In my previous column, I discussed the details of how to proceed with the qualified acceptance process. In this column I will explain the liquidation process, which is at the heart of the qualified acceptance process.

Liquidation methods in the qualified acceptance process

Article 932 of the Civil Code says that assets must be liquidated in the qualified acceptance process by “putting that property to auction”. As this liquidation is limited to the value of the inherited assets that are to be used to meet the repayment obligations in the qualified acceptance process, from the viewpoint of the heirs, there is a risk that the value of the estate to be distributed to them will decrease if the assets are not liquidated for a fair value; therefore, “auction” is required as a process that does not introduce an element of arbitrariness to the liquidation. Any of the estate’s assets may be put to auction, regardless of their type.

Sale by private contract

Perceptive readers may be thinking that “the auction process itself is troublesome and is bound to end in a sale for less than market value. So, wouldn’t it be better to find someone willing to purchase the asset via private contract and sell it to them?”

Such a thought is correct. As the auction is conducted by the court, it is extremely complex and normally results in a sale for less than market value. Therefore, if the heirs can find someone willing to purchase via private sale, they can avoid the difficult auction process and obtain a higher value, which is also better for the estate’s creditors.

However, there are no provisions in the Civil Code that permit liquidation via private sale. The only two liquidation processes permitted by the Civil Code are auction and the exercise of a preferential purchase right, which is described later. Under the current law, if an asset is sold privately rather than by auction or exercise of a preferential purchase right, the heir will be considered to have given unconditional acceptance due to their “disposition of the inherited property in whole or in part” (Civil Code Art. 921), which at the very least means there is a risk that the scope of the heirs’ liability will no longer be limited to the estate’s assets, but may increase to include the heirs’ own property. With this, the greatest merit of qualified acceptance, namely “accepting inheritance while reserving to perform the obligations or testamentary gifts of the decedent only within the extent of the property obtained by inheritance” will be lost. When this risk is considered, sale by private contract should be avoided during the qualified acceptance process.

What is a preferential purchase right?

Traditionally, auction was the only liquidation method permitted in the qualified acceptance process. But if all of the estate’s assets are put to auction, there is a risk that the heirs will not be certain of inheriting particular assets, for example items they have a certain affinity for, such as their parents’ home, or business assets which are essential to the heirs continuing to operate a family business. Here, the proviso clause in Article 932 of the Civil Code permits an exception to auction where an heir can acquire an asset from the estate for a price equal to or greater than the valuation of the asset as assessed by an appraiser appointed by the Family Court. This right exercised by an heir is called a “preferential purchase right”. An heir who exercises a preferential purchase right can acquire the relevant asset by paying to the estate (the estate’s management account) an amount equal to the valuation by the Family Court-appointed assessor.

Sale by private contract using the preferential purchase right

Earlier I said that sale by private contract should be avoided during the qualified acceptance process. However, in practice, if the preferential purchase right is used then a sale by private contract is substantially possible. In other words, if a private buyer can be found, an heir can acquire the rights to the asset by exercising the preferential purchase right then sell the asset to the private buyer. A transaction from the estate to a private buyer carries the risk of unconditional acceptance, but if there is an intermediate transaction of an heir exercising the preferential purchase right, then the asset is being sold after the heir has acquired full rights to the asset, so it does not carry the risk of unconditional acceptance.

Of course, in the case of real estate, extra expenses such as registration fees will be incurred, but a private sale utilizing the preferential purchase right is the safe way of avoiding the risk of unconditional acceptance under the current law.

In this way, the liquidation of the assets in the qualified acceptance process is extremely rigid and requires either a court-conducted auction or the complicated procedure of appointing an assessor, registration processes and payment of taxes that accompanies the exercise of the preferential purchase right. The risk of being deemed an unconditional acceptance also exists if there is one false step, so cautious handling is required.

(Translated from the original Japanese)