The Japanese way of debt: Tale of gangsters, underwear and cooked books

IT WAS an ordinary bankruptcy for Japan: 27bn yen ( pounds 156m) in debts, secret accounts showing the book-keeping to be false, yakuza gangsters demanding their money back and a trail of investments in Canadian property, artworks and women's underwear.

In short, Ipec (International Publishing and Education Corporation) was a 'bubble' company - a business which over-expanded during the easy credit of the late 1980s and came to grief in the real world of the 1990s. And yet it was an interesting bankruptcy - because of the level of deception practised on the shareholders and creditors by the head of the firm, Yasushi Ogawa, and because it was a listed company.

Bankruptcies are increasing in Japan - up 32 per cent last year. Some 14,167 companies went broke in 1992 as the economy slowed and banks lost their traditional reluctance to blow the whistle and call in the receivers. But when they called in their debts with Ipec, they discovered a spectacularly rotten company that had actually been in the red for six years, was involved in shady deals and, despite the reporting requirements for a listed company, was being run on an ad hoc basis by Mr Ogawa on his own.

Ipec was set up in 1983 as a publisher of educational materials. Its founder, Mr Ogawa, was a flamboyant figure who had graduated from a good university in Tokyo and had many friends in the media, business and politics. At the party to celebrate the founding of Ipec were many of Tokyo's high-flyers, including the future prime minister, Toshiki Kaifu.

Mr Ogawa had been head of the education division of Time-Life and used what he learned to establish Ipec. Apart from publishing textbooks and teaching aids, he set up English-language schools. This side of his business was run well and up to the day of his bankruptcy, the education services core of Ipec was profitable. Like so many bubble fatalities, it was the extravagant sidelines that sank Mr Ogawa.

In the 1980s, more Japanese travelled overseas and the demand for English-language courses soared, since the standard of English taught at schools is so low. Ipec did well and prepared for a flotation on Tokyo's OTC (over the counter) exchange, which was completed in 1990. But beneath the deception of doctored books, things started to go wrong.

Mr Ogawa had diversified - into art dealing, lingerie sales by mail order and property speculation. He became involved in two big projects in Canada, where he had invested large sums borrowed in Ipec's name in Japan to pay for leisure complexes across the Pacific. He was also juggling deals to buy a Renoir and immediately resell it at a profit and to acquire some property beside railway lines in central Tokyo.

In the late 1980s, banks in Tokyo could not lend money fast enough to Japanese who thought that on the strength of the economy they could buy up large chunks of the world. These banks soon realised that many of their clients were paying outrageous premiums for property which could never yield a profit. Mr Ogawa's bankers balked at issuing more loans and, as the Canada projects fell into the red, Mr Ogawa resorted to loans from more shady sources to keep his company afloat.

In the summer of 1992, the whole off-balance financing run by Mr Ogawa was exposed. According to Ipec's receivers, 'a dubious real estate deal for which he issued an off-book promissory note was by chance detected by Ipec's official banks and these banks stopped financing Ipec'. These off-book loans, the receiver discovered, came from 'dubious financing companies' - a reference to loan- sharking institutions which proliferate in Japan and are mostly run by yakuza gangster syndicates.

In August, the staff noticed that the atmosphere in the company had changed and rumours circulated of financial difficulties. The end came on 22 September when there was an announcement that the company had 'fairly serious problems' and might be forced to suspend business. Two days later, staff were given one hour to pack up their belongings before the building was sealed by the receivers.

The one part of the company that was kept going was the language schools - they made money and the receivers did not want to drain the company of any cash it could take in. When the bankruptcy was announced, it was discovered that Mr Ogawa had fled Tokyo and gone into hiding.

Examination of Mr Ogawa's private books disclosed that the company had been operating in the red since 1986 - long before the banks sensed any trouble - and that the debts outstanding were far greater than had been supposed.

For those staff who remained in the language school, there was uncertainty about whether their salaries would be paid and then an even more unpleasant shock. About one week after the bankruptcy, 'about half a dozen yakuza - men in dark suits - marched in and demanded to see the men in charge', according to one employee. They turned off the electricity in the building to intimidate everyone and threatened the office staff for some time before leaving.

The yakuza apparently were as distressed as the other creditors that their loans had not been repaid - but they appeared to have different ideas about how to persuade debtors to pay up. After their visit, the company put in some security guards and the managers started coming to work in jeans and T-shirts so that they would not look like company executives if they were caught in the lift.

The company is in the hands of the receivers. They think that they can reclaim some Y1bn from the government in taxes paid by Ipec on a notional profit while the company was in fact making losses. Mr Ogawa resurfaced four months after disappearing, having hidden in a provincial hotel, contemplating his company's ruin. Another brick in Japan's economic edifice has been knocked out.