Civil code for bankruptcy law<\/p>\n
By Frans H. Winarta<\/p>\n
The following is an excerpt from a paper presented at a recent
\nconference in Jakarta on 150 Years of the Indonesian Civil Code:
\nThe Civil Law Basis for a Modern Bankruptcy Law. The conference
\nwas jointly organized by the Ministry of Justice and the
\nNetherlands' University of Leiden.<\/p>\n
JAKARTA: The monetary crisis has put a number of companies in
\nfinancial difficulties. Many do not have the ability to pay back
\ntheir loans. Some companies wrote a letter to President B.J.
\nHabibie asking him to declare the monetary crisis a force
\nmajeure. (Forum Keadilan, Sept. 7, 1998).<\/p>\n
The letter demonstrates the skin-deep legal culture of
\nIndonesian businessmen. The court of law is the institution which
\ncan make such a declaration, not the President.<\/p>\n
Creditors will certainly try to protect their rights by
\ndemanding the repayment of the loans. If debtors do not have the
\nassets or money (liquidity) to pay back their loans, creditors
\ncan file a civil lawsuit in a court of law on the basis of
\nnonperformance. However, if a debtor does not have enough assets
\nor cash, the creditors (at least two creditors) are obliged to
\nfile a bankruptcy lawsuit with the Commercial Court.<\/p>\n
According to the bankruptcy law, a debtor who ceases to pay
\nback its loan is considered bankrupt. In cases where only one
\ncreditor is involved, a civil lawsuit will be used to settle the
\ndispute, but in cases where two or more creditors are involved
\nthe bankruptcy law is applicable.<\/p>\n
Currently, creditors are prone to file bankruptcy lawsuits
\nwith the Commercial Court in expectation that their interests
\nwill be protected. During the monetary crisis it is important
\nthat both creditors and debtors show good faith in settling their
\nproblems according to the principle of pacta sunt servanda
\n(agreement applies as law to makers of the contract) embodied in
\nthe contract.<\/p>\n
Henry Campbell Black defines force majeure as follows: \"In the
\nlaw of insurance, it is a superior or irresistible force. Such a
\nclause is common in construction contracts to protect the parties
\nin the event that a part of the contract cannot be performed due
\nto causes which are outside the control of the parties and could
\nnot be avoided by exercise of due care.\"<\/p>\n
Debtors should not use the monetary crisis as an excuse to
\nescape from paying their debts. Debtors who fraudulently file for
\nbankruptcy to avoid paying creditors can be charged with
\nviolating articles 372, 378 and 263 of the Penal Code for
\nembezzlement, racketeering and falsification.<\/p>\n
In essence, the assets of a debtor basically are mortgaged to
\na creditor as provisioned in Article 1131 of the Civil Code. On
\nthe implementation of that provision, Article 1132 of the Civil
\nCode stipulates the debtor's assets be sold publicly on the basis
\nof the court's ruling and distributed proportionately among the
\nrelevant creditors, according to the ratio of each creditors'
\nloan.<\/p>\n
Unfortunately, further provisions on securing the debtor's
\nassets are not detailed in the bankruptcy law, although such
\nprovisions are essential, particularly when the time comes to
\ndistribute the debtor's assets among creditors.<\/p>\n
No matter what happens, the contract between the creditor and
\ndebtor should be carried out according to the pacta sunt servanda
\nprinciple of Article 1338, Section 1 of the Civil Code. This
\narticle says agreements of the parties must be observed and the
\nprinciple of freedom of contract must be honored.<\/p>\n
Furthermore, Article 1338, Section 3 of the Civil Code
\nstipulates that contracts must be signed in good faith. The term
\n\"in good faith\" should be explicitly and firmly defined in our
\nnext national Indonesian Civil Code (ICC) Law on Contracts. What
\nthe legislators meant by article 1339 of the Civil Code has not
\nsatisfactorily explained the real meaning of \"good faith\". \"What
\nis just and equitable\" or \"What is reasonable and equitable\"
\nhave more emotional than legal value.<\/p>\n
In such conditions, it is difficult for the parties in a
\ncontract to interpret \"good faith\". The creditor is expected to
\ntreat the debtor fairly and reasonably. Businessmen usually pay
\nless attention to the formulation of clauses in a contract. They
\nconsider a contract more as trust, commitment and friendship.<\/p>\n
They believe more in economic than legal rational. That is the
\nreason why the business society of the past, according to a
\nsurvey conducted by Steward Macaulay, usually tried to avoid
\ndispute settlement as provisioned in a contract.<\/p>\n
Parties hesitated to argue for their rights as stated in a
\ncontract or to file a civil lawsuit as permitted by a contract.
\nBusiness disputes were settled through mediation if there was no
\ncontract between the parties. They even settled their differences
\nby telephone and conversed peacefully with business partners who
\ncould not repay loans.<\/p>\n
Economic and practical considerations were behind such
\nsettlements because it was expected that business would continue
\nas usual in the future.<\/p>\n
That situation is drastically different from the Dutch context
\nin which things are more business-like, and companies believe the
\ncourt's, as the last bastion of justice, can settle business
\ndisputes. This is shown in Article 1266 of the Indonesian Civil
\nCode.<\/p>\n
The Indonesian contract law adopts various principles,
\nincluding the equitable principle. This principle dictates the
\nobligations of parties bound in a contract to implement their
\nagreements. The creditor is entitled to demand performance of the
\ndebtor and, if necessary, seize the assets of the debtor. But the
\ncreditor also has the obligation to carry out the agreements in
\ngood faith. This means the strong and advantageous position of
\nthe creditor is balanced with its obligation to maintain good
\nfaith, resulting in an equal position for both the creditor and
\nthe debtor.<\/p>\n
As far as the equitable principle is concerned, it is
\nworthwhile to pay attention to the decision of the Commercial
\nCourt in Jakarta in case no. 07\/Pailit\/1998\/PN. Niaga\/Jkt. Pst.
\nThe Commercial Court declared PT Modernland Realty Tbk., a
\ndaughter company of the Modernland Group of Companies, bankrupt.
\nThe company had developed an apartment block in Tangerang
\ncomprising five towers each with twelve stories.<\/p>\n
The apartments, amounting to Rp 50 billion, were marketed
\nbeginning in December 1995. By 1997, 1,000 units had been sold
\nwith a market price of Rp 30 million to Rp 90 million per unit.
\nWhen the monetary crisis struck, some 30 percent of construction
\nwork had been completed. However, construction immediately
\nstopped.<\/p>\n
In anticipation of a worsening economic condition, the company
\noffered the buyers compensation in the form of vouchers to use
\nfor the purchase at Modern Golf Bungalows. The majority of buyers
\nrefused the offer. A buyer who had paid Rp 90.4 million for an
\napartment unit filed a lawsuit against the company at the
\nCommercial Court, with the court declaring the company bankrupt.
\n(D&R. Oct. 24, 1998)<\/p>\n
The Commercial Court's decision was considered controversial
\nby many observers. The company, with Rp 600 billion in assets,
\nwas ironically declared bankrupt for a Rp 90-million civil
\nlawsuit. The decision tarnished the image of the mother company
\nand the reputation of the owners. The Modernland case had a
\nnegative impact on the business circle, with the possibility now
\nexisting for a bankruptcy lawsuit being filed at any time by
\ncreditors.<\/p>\n
The speedy process of a bankruptcy trial should be accompanied
\nby fairness and reasonable and equitable treatment of the
\nparties. It should also protect the interests of the creditor and
\ndebtor. On the other hand, the independence and impartiality of
\nthe court should be guaranteed, without which there will always
\nbe controversial decisions.<\/p>\n
The current bankruptcy law does not provide a limit on the
\ndebt which makes a company open to a bankruptcy lawsuit. Nor does
\nit specify the type of debts which can lead to a bankruptcy
\nlawsuit. Two or more creditors can file a bankruptcy lawsuit
\nagainst a debtor regardless of the disputed amount as long as
\nlong as the lawsuit meets the requirements of Article 1, Section
\n1 of the bankruptcy law.<\/p>\n
Even if the disputed amount is only Rp 10 million, creditors
\ncan file a lawsuit against a debtor with a large amount of
\nassets.<\/p>\n
Another important concept is that the protection of creditor's
\nrights stipulated in Article 1341 of the Indonesian Civil Code is
\nnot a new concept in the bankruptcy law. It has been provided for
\nin articles 41 to 44 of the bankruptcy law. The only difference
\nis the termination time. In the bankruptcy law it is one year
\nwhile in the civil code it is 40 days.<\/p>\n
But the most important principle is the duty of the curator
\n(including the temporary curator) to maintain equitable treatment
\nof creditors and debtors in a bankruptcy proceeding. A curator
\nshould be independent and impartial, although in carrying out
\ncertain duties outside the court it is stipulated that he must
\nobtain approval or notice from the debtor.<\/p>\n
Furthermore, the problem of law enforcement in developing
\ncountries is not in the legislation or the law, but the people
\nwho administer the law. Therefore the business community expects
\nthe Commercial Court to act as the last bastion of justice in
\nprotecting the interests of creditors and debtors. No less
\nimportant is the mastering of international business practices by
\nthe judges at the Commercial Court.<\/p>\n
The concepts and principles of the Indonesian Civil Code are
\nstill relevant to the bankruptcy law. What we need is a
\nCommercial Court concerned with the interests of creditors and
\ndebtors and which will protect both creditors and debtors in an
\nhonest, independent and impartial court of law. Whatever
\ndecisions are made by the Commercial Court, they have an
\nimmediate and direct implication to society, particularly the
\nbusiness society.<\/p>\n
The writer is the managing partner of the law firm Frans
\nWinarta & Partners in Jakarta. He is also a doctorate candidate
\nat the University of Leiden majoring in law.<\/p>",
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