excluded from the vote and must not be counted in the quorum 40 with respect to the resolution. A direc t o r involved i n an - 84 -ar t . 265 transaction i s considered to have a special interest 41 and thus must not vote to approve the transaction. However, there i s an i n f e r i o r court decision that where a l l directors including an interested d i r e c t o r has voted to approve the transaction, the approval i s v a l i d inasmuch as the other 42 directors constituted the requisite majority. It has been established by the courts that an ex post 43 facto approval i s v a l i d . Whenever the approval i s given, i t must be made by the board of directors, and the approval 44 made by the shareholders' meeting i s i n v a l i d . However, the Supreme Court held that where a l l the shareholders of a company approved the transaction, board approval i s no longer required. (4) V a l i d i t y of Transaction The statutory provisions remain s i l e n t as to the v a l i d i t y of an art. 265 transaction without board approval. There i s a s i g n i f i c a n t development of the case law on thi s matter. I n i t i a l l y such a transaction was held to be voidable 46 at the option of the company. Then i t was held to be n u l l 47 and void. However, the courts have since held that i t 48 becomes v a l i d by an ex post facto approval. - 85 When the Supreme Court extended the scope of ar t . 265 to the in d i r e c t transaction, i t created an exception for the sake of security of transactions; namely, the company cannot assert the n u l l i t y of an in d i r e c t transaction against the other party unless i t proves that the other party knew of the lack of 49 board approval. Then i t extended the rule to the holder of a promissory note issued or endorsed by the company to i t s di r e c t o r . In the course of dra f t i n g the 1981 amendment, i t was proposed to put i n a provision that the board of di r e c t o r s can avoid an art. 265 transaction which lacks i t s approval, provided that the avoidance i s not e f f e c t i v e against a bona  fide t h i r d party. However, due to strong opposition, a provision along these l i n e s i n the draft amendment proposal was deleted and the matter was del i b e r a t e l y l e f t to the case law. (5) Director's L i a b i l i t y The relevant provisions of the Commercial Code provide as follows: (a) A director who effects an a r t . 265 transaction i s l i a b l e to the company for the damages sustained by the company. - 86 (b) A d i r e c t o r who e f f e c t s a monetary loan from the company to another d i r e c t o r i s l i a b l e t o the company f o r the unpaid amount. (c) A d i r e c t o r who v i o l a t e s the law or the company's a r t i c l e s of i n c o r p o r a t i o n i s l i a b l e t o the company f o r the damages s u s t a i n e d by the company. (d) The d i r e c t o r s who e f f e c t such a c t s or who vote f o r the r e s o l u t i o n to a u t h o r i z e such a c t s are j o i n t l y and 52 s e v e r a l l y l i a b l e . The Code f u r t h e r p r o v i d e s that the l i a b i l i t y of (a) can be r e l i e v e d by a m a j o r i t y of not l e s s than two-thirds of a l l i s s u e d shares of the company, whereas the l i a b i l i t i e s of (b) and (c) can be r e l i e v e d o n l y by the consent of a l l 53 shareholders of the company. There i s a c o n f u s i o n among s c h o l a r l y o p i n i o n s on those p r o v i s i o n s . According t o the m a j o r i t y o p i n i o n , while the l i a b i l i t y of (c) r e q u i r e s the i n t e n t i o n or negligence of the 54 d i r e c t o r , (a) and (b) are non-negligent l i a b i l i t i e s ; a t r a n s a c t i o n with board approval comes under (a) and that without board approval comes under ( c ) ; but a loan t o a d i r e c t o r , whether approved by the board or not, comes under - 87 (b) . Therefore, a director i s l i a b l e even i f he has obtained approval pursuant to art. 265. I r o n i c a l l y , despite the s t r i c t nature of the l i a b i l i t y , there i s v i r t u a l l y no case about the l i a b i l i t y a r i s i n g from an ar t . 265 transaction. The 1981 amendment did not a l t e r the above statutory scheme concerning dire c t o r s ' l i a b i l i t y for a r t . 265 transactions. It was planned to repeal the above (a) ( l i a b i l i t y for art 265 transaction) so as to treat the art. 265 cases under (c) ( l i a b i l i t y for v i o l a t i o n of law or a r t i c l e s of incorporation) . However, the plan was abandoned due to the opposition that the a b o l i t i o n of non-negligent l i a b i l i t y i s inconsistent not only with (b) ( l i a b i l i t y for monetary loan to another director) which i s considered to be a non-negligent l i a b i l i t y , but also with the p o l i c y of strengthening the 55 direct o r s ' r e s p o n s i b i l i t y . When a majority of not less than two-thirds of the shares may relie v e the director's l i a b i l i t y , the po s i t i o n of minority shareholders may be impaired by the abuse of voting power of the director who i s also a shareholder. Before the 1981 amendment, a shareholder having a special interest i n the 56 resolution was excluded from voting. The 1981 amendment removed this r e s t r i c t i o n and added a new safeguard. If a grossly unfair resolution i s made by virtue of the directo r ' s - 88 -vote, the court may set aside the resolution in the special . . . . . . - . 57 l i t i g a t i o n proceedings. In short, in Canada exhaustive statutory provisions have e n t i r e l y reformed the common law po s i t i o n . Those provisions are c a r e f u l l y designed to avoid ambiguity. Whereas in Japan statutory provisions leave a l o t of unclearness, changes in the case law concerning the scope of interest and the v a l i d i t y of transactions functioned as law reform. The 1981 amendment only made modest changes. Important issues such as the v a l i d i t y of transactions and application of l i a b i l i t y provisions are s t i l l l e f t to the case law. This i l l u s t r a t e s the r e l a t i v e importance of the case law i n law reform i n Japan, and the lack of e f f o r t to remove ambiguity by exhaustive l e g i s l a t i v e reform. FOOTNOTES (C. A Directors' Transactions with His Company) 1 Aberdeen Railway Co. v. B l a i k i e Bros., [1843-60] A l l E.R. Rep. 249 (H.L.). 2 Imperial Mercantile Credit Assoc. v. Coleman (1873), L.R. 6 H.L. 189. 3 Transvaal Lands Company v. New Belgium (Transvaal) Land and  Development Company, [1914] 2 Ch. 488. 4 Can. Guaranty Trust Co. v. Young, [1933] 1 D.L.R. 256 (Man. CA. ) . - 89 -5 Imperial Mercantile Credit Assoc. v. Coleman, supra, n. 2. 6 North-West Transportation Company, Limited v. Beatty (1887), 12 App. Cas. 589 (P.C.). 7 Ibid. 8 BCCA ss. 144(1) (4) 159; old OBCA s. 132(1) (2); new OBCA s. 132(1)(5); CBCA s. 115(l)(5). 9 CBCA s. 2(1); new OBCA s. 1(1). 10 BCCA s. 144(4); old OBCA s. 132(1); new OBCA s. 132(5); CBCA s. 115(5). 11 BCCA s. l 4 4 ( l ) - ( 3 ) ; old OBCA s. 132 (1) (3) (6) ; new OBCA s. l3 2 ( l ) - ( 4 ) ( 6 ) ; CBCA s. 115(1)-(4)(6). 12 Imperial Marcantile Assoc. v. Coleman, supra, n. 2; Gray v. New Augarita Porcupine Mines Ltd., [1952] 3 D.L.R. 1 (P.C.). 13 BCCA s. 144(2); old OBCA s. 132(3); new OBCA s. 132(2)-(4); CBCA s. 115(2)-(4). 14 BCCA s. 144(3); old OBCA s. 132(6); new OBCA s. 132(6); CBCA s. 115(6). 15 BCCA s. 145(1) (2); old OBCA s. 132(1); new OBCA s. 132(5); CBCA s. 115(5). 16 The CBCA s. 115(7) and the new OBCA s. 132(7) provide, inter a l i a , that a contract w i l l not be void or voidable simply because an interested director i s counted in determining the presence of a quorum. Therefore, he can be counted in the quorum. 17 S. 145(1). Under the BCCA, a special resolution requires a majority of not less than three-fourths of the votes cast (s. 1(1)). 18 S. 146. 19 S. 132(4)(5). 20 S. 115(7). 21 Department of Consumer and Corporate A f f a i r s , Detailed  Background Paper for an Act to Amend the Canada Business  Corporations B i l l (1974), 27. - 90 22 S. 115(8). 23 S. 132(7). 24 S. 132(8). Under the new OBCA, a special resolution requires a majority of not less than two-thirds of the votes cast (s. 1(1)). 25 S. 132(9). 26 Relevant provisions of the Commercial Code are as follows (translation i n 2 EHS Law B u l l e t i n Series No. 2200, s l i g h t l y modified by the author): " A r t i c l e 265. (1) When a director intends to acquire the company's products or other properties by transfer or to transfer h i s own products or other properties to the company or to receive loans from the company or to effect any transaction with the company on h i s own behalf or on that of a t h i r d person, he s h a l l obtain the approval of the board of di r e c t o r s . The same s h a l l apply i n the case where the company guarantees l i a b i l i t y of the director or otherwise effects with a person other than the dire c t o r a transaction in which interests are contrary between the company and the di r e c t o r . (2) In the case where there has been the approval under the former clause of the preceding paragraph, the provision of A r t i c l e 108 of the C i v i l Code s h a l l not apply. (3) The provision of paragraph 2 of the preceding A r t i c l e s h a l l apply mutatis mutandis to the director having effected the transaction of paragraph 1." C i v i l Code a r t . 108 provides the p r o h i b i t i o n of acting for oneself and as agent for the other party, or as agent for both parties, in one and the same action. Commercial Code art. 264(2) provides that a dire c t o r who effected a transaction which comes under the category of business of his company (under art. 264(1) such a transaction requires p r i o r approval of the board of directors) must report immportant facts of the transaction to the board of directors without delay. - 91 " A r t i c l e 266. (l) In the following cases, directors who have done any one of the acts mentioned there s h a l l be j o i n t l y and severally l i a b l e i n effecting performance or i n damages to the company, i n the case of item (i) for the amount which has been d i s t r i b u t e d or divided i l l e g a l l y , i n the case of item ( i i ) for the amount of the interests offered, i n the case of item ( i i i ) for the amount of loans not yet repaid, or in the case of item (iv) and item (v) for the amount of any damage caused to the company: (1) Where they have submitted to a general meeting the proposal for the d i s t r i b u t i o n of p r o f i t s i n contravention of the provision of A r t i c l e 290 paragraph 1, or they have dis t r i b u t e d money in contravention of the provision of A r t i c l e 293.5 paragraph 3; ( i i ) Where they have offered the interests on a property i n v i o l a t i o n of the provison of A r t i c l e 294.2 paragraph 1; ( i i i ) Where they have loaned money to another d i r e c t o r ; (iv) Where they have effected any transaction mentioned in paragraph 1 of the preceding A r t i c l e ; (v) Where they have done any act which violates any law or ordinance or the a r t i c l e s of incorporation. (2) In cases where any act mentiond in the preceding paragraph has been done in accordance with the resolution of the board of directors, the directors who have assented to such resolution s h a l l be deemed to have done such act. (3) The directors who have participated i n the resolution mentioned in the preceding paragraph and who have not expressed their dissent in the minutes s h a l l be presumed to have assented to such resolution. - 92 -(4) I f the d i r e c t o r has e f f e c t e d a t r a n s a c t i o n i n v i o l a t i o n o f the p r o v i s i o n o f A r t i c l e 264 p a r a g r a p h 1, the amount of the p r o f i t a c q u i r e d due t o the t r a n s a c t i o n by the d i r e c t o r or the t h i r d p a r t y s h a l l be presumed t o be t h e amount of the damage imposed t o the company i n p a r a g r a p h 1. P r o v i d e d t h a t , t h i s s h a l l not a p p l y i f the r i g h t p r e s c r i b e d i n p a r a g r a p h 3 of t h e s a i d A r t i c l e has been e x e r c i s e d . (5) The l i a b i l i t y p a r a g r a p h 1 cannot be unanimous consent of a l l o f d i r e c t o r s mentioned i n r e l e a s e d e x cept by t h e the s h a r e h o l d e r s . (6) The l i a b i i t y o f d i r e c t o r s i n r e s p e c t o f the t r a n s a c t i o n mentioned i n i t e m ( i v ) o f p a r a g r a p h 1 may be r e l e a s e d by m a j o r i t y of t w o - t h i r d s or more of the v o t e s o f the t o t a l number of the i s s u e d s h a r e s , n o t w i t h s t a n d i n g the p r o v i s i o n s o f the p r e c e d i n g p a r a g r a p h . In t h i s c a s e , the d i r e c t o r s s h a l l show a l l m a t e r i a l f a c t s as t o such t r a n s a c t i o n a t a g e n e r a l meeting o f s h a r e h o l d e r s . " T h i s i s the b a s i c p r o v i s i o n c o n c e r n i n g d i r e c t o r s ' l i a b i l i t y and c o v e r s m a t t e r s o t h e r than a r t . 265 t r a n s a c t i o n s as w e l l . A r t s . 290(1) and 293.5(3) s e t out l i m i t a t i o n s t o d i s t r i b u t i o n o f d i v i d e n d and i n t e r i m d i v i d e n d r e s p e c t i v e l y . A r t . 294(1) p r o h i b i t s g i v i n g p r o f i t t o a s h a r e h o l d e r i n c o n n e c t i o n w i t h e x e r c i s e o f the v o t i n g power. 27 Nihon V i c t o r K.K. v. S a n ' e i Denki K.K., S.C. December 25, 1968, 22 Minshu 3511. 28 Amended a r t . 2 6 5 ( 1 ) . 29 Wada, a l i a s Takara S h o k a i v. D a i s a n S h o j i K.K., S.C. A p r i l 23, 1970, 24 Minshu 364. 30 K.K. H i c h i j u h i c h i Ginko v. Tamura, S.C. October 21, 1958, 165 H a n r e i J i h o 32. 31 E.g. T s u c h i k i d a v. K.K. Sengokuya, S.C. October 13, 1971, 25 Minshu 900. 32 T atsuno Seifunmen K.K. v. A s aka, G.C.J. F e b r u a r y 20, 1920, 26 M i n r o k u 184. 33 Re a p p e a l by Hai e t a l . , Tokyo H.C. March 5, 1956, 9 Kominshu 76. - 93 -34 Sasa v. Sakurai, G.C.J. September 28, 1938, 17 Minshu 1895. 35 Okamoto v. K.K. Green Cab, S.C. December 6, 1963, 17 Minshu 1664. 36 Tanaka v. K.K. Aida Mitsuzo Shoten, S.C. January 28, 1964, 18 Minshu 180 (A company endorsed a promissory note to a director in exchange for his financing the same amount of money to the company); Yagimachi Nogyo Kyodo Kumiai v. Kyoei Rikuun K.K. et a l . , Osaka H.C. December 23, 1968, 232 Hanrei Times 122 (A company guaranteed i t s director's loan, but i t was i n substance to enable the company to borrow from the a g r i c u l t u r a l co-operative which r e s t r i c t e d the q u a l i f i c a t i o n of borrower); Sawayama v. Meirin Sangyo K.K., Osaka D.C. January 30, 1973, 715 Hanrei Jiho 102 (~A direc t o r received a promissory note issued by h i s company and endorsed i t in l i e u of guarantee by him for the company). 37 Arts. 265(3), 264(2). 38 Art. 498(1)(xx.ii). 39 Motoki, Kaisei Shoho Chikujo Kaisetsu ( A r t i c l e by A r t i c l e Commentary to Amended Commercial Code)(1981), 131. 40 Art. 260.2(2)(3). 41 Unknown v. Unknown, Tokyo D.C. June 22, 1976, 807 Kinyu  Homu J i j o 32. 42 Unknown v. Unknown, Nagoya D.C. November 14, 1974, 21 Shomu  Geppo 575. 43 E.g. Senboku Shuzo K.K. v. Iwadeyama Shuzo K.K., G.C.J. September 26, 1927, 2767 Shinbun 13. 44 K.K. Nihon K a i j i Shinbunsha v. Mikuriya, a l i a s K a i j i  Shinposha, Tokyo D.C. August 30, 1954, 5 Kaminshu 1379; Tanaka Tekkin K.K. v. Ishikawa, Tokyo D.C. March 20, 1975, 785 Hanrei Jiho 102. 45 Honma v. Asahikawa Shoji K.K., S.C. September 26, 1974, 28 Minshu 1306. 46 Yamanaka v. Toyokawa Tetsudo K.K., G.C.J. September 4, 1903, 9 Minroku 978. 47 I s h i i v. Hyogo Unga K.K., G.C.J. December 2, 1909, 15 Minroku 926. - 94 -48 G.C.J., s u p r a , n. 43. 49 Ninon V i c t o r K.K. v. S a n ' e i Denki K.K., s u p r a , n. 27. 50 T s u c h i k i d a v. K.K. Sengokuya, s u p r a , n. 31. 51 M o t o k i , op. c i t . , n. 39, 131. 52 A r t . 2 6 6 ( 1 ) ( i ) ( i i i ) ( i v ) ( v ) and ( 2 ) . 53 A r t . 2 6 6 ( 5 ) ( 6 ) . 54 Unknown v. Unknown, S.C. March 23, 1976, 798 K i n y u Homu  J i j o 36 took t h i s view i n a d i f f e r e n t matter which d i d not i n v o l v e a r t . 265. 55 M o t o k i , op. c i t . , n. 39, 138. 56 P r e v i o u s a r t . 2 3 9 ( 5 ) . 57 A r t . 2 4 7 ( l ) ( i i i ) . - 95 -D. The D i r e c t o r ' s Duty of Care, D i l i g e n c e and S k i l l " 1 " In Canada, e f f o r t s have been made to upgrade the low common law standard of the d i r e c t o r s ' duty of care by s t a t u t o r y reform, whereas i n Japan the duty and the standard have been developed by court d e c i s i o n s based on a b s t r a c t l e g i s l a t i v e p r o v i s i o n s . 1. Canada (1) Common Law While c o u r t s have developed a s t r i c t standard f o r the f i d u c i a r y duty of d i r e c t o r s by analogy t o the d u t i e s of t r u s t e e s , they have adopted a low standard f o r the duty of care, d i l i g e n c e and s k i l l of d i r e c t o r s . Romer, J.'s judgement i n Re C i t y E q u i t a b l e F i r e 2 Insurance Company L t d . i s the l e a d i n g case on t h i s p o i n t and e s t a b l i s h e d three important p r o p o s i t i o n s . F i r s t , as t o the duty of care, he s t a t e d t h a t the care t h a t a d i r e c t o r i s bound to take i s "'reasonable c a r e ' t o be measured by the care an o r d i n a r y man might be expected t o take i n the circumstances on h i s own b e h a l f " , quoting the d e c i s i o n of N e v i l l e , J . i n In Re 3 B r a z i l i a n Rubber P l a n t a t i o n s & E s t a t e s L t d . In t h i s sense, - 96 -the standard i s o b j e c t i v e . However, Romer, J.'s d e c i s i o n l i m i t e d i t by the s u b j e c t i v e standard that "[a] d i r e c t o r need not e x h i b i t i n the performance of h i s d u t i e s a g r e a t e r degree of s k i l l than may reasonably be expected from a person of h i s knowledge and experience." The B r a z i l i a n Rubber case, supra, shows us an extreme example. The d i r e c t o r s of the company who were induced to become d i r e c t o r s i n c l u d e d : A., who was a b s o l u t e l y ignorant of b u s i n e s s matters and o n l y consented t o act because he was t o l d the d i r e c t o r s h i p would g i v e him a l i t t l e p l e a s a n t employment without h i s i n c u r r i n g any r e s p o n s i b i l i t y ; T., a p a r t n e r i n a f i r m of bankers, who was s e v e n t y - f i v e years o l d and very deaf; B., a rubber broker, who was t o l d t h a t a l l he would have to do would be to g i v e an o p i n i o n as to the value of rubber; and H., a man of b u s i n e s s who was induced to j o i n by the presence on the board of T. and B., whom he c o n s i d e r e d good men. They were h e l d not l i a b l e f o r the l o s s e s s u s t a i n e d i n a d i s a s t r o u s s p e c u l a t i o n i n rubber p l a n t a t i o n s on the b a s i s t h a t : "[A d i r e c t o r ] i s , I t h i n k , not bound t o b r i n g any s p e c i a l q u a l i f i c a t i o n s t o h i s o f f i c e . He may undertake the management of a rubber company i n complete ignorance of e v e r y t h i n g connected with rubber, without i n c u r r i n g r e s p o n s i b i l i t y f o r the mistakes which may r e s u l t from such ignorance." However, i f a d i r e c t o r has experience i n the area of the company's bus i n e s s , he would be r e q u i r e d to use i t f o r the 4 b e n e f i t of the company. Further, i n L i s t e r v. Romford Ice 5 and Cold Storage Ltd., where an e x e c u t i v e d i r e c t o r was employed under a s e r v i c e c o n t r a c t , i t was h e l d to be an i m p l i e d term of t h a t c o n t r a c t that the employee would e x e r c i s e the degree of care and s k i l l t o be expected of a person i n that p o s i t i o n . Secondly, as to the l e v e l of a t t e n t i o n a d i r e c t o r must devote to c o r p o r a t e a f f a i r s , Romer, J . i n the C i t y E q u i t a b l e d e c i s i o n set out a generous standard: "A d i r e c t o r i s not bound to g i v e continuous a t t e n t i o n to the a f f a i r s of h i s company. His d u t i e s are of i n t e r m i t t e n t nature to be performed at p e r i o d i c a l board meetings, and at meetings of any committee of the board upon which he happens to be p l a c e d . He i s not, however, bound to attend a l l such meetings, though he ought to a t t e n d whenever, i n the circumstances, he i s reasonably able to do so." T h i s p r o p o s i t i o n concerns non-executive d i r e c t o r s . O f f i c e r s must g i v e continuous a t t e n t i o n to the a f f a i r s of the company. 6 The outcome of the second p r o p o s i t i o n i s that a d i r e c t o r who does not attend a board meeting may be i n a b e t t e r p o s i t i o n t o escape l i a b i l i t y f o r a r e s o l u t i o n passed at that - 98 meeting than a d i r e c t o r who does a t t e n d . In Re C a r d i f f Savings 7 Bank, a d i r e c t o r who had not attended any meetings f o r seventeen years was h e l d not l i a b l e . S t i r l i n g , J . s t a t e d the r a t i o n a l e as f o l l o w s : "Neglect or ommission to a t t e n d meetings i s not the same t h i n g as n e g l e c t or omission of a duty which ought to be performed at those meetings." T h i r d l y , as to the matters delegated t o o t h e r o f f i c i a l s , Romer, J . i n the C i t y E q u i t a b l e d e c i s i o n s t a t e d : "In r e s p e c t of a l l d u t i e s t h a t , having regard t o the e x i g e n c i e s of b u s i n e s s , and the a r t i c l e s of a s s o c i a t i o n , may p r o p e r l y be l e f t t o some other o f f i c i a l , a d i r e c t o r i s , i n the absence of grounds f o r s u s p i c i o n , j u s t i f i e d i n t r u s t i n g t h at o f f i c i a l to perform such d u t i e s h o n e s t l y . " 8 Then he quoted the d e c i s i o n i n Dovey v. Cory t h a t a d i r e c t o r i s e n t i t l e d to r e l y on the judgement, i n f o r m a t i o n and advice, of the chairman and g e n e r a l manager, as t o whose i n t e g r i t y , s k i l l and competence he has no reason f o r s u s p i c i o n , and that a d i r e c t o r i s not bound to examine e n t r i e s i n the company books f o r h i m s e l f , notwithstanding they are l a i d on the t a b l e at a meeting of the board f o r r e f e r e n c e . The f o r e g o i n g d e c i s i o n of Romer, J . i s c o n s i d e r e d the l o c u s c l a s s i c u s on the d i r e c t o r s ' duty of c a r e . As such, i t - 99 -h a s r e s u l t e d i n an a l m o s t t o t a l a b s e n c e o f c a s e s i m p o s i n g 9 l i a b i l i t y on d i r e c t o r s f o r n e g l i g e n c e . The r e a s o n s f o r t h e c o u r t s ' r e l u c t a n c e t o i m p o s e a s t r i c t s t a n d a r d o f c a r e a r e e x p l a i n e d a s f o l l o w s : " T h i s r e l u c t a n c e i s g e n e r a l l y a t t r i b u t e d t o t h e f a c t t h a t d i r e c t o r s ' d e c i s i o n s a r e l a r g e l y m a t t e r s o f b u s i n e s s j u d g m e n t w i t h w h i c h c o u r t s a r e r e l u c t a n t t o i n t e r f e r e . I n a d d i t i o n , c o u r t s a r e a ware t h a t d i r e c t o r s a r e o f t e n i n v o l v e d w i t h t h e company o n l y on a p a r t - t i m e b a s i s a n d a r e s o m e t i m e s e l e c t e d f o r r e a s o n s o t h e r t h a n t h e i r b u s i n e s s e x p e r t i s e . " l < - > I n a n y e v e n t , t h i s l a x a p p r o a c h d o e s n o t e n c o u r a g e a h i g h s t a n d a r d o f p e r f o r m a n c e o f t h e d i r e c t o r s ' d u t y o f c a r e , d i l i g e n c e and s k i l l , and i s an u n d u l y l o w s t a n d a r d i n t h e modern b u s i n e s s e n v i r o n m e n t . ( 2) S t a t u t o r y R e f o r m (a) S t a n d a r d o f D u t y o f C a r e , D i l i g e n c e and S k i l l The BCCA, t h e o l d and new OBCA and t h e CBCA h a v e p r o v i s i o n s w h i c h a r e i n t e n d e d t o u p g r a d e t h e l o w common l a w standard.''"''' They e x p r e s s l y demand t h a t e v e r y d i r e c t o r o r o f f i c e r i n e x e r c i s i n g h i s p o w e r s and p e r f o r m i n g h i s d u t i e s s h a l l e x e r c i s e t h e c a r e , d i l i g e n c e and s k i l l o f a r e a s o n a b l y - 100 -prudent person. Except i n the BCCA, t h i s standard i s q u a l i f i e d by a phrase " i n comparable circumstances". It i s l i k e l y t h a t a cour t would read such a phrase i n t o the BCCA p r o v i s i o n i n 12 d e c i d i n g the f a c t s of a p a r t i c u l a r case. In d r a f t i n g the o l d OBCA p r o v i s i o n , the Lawrence Committee proposed that the standard be that of the "reasonably prudent d i r e c t o r " , i n the hope that the c o u r t s would develop 13 p r o f e s s i o n a l standards f o r d i r e c t o r s . However, i t caused an uproar from the c o r p o r a t e bar, which was s u c c e s s f u l i n having the wording changed from "prudent d i r e c t o r " t o "prudent p e r s o n " . 1 4 One of the draftsmen s t a t e s that " t h i s change i n terminology e f f e c t s no change i n the i n t e n t i o n or meaning of 15 16 the new s e c t i o n " , but t h i s p r o p o s i t i o n i s questioned. It should be noted that the BCCA, the new OBCA and the CBCA have p r o v i s i o n s which w i l l r e l i e v e a d i r e c t o r from l i a b i l i t y under c e r t a i n circumstances, e.g. when he r e l i e d i n good f a i t h on f i n a n c i a l statements s u p p l i e d by an o f f i c e r or an 17 a u d i t o r . The BCCA p r o v i s i o n a p p l i e s o n l y t o s p e c i f i c s t a t u t o r y l i a b i l i t i e s , while the new OBCA and the CBCA p r o v i s i o n s a l s o apply t o the g e n e r a l duty of c a r e . In a d d i t i o n , the BCCA p r o v i d e s that i n any proceedings a g a i n s t a d i r e c t o r and an o f f i c e r , i f i t appears t o the cou r t - 101 -th a t he i s or may be l i a b l e i n respect of n e g l i g e n c e , d e f a u l t , breach of duty or breach of t r u s t , but acted h o n e s t l y and reasonably and ought f a i r l y t o be excused, the cou r t s h a l l take i n t o c o n s i d e r a t i o n a l l the circumstances of the case, i n c l u d i n g those connected with h i s appointment. Then the cou r t may r e l i e v e him, e i t h e r wholly or p a r t l y , from h i s l i a b i l i t y on the 18 terms the court c o n s i d e r s necessary. But the adequacy of 19 such a p r o v i s i o n i s s e r i o u s l y questioned. Whether the c o u r t s w i l l apply the new p r o v i s i o n s on the standard of performance of the duty of care so as to upgrade the low common law standard i s q u e s t i o n a b l e . In l i g h t of the experience i n the U.S., a p e s s i m i s t i c o b s e r v a t i o n has been made: " I f the American d e c i s i o n s are any guidance, the degree of care, d i l i g e n c e and s k i l l e n j o i n e d on the incumbent [ i n the o l d OBCA and the CBCA] would appear t o do l i t t l e t o r a i s e the low standards imposed by the common law on n o n - p r o f e s s i o n a l d i r e c t o r s . Perhaps t h i s i s i n e v i t a b l e given the d i v e r s i t i e s of background and experience from which such persons are drawn and the many c a l l s i n t h e i r time. These are the f a c t o r s , r a t h e r than a l a c k of prudence, which o f t e n account f o r t h e i r d i s a p p o i n t i n g performance i n p r a c t i c e . " 2 0 - 102 -(b) Deemed Consent A s i g n i f i c a n t development was made by p r o v i s i o n s which prevent a d i r e c t o r from r e l y i n g on absence from meetings t o escape l i a b i l i t y . The BCCA, the o l d and new OBCA and the CBCA pro v i d e that i f a d i r e c t o r was absent from a meeting at which a r e s o l u t i o n was passed or an a c t i o n was taken, he i s deemed to have consented to i t unless he submits h i s d i s s e n t w i t h i n seven 21 days a f t e r he becomes aware of the r e s o l u t i o n or a c t i o n . The deemed consent i n the BCCA and the o l d OBCA i s l i m i t e d to s p e c i f i c matters such as the improper d e c l a r a t i o n o f a d i v i d e n d . The CBCA p r o v i s i o n i s b e t t e r i n that the deemed consent i s a p p l i c a b l e to any r e s o l u t i o n or a c t i o n a t a meeting of d i r e c t o r s or a committee of d i r e c t o r s . The new OBCA fo l l o w e d t h i s p o s i t i o n . However, the phrase " a f t e r he becomes aware of the r e s o l u t i o n " may l i m i t the e f f e c t i v e n e s s of the p r o v i s i o n s . A d i r e c t o r who does not bother to read minutes or 22 n o t i c e s could presumably escape l i a b i l i t y . (c) S p e c i f i c S t a t u t o r y L i a b i l i t i e s In a d d i t i o n to the f o r e g o i n g g e n e r a l standard, the BCCA, the o l d and new OBCA and the CBCA a l l have extended the s p e c i f i c s t a t u t o r y l i a b i l i t i e s of d i r e c t o r s and o f f i c e r s 103 r e l a t i n g to corporate mismanagement. The a c t i v i t i e s giving r i s e to l i a b i l i t y under the l e g i s l a t i o n range from the improper declaration of a dividend to unpaid wages of employees. Most of them concern the protection of the corporate fund. However, for the purpose of this study, i t w i l l not be necessary to go 23 into d e t a i l s about them. (d) L i a b i l i t y of an "Agent" in the New Bankruptcy A c t 2 4 A further attempt i s made to increase the l i a b i l i t y of directors for improper commercial conduct by the "agent" provisions i n the proposed new federal bankruptcy 25 l e g i s l a t i o n . In respect of a corporation, the d e f i n i t i o n of agent includes a director or an o f f i c e r of a corporation, or any person who i s related to the corporation or who has, 2 6 d i r e c t l y or i n d i r e c t l y , de facto control of the corporation. An agent i s l i a b l e for the d e f i c i t of the bankrupt corporation i f he has acted in h i s own pecuniary interest or in the interest of someone related to him and has caused the corporation, when insolvent, to do certain conduct proscribed 27 in the new Act. The f i r s t category of such conduct i s to carry on a business or enter into a transaction that was contrary to the pecuniary interest of the corporation, or to r e f r a i n from carrying on business or entering into a - 104 -t r a n s a c t i o n that was i n the p e c u n i a r y i n t e r e s t of the r c o r p o r a t i o n . The second category i s to continue a business by r e s o r t i n g to s a l e s below c o s t t o the detriment of the c r e d i t o r s , or ruinous borrowings or s i m i l a r a c t s i n circumstances where i t was not reasonable t o expect t h a t the bankruptcy could be prevented and where those a c t s aggravate the i n s o l v e n c y of the c o r p o r a t i o n . The t h i r d category i s t o conduct a bus i n e s s with a view t o de f r a u d i n g or d e l a y i n g the c r e d i t o r s . F u r t h e r , i f an agent f a i l s t o keep accounts i n a manner that permits the t r u s t e e t o d i s t i n g u i s h the p r o p e r t y of the agent from that of the c o r p o r a t i o n which subsequently becomes bankrupt, he i s l i a b l e f o r the d e f i c i e n c y i n the 28 e s t a t e . The l i a b i l i t y of an agent can be reduced t o the extent that i t i s proved t h a t the amount of l o s s or damages caused t o the e s t a t e by him i s s m a l l e r than the amount of the 29 d e f i c i e n c y . In a d d i t i o n t o the f o r e g o i n g l i a b i l i t y , an agent may be s u b j e c t t o the severe consequences of a caveat. The a d m i n i s t r a t o r may i n q u i r e i n t o c e r t a i n circumstances which are - 105 -30 b r o a d e r t h a n the causes of l i a b i l i t y . The p r e s c r i b e d c i r c u m s t a n c e s i n c l u d e , f o r example, f a i l u r e t o keep p r o p e r b u s i n e s s r e c o r d s , i n c u r r i n g o f an u n j u s t i f i a b l e expense by t h e t a k i n g o r c o n t i n u i n g o f f r i v o l o u s o r v e x a t i o u s p r o c e e d i n g s , gambling, wagering, g r o s s incompetence o r c a r e l e s s n e s s , e x t r a v a g a n t expenses o r r a s h s p e c u l a t i o n . When an a d m i n i s t r a t o r has re a s o n t o b e l i e v e t h a t an agent may be l i a b l e under s s . 189 or 190, or t h a t any o f t h e causes g i v i n g r i s e t o an i n v e s t i g a t i o n as s e t f o r t h i n s. 215, a r e a t t r i b u t a b l e t o an agent, t h e a d m i n i s t r a t o r may, w i t h i n one y e a r from t h e d a t e of b a n k r u p t c y of t h e c o r p o r a t i o n , f i l e a c a v e a t w i t h r e s p e c t t o 31 t h e agent. U n t i l t he ca v e a t i s d i s c h a r g e d , i t i s p r o h i b i t e d f o r t h e agent, w i t h o u t l e a v e of t h e c o u r t , t o ( i ) be a d i r e c t o r o r an o f f i c e r o f , o r manage, a c o r p o r a t i o n , and ( i i ) engage i n or c a r r y on any b u s i n e s s w i t h o u t d i s c l o s i n g t h e e x i s t e n c e o f t h e ca v e a t t o a l l p e r s o n s w i t h whom he i n c u r s 32 d e b t s i n the c o u r s e o f such t r a n s a c t i o n o r b u s i n e s s . The 33 ca v e a t w i l l e x p i r e f i v e y e a r s from t h e d a t e of i s s u a n c e . T h i s system w i l l be u s e f u l f o r up g r a d i n g t h e d u t y o f c a r e i n d i r e c t l y . - 106 -2. Japan (1) Statutory Provisions concerning the Duty of Care With respect to the stock corporation, the Commercial Code provides that the relations between directors and the company are governed by the provisions concerning 34 mandates. The C i v i l Code provides that a mandatory i s 35 obliged to exercise the "care of a good manager". Therefore, t h i s i s the general standard of care of d i r e c t o r s . Under the C i v i l Code, there are two degrees of duty of care. The care of good manager i s the higher standard which i s applicable to a mandatory, a bailee for reward, a person having a right of retention, a pledgee, and a guardian. In contrast, the "same care as he uses on his own behalf" i s the lower standard which i s applicable to a gratuitous bailee, a person who exercises parental power, and a successor. However, t h i s abstract standard does not give an immediate answer when applied to company d i r e c t o r s . The substance of the standard was created by court interpretations. Before going into the discussion, some preliminary explanations seem to be necessary. The f i r s t i s the t h i r d - 107 party l i a b i l i t y provision. Art. 266.3(1) of the Commercial Code provides that directors are j o i n t l y and severally l i a b l e to a t h i r d party for damage caused i n t e n t i o n a l l y or by gross 3 6 negligence i n performing t h e i r duty. The meanings of t h i s provision caused a l o t of confusion among courts and commentators. The Supreme Court decision i n Senbi Kozai K.K. 37 . . . v. Muto set t l e d basic issues concerning t h i s provision. According to the decision, t h i s provision i s intended to protect a t h i r d party. If a d i r e c t o r breached his duty which he owes to his company i n t e n t i o n a l l y or by gross negligence, he i s l i a b l e to a t h i r d party, regardless of whether the t h i r d party suffered damage d i r e c t l y from h i s breach of duty, or i n d i r e c t l y as a result of the damage which the d i r e c t o r caused to his company, so long as a reasonable causation exists between his breach of duty and the t h i r d party's damage. Therefore, the injured t h i r d party i s not required to prove that the d i r e c t o r intended or should have foreseen his damage, so long as the causal l i n k e x i s t s . The party must prove intentional or foreseeable harm i f he claims damages under the ordinary tort provisions. Almost a l l cases i n which directors have been held l i a b l e for breach of duty of care were brought under th i s provision by creditors of f i n a n c i a l l y collapsed companies. The courts have been rather s t r i c t toward directors and t h i s provision has been a powerful weapon for c r e d i t o r s . - 108 Secondly, there i s an express provision which presumes a director's consent to a decision of the board of 38 dir e c t o r s . However, t h i s i s applicable only to a di r e c t o r who attended a board meeting but did not cause h i s dissent to be entered i n the minutes. As discussed below, in order to condemn directors who do not attend meetings, the courts inferred a duty to monitor the execution of corporate a f f a i r s from the duty of care. Thirdly, there are provisions concerning s p e c i f i c 39 statutory l i a b i l i t i e s of d i r e c t o r s . However, in the following discussion I w i l l focus on the general duty of care. (2) Duty of Care concerning Corporate Business Business management necessarily involves some r i s k s . Therefore, directors should be allowed to exercise a reasonable d i s c r e t i o n and should not be held l i a b l e simply because th e i r decisions results in loss or damages to the company. This . . 40 logic i s stated i n several i n f e r i o r court decisions. However, there are a number of cases i n which directors were held l i a b l e for mismanagement which caused the collapse of the i r companies. As i t i s impossible to catalogue a l l of them here, I w i l l draw on some examples. - 109 ( i ) A r e p r e s e n t a t i v e d i r e c t o r continued with, and even i n c r e a s e d the l e v e l of, t r a n s a c t i o n s w i t h a customer d e s p i t e the f a c t t h a t he was w e l l aware of the extreme f i n a n c i a l d i f f i c u l t i e s being experienced by the customer and that the unpaid debts of the customer to h i s company kept i n c r e a s i n g . T h i s conduct i n c r e a s e d h i s company's l o s s . He was found n e g l i g e n t and t h e r e f o r e l i a b l e to h i s company f o r the l o s s . The Tokyo High Court r e j e c t e d the defendant's argument concerning the d i r e c t o r ' s r i g h t to e x e r c i s e business judgment i n c o n n e c t i o n with r i s k s i n b u s i n e s s a c t i v i t i e s , on the grounds that the negligence i n t h i s case c o u l d have been e a s i l y avoided. ( i i ) A company's payment to i t s s u p p l i e r s depended on the payment of promissory notes i s s u e d by i t s major customer. Although the r e p r e s e n t a t i v e d i r e c t o r of the company d i s c o v e r e d the f i n a n c i a l d i f f i c u l t y of the customer, he d e s u l t o r i l y continued the t r a n s a c t i o n s with i t without t a k i n g any a c t i o n to a v o i d i t s p o s s i b l e bankruptcy. The customer s h o r t l y afterwards went bankrupt and the company subsequently became unable to pay the - 110 s u p p l i e r s . The Tokyo High C o u r t , w h i l e acknowledging t h a t t h e c o u r t s s h o u l d be c a r e f u l of t h e p o s s i b i l i t y o f harming t h e d i s c r e t i o n or e l a s t i c i t y o f b u s i n e s s management by condemning a d i r e c t o r t o o e a s i l y , found t h a t t h e d i r e c t o r i n t h i s case was e x t r e m e l y u n r e a s o n a b l e and thus 42 g r o s s l y n e g l i g e n t . ( i i i ) A r e p r e s e n t a t i v e d i r e c t o r i s s u e d a p r o m i s s o r y note on b e h a l f o f h i s company t o an o t h e r company which was a l r e a d y b a n k r u p t f o r t h e purpose of g i v i n g i t a c r e d i t . Such conduct was h e l d t o be g r o s s n e g l i g e n c e i n t h e absence o f s p e c i a l c i r c u m s t a n c e s which would ensure the s e t t l e m e n t 43 of the note by t h e ba n k r u p t company. ( i v ) A r e p r e s e n t a t i v e d i r e c t o r o b t a i n e d f i n a n c e by i s s u i n g p r o m i s s o r y n o t e s , e x p e c t i n g t h a t i t would be p o s s i b l e t o pay them o f f by expanding t h e b u s i n e s s and i n c r e a s i n g t h e income, w i t h o u t h a v i n g any c l e a r f o r e s i g h t o r p o l i c y c o n c e r n i n g the b u s i n e s s . He th e n made a huge inv e s t m e n t i n a n o t h e r company which he d i d not i n v e s t i g a t e s u f f i c i e n t l y , w i t h o u t c o n s i d e r i n g t h e a s s e t s and c a p a c i t y o f h i s company. The b a n k r u p t c y of t h e - I l l -o t h e r company caused th e c o l l a p s e of h i s company. I t was h e l d t h a t he a c t e d i n an e x t r e m e l y l o o s e - s p e n d i n g manner, and t h u s he was 44 found g r o s s l y n e g l i g e n t . (v) A r e p r e s e n t a t i v e d i r e c t o r who r a i s e d funds by t r a n s f e r r i n g p r o m i s s o r y n o t e s t o a t h i r d p a r t y when h i s company was about t o go b ankrupt was 45 h e l d g r o s s l y n e g l i g e n t . ( v i ) A r e p r e s e n t a t i v e d i r e c t o r who o r d e r e d a d v e r t i s e m e n t s a t c o n s i d e r a b l e c o s t i n s p i t e of the e x t r e m e l y poor f i n a n c i a l s t a t u s of h i s company, was found t o have exceeded th e bounds of r e a s o n a b l e d i s c r e t i o n and t h u s t o be g r o s s l y n e g l i g e n t . ( v i i ) Two d i r e c t o r s p l a n n e d t o c o n s t r u c t g o l f l i n k s and t h e y r e c r u i t e d members, a l t h o u g h t h e y d i d not have any e x p e r i e n c e i n t h a t b u s i n e s s . They f a c e d f i n a n c i a l d i f f i c u l t y , c o u l d not even pur c h a s e th e r e q u s i t e s i t e , and abandoned the p l a n . They were h e l d g r o s s l y n e g l i g e n t and t h u s l i a b l e f o r t h e amount of membership f e e s t h e y had c o l l e c t e d . The c o u r t ' s r e a s o n i n g was t h a t t h e y commenced t h e - 112 p l a n without s u f f i c i e n t i n v e s t i g a t i o n or a reasonable p l a n to r a i s e the necessary funds, simply swallowing the e x p l a n a t i o n of the l o c a l people. The f o r e g o i n g i s o n l y a s e l e c t i o n from a number of cases which have h e l d r e p r e s e n t a t i v e d i r e c t o r s l i a b l e f o r mismanagement. However, there i s one case i n which an o v e r l y s t r i c t d e c i s i o n of a lower c o u r t was r e v e r s e d . In Tsuboi v. 48 Yaj ima, a c o n t r a c t o r company went bankrupt due t o the bankruptcy of the s u b c o n t r a c t o r to which the company had extended l o a n s . The Supreme Court h e l d t h a t the o r i g i n a l d e c i s i o n was wrong i n h o l d i n g the r e p r e s e n t a t i v e d i r e c t o r l i a b l e f o r loose-spending loans to the s u b c o n t r a c t o r o n l y on the grounds that the amount of the loans exceeded the amount of the order taken by the s u b c o n t r a c t o r at the time of i t s bankruptcy. The Supreme Court suggested t h a t i t was necessary to c o n s i d e r the f a c t o r s such as when the s u b c o n t r a c t o r ' s i n a b i l i t y t o make payment was f o r e s e e n or c o u l d have been foreseen, whether the loans were made a f t e r t h a t date, and how much money was l e n t . In s h o r t , i t may be s a i d t h a t the Japanese c o u r t s e x p r e s s l y or i m p l i e d l y recognize t h a t d i r e c t o r s who manage co r p o r a t e b u s i n e s s are e n t i t l e d t o e x e r c i s e some d i s c r e t i o n i n - 113 making business decisions- However, the courts often hold them l i a b l e for mismanagement in corporate bankruptcy cases and do not hesitate to scr u t i n i z e the adequacy of t h e i r business decisions i n concrete cases to es t a b l i s h l i a b i l i t y . (3) Duty of Care with respect to Monitoring the Execution of Corporate A f f a i r s  The foregoing i s the l i a b i l i t y of di r e c t o r s who are actually managing corporate business a c t i v i t i e s . The next question i s the l i a b i l i t y of other directors who f a i l to prevent the breaches of duty of the errant d i r e c t o r s . In order to hold them l i a b l e , the courts read a duty to monitor the execution of corporate a f f a i r s into the duty of care. F i r s t , the duty was established with respect to representative d i r e c t o r s . After a l i n e of i n f e r i o r court decisions upholding t h i s duty, the Supreme Court, i n Senbi 49 Kozai case, held that: "...Since a representative director i s an organ organ which has the power and duty to represent the company externally and manage the execution of o v e r a l l corporate a f f a i r s i n t e r n a l l y , i t goes without saying that he i s obliged to perform his duty f a i t h f u l l y for the company with the care of a good manager and pay attention to the o v e r a l l corporate a f f a i r s . Therefore, at least, i f a representative director l e f t a l l corporate a f f a i r s to another representative d i r e c t o r or others without paying any attention to their execution of corporate a f f a i r s , and eventually - 114 -overlooked t h e i r wrongdoing or breach of duty, i t i s reasonable t o c o n s i d e r t h a t he h i m s e l f a l s o breahed h i s duty through mala f i d e or by gross n e g l i g e n c e . " In t h i s case, a r e p r e s e n t a t i v e d i r e c t o r (A.) purchased goods and i s s u e d a promissory note to pay f o r them although the f i n a n c i a l c o n d i t i o n of h i s company was extremely bad and i t s i n a b i l i t y to pay the note c o u l d have been fo r e s e e n e a s i l y . Another r e p r e s e n t a t i v e d i r e c t o r (B. ) who had been appointed by v i r t u e of h i s fame and c r e d i b i l i t y , was busy with h i s own bu s i n e s s and l e f t the c o r p o r a t e a f f a i r s e n t i r e l y t o A. Both A. and B. were h e l d g r o s s l y n e g l i g e n t . Secondly, the duty to monitor was e s t a b l i s h e d with res p e c t t o o r d i n a r y d i r e c t o r s . Undoubtedly they are o b l i g e d t o pay a t t e n t i o n t o the matters brought to the meeting of the board of d i r e c t o r s . The q u e s t i o n was whether they were bound to pay a t t e n t i o n to other matters, e.g. wrongdoing of the r e p r e s e n t a t i v e d i r e c t o r which i s not d i s c l o s e d at the board meeting. At f i r s t , i n f e r i o r c o u r t s denied the e x i s t e n c e of such a duty. L a t e r , some d e c i s i o n s upheld the duty. F i n a l l y t h i s matter was s e t t l e d a f f i r m a t i v e l y by the Supreme Court i n 50 Kobayashi et a l . v. Hashimoto et a l . In t h i s case, A., B. and C. formed a company to combine t h e i r r e s p e c t i v e b u sinesses, i . e . s a l e s of e l e c t r i c a p p l i a n c e by A. and r e p a i r of the same by B. and C. A. became a r e p r e s e n t a t i v e d i r e c t o r and B. and C. - 115 -o r d i n a r y d i r e c t o r s . B. and C. were engaged i n the r e p a i r business and l e f t a l l c o r p o r a t e a f f a i r s t o A. A. managed the company at h i s s o l e d i s c r e t i o n and h e l d no s h a r e h o l d e r s ' meetings or board meetings. A. planned t o expand the b u s i n e s s t o i n c l u d e automobile r e p a i r s , without c o n s u l t i n g the other two, and i s s u e d an e x c e s s i v e l y l a r g e promissory note t o o b t a i n f i n a n c e . As he l o s t the note by f r a u d and c o u l d not o b t a i n the proceeds, the company went bankrupt. The c o u r t of second i n s t a n c e h e l d that B. and C. were g r o s s l y n e g l i g e n t i n not paying a t t e n t i o n to c o r p o r a t e a f f a i r s and i n not p r e v e n t i n g the issuance of the e x c e s s i v e note by A. The Supreme Court a f f i r m e d , saying t h a t : "Inasmuch as the board of d i r e c t o r s i s i n a p o s i t i o n t o s u p e r v i s e the e x e c u t i o n of c o r p o r a t e a f f a i r s , i t should be h e l d t h a t the d i r e c t o r s who comprise the board of d i r e c t o r s have a duty to the company not o n l y to monitor the matters brought t o the board meetings, but a l s o to monitor the r e p r e s e n t a t i v e d i r e c t o r s ' e x e c u t i o n of c o r p o r a t e a f f a i r s i n g e n e r a l and, i f necessary, t o convene a board meeting themselves or request i t t o be convened, and t o see t h a t the e x e c u t i o n of c o r p o r a t e a f f a i r s i s done p r o p e r l y through the board meeting." The defendants argued t h a t so f a r as A. s e c r e t l y d i d the act i n q u e s t i o n , there was no reasonable c a u s a t i o n between A.'s act and t h e i r i n a t t e n t i o n , but the Supreme Court simply r e j e c t e d the argument. - 116 Those Supreme Court decisions accelerated the a r t . 266.3 claims by allowing creditors to condemn the di r e c t o r s ' inaction which allowed mismanagement by other d i r e c t o r s . (4) The Duty of Nominee Directors There are many occasions i n which representative directors and ordinary directors are appointed merely as nominee directors and pay no attention to the conduct of the director who actually manages the company. When they are sued, they t r y to escape l i a b i l i t y asserting that they are only nominee dir e c t o r s . The courts have not been sympathetic with 51 them. In the Senbi Kozai case, the Osaka High Court acknowledged the fact that the representative d i r e c t o r assumed his o f f i c e only because he was told that his p o s i t i o n would be nominal and he would not incur any r e s p o n s i b i l i t y . Nevertheless, the court f l a t l y said that t h i s was no defence to his breach of duty to monitor the execution of corporate a f f a i r s . This point was impliedly affirmed by the Supreme Court. There are other i n f e r i o r court decisions which hold the 52 nominee directors l i a b l e . There are cases i n which a defendant t r i e s to escape l i a b i l i t y by alleging that he has not been a director from the outset and that the corporate r e g i s t r a t i o n form indicating h i s - 117 assumption of o f f i c e i s f a l s e . The Supreme C o u r t , i n K. K. 53 Nihon S t u d i o v. Nakamura, r e j e c t e d such a defence by f o l l o w i n g r e a s o n s : A r t . 14 of t h e Commercial Code p r o v i d e s t h a t a p e r s o n who i n t e n t i o n a l l y o r n e g l i g e n t l y r e g i s t e r s f a l s e m a t t e r s i s p r e v e n t e d from a s s e r t i n g t h a t t h o s e m a t t e r s are f a l s e as a g a i n s t a bona f i d e t h i r d p a r t y . As t o the f a l s e r e g i s t r a t i o n of d i r e c t o r s , t h e p a r t y who i s estopped by t h i s p r o v i s i o n i s not t h e p e r s o n i n d i c a t e d as d i r e c t o r , but t h e company which e f f e c t e d t h e r e g i s t r a t i o n . However, t h e Supreme Court a p p l i e d the p r o v i s i o n by a n a l o g y t o a p e r s o n who consented t o the f a l s e r e g i s t r a t i o n of h i s assumption of t h e o f f i c e of a d i r e c t o r . T h e r e f o r e , he was h e l d l i a b l e under a r t . 266.3 of the Commercial Code f o r not m o n i t o r i n g t h e e x e c u t i o n of the c o r p o r a t i o n ' s a f f a i r s and not p r e v e n t i n g a l o o s e - s p e n d i n g l o a n by the p e r s o n who a c t u a l l y managed t h e company, j u s t as i f he had been a r e a l d i r e c t o r . (5) L i m i t a t i o n s on the Duty t o M o n i t o r R e c e n t l y t h e r e have been an i n c r e a s i n g number of i n f e r i o r c o u r t d e c i s i o n s which have h e l d d i r e c t o r s not l i a b l e f o r b r e a c h e s of t h e d u t y t o m o n i t o r . The f o l l o w i n g a r e a sample o f t h o s e d e c i s i o n s : ( i ) a r e p r e s e n t a t i v e d i r e c t o r i n charge of a c c o u n t i n g (A. ) committed f r a u d and caused damage t o t h i r d - 118 -p a r t y . Another r e p r e s e n t a t i v e d i r e c t o r i n charge of marketing (B.) was found i n breach of h i s duty to monitor A.'s conduct. But the cou r t h e l d that h i s breach d i d not amount t o the gross n e g l i g e n c e r e q u i r e d under a r t . 266.3, because i t was d i f f i c u l t f o r B. to know of A. 1 s fr a u d , and the f i n a n c i a l statements which were submitted by A. to the management committee and examined by B. d i d not suggest the company was i n f i n a n c i a l d i f f i c u l t y . ( i i ) A d i r e c t o r ' s i n a t t e n t i o n to c o r p o r a t e a f f a i r s was h e l d not t o be gross n e g l i g e n c e , because he was t a k i n g a r e s t due to i l l n e s s and was not i n v o l v e d i n the management of the company, and he d i d not have an o p p o r t u n i t y t o know the s i t u a t i o n of the management of the company as no shareholders 55 meeting or board meeting was h e l d . ( i i i ) A company's management was dominated completely by a r e p r e s e n t a t i v e d i r e c t o r (A.). A. induced the o l d e s t employee (B. ) t o become a d i r e c t o r , saying that i t was to f u l f i l the quorum of d i r e c t o r s and i t would cause no t r o u b l e t o B. B. c o n t i n u o u s l y engaged i n simple work under the - 119 d i r e c t i o n of A. No board meeting was h e l d and B. had never been i n v o l v e d i n f i n a n c i a l a f f a i r s of the company. B. had no education other than that of elementary s c h o o l , had no knowledge concerning accounting books or bank t r a n s a c t i o n s , and was t o t a l l y ignorant of the d u t i e s of a d i r e c t o r . A. and another d i r e c t o r i n charge of accounting obtained f i n a n c e by d e c e i v i n g a bank as t o the f i n a n c i a l c o n d i t i o n of the company. Although the court found B. t o be n e g l i g e n t f o r h i s f a i l u r e to monitor the corporaton's a f f a i r s , he was h e l d not to be g r o s s l y n e g l i g e n t . ^ ( i v ) A company had one r e p r e s e n t a t i v e d i r e c t o r (A.) and two d i r e c t o r s (B. and C. ) . B. was A. 's w i f e . C. was a l i c e n s e d i n v e s t i g a t o r of lands and houses but had no knowledge about the busin e s s of the company. C. was induced by A. t o become a d i r e c t o r as he was a r e l a t i v e of B. C. made no c a p i t a l c o n t r i b u t i o n , nor d i d he r e c e i v e any remuneration. The company was managed s o l e l y by A. No board meeting was ever h e l d . Every month C. r e c e i v e d A . 1 s o r a l r e p o r t about the company's b u s i n e s s . The f i n a n c i a l c o n d i t i o n of the company d e c l i n e d and f i n a l l y i t went - 120 -bankrupt. However, A. had constantly informed C. that the business was i n good condition. The court found that C.'s f a i l u r e to use stronger supervision and intervention was a breach of h i s duty to the company, but i t denied his conduct amounted to gross negligence i n l i g h t of his limited p o sition. In addition, the court indicated i t s doubt about the existence of reasonable causation, because even i f C. had received the report on the f i n a n c i a l status of the company, he could have done nothing but trust 57 A.'s optimistic comments. There are other recent cases which set out generous 58 standards for nominee d i r e c t o r s . It seems that i n f e r i o r court decisions are moving towards subjective standards comparable to the common law standard, p a r t i c u l a r l y with respect to nominee dir e c t o r s . However, there s t i l l are cases which have refused to give a lower standard to nominee 59 di r e c t o r s . Recently i n Daido Sanso K.K. v. Suga, the Supreme Court reversed the o r i g i n a l lower court decision which negated a nominee director's duty to monitor another director's execution of corporate a f f a i r s . In t h i s case, A. was a - 121 representative director of a company and B. occupied the corresponding p o s i t i o n in a customer company. At the request of A., B. subscribed to o n e - f i f t h of A's company's shares and became i t s nominee dire c t o r . B. l e f t the corporate a f f a i r s e n t i r e l y to A.'s sole d i s c r e t i o n and did not monitor h i s conduct at a l l . A. purchased goods when there was no p o s s i b i l i t y of payment and caused damages to the s e l l e r . The Supreme Court held that an ordinary director's duty to observe the execution of corporate a f f a i r s established in Kobayashi et  a l . v. Hashimoto et a l . ^ i s also applicable to a nominee director such as B. Secondly, the Supreme Court found the o r i g i n a l decision to be wrong i n holding that B. was in fact unable to prevent the purchase by A. The court suggested that B. had not a l i t t l e i n f l u e n t i a l power over A. , and ordered a r e t r i a l of the case. Unfortunately t h i s decision did not c l a r i f y to what extent the courts may take into consideration subjective factors, such as the circumstances surrounding a director's appointment. The standard of care developed by court interpretations i s s t i l l f l u i d . (6) 1981 Amendment to the Commercial Code In the course of dra f t i n g the 1981 amendment to the company law provisions i n the Commercial Code, a request was - 122 made t o make the c o n d i t i o n s f o r t h i r d p a r t y l i a b i l i t y under a r t . 266.3 more s p e c i f i c , i n l i g h t o f t h e c o n f u s i o n i n t h e c o u r t d e c i s i o n s . However, i t was f e l t t o o e a r l y t o enact more s p e c i f i c r u l e s , and i t was d e c i d e d t o w a i t f o r f u r t h e r developments i n the c o u r t c a s e s . ^ A s i g n i f i c a n t development was t h e l e g i s l a t i v e d e c i s i o n t o i n c r e a s e t h e s u p e r v i s o r y power o f t h e b o a r d o f d i r e c t o r s . F i r s t l y , t h e o l d Commercial Code was i n t e r p r e t e d so as t o mean t h a t t h e board of d i r e c t o r s had a power t o s u p e r v i s e t h e d i r e c t o r s ' performance of t h e i r d u t i e s . In t h e 1981 amendment, a p r o v i s i o n e x p r e s s l y s t a t i n g t h i s power was e n a c t e d , i n t h e hope t h a t d i r e c t o r s would become more c o n s c i o u s of t h e i r •4. • 4= 4.- 63 m o n i t o r i n g f u n c t i o n . S e c o n d l y , under the o l d Code, t h e e x t e n t t o which t h e board of d i r e c t o r s c o u l d d e l e g a t e t h e i r power t o a r e p r e s e n t a t i v e d i r e c t o r was u n c l e a r . The amended Code now p r o v i d e s t h a t t h e board of d i r e c t o r s has t h e power t o determine i m p o r t a n t c o r p o r a t e a f f a i r s w hich t h e y cannot d e l e g a t e t o d i r e c t o r s (whether r e p r e s e t n a t i v e d i r e c t o r s o r n o t ) . The new p r o v i s i o n s e t s f o r t h some examples of i m p o r t a n t c o r p o r a t e a f f a i r s , such as d i s p o s i t i o n and a c q u i s i t i o n o f i m p o r t a n t p r o p e r t y , o r a l o a n of a l a r g e amount, but t h e l i s t i s not e x h a u s t i v e . - 123 -Thirdly, to f a c i l i t a t e the supervisory function of the board of directors, the amended Code imposes on directors the duty to report to the board of directors on the execution of 65 corporate a f f a i r s at least once every three months. Fourthly, under the old Code, each director had a power to convene a board meeting, except that the board of directors designated a p a r t i c u l a r d i r e c t o r to do s o . 6 6 If the designated director refused to convene a meeting, i t was unclear whether or not other directors were e n t i t l e d to do so. The amended Code has new provisions that each director may request the designated director to convene a meeting, and that i f he does not do so within a s p e c i f i e d period, the director 6 7 making the request may convene the meeting himself. The foregoing i s another example of law reform i n Japan. The courts develop rules by creative interpretation of simple statutory provisions. But t h i s process i s time-consuming and involves uncertainty. Before the Supreme Court renders a decision on a c e r t a i n issue, there are c o n f l i c t i n g i n f e r i o r court decisions. The Supreme Court decision i s not necessary clear enough to s e t t l e the issue completely. Legislators are wary of i n t e r f e r i n g with t h i s procedure. - 124 -FOOTNOTES (D. The Director's Duty of Care, Diligence and S k i l l ) 1 In doing research on t h i s topic, I am indebted to Toriumi, Directors' Duty of Care, Diligence and S k i l l : Comparative  Study of Japanese and Canadian Law, unpublished thesis submitted to the University of B r i t i s h Columbia, Faculty of Law (1983). 2 [1925] Ch. 407. 3 [1911] 1 Ch. 425. 4 Ibid., 437. 5 [1957] A.C. 555. 6 Gower, The Principles of Modern Company Law (4th Ed.) (1979), 605. 7 [1892] 2 Ch. 100. 8 [1901] A.C. 477. 9 Beck et a l . , Business Associations Casebook (1979), 215. 10 Iacobucci et a l . , Canadian Business Corporations (1977), 287. 11 BCCA s. 142(1) ( b ) ; old OBCA s. 142; new OBCA s. 134(1) (b); CBCA s. 117. 12 Iacobucci et a l . , op. c i t . , n. 10, 290. 13 The Report of the Ontario Select Committee on Company Law (Lawrence Report), paras. 7.2.3 and 7.2.4. 14 Beck et a l . , op. c i t . , n. 9, 216. 15 Lavine, The Business Corporations Act (1971), 230. 16 Beck et a l . , op. c i t . , n. 14. 17 BCCA s. 151(9); new OBCA s. 135(4); CBCA s. 118(4). 18 BCCA s. 226. 19 Iacobucci et a l . , op. c i t . , n. 10, 332. 20 Ziegel, "The New Look i n Canadian Corporation Law", 2 Studies in Canadian Company Law, Ziegel ed. (1973), 1, 45. - 125 21 BCCA s. 151(6); old OBCA s. 135(3); new OBCA s. 135(3); CBCA s. 118(3) . 22 Iacobucci et a l . , op. c i t . , n. 10, 293 23 For further d e t a i l s , see i b i d . , 321-328. 24 For more detailed discussion, see Marantz, "Current Trends in Canadian Bankruptcy Law", Special Lectures of the Law  Society of Upper Canada (1982), 659, 678-680. 25 B i l l C-12, An Act respecting bankruptcy and insolvency, F i r s t Session, 32nd Parliament, 29 Elizabeth II, 1980. 26 S. 2(1). 27 S. 189. 28 S. 190. 29 S. 191. 30 S. 215. 31 S. 218. 32 S. 224. 33 S. 219(9). 34 Art. 253(3). 35 Art. 644. 36 Commercial Code a r t . 266.3 provides as follows (translation i n 2 EHS Law B u l l e t i n Series No. 2200, s l i g h t l y modified by the author): " A r t i c l e 266.3 (1) If directors have been g u i l t y of wrongful intent or of gross negligence i n respect of the assumption of th e i r duties, they s h a l l be j o i n t l y and severally l i a b l e i n damages to t h i r d persons also. (2) It s h a l l be the same to the preceding paragraph i f the d i r e c t o r has made a fal s e entry as to the important matters to be stated in the application for shares, c e r t i f i c a t e for - 126 -pre-emptive right, application for debenture, or the prospectus or i n the documents of A r t i c l e 281 paragraph 1, or made a fals e r e g i s t r a t i o n or public notice. Provided that, t h i s s h a l l not apply i n the case where the direct o r validated that he was not negligent of care to making the entry, r e g i s t r a t i o n or public notice. (3) The provisions of A r t i c l e 266 paragraphs 2 and 3 s h a l l apply mutatis mutandis to the cases mentioned i n the preceding two paragraphs." 37 S.C. November 26, 1969, 23 Minshu 2150. 38 Commercial Code Art. 266(3). 39 See Commercial Code art. 266(1) quoted in supra, Section C, n. 26. In addition, there are following provisions: a r t s . 280.13(1) (lack of subscription of new shares), 293.5(5) (d i s t r i b u t i o n of interim dividend which results in i n s u f f i c i e n t net assets of the company at the end of the f i s c a l year). 40 Bankrupt: San'ei Byora K.K.; Trustee of Bankruptcy: Tanaka v. Misaka et a l . , Osaka D.C. A p r i l 20, 1967, 498 Hanrei  Jiho 64; Azuma "Kozai K.K. v. Saigusa, Tokyo H.C. January 29, 1975, 771 Hanrei Jiho 77; Kitahara v. Ohashi et a l . , Toyko D.C. March 2, 1978, 909 Hanrei Jiho 95; Daiwa Kpgyo  K.K. v. Tezuka et a l . , Tokyo D.C. September 30, 1980, 1005 Hanrei Jiho 161. 41 Nisshin Shirring K.K. v. Funaki, Tokyo H.C. January 29, 1970, 21 Kaminshu 118, afmd., S.C. A p r i l 25, 1972, 670 Hanrei Jiho 45. 42 Azuma Kozai K.K. v. Saigusa, supra, n. 40, afmd., S.C. June 3, 1976, 801 Kinyu Homu J i j y o 29. 43 Unknown v. Unknown, S.C. October 26, 1976, 813 Kinyu Homu  J i j y o 40. 44 Nihon Jidosha K.K. v. Suzuki, S.C. A p r i l 15, 1966. 45 Takagi v. Yoshioka et a l . , Osaka D.C. October 30, 1979, 954 Hanrei Jiho 91; Saotome Shokai v. Makita, Tokyo D.C. December 21, 1979, 961 Hanrei Jiho 113; Teraji v. Saito, Tokyo H.C. June 30, 1980, 973 Hanrei Jiho 120. 46 K.K. Sanpo v. Fujino, Tokyo D.C. February 24, 1978, 906 Hanrei Jiho 91. - 127 -47 Takemura et a l . v. Endo et a l . Tokyo D.C. November 28, 1979, 965 Hanrei Jiho 108. 48 S.C. December 12, 1978, 884 Kinyu Homu J i j y o 27, reversing Tokyo H.C. October 27, 1977, 874 Hanrei Jiho 85. 49 Supra, n. 37. 50 S.C. May 22, 1973, 27 Minshu 655. 51 Osaka H.C. July 16, 1964, 385 Hanrei Jiho 64, afmd., supra, n. 37. 52 Ta k i i v. Suginaka et a l . , Hiroshima D.C. August 30, 1961, 12 Kaminshu 2116; Yamamoto, a l i a s Yuibumi Shoji v. Kakami, Tokyo H.C. December 25, 1975, 818 Hanrei Jiho 88; Sato v. Kureyama, Osaka H.C. A p r i l 17, 1974, 27 Kominshu 115, appeal on d i f f e r e n t issue dismissed, S.C. December 17, 1974, 28 Minshu 2059. 53 S.C. June 15, 1972, 26 Minshu 984. 54 Taiyo Kogyo K.K. v. Kurosawa, Tokyo H.C. July 19, 1978, 29 Kaminshu 485. 55 Shiozawa v. Tsuhi j i et a l . , Maebashi D.C. Takasaki Branch, December 26, 1974, 780 Hanrei Jiho 96. 56 K.K. Kofuku Sogo Ginko v. Oya et a l . , Osaka H.C. A p r i l 27, 1978, 29 Kaminshu 281. 57 Takaji Kogu K.K. et a l . v. Yoshii, Osaka H.C. March 23, 1979, 30 Kaminshu 137. 58 Unknown v. Unknown, Tokyo D.C. August 24, 1978, 372 Hanrei  Times 141; Yamashita v. Segawa et a l . , Osaka D.C. March 28, 1980, 963 Hanrei Jiho 96; Shimazaki, a l i a s Kyoei Shokai v. Honda, Tokyo D.C. A p r i l 22, 1980, 983 Hanrei Jiho 120; Sakai, a l i a s Marutsune Shoji v. Noji et a l . , Fukui D.C. December 25, 1980, 1011 Hanrei Jiho 116, etc. 59 Yamamoto, a l i a s Yuibumi Shoji v. Kakami, supra, n. 52; Matsushita Denki Sangyo K.K. v. Morita, Urawa D.C. March 25, 1980, 969 Hanrei Jiho 110, etc. 60 S.C. March 18, 1980, 971 Hanrei Jiho 101. 61 Supra, n. 50. 62 Motoki, Kaisei Shoho Chikujo Kaisetsu ( A r t i c l e by A r t i c l e Commentary to Amended Commercial Code) (1981), 142. - 128 -63 Art. 64 Art. 65 Art. 66 Art. 67 Art. 260(1) . 260(2) . 260(3) . 259; now Art. 259(1). 259(2)(3) 129 -E. L i f t i n g the Corporate V e i l In Anglo-Canadian law, the courts have been wary of disregarding the separate existence of a company as distinguished from i t s members. This i s p a r t i c u l a r l y true when the limited l i a b i l i t y of shareholders i s at. stake. 1 Conversely, most of the cases in which the Japanese courts used the doctrine concern the imposition of corporate debts on 2 shareholders or related companies. Therefore, i n comparing the Canadian approach and the Japanese equivalent with respect to t h i s doctrine, I w i l l focus on the issue of limited l i a b i l i t y . 1. Canada (1) Pri n c i p l e of Salomon Case In Canada, as well as i n England, with respect to the limited l i a b i l i t y of shareholders, the courts have r i g i d l y applied the p r i n c i p l e established i n Salomon v. Salomon & 3 Co• and i t s corelative propositions. Namely, a company i s a legal entity d i s t i n c t from i t s members, and i t s property, rights and l i a b i l i t i e s are not those of the members. Even i f i t i s a "one man company", the company i s not an a l i a s for the owner. In the absence of fraud or improper conduct, the courts cannot disregard the separate existence of a corporate e n t i t y . - 130 -T h e r e f o r e , as shown i n t h e S a l o m o n c a s e , an i n d i v i d u a l who o p e r a t e s a b u s i n e s s t h r o u g h h i s company c a n u s e t h e l i m i t e d l i a b i l i t y o f a s h a r e h o l d e r as a s h i e l d f r o m t h e d e b t s a r i s i n g f r o m t h e b u s i n e s s , e v e n i f i t i s h i s one man company. S i m i l a r l y , t h e c r e d i t o r s o f a s h a r e h o l d e r c a n n o t h a v e a c c e s s t o t h e a s s e t s o f a company owned and c o n t r o l l e d b y h i m by a l l e g i n g t h a t t h e company i s a mere a g e n t a nd t h e a l t e r ego 4 o f t h e s h a r e h o l d e r . (2) Some S o l u t i o n s The r i g i d a d h e r e n c e t o t h i s p r i n c i p l e may c r e a t e i n e q u i t a b l e r e s u l t s f o r c r e d i t o r s o f a company. T h e r e f o r e , w h i l e n o t a l t e r i n g t h e p r i n c i p l e i t s e l f , t h e c o u r t s and l e g i s l a t o r s h a v e a t t e m p t e d t o m i t i g a t e t h e i n c o n v e n i e n c e s c r e a t e d b y t h e s e p a r a t e l e g a l e n t i t y . R e g u l a t i o n s c o n c e r n i n g p r e s e r v a t i o n o f c o r p o r a t e f u n d s c o n t a i n e d i n company l e g i s l a t i o n a r e one s u c h c o u n t e r m e a s u r e . However, i n t h e d i s c u s s i o n b e l o w , I w i l l o n l y m e n t i o n some s e l e c t e d m a t t e r s . ( a ) I d e n t i f i c a t i o n o f t h e P a r t y t o a C o n t r a c t The "one man company" o f t e n makes t h e c o n t r a c t i n g p a r t y a m b i g u o u s . T h e r e a r e many c a s e s i n w h i c h t h e s o l e owner - 131 of the company enter s i n t o a c o n t r a c t without making i t c l e a r t h a t he i s a c t i n g as agent f o r the company, and l a t e r a l l e g e s t h a t i t i s not he but h i s company that i s l i a b l e under the c o n t r a c t . The c o u r t s have s o l v e d t h i s problem as a matter of i d e n t i f i c a t i o n of the p a r t y t o the c o n t r a c t . I w i l l c i t e only recent cases. In order t o p r o t e c t the other p a r t y t o the c o n t r a c t , the c o u r t s use the d o c t r i n e of the u n d i s c l o s e d p r i n c i p a l ; i . e . when an agent ente r s i n t o a c o n t r a c t i n h i s own name, he i s p e r s o n a l l y bound by the c o n t r a c t . The other p a r t y may sue e i t h e r the agent or the p r i n c i p a l who was l a t e r d i s c o v e r e d , but the agent cannot escape l i a b i l i t y by the f a c t t h a t the p r i n c i p a l may a l s o be added as a p a r t y . Therefore, an owner of a company who signed a c o n t r a c t without q u a l i f i c a t i o n i s p e r s o n a l l y l i a b l e , and cannot escape l i a b i l i t y by saying that 5 he intended t o act as agent f o r h i s company. There i s an o b l i g a t i o n upon a p a r t y who intends t o r e l y on the f a c t of i n c o r p o r a t i o n t o c l a i m l i m i t e d l i a b i l i t y p r o t e c t i o n t o g i v e n o t i c e t o the other p a r t y . 6 There are cases i n which an i n d i v i d u a l defendant was h e l d p e r s o n a l l y l i a b l e due to the f a i l u r e t o prove that the other p a r t y was aware t h a t he was c o n t r a c t i n g with a c o r p o r a t i o n , d e s p i t e some dubious f a c t s ; e.g. payments were made by company cheques, or 7 the p l a i n t i f f r e c e i v e d timebooks b e a r i n g a company name. - 132 F u r t h e r , there i s a case which h e l d that an i n d i v i d u a l defendant had pledged h i s own c r e d i t by h i s a c t s , and i m p l i e d l y g had agreed to pay p e r s o n a l l y . In another case, a person who entered i n t o a c o n t r a c t and c o n t i n u o u s l y engaged i n d e a l i n g s p e r s o n a l l y , intended to s u b s t i t u t e h i s company f o r h i m s e l f as p a r t y to a c o n t r a c t . But he was h e l d t o be s t i l l l i a b l e , as h i s n o t i c e t o the other p a r t y was i n s u f f i c i e n t and the 9 subsequent d e a l i n g s were done i n the same manner as b e f o r e . A s i m i l a r problem occurs between two i n t e r r e l a t e d companies. In Keewatin E l e c t r i c & D i e s e l s L t d . v. D u r a l l  L t d . , an o f f i c e r of both the defendant company (D. Co.) and another company (A. Co.) requested the p l a i n t i f f t o r e p a i r machinery. He drove the machinery t o the p l a i n t i f f i n D. Co.'s t r u c k , and he answered the telephone when the p l a i n t i f f telephoned D. Co. The work order was taken from the books of A. Co., and p a r t payment was made by A. Co. 's cheque. When sued by the p l a i n t i f f f o r the balance payment, D. Co. a l l e g e d that A. Co. was l i a b l e f o r i t . I t was h e l d that when two i n t e r r e l a t e d companies worked from the same o f f i c e there was a heavy onus on the o f f i c e r s t o prove they were d e a l i n g i n the name of one company or other, and that D. Co. was l i a b l e as i t had not d i s c h a r g e d the onus. - 133 It should be noted that BCCA s. 130 provides the s p e c i f i c l i a b i l i t y of a d i r e c t o r or o f f i c e r who v i o l a t e s the duty to display the name of h i s company. However, once i t i s established that the other party was aware that he was dealing with a company, i t i s no longer possible to hold the owner of the company l i a b l e . 1 1 In fact, the Salomon decision, supra, said: "The unsecured creditors of A. Salomon and Company, Limited, may be e n t i t l e d to sympathy, but they have only themselves to blame for t h e i r misfortunes. They trusted the company, I suppose, because they had long dealt with Mr. Salomon, and he had always paid h i s way; but they had f u l l notice that they were no longer dealing with an i n d i v i d u a l . . . " In Rockwell Developments Ltd. v. Newtonbrook Plaza 12 Ltd., the p l a i n t i f f company (R. Co.) l o s t case which concerned the transfer of land. The t r i a l judge ordered the owner (K. ) of the company to pay the costs, on the basis that K. was the actual contracting party and the actual l i t i g a n t , and that R. Co. was only a nominee to hold t i t l e . In the absence of an a l l e g a t i o n against K. of any misconduct, the Ontario High Court overruled the order. The court was not persuaded to depart from the t r a d i t i o n a l p r i n c i p l e by the fact that there was nothing in R. Co.'s corporate records respecting the transaction, no d i r e c t o r s ' resolution was passed as to the - 134 -transaction and the l i t i g a t i o n , and K. and h i s partner d i r e c t l y advanced the deposit for the transaction and paid the fees to R. Co.'s s o l i c i t o r s . What i f the owner of companies de l i b e r a t e l y has misled the other party as to the i d e n t i t y of the company he was dealing with? In P a c i f i c Rim I n s t a l l a t i o n s Ltd. v. T i l t - u p 13 Construction Ltd. et a l . , T., the p r i n c i p a l of T. Co. and C. Co., caused T. Co. to enter into a contract with a t h i r d party with respect to the construction project. He caused the p l a i n t i f f to enter into a subcontract with C. Co. by pretending that C. Co. was the proper party to deal with. The owner made payment to T. Co. but T. did not pay i t to the p l a i n t i f f . The court held that in order to prevent t h i s unconscionable manipulation by T. to avoid the payment of the p l a i n t i f f ' s claim, the corporate v e i l should be l i f t e d and the companies should be recognized as T.'s a l t e r ego, and therefore both companies were j o i n t l y l i a b l e . (b) Anti-fraud Provisions concering Winding-up The BCCA, the old and new OBCA and the CBCA have special anti-fraud provisions which are applicable i n cases of 14 winding-up. The BCCA provides that in the course of the winding-up of a company, where i t appears that any person who - 135 has taken p a r t i n the formation or promotion of the company or any past or present d i r e c t o r , o f f i c e r , r e c e i v e r , r e c e i v e r manager, l i q u i d a t o r or member of the company has m i s a p p l i e d , or r e t a i n e d , or become l i a b l e or accountable f o r , any money, or pr o p e r t y , or breach of t r u s t , i n r e l a t i o n t o the company, the court may examine the conduct of such a person on a p p l i c a t i o n of c e r t a i n s p e c i f i e d persons, i n c l u d i n g a c r e d i t o r . Then the cour t may compel such a person t o repay or r e s t o r e the money or p r o p e r t y or c o n t r i b u t e the sum to the a s s e t s of the company by way of compensation i n resp e c t of such misconduct. A s i m i l a r p r o v i s i o n i n the o l d OBCA, which remains the same i n the new OBCA, extends t o misfeasance. The e q u i v a l e n t p r o v i s i o n i n the CBCA may be used to att a c k the misconduct of any person. However, the s p e c i f i e d misconduct i s l i m i t e d t o concealment, w i t h h o l d i n g and m i s a p p l i c a t i o n of c o r p o r a t e p r o p e r t y , and o n l y a l i q u i d a t o r may apply t o the c o u r t . (c) Bankruptcy Act 15 The Bankruptcy Act has some p r o v i s i o n s which may be used a g a i n s t improper conduct by use of of a separate corpor a t e e n t i t y . I t i s imp o s s i b l e t o catalogue them e x h a u s t i v e l y i n t h i s l i m i t e d space. Instead, I w i l l show some 136 examples in which fraudulent transactons between a bankrupt company and i t s shareholders or related companies were successfully attacked by invoking provisions of the Act. 16 In Re Appleby Estates Ltd., the bankrupt company resolved to pay a death benefit to the substantial shareholder. It was applied to reduce her debt to the company. It was held to be a "transfer of property" under s. 73 of the Act. In Re Imperial Broadloom Co.; Trustee v. Shkony 17 and Baruch, a dividend was declared to forgive the debts of the shareholders to the company. It was held to be a "payment" under s. 79 of the Act. The "reviewable transaction" mechanism i s 18 noteworthy. It i s primarily designed to apply to transactions involving associated companies or a c l o s e l y held corporation and i t s o f f i c e r s or shareholders where an undue benefit i s conferred on the one party to the ultimate detriment of creditors of the debtor. A transaction between parties other than at arm's length i s a reviewable transaction. Related persons as defined in the Act are deemed not to deal with each other at arm's length while so related. Where a person (including a coporation) who has sold, purchased, leased, hired, supplied or - 137 -r e c e i v e d p r o p e r t y or s e r v i c e s i n a reviewable t r n s a c t i o n becomes bankrupt w i t h i n twelve months of the t r a n s a c t i o n / the c o u r t may i n q u i r e i n t o whether the bankrupt gave or r e c e i v e d f a i r market value i n c o n s i d e r a t i o n f o r such p r o p e r t y or s e r v i c e s . I f i t i s found t h a t the c o n s i d e r a t i o n was c o n s p i c u o u s l y g r e a t e r or l e s s than the f a i r market value, the court may g i v e judgment to the t r u s t e e a g a i n s t the other p a r t y to the t r a n s a c t i o n and/or any person who i s p r i v y to the t r a n s a c t i o n with the bankrupt, f o r the d i f f e r e n c e between the a c t u a l c o n s i d e r a t i o n g i v e n or r e c e i v e d by the bankrupt and the f a i r market va l u e . The onus of proof i s r e v e r s e d i n that the court i s bound by what i s s t a t e d by the t r u s t e e as the f a i r market value and the a c t u a l value i n q u e s t i o n , unless other values are proven. 19 For example, i n Rustop L t d . v. White et a l . , B. and W. were the o n l y d i r e c t o r s of R. Co. and B. Co. They were s o l e shareholders of B. Co., which owned 33% of R. Co.'s shares. The balance of 67% was owned by them. They caused R. Co. to f o r g i v e the debt of B. Co. to R. Co., f o r which R. Co. r e c e i v e d no c o n s i d e r a t i o n . L a t e r R. Co. went bankrupt. I t was h e l d that f o r g i v e n e s s of the debt was a reviewable t r a n s a c t i o n , and B., W and B. Co. were ordered to pay the amount of the debt. In H. R. Doane L t d . v. A c a d i a Automotive & I n d u s t r i a l 20 S u p p l i e s L t d . et a l •, the p r i n c i p a l o f f i c e r of both the - 138 -bankrupt company and a s i s t e r company effected an undervalued transfer of assets from the bankrupt company to the s i s t e r company, and further to a t h i r d company which had s u f f i c i e n t knowledge of the entire transaction, before the company went bankrupt. The o f f i c e r and the t h i r d company were ordered to pay the f a i r p r i c e . The provisions concerning "agent" i n the proposed new bankruptcy l e g i s l a t i o n i s another s i g n i f i c a n t step i n imposition of personal l i a b i l i t y . It has been discussed in Section D concerning d i r e c t o r s ' duty of care. 2. Japan (1) Rise of the Doctrine Contrary to the s i t u a t i o n in Canada, the Japanese equivalent of the doctrine ("hojinkaku h i n i n no h o r i " ; i . e . the doctrine of disregard of the corporate entity) i s often used by the Japanese courts to hold the p r i n c i p a l shareholders or related companies l i a b l e for corporate debts. The leading case i s the Supreme Court decision of 1969 21 in Hoshihara v. K.K. Yamayoshi Shokai, although i t i s not a t y p i c a l case of imposition of debts on the shareholder. Before - 139 -t h a t , the d o c t r i n e developed i n the U.S. was int r o d u c e d to Japan by a small number of s c h o l a r s . There were o n l y a few i n f e r i o r c o u r t d e c i s i o n s which upheld the d o c t r i n e . The m a j o r i t y of commentators were s k e p t i c a l about t h i s u n f a m i l i a r d o c t r i n e . However, when the case was brought t o the F i r s t P etty Bench of the Supreme Court, of the f i v e judges of the Bench two were vigorous advocates of the d o c t r i n e ; namely, J i r o Matsuda, a car e e r judge, and K e n ' i c h i r o Osumi, a former p r o f e s s o r . Both of them had h i g h r e p u t a t i o n s i n the study of the company law. I t i s no wonder t h a t the Supreme Court s u r p r i s e d academics and p r a c t i t i o n e r s by f o r c i b l y upholding the d o c t r i n e . The case seems t o deserve a b r i e f summary here. The p l a i n t i f f (H.) was a small merchant, and l e n t a s t o r e b u i l d i n g with l i v i n g space t o an e l e c t r i c a p p l i a n c e shop. The shop was run by the defendant company (Y. Co.), of which K. was a r e p r e s e n t a t i v e d i r e c t o r . I t was h i s one man company, and i n substance was nothing but h i s p e r s o n a l b u s i n e s s . Being u n f a m i l i a r with the law, H. d i d not c l e a r l y r e c o g n i z e whether the shop was operated through a corpora t e form or as a p e r s o n a l b u s i n e s s , when he agreed t o l e a s e the s t o r e . Although the s i g n a t u r e of the l e s s e e on the le a s e agreement was g i v e n under the c o r p o r a t e name, l a t e r K. executed a memorandum c o n f i r m i n g the t e r m i n a t i o n date under h i s own name. As K. f a i l e d t o - 140 -v a c a t e the p r e m i s e s , . H. sued K. as l e s s e e . I n the c o u r t - s u p e r v i s e d s e t t l e m e n t , K. agreed t o v a c a t e the p r e m i s e s , w i t h o u t q u e s t i o n i n g the i n d i c a t i o n of l e s s e e i n t h e agreement. S u b s e q u e n t l y , K. r e f u s e d t o v a c a t e the p r e m i s e s a l l e g i n g t h a t t h e l e s s e e was Y. Co. Now H. sued Y. Co. as l e s s e e . The f i r s t and second i n s t a n c e c o u r t s h e l d t h a t Y. Co., a c t i n g t h r o u g h K. , had a l s o agreed t o v a c a t e t h e pr e m i s e s i n the s e t t l e m e n t . However, t h e Supreme Court r e l i e d on t h e more d r a s t i c t h e o r y , i . e . t h e d o c t r i n e of d i s r e g a r d of t h e c o r p o r a t e e n t i t y . ( T h i s i s c o n t r a r y t o t h e Salomon case i n which t h e House o f Lords f i e r c e l y negated t h e o r i g i n a l d e c i s i o n which had l i f t e d t he c o r p o r a t e v e i l . ) The Supreme Court s a i d : " I t i s n e e d l e s s t o say t h a t i n t h e case o f an i n c o r p o r a t e d a s s o c i a t i o n , t h e c o r p o r a t i o n and i t s members a r e s e p a r a t e e n t i t i e s d i s t i n c t from each o t h e r under t h e law, and i t i s a l s o t r u e i n the case i n which t h e r e i s o n l y one member. However, the g r a n t of c o r p o r a t e e n t i t y i s a m a t t e r of l e g i s l a t i v e p o l i c y made by examining t h e v a l u e of s o c i a l l y e x i s t i n g a s s o c i a t i o n s . When i t i s c o n s i d e r e d t o be w o r t h w h i l e b r i n g i n g such a s s o c i a t i o n s i n t o e x i s t e n c e as s u b j e c t s of r i g h t s , t h e g r a n t i s e f f e c t e d based on l e g a l t e c h n i q u e s . T h e r e f o r e , where t h e c o r p o r a t e e n t i t y i s n o t h i n g but a s h e l l , o r i s abused t o c i r c u m v e n t t h e a p p l i c a t i o n of law, we s h o u l d say t h a t t h e award of the c o r p o r a t e e n t i t y s h o u l d not be p e r m i t t e d i n l i g h t of t h e fundamental purpose of t h e c o r p o r a t e e n t i t y , and t h e r e may be ca s e s i n which d i s r e g a r d of t h e c o r p o r a t e e n t i t y i s r e q u i r e d . Concerning t h i s p o i n t , t h e f o l l o w i n g s i t u a t i o n must be c o n s i d e r e d p a r t i c u l a r l y w i t h . r e s p e c t t o s t o c k c o r p o r a t i o n s . 141 As a stock c o r p o r a t i o n can be e a s i l y i n c o r p o r a t e d under the p r i n c i p l e t h a t i n c o r p o r a t i o n i s a r i g h t o n l y r e q u i r i n g completion of f o r m a l i t i e s , and even a s o - c a l l e d "one man company" i s p o s s i b l e , the s i t u a t i o n a r i s e s where the form of stock c o r p o r a t i o n i s a mere straw dummy, so t o speak; the company i s equal to the i n d i v i d u a l , and the i n d i v i d u a l i s equal t o the company; and the substance of the company i s p e r c e i v e d as a pure p e r s o n a l b u s i n e s s . In such a case, i t o f t e n becomes ambiguous f o r the other p a r t y e n t e r i n g i n t o a c o n t r a c t with a company, whether the t r a n s a c t i o n was done as a company or as an i n d i v i d u a l , and the p r o t e c t i o n of the other p a r t y i s necessary. Then, we acknowledge the f o l l o w i n g : namely, i n that case, where i t becomes necessary t o pursue an i n d i v i d u a l as i n substance e x i s t i n g behind the l e g a l form of a company, even i f the t r a n s a c t i o n was done under the name of a company, the other p a r t y can t r e a t the t r a n s a c t i o n as t h a t of the i n d i v i d u a l and ho l d him l i a b l e as i f there was no cor p o r a t e e n t i t y , by d i s r e g a r d i n g the cor p o r a t e e n t i t y of the company. A l s o , i n th a t case, even i f the act was done under the name of the i n d i v i d u a l , the other p a r t y can i n s t a n t l y t r e a t i t as t h a t of the company, without r e l y i n g on Commercial Code a r t . 504 [ i . e . the p r o v i s i o n s i m i l a r t o the d o c t r i n e of u n d i s c l o s e d p r i n c i p a l ] . T h i s i s because the other p a r t y ' s i n t e r e s t would be u n j u s t l y i n j u r e d by the i n d i v i d u a l ' s use of the co r p o r a t e form, i f i t i s not so c o n s i d e r e d . " Under t h i s p r o p o s i t i o n , the Supreme Court h e l d that inasmuch as K. was i n substance Y. Co., the agreement t o vacate the premises entered i n t o between H. and K. was b i n d i n g on Y. Co. (2) Development of the D o c t r i n e Undoubtedly t h i s d e c i s i o n opened a Pandora's box. I t - 142 brought a remarkable i n c r e a s e i n c a s e s u s i n g t h e d o c t r i n e , most of which were re n d e r e d by t h e i n f e r i o r c o u r t s t o impose c o r p o r a t e debts on the p r i n c i p a l s h a r e h o l d e r s o r r e l a t e d companies. The H o s h i h a r a d e c i s i o n s e t out two t e s t s : i . e . the " s h e l l " t e s t and t h e "abuse" t e s t . However, t h o s e t e s t s are q u i t e a b s t r a c t and t h e c u r r e n t s i t u a t i o n i s s t i l l f l u i d . The "abuse" t e s t i s o f t e n used when t h e r e i s a company which has f i n a n c i a l l y c o l l a p s e d . The c o n t r o l l e r s o f the company s u b s e q u e n t l y s e t up a new company t o dump th e b u s i n e s s of t h e o l d company i n i t - t h e a s s e t s , g o o d w i l l , and employees. The s h a r e h o l d e r s and o f f i c e r s of t h e o l d company, o f t e n r e l a t i v e s , become t h o s e o f t h e new company. The new company commences b u s i n e s s a c t i v i t i e s which a r e v i r t u a l l y t h e same as t h o s e o f the o l d company. The o l d company becomes empty w i t h o u t t a k i n g t h e f o r m a l p r o c e e d i n g s f o r l i q u i d a t i o n , o r b a n k r u p t c y . I f t h i s s c e n a r i o happens, t h e c o u r t s i n f e r t h e i n t e n t i o n of t h e c o n t r o l l e r s t o d e f r a u d t h e c r e d i t o r s of t h e o l d company, and h o l d t h e new company l i a b l e f o r the debt of t h e o l d company on the ground t h a t t h e c o r p o r a t e e n t i t y was abused t o escape the deb t s and t h e r e f o r e i t must be 22 d i s r e g a r d e d . A l t h o u g h t h e r e a re a n t i - f r a u d p r o v i s i o n s i n Japanese law, t o i n v o k e them i s o f t e n burdensome and i s not so 143 -e f f e c t i v e . The doctrine therefore gives creditors a powerful weapon to attack evasive schemes of debtors. As to the " s h e l l " test, i t i s d i f f i c u l t to extract a fixed p r i n c i p l e from the court cases. At any rate, the courts are l i b e r a l in applying the test to small one man companies. Experience indicates that the courts often consider the following factors: the company i s completely controlled and managed by the p r i n c i p a l shareholder who i s also an o f f i c e r ; a l l other shareholders and o f f i c e r s are nominees of the p r i n c i p a l ; the business of the p r i n c i p a l was converted to a corporate form for tax savings without changing the substance; the assets, account and business of the company are mingled with those of the p r i n c i p a l ; the corporate proceedings are neglected, e.g. dir e c t o r s ' meetings, and the audit of f i n a n c i a l statements. The courts use those factors to regard the company as a mere s h e l l which i s i n substance a personal business, and 23 hold the individual l i a b l e for the corporate debts. The misunderstanding of the other party or fraudulent intention of the p r i n c i p a l i s a plus factor, but not a sine qua non. The doctrine was used in situations which involved "thin c a p i t a l i z a t i o n " together with other factors of a " s h e l l " . In one case, the company had no assets from the outset, because the sole shareholder used the company to pay - 144 -24 off his personal debts. In another case, the sole shareholder used the company to acquire property and retained the property under h i s name while leaving the company l i a b l e 25 for the debts. In both cases the cre d i t o r s ' claims against the p r i n c i p a l s were allowed by both the " s h e l l " and "abuse" tests. There are some cases in which creditors t r y to rel y on the doctrine together with the provision concerning d i r e c t o r s ' l i a b i l i t y to a th i r d party mentioned before. Depending on the facts of each case, the courts allowed or dismissed one claim and/or the other. In one case the court held the directors l i a b l e to the t h i r d party for breach of duty of care, concurrently with holding the p r i n c i p a l shareholder l i a b l e by 2 6 disregarding the corporate e n t i t y . (3) Is the Doctrine Overused? Some commentators severely c r i t i c i z e the overuse of the doctrine, and strongly assert that an exhaustive analysis of the ordinary p r i n c i p l e s and provisions must be undertaken 27 before jumping to t h i s extraordinary doctrine. For example, in one case the in d i v i d u a l defendant (A. ) who was dealing with the p l a i n t i f f (B. ) incorporated a company - 145 but f a i l e d to n o t i f y B. t h a t the company would take over the bus i n e s s . L a t e r , B. n o t i c e d the e x i s t e n c e of the company from the company name p a i n t e d on i t s truc k and stamped on the cheques and promissory notes presented f o r payment. But B. thought A. was using the company simply f o r tax savings or some other purposes. The manner of the bu s i n e s s was the same as be f o r e the i n c o r p o r a t i o n . The company o f f i c e was A. 1 s re s i d e n c e , and i t s telephone was t h a t of A. He managed the business and the r e p r e s e n t a t i v e d i r e c t o r , A.'s wife, was a nominal d i r e c t o r . The co u r t d i s r e g a r d e d the c o r p o r a t e e n t i t y 28 by the " s h e l l " t e s t and h e l d A. l i a b l e t o B. However, as d i s c u s s e d above, i n Canada the c o u r t s t r e a t t h i s k i n d of s i t u a t i o n as i d e n t i f i c a t i o n of the c o n t r a c t i n g p a r t y . Indeed, t h e r e i s a Japanese court d e c i s i o n which h e l d the r e p r e s e n t a t i v e d i r e c t o r p e r s o n a l l y l i a b l e on the ground that he f a i l e d t o d i s c h a r g e the onus t o n o t i f y the other p a r t y t h a t he 29 was d e a l i n g with a company, without using the d o c t r i n e . F u r t h e r , Commercial Code a r t . 26(1) p r o v i d e s that the t r a n s f e r r e e of the business who subsequently uses the trade name of the t r a n s f e r o r w i l l be j o i n t l y l i a b l e f o r the debt which arose from the busi n e s s of the t r a n s f e r o r . Some of the abuse cases d i s c u s s e d above co u l d have been s e t t l e d by t h i s p r o v i s i o n . In f a c t , there are cases i n which the debtor's e v a s i v e scheme t o use a new company was s u c c e s s f u l l y a t t a c k e d by t h i s p r o v i s i o n . - 146 -While in Canada the courts r i g i d l y s t i c k to the p r i n c i p l e of the separate entity and the resolution of resulting problems depends on l e g i s l a t i v e reform, the Japanese courts e n t h u s i a s t i c a l l y use the doctrine established by the case law, in spite of alternative statutory provisions which could be r e l i e d on. FOOTNOTES (E. L i f t i n g the Corporate V e i l ) 1 In the tax law area the courts are receptive to the doctrine. There i s an extensive analysis in Dunford, "The Corporate V e i l i n Tax Law", 27 Can. Tax J. 282 (1979). Another area in which the doctrine i s often used i s the circumvention of contract. The leading English case i s Gi l f o r d Motor Co., Ltd. v. Home, [1933] Ch. 935. A former employee who had covenanted not to s o l i c i t the p l a i n t i f f ' s customers incorporated a company. Under his control the company undertook s o l i c i t i n g . The company was held to be a mere "cloak or sham" for enabling him to commit a breach of the covenant, and the injunction was issued against both him and the company. In Garbutt Business College Ltd. v. Henderson et a l . , [1939] 3 W.W.R. 257 (Alta. C.A.), the defendant, in breach of a covenant, commenced a competing business, and subsequently set up a company to continue the business. In holding both him and his company l i a b l e , the courts distinguished the cause of his l i a b i l i t y (breach of contract) from that of the company (tort of inducement of breach). - 147 -Now the courts appear not so concerned about the nature of the l i a b i l i t y of the company when they allow claims against i t for i t s owner's breach of a covenant r e s t r i c t i n g competition: Greening Industries Ltd. et a l . v. Penny  et a l . (1965), 53 D.L.R. C2d~) 643 (N.S.S.C. ) ; E.P. Chester Ltd. v. Mastorkis et a l . (1968), 70 D.L.R. (2d) 133 (N.S. CA. ) ; Betz Laboratories Ltd. v. Klyn et a l . (1969), 70 W.W.R. 304 (B.C.S.C), varied on other grounds, 70 W.W.R. 742 (B.C.C.A.). For other cases in which the corporate v e i l was l i f t e d to attack the circumvention of contract, see Saskatchewan Economic Development Corp. v. Pat terson-Boyd Manufacturing Corp. et a l . , [1981] 2 W.W.R. 40 (Sask. CA. ) (to avoid r e s t r i c t i o n s on shareholders' loans to the company, they set up a dummy company to make a loan) ; Big Bend Hotel Ltd. v. Security Mutual Casualty Company (1980), 19 B.C.L.R. 102 (B.C.S.C.) Ta hotel owner incorporated a company to purchase f i r e insurance while concealing his previous f i r e loss) . But see Metal Industries Association v. B u t t e r f i e l d Machinery Ltd. et a l . (1982), 132 D.L.R. (3d) 490 (B.C.C.A.) (transfer of employees from one company to another company under the same proprietorship was found not for circumvention of obligation imposed on the former by an employers' assocation). Further, the doctrine has been used in the case of breach of f i d u c i a r y duty of directors, o f f i c e r s , etc.: see Patton  et a l • v. Yukon Consolidated Gold Corporation et a l . , [1934] O.W.Nl 321 (C.A.); Fern Brand Waxes L t d . ~ Pearl  et a l . , [1972] 3 O.R. 829 (CA. ) (in both cases an o f f i c e r attempted to make a secret p r o f i t by arranging a transaction between h i s company and another company controlled by him). There i s a l i n e of cases i n which dir e c t o r s , o f f i c e r s or high-ranking management employees who diverted goodwill from th e i r employers by establishing r i v a l companies were held i n breach of fid u c i a r y duty: Canadian Aero Service  Ltd. v. O'Malley et a l . , [1974] S.C.R. 592; The J i f f y  People Sales (1966) LtdT" et a l . v. Eliason et a l . (1975), 58 D.L.R. (3d) 439 (B.C.S .C. ) ; Bendix Home Systems Ltd. v. Clayton et a l . (1978), 33 C. PTR. T2dl 230 (B.C.S.C. ) ; PCF Systems Ltd. et a l . v. Gellman et a l . (1978), 5 B.L.R. 98 (Ont. H.C); W.J. Ch r i s t i e & Co., Ltd. v. Greer  et a l . (1981), 121 D.L.R. (3d) 472 (Man. CA. ) . - 148 -Among these cases, i n the Canadian Aero, PCF Systems and W.J. C h r i s t i e cases the courts held both the i n d i v i d u a l defendants and t h e i r new companies l i a b l e , without s c r u t i n i z i n g the nature of the l i a b i l i t y of the l a t t e r . But i n the Bendix Home case, the court refused the claim against the company noting that, inter a l i a , many other investors joined in the formation of the company, and the ind i v i d u a l defendants did not control the company. For other areas of law where the l i f t i n g the corporate v e i l becomes an issue, see Gower, Princip l e s of Modern Company Law (4th Ed.) (1979), 112 - 138; Feltham, " L i f t i n g the Corporate V e i l " , Special Lecures of the Law Society of  Upper Canada (1968), 305. 2 In Japan, the number of court decisions i n which the doctrine i s used i n other areas i s r e l a t i v e l y small. For example, there are only three cases which upheld the doctrine with respect to circumvention of contractual obligations: K.K. Kagami Chuo Uoichiba v. Tazaki et a l . , Kumamoto D.C. Yatsushiro Branch, January 13, 1960, 11 Kaminshu 4 (obiter); Yamamoto v. Goshi Gaisha Yakuruto Chita Eigyosho; Japan v. Yamamoto et a l . , Nagoya H.C. February 10, 1972, 25 Kominshu 48; Unknown v. Unknown, Omura Sm.C. September 25, 1972 694 Hanrei Jiho 109. In l i g h t of the purpose of t h i s study, I omit an explanation of those other cases. 3 [1897] A.C. 22 (H.L.). 4 Clarkson Co. Ltd. v. Zhelka (1967), 64 D.L.R. (2d) 457 (Ont. H.C). In t h i s case, the bankrupt person manipulated his companies by transferring assets and money among them in a manner fraudulent to the creditors of the companies. However, the court held that i t was not fraudulent to the bankrupt's personal c r e d i t o r s . Of course, transfer of assets from the insolvent to h i s company can be fraudulent conveyance under the ordinary theory: Faulhaver v. Ulseth et a l . , [1976] 4 W.W.R. 48 (Alta. S . C ) . 5 W. Rodgerson's Insulators Ltd. v. Bezanson (1979), 39 N.S.R. (2d) 81 (A.D.). 6 Hampstead Carpets Ltd. v. Ivanovski et a l . (1981), 12 Sask., R. 173 (Q.B.). - 149 -7 Blackwood Hodge A t l a n t i c Ltd. v. Connolly (1977), 25 N.S.R. (2d) 621 (T.D.); McLellan v. Geldert; Bodechon v. Geldert (1982), 38 N.B.R. (2d) 3T0 (Q.B.); W.R. Benjamin Products  Ltd. v. Saulnier (1982), 40 N.B.R. (2d) 537 (Q.B.). 8 Double D. Boiler Repairs Ltd. v. Granville Assoc. Ltd. et a l . (1979), 37 N.S.R. (2d) 534 (T.D.). 9 McNulty Cartage Ltd. v. McManus (1980), 29 N.B.R. (2d) 332 (Q.B.). 10 [1976] W.W.D. 119 (Man. Q.B.). 11 E.g. Waldron v. Hogan, [1934] 3 D.L.R. 800 (B.C. Co. Ct.). 12 [1972] 3 O.R. 199 (C.A.). 13 (1978), 5 B.C.L.R. 231 (Co. Ct.). 14 BCCA s. 3 l 4 ( i ) , old OBCA s. 231(2), new OBCA s. 229(2), CBCA s. 215(3)(4). 15 R.S.C. 1970, c. B-3. 16 (1982) 43 C.B.R. (N.S.) 300 (Ont. S . C ) . 17 (1982) 40 C.B.R. (N.S.) 84 (Ont. S . C ) . 18 Bankruptcy Act ss. 3, 4(2), 78; for a more detailed discussion, see Honsberger, "Insolvency and the Corporate V e i l i n Canada", 15 C.B.R. (N.S.) 89 (1952); Houlden et a l . , Bankruptcy Law of Canada, current service (1979), Part 4, 125. 19 (1979), 36 N.S.R. (2d) 207 (C.A.). 20 (1982), 43 C.B.R. (N.S.) 282 (N.S.S.C). 21 S.C. February 27, 1969, 23 Minshu 511. 22 Goshi Gaisha Futaba Denki Shokai v. Yugen Gaisha Muto Denki  Shokai, Fukuoka H.C. October 16, 1968, 19 Kaminshu 607; K.K. Hotel New Japan v. Nihon Chikudo Kaihatsu K.K., S.C. October 26, 1973, 27 Minshu 1240; Nihon Shizen Kagaku K.K. v. K.K. Makomo, Tokyo H.C. July 29, 1974, 755 Hanrei Jiho 103; Yugen Gaisha Marujo v. Atene Kasei K.K. et a l . , Tokyo D.C. August 8, 1975, 799 Hanrei Jiho 90; Tatsuei Kensetsu  K.K. v. Wako Sangyo K.K., Matue D.C. September 22, 1975, 26 - 150 -K a m i n s h u 797; H a n a b u s a v. Ueda Y o t o n K.K., O s a k a H.C. November 20, 1979, 960 H a n r e i J i h o 5 2 ; Hasegawa G a r a s u K.K. v. K.K. F u j i K o g e i e t a l . , T o k y o D.C. F e b r u a r y 20, 1980, 966 H a n r e i J i h o 112. 23 G o t o v. T s u c h i d a e t a l . ; D o j i m a Kanko K.K. v. G o t o , O s a k a D.C. May 14, 1969, 20 K a m i n s h u 354; Yugen G a i s h a S a n k o  S e i n i k u t e n v. Y a m a s h i t a , K a g o s h i m a D.C. J u n e 17, 1 9 7 1 , 22 K a m i n s h u 702; K a t s u y a , a l i a s N a r a y o s h i v. Masame, O s a k a D.C. A u g u s t 21, 1973, 398 K i n y u S h o j i Homu 9; K.K. S h o e i  D e n k i v. Nomura e t a l . , O s a k a D.C. F e b r u a r y 13, 1974, 735 H a n r e i J i h o 99; Nakamura v. K.K. F u k u i r i S h o s h a e t a l . , T o k y o D.C. J u l y 24, 1975, 810 H a n r e i J i h o 6 0 ; K.K. T o k e n v. S h o k e n Sangyo K.K. e t a l . , T o k y o D.C. May 27, 1976, 345 H a n r e i T i m e s 2 9 0 ; I n o u e v. S h i r o t a , T o k y o H.C. M a r c h 3, 1978, 890 H a n r e i J i h o 1 1 2 ; U c h i y a m a v . Y a s u d a , T o y k o H.C. A u g u s t 9, 1978, 904 H a n r e i J i h o 65. 24 E a s t e r n Kogyo K.K. v. K a n e k o , T o k y o H.C. J a n u a r y 28, 1976, 815 H a n r e i J i h o 8 3 . 25 U r a t a v. H i d a k a , a l i a s Y a m a z a k i , F u k u o k a H.C. J u l y 22, 1974, 760 H a n r e i J i h o 95. 26 K.K. Chohoku S h o k a i v. K o y a n a g i e t a l . , T o k y o H.C. A p r i l 28, 1977, 357 H a n r e i T i m e s 278. 27 E.g. E g a s h i r a , K a i s h a H o j i n k a k u H i n i n No H o r i ( D o c t r i n e o f D i s r e g a r d o f C o r p o r a t e E n t i t y ) ( 1 9 8 0 ) . 28 Yugen G a i s h a Nakamura Komuten v. I c h i g e , M i t o D.C. J u l y 7, 1978, 918 H a n r e i J i h o 109. 29 H o s h i n o v. N o b u y u k i N a g a h a r a , a l i a s O r i o n - Z a , a l i a s S h i n - O r i o n - Z a , a l i a s A r u s a r o - O r i o n , a l i a s N a r i y u k i  N a g a h a r a , O s a k a D.C. J u n e 13, 1960, 236 H a n r e i J i h o 30. - 151 Conclusion In conclusion, I w i l l quickly examine how the general propositions discussed in Chapter II are refl e c t e d i n the foregoing f i v e s p e c i f i c topics in the f i e l d of company law which have been examined here in d e t a i l . (1) The Ultra Vires Doctrine: This i s an extreme example of the contrast between law reform by l e g i s l a t i o n in Canada and by case law i n Japan. In Canada, although courts did gradually relaxed the standard of interpretation of object clauses, the reform of the common lav; p r i n c i p l e of u l t r a vires was achieved by new company l e g i s l a t i o n . In Japan, the express provision in the C i v i l Code which co d i f i e d the doctrine was gradually rendered meaningless by the changing case law. However, t h i s topic also shows the problems of the Japanese approach. F i r s t l y , the delay i n the l e g i s l a t i v e reform i s evident. The u l t r a vires provision in the C i v i l Code s t i l l remains the same, and the extensive 1981 amendments to the company laws did not touch i t . In comparison, i n Canada the old OBCA, which had reformed the common law po s i t i o n on t h i s issue, was further reformed by the new OBCA. Secondly, the Japanese solution leaves a l o t of ambiguity in the law. Although courts talk about the standard - 152 -of i n t e r p r e t a t i o n of o b j e c t s c l a u s e s i n a b s t r a c t terms, i t s concrete a p p l i c a t i o n i s not so c l e a r . No attempt has been made to avoid u n c e r t a i n t y by s k i l l f u l d r a f t i n g of o b j e c t c l a u s e s . T h i r d l y , there i s a la c k of any e f f o r t t o c r e a t e e f f e c t i v e remedy p r o v i s i o n s . The Commercial Code p r o v i s i o n designed t o c h a l l e n g e u l t r a v i r e s a c t s has never been invoked. No e f f o r t has been made to make the p r o v i s i o n more a c c e s s i b l e and u s e f u l f o r aggrieved p a r t i e s . This c o n t r a s t s with the p o s i t i o n i n Canada. These f a c t o r s h i g h l i g h t the very d i f f e r e n t responses to a s i m i l a r problem which have emerged i n Canada and Japan. (2) P r e - I n c o r p o r a t i o n T r a n s a c t i o n s : In Canada, the s t r i c t common law p r i n c i p l e s concerning p r e - i n c o r p o r a t i o n t r a n s a c t i o n s u l t i m a t e l y were reformed by l e g i s l a t i o n . In Japan, s t a t u t o r y p r o v i s i o n s imposing s t r i c t c o n t r o l s on p r e - i n c o r p o r a t i o n t r a n s a c t i o n s f o r c e d the c o u r t s t o take a s t r i c t p o s i t i o n . However, the c o u r t s e x e r c i s e d some degree of f l e x i b i l i t y i n o f f e r i n g remedies t o p a r t i e s d e a l i n g with promoters. This example a l s o shows the problems of the Japanese approach. F i r s t l y , the d e l a y i n l e g i s l a t i v e reform i s again seen here. The inconvenience t o commercial p a r t i e s comes from the f a c t t h a t the c o n t r o l s on p r e - i n c o r p o r a t i o n t r a n s a c t i o n s i n the Commercial Code n e g l e c t the s e c u r i t y of t r a n s a c t i o n s . But no l e g i s l a t i v e s o l u t i o n has been forthcoming - 153 -t o improve t h e s i t u a t i o n . S e c o n d l y , t h e r e i s a m b i g u i t y i n t h e Japanese s o l u t i o n . The remedies of u n j u s t enrichment o r l i a b i l i t y of an u n a u t h o r i z e d agent a r e themselves o f u n c e r t a i n n a t u r e . I t i s u n c l e a r whether the s u c c e s s i o n t h e o r y adopted by some i n f e r i o r c o u r t s w i l l be a c c e p t e d by t h e Supreme C o u r t . T h i r d l y , i n Canada, t h e o l d and new OBCA and t h e CBCA g i v e t h e c o u r t a d i s c r e t i o n a r y power t o a p p o r t i o n l i a b i l i t y between a promoter and t h e new company. There i s a l i t t l e p o s s i b i l i t y t h a t such a r a d i c a l remedy w i l l be c r e a t e d i n t h e Japanese company l e g i s l a t i o n and i t i s u n l i k e l y t h a t a c o u r t c o u l d r e a c h t h i s r e s u l t by i t s e l f . A c c o r d i n g l y , t h e e x t e n t of re f o r m i n Japan tends t o be more l i m i t e d t h a n i n Canada. (3) A D i r e c t o r ' s T r a n s a c t i o n w i t h H i s Company: Here, a g a i n , the common law p r i n c i p l e s were r e p l a c e d by d e t a i l e d s t a t u t o r y p r o v i s i o n s i n Canada. In c o n t r a s t , t h e e q u i v a l e n t p r o v i s i o n s i n t h e Commercial Code i n Japan a re r a t h e r s i m p l e , and case law has c r e a t e d the substa n c e o f t h e law. As t o t h e scope o f t r a n s a c t i o n s which r e q u i r e t h e board of d i r e c t o r s ' a p p r o v a l , t h e c o u r t s c r e a t e d e x c e p t i o n s on t h e one hand, and expanded t h e scope of t r a n s a c t o n s on t h e o t h e r hand. F u r t h e r , c o u r t s have c r e a t e d a new r u l e c o n c e r n i n g t h e v a l i d i t y of t r a n s a c t i o n s which l a c k t h e r e q u i s i t e a p p r o v a l . Changes i n p r e c e d e n t s on t h e s e i s s u e s a r e an i m p o r t a n t f a c t o r - 154 -i n the development of law. However, the problems i n the Japanese approach are also clear. L e g i s l a t i v e reform i s extremely slow. The 1981 amendment simply c o d i f i e d the case law concerning the scope of regulated transactions, and added the ex post facto reporting requirement. With respect to the v a l i d i t y of transactions which lack the di r e c t o r s ' approval, l e g i s l a t o r s l e f t the solution to case law. With respect to the application of the l i a b i l i t y provisions, there i s a confusion among commentators, and the lack of case law leaves the issue in an ambiguous state. Legislators did not make the si t u a t i o n clear either. The lack of case law can be attributed to the d i f f i c u l t i e s i n bringing a derivative action against d i r e c t o r s . So far, no l e g i s l a t i v e reform has been made to reduce such d i f f i c u l t i e s . (4) The Director's Duty of Care, Diligence and S k i l l ; In Canada, l e g i s l a t i v e reform aimed at upgrading the common law standard of the director's duty of care, diligence and s k i l l has been unsuccessful. Instead, s p e c i f i c l i a b i l i t y provisions to condemn the improper conduct of directors have been extended i n the new company l e g i s l a t i o n and the new bankruptcy l e g i s l a t i o n . In Japan, the development of law in this area has been achieved by case law. While the statutory provision concerning the standard of the duty of care remains - 155 -a b s t r a c t , c o u r t s have b u i l t up a s t r i c t standard. Courts have used techniques such as the reading of the duty t o monitor the exe c u t i o n of c o r p o r a t e a f f a i r s i n t o the duty of care, and the a p p l i c a t i o n of the p r o v i s i o n concerning a f a l s e r e g i s t r a t i o n by analogy. However, problems e x i s t i n t h i s area, too. D i r e c t o r s who are h e l d l i a b l e f o r the breach of duty of care are normally those of s m a l l companies. C o n t r o l s on t h e i r conduct i n the cu r r e n t company l e g i s l a t i o n are not s u f f i c i e n t , and l e g i s l a t i v e reform i n t h i s regard i s delayed. There i s a c o n f u s i o n among i n f e r i o r c o u r t s with r e s p e c t t o whether a s u b j e c t i v e , lower standard of c a r e should be used f o r nominee d i r e c t o r s . The Supreme Court d i d not make t h i s c l e a r , although an a p p r o p r i a t e case d i d come bef o r e i t . L e g i s l a t o r s have not sol v e d the ambiguity e i t h e r , as they have chosen t o leave the matter t o case law. So we see a l a c k of l e g i s l a t i v e w i l l t o act i n a very s i g n i f i c a n t area of law i n Japan, u n l i k e i n Canada. (5) L i f t i n g the Corporate V e i l : In Canada, the i m p o s i t i o n of p e r s o n a l l i a b i l i t y on c o n t r o l l e r s of a company depends on the c r e a t i o n of s p e c i f i c l i a b i l i t y p r o v i s i o n s , as the p r i n c i p l e of the Salomon case i s s t i l l dominating the Canadian Case law on t h i s i s s u e . In Japan, c o u r t s e n t h u s i a s t i c a l l y use the d o c t r i n e of d i s r e g a r d of the c o r p o r a t e e n t i t y which was imported from the U.S. f o r t h a t - 156 pu r p o s e . T h i s example a l s o shows problems of t h e Japanese approach t o law re f o r m . The t y p i c a l company wh i c h becomes t h e t a r g e t o f the d o c t r i n e i s a s m a l l , c l o s e l y - h e l d company or a s o - c a l l e d one man company. A number of such companies a re i n c o r p o r a t e d as a s t o c k company. But t h e y o f t e n n e g l e c t t h e f o r m a l i t i e s r e q u i r e d by law, and cause many problems. There i s a n o t a b l e d e l a y i n the r e f o r m o f company law i n Japan t o c o n t r o l t h e s e s m a l l companies. S i m i l a r l y , t h e r e i s a d e l a y i n s o l v i n g many problems i n t h e e x i s t i n g laws c o n c e r n i n g remedies of c r e d i t o r s o f i n s o l v e n t companies. Such d e l a y l i e s b e h i n d the f r e q u e n t use of t h i s e x t r a o r d i n a r y d o c t r i n e . F u r t h e r , t h e c r i t e r i a o f t h e d o c t r i n e a re not so c l e a r . W h i l e c o u r t s r e l y on t h e two b r o a d c r i t e r i a s e t out by t h e Supreme C o u r t , t h e y do not attempt t o make t h e c r i t e r i a more s p e c i f i c . The f o r e g o i n g f i v e t o p i c s amply demonstrate t h e c h a r a c t e r i s t i c s of the Japanese case law. Through c r e a t i v e i n t e r p r e t a t i v e t e c h n i q u e s and changes i n p r e c e d e n t s , t h e c o u r t s c r e a t e the s u b s t a n t i a l p o r t i o n s of law, and even r e f o r m the s t a t u t e law. However, they a l s o show problems of t h e Japanese approach. The most n o t a b l e one i s a l a c k o f law r e f o r m , as compared w i t h t h e l e g i s l a t i v e r e f o r m of Canadian company law. For example, a l a c k of adequate c o n t r o l on s m a l l s t o c k companies has c r e a t e d a monstrous s i t u a t i o n . Now t h a t t h e 1981 amendments have been f i n i s h e d , t h i s i s s u e has f i n a l l y become - 157 -t h e agenda o f t h e n e x t company law r e v i s i o n . In c o n t r a s t , i n Canada t h e r e are independent l e g i s l a t i v e commissions which check up on a l l r e l e v a n t i s s u e s and propose r a d i c a l r e f o r m o f the l a w . 1 One j u r i s d i c t i o n can l e a r n from t h e e x p e r i m e n t s i n the o t h e r s . As mentioned i n Chapter I I , t h e r e a r e v a r i o u s d i f f i c u l t i e s i n l e g i s l a t i v e r e f o r m i n Japan. However, i t s h o u l d be noted t h a t t h e Japanese company l e g i s l a t i o n has been i n f a c t amended p a r t i a l l y from time t o t i m e , as summarized i n Chapter I I . There even have been o c c a s i o n s i n which i n t o l e r a b l e r e s u l t s of c o u r t d e c i s i o n s were o v e r t u r n e d by l e g i s l a t i v e r e f o r m . T h e r e f o r e , as a m a t t e r o f t h e o r y , i t c o u l d be p o s s i b l e t o d e s i g n e x h a u s t i v e s t a t u t o r y p r o v i s i o n s t o r e p l a c e case law p r i n c i p l e s , d e s p i t e t h e d i f f i c u l t i e s I have e x p l o r e d . N e v e r t h e l e s s , many o t h e r i m p o r t a n t o r complex l e g a l i s s u e s a r e s t i l l l e f t t o case law, not j u s t t h e f o r e g o i n g f i v e t o p i c s . I t seems t o r e f l e c t not o n l y a r e c o g n i t i o n of t h e r o l e of case law i n t h e development of law, but a l s o an i n c l i n a t i o n among Japanese p e o p l e towards a m b i g u i t y i n t h e law, o r a r e l a t i v e l a c k of w i l l i n g n e s s t o make the e x i s t i n g law more c e r t a i n . I would r e i t e r a t e t h a t t h i s s t u d y i s by no means an e x h a u s t i v e a n a l y s i s o f t h e Japanese law. The f i v e t o p i c s i n o n l y one a r e a of law a r e o b v i o u s l y i n s u f f i c i e n t f o r t h a t purpose. There a r e many o t h e r l e g a l i s s u e s i n which case law - 158 -and statute law make for complex rel a t i o n s . Also, there are other factors which should be c a r e f u l l y studied, e.g. the role of scholarly arguments i n the development of case law on each legal issue. I hope th i s study w i l l be taken as an introduction to the r e a l i t y of case law in Japan and w i l l f a c i l i t a t e further studies by foreigners. FOOTNOTE (Conclusion) 1. The process of the recent l e g i s l a t i v e reform of Canadian company law and the work of law reform commissions are well summarized in Iacobucci et a l , Canadian Business  Corporations (1977), 1 - 5 . - 159 -BIBLIOGRAPHY As the intended readers of t h i s paper are common lawyers and other foreigners, only English language materials are l i s t e d . I. Japanese Law - General 1. Books Noda, Y., Introduction to Japanese Law, Univ. of Tokyo Press, Tokyo, 1976. J. Sawada, T., Subsequent Conduct and Supervening Events, i b i d . , 1968. Tanaka, H. ed., The Japanese Legal System, i b i d . , 1976. 2. A r t i c l e s Kato, I., "Logic and Balancing of Interests in Legal Interpretation", 2 Law i n Japan; An Annual 80 (1968). Kawashima, T., "The Concept of J u d i c i a l Precedent in Japanese Law", Ius Privatum Gentium F e s t s c h r i f t Fur Max  Rheinshtein (1969), 85. . "Legal Consciousness of Contract i n Japan", 7 Law in Japan; An Annual 1 (1974). Kitagawa, Z., "Theory Reception - One Aspect of the Development of Japanese C i v i l Law Science", 4 i b i d . 1 (1970). Noda, Y. , "Comparative Jurisprudence i n Japan: Its Past and Present", 8 i b i d . 1 (1975), 9 i b i d . 1 (1976). Takayanagi, K. , "A Century of Innovation: The Development of Japanese Law, 1868-1961", von Mehren ed. Law i n Japan (1963), 5. Tanaka, H. and Takeuchi, A., "The Role of Private Persons in the Enforcement of Law: A Coparative Study of Japanese and American Law", 7 Law in Japan: An Annual 34 (1974). - 160 -II. Japanese Company Law 1. Books Tatsuta, M. and Henderson, D.F., Japanese Business  Corporation Law, Mimeographed, Univ. of Washington Law Library, 1967. 2. A r t i c l e s Matsueda, M. and Ihara, K., "Business Organization", Kitagawa ed. Doing Business in Japan (1982), Vol. 4, Part 7. Matsumoto, K., "Management Responsibility to Minority Shareholders i n Japan: Derivative Suit in West-East Melting Pot", 18 New York Law Forum 377 (1972). Motoki, S. et a l . , "Explanation of the Amended Stock Corporation Law", 2 The Japan Bus. L. J . 309 (1981). Salwin, L., "The New Commercial Code of Japan: Symbol of Gradual Progress Toward Democratic Goals", 50 Georgetown  L.J. 478 (1962) . Shibuya, M., "Fiduciary Duty of Directors - Fairness in Regulation of Corporate Dealing with Directors", 5 Law in  Japan: An Annual 115 (1972). Smith, M.D.H., "The 1974 Revision of the Commercial Code and Related L e g i s l a t i o n " , 7 i b i d . 113 (1974). . "How W i l l Commercial Code Revisions Affect Foreign Investors?", East Asian Executive Reports 2 (May, 1982). Takuchi, A., "How Should We Abolish the Ultra Vires Doctrine in Corporation Law?", 2 Law in Japan: An Annual 140 (1068). Toriumi, T., Directors' Duty of Care, Diligence and S k i l l :  A Comparative Study of Japanese and Csnadian Law, Unpublished thesis submitted to U.B.C. Faculty of Law (1983). Yamaguchi, K., "Lgal Postiion of Managing Directors in Japanese Company Law - H i s t o r i c a l Perspective", 26 Osaka  Univ. L.R. 9 1979). Yazawa, M., "The Legal structure for Corporate Enterprise: Shareholder-Management Relations under Japanese Law", von Mehren ed. Law in Japan (1963), 547. - 161 -III. Canadian Company Law 1. Books Beck, S.M. et a l . , Business Associations Casebook, Richard De Boo Ltd., Toronto, 1979. Iacobucci, F. et a l . , Canadian Business Corporations, Canada Law Book Ltd., Agincourt, 197 7. Palmer, E.E. et a l . , Canadian Company Law - Cases, Notes  and Materials (2nd Edition), Butterworths & Co. (Canada) Ltd., 1978. 2. Ar t i c 1 e s Feltham, I.R., " L i f t i n g the Corporate V e i l " , Special  Lectures of the Law Society of Upper Canada (1968), 305. Getz, L. , "Pre-incorporation Contracts: Some Proposals", U.B.C.L. Rev. - Cahiers de Droit 381 (1976). "Ultra Vires and Some Related Problems", 3 U.B.C.L. Rev. 30 (1968). Honsberger, J.D., "Insolvency and the Corporate V e i l in Canada", 15 C.B.R. (N.S.) 89 (1952). Iacobucci, F., "The Business Corporations Act, 1970: Creation and Financing of a Corporation", 21 U. T. L. J. 416 (1971) . Lewtas, J.L., "Directors', O f f i c e r s ' and Insiders' L i a b i l i t y " , Special Lectures of the Law Society of Upper  Canada (1972), 183. Marantz, R.G., "Current Trends in Canadian Bankruptcy Law", Special Lectures of the Law Society of Upper Canada (1982), 659. Mockler, E.J., "The Doctrine of U l t r a Vires in Letters Patent Companies", Ziegel ed. 1 Studies i n Canadian  Company Law (1967), 231. Palmer, E.E., "Directors' Powers and Duties", i b i d . , 365. Slutsky, B.V., "Ultra Vires - The B r i t i s h Columbia Solution", 8 U.B.C.L. Rev. 309 (1973). Ziegel, J.S., "The New Look i n Canadian Corporation Laws", Ziegel ed. 2 Studies in Canadian Company Law (1973), 1. 

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