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