Amendment to bankruptcy law must include solvency test

Amendment to bankruptcy law must include solvency test

Andrew I. Sriro, Jakarta

When the news started to circulate that the gavel had struck
at the Central Jakarta Commercial Court issuing the decision to
declare PT Prudential Life Assurance bankrupt -- a company
purportedly worth trillions of rupiah in assets and a Risk Based
Capital level 2.5 times higher than that required by the minister
of finance -- legal experts, local and foreign investors,
government officials, economic pundits, and anyone else
interested in the economic well being of Indonesia once again
gritted their teeth and braced themselves for the resultant shock
waves.

The immediate impact of the bankruptcy decision must have hit
Prudential policy holders like a ton of bricks due to the lack of
clarity suddenly imposed on their insurance based future
financial security. Prudential's agents and staff must be
wondering about their own financial futures as well.

For those new to Indonesia, the decision to declare a
financially solvent company bankrupt must boggle the mind. But
here is the thing about the bankruptcy law. It doesn't actually
directly say that a company has to be insolvent in order to be
subject to a declaration of bankruptcy. And, there are no
special conditions imposed on determinations of bankruptcies
relating to companies vital to public interests like insurance
companies (as for example exist in the law with respect to banks
and securities companies).

The primary conditions specifically stated in the law for a
declaration of bankruptcy are that a company has at least two
creditors; at least one of the debts to at least one of the
creditors is due and payable; and that one debt is capable of
proof through a simple evidentiary submission.

Legal scholars disagree on the correct interpretation of the
bankruptcy test. The question of whether a solvency test should
be included in the law arose and was debated at the time of
drafting and promulgation of the 1998 revisions to the original
1905 colonial period bankruptcy law.

However, in recognition of the inefficiencies existing in the
ordinary civil District Court hearing and execution procedures
(bankruptcy cases are tried in a separate Commercial Court), some
scholars interpret the current test as an intention to eliminate
complicated proofs of insolvency to avoid judicial discretion.
In that way, debtors hiding behind District Court process delays
would be faced with the real risk of losing control of their
companies to bankruptcy curators or, alternatively, avoiding that
risk by paying their debts within the thirty days prescribed by
law between the submission of a bankruptcy petition by a creditor
and the issuance of the Commercial Court's bankruptcy decision.

The fundamental basis of the law is the requirement that at
least one debt is proven to be due and payable by simple proof.
That means, the debt must be proven to the Commercial Court to be
beyond any reasonable dispute. Evidence such as a clean
irrevocable letter of credit or a final and binding court
decision or an unequivocal acknowledgement of indebtedness should
all certainly satisfy the evidentiary condition.

The question is whether the Commercial Court correctly applied
the law to the facts and evidence presented in the Prudential
case. If not, the decision is inappropriate under the black
letter of the law.

However, other scholars do not take the same view regarding
the proper interpretation of the bankruptcy test. There is a
strong contingent of opponents to the "double debtor single debt
due and payable" test who believe that Indonesian judges are
obligated to consider all of the circumstances in every case in
order to arrive at a fair and just decision. It has been
suggested that one of those circumstances should be the inclusion
of considerations relevant to the commonly understood definition
of the word bankruptcy which implies insolvency or at least
systematic behavior by a debtor to avoid just debts which have
become due.

Indonesia has a rich tradition of what legal scholars here
call "finding the law." The theory is simply that in rendering
every single decision, judges are not only obligated to look at
the written law, but judges are also obligated to look at other
criteria including domestic Adat traditional law, international
standards, the opinions of legal experts, economic impacts,
sociological and psychological considerations, philosophical and
moral underpinnings, every other relevant circumstance, their own
hearts and their duty to God. That is what Indonesian written
law says and that is the guide which I personally feel will
overturn the Prudential bankruptcy decision at the Supreme Court
level.

I am not here to question, and I do not intend to imply in any
sense, that there was any impropriety or any incompetence in
delivering the Commercial Court's decision.

What people must realize is that the Indonesia legal system
tends in many circumstances to dogmatically resolve to interpret
itself in an extreme civil law format where the common law system
of following the precedence of a higher court is argued to be
non-imperative. Courts feel free not only to rule in complete
juxtaposition with decisions of other courts in cases with
analogous facts, but also to adopt very narrow interpretations of
the provisions of written law. Sometimes without the benefit of a
view of principles of fairness and equity.

It all comes to rest on the Supreme Court and the legislature
to set the standards and rules of order. While some have argued
that these types of cases show how Indonesia is digging its own
economic development grave, the fact is Indonesia is growing,
however painfully. We are in the midst of a fast-passed
evolution which requires careful direction and handling.

To prevent erroneous decisions and the injustices arising from
them, Indonesian legal scholars have proposed that the bankruptcy
law should be amended to impose additional conditions on the
filing of bankruptcy petitions against insurance companies and
other entities vital to public interests.

The question of whether an insolvency test should be
specifically introduced as an amendment to the law should be the
subject of a hearty public debate. I can see pros and cons
considering the inefficiencies in the District Courts and the
interests of solvent debtors.

To be sure, Indonesia needs a system to provide real credible
motivation for debtors to pay their reasonably undisputable debts
and the introduction of an insolvency test could vitiate the
utility of the Commercial Court.

However, if the law is to maintain the double debt with single
debt due and payable test, the Supreme Court must rigidly require
steadfast adherence to the requirement of proof beyond a
reasonable doubt that both the debt itself and the quantum of the
debt are beyond dispute to protect companies like Prudential from
questionable bankruptcy petitions. I expect the Supreme Court to
do just that.

The writer is a lawyer. He can be reached at
asriro@attglobal.net