## Facts

- A recycled-tire manufacturing company faced serious financial distress due to intensified market competition.
- A director with authority to represent the company sought to keep the business operating long enough to attempt a turnaround, including plans to export recycled tires to South Korea and the Philippines.
- To make the company appear financially sound and to obtain time and continued credit, the director manipulated corporate accounting and maintained financial reporting that portrayed the company as healthier than it was.
- The company invested large sums in building a new factory, funded mainly by bank borrowing.
- By the time the factory was completed and began operating, economic conditions had shifted and exporting became more difficult.
- Banks declined to extend further credit.
- The director then pursued and obtained high-interest loans to keep operations going.
- Other directors objected to the high-interest borrowing strategy, but the director continued both the borrowing and the accounting manipulation, even though the company had been losing money for several years.
- The company ultimately collapsed and entered bankruptcy.
- A supplier that had provided rubber and light metals to the company remained unpaid and sued the director personally for the amount owed by the company.
- The district court entered judgment for the supplier, and the director appealed to the Tokyo High Court.

## Issues

1. May a corporate director with representative authority be held personally liable to a trade supplier for the supplier’s unpaid invoices when the company later enters bankruptcy?
2. Does manipulating corporate accounting to make an unprofitable company appear financially sound, while continuing to obtain goods on credit and obtain financing, constitute tortious conduct toward a supplier?
3. What connection must be shown between the director’s misleading conduct and the supplier’s loss (nonpayment after bankruptcy) to support an award of damages against the director?

## Decision

- The Tokyo High Court addressed whether a representative director’s accounting manipulation and continued course of obtaining credit while the company was failing could support personal liability to a specific supplier outside the bankruptcy distribution.
- The court treated deceptive financial reporting intended to present the company as viable—paired with continued transactions undertaken on that false appearance—as conduct that can ground direct tort liability to an unpaid supplier, rather than being treated as mere poor management.
- The court evaluated liability in terms of wrongful conduct by the director and whether the supplier’s loss could be tied to that conduct, instead of treating the debt as automatically chargeable to the director simply because the company failed.

## Legal Principles

- A corporation is ordinarily the sole obligor on its trade debts; bankruptcy and limited liability generally channel creditor recovery to claims against the corporate estate.
- A director may nevertheless be personally liable to a third party when the director, acting in an individual capacity, commits a tort (including misrepresentation or deceptive concealment of material financial facts) that foreseeably causes loss to that third party.
- Where a director creates or maintains a false appearance of solvency through accounting manipulation to induce continued dealing, the resulting extension of trade credit may be treated as harm caused by the director’s own wrongful acts rather than as a simple consequence of business failure.
- Personal tort liability requires a showing that the supplier’s loss is connected to the director’s misconduct (including that the supplier continued supplying or extended credit in reliance on, or in a manner foreseeably influenced by, the misleading presentation), not merely that the company later became unable to pay.

## Conclusion

This case concerns a representative director of a recycled-tire manufacturer who manipulated accounting to make a long-unprofitable company appear sound while it continued borrowing, investing, and buying from suppliers until bankruptcy; the Tokyo High Court analyzed whether that deceptive conduct, as distinct from ordinary mismanagement, could support the director’s personal tort liability to an unpaid supplier upon an adequate showing of connection between the misconduct and the supplier’s loss.


Tokyo High Court, 29 March 1983, 29 March 1983, 1079 Hanrei Jiho 92 (1983)