Bankers schocked by court rulings on derivative deals

Bankers schocked by court rulings on derivative deals

By Riyadi

JAKARTA (JP): Shockwaves have rocked the banking community in
the wake of recent Jakarta High Court decisions which rejected
appeals by Bank Niaga and Bank Credit Lyonnais Indonesia against
controversial lower court rulings on derivative transactions.

The decisions set off alarm bells about how to deal with
companies reneging on their derivative contracts.

Bankers and lawyers say the rulings do not bode well for the
chances of impatient offshore creditors struggling to recover
debts from Indonesia's troubled firms.

P.D.D. Dermawan from Dermawan & Co. law firm warns of adverse
effects on the lending and borrowing climate in the country if
court rulings continue to benefit corporations which renege on
their derivative contracts.

"No foreign banks would be willing to take the risk of lending
more funds to Indonesian companies. Enough is enough. This will
strip Indonesian corporations naked."

He identifies a single motive in all the derivative cases
brought before the South Jakarta District Court by Hotman Paris
Hutapea of Makarim & Tiara law firm.

"It is to avoid paying obligations to banks by hiding in
Indonesia's legal jungle," he said.

Hotman argues it is the banks which trapped local corporations
into trying to get as much profit as possible through imprudent
derivative transactions.

In entering into derivative transactions, Hotman claims, banks
did not provide sufficient explanation to their clients about the
accompanying high risks.

"It is clear that Bank Niaga and Credit Lyonnais did not
uphold prudent banking practices and rules on derivative
transactions, and even inflicted losses on their clients," Hotman
said.

The Jakarta High Court earlier this month turned down appeals
brought by Bank Niaga and Bank Credit Lyonnais Indonesia, which
were sued by publicly listed PT Suryamas Dutamakmur and non-
listed PT Nugra Santana respectively.

The court ordered Bank Niaga to pay Rp 290.08 billion (US$36
million) in compensation to property developer Suryamas, a
company under the Sinar Mas Group.

It also declared invalid all agreements between Bank Niaga and
Suryamas.

Future contract

Bank Niaga's assistant vice president Catherine Hadiman says
that under a derivative transaction with Suryamas entered into on
18 July, 1997, the bank was obliged to buy $50 million at a
future date from the property company at a rate of Rp 2,800 to
the dollar.

She says Bank Niaga even transferred Rp 900 billion as an
upfront fee to Suryamas. The developer, she added, did not
deliver the dollars in July 1998 as agreed.

"We had had negotiations with Suryamas on how the company
could meet its obligations, but it turned around and sued us for
not giving it $50 million."

Catherine says Suryamas actually admitted in its audited
financial report of Dec. 31, 1997, which was approved by
shareholders last year, that it owed Bank Niaga $50 million.

Bank Niaga vice president Yos Badilangoe admits his sense of
justice has been "offended" by the decisions made by both the
district and the high courts.

"How come the district court at that time refused to hear
independent opinions from expert witnesses of Bank Indonesia and
public accountants about who had the dollar obligations?

"Even if we breached Bank Indonesia's regulation on derivative
transactions, the punishment -- as stated in the regulation --
should be only administrative. So, the court could not declare
our agreements with Suryamas as invalid."

PT Bank Credit Lyonnais has a similar complaint. The
derivative transaction involved was a simple forward contract
under which Nugra Santana agreed to deliver dollars to the bank
at a future date.

But by the time the company was due to pay, the rupiah's value
had plummeted against the dollar, leaving the company under
pressure to pay.

Nugra Santana, a company owned by Ponco Sutowo, did not
deliver the amount but instead sued Credit Lyonnais for
negligence. It claimed the bank did not properly informed the
company of the speculative nature of the transaction.

Both courts ruled in favor of Nugra Santana. The high court
ruled Credit Lyonnais should pay $1.56 million and Rp 1.06
billion.

Hotman champions the court's decision as proving the banks did
not uphold prudent banking practices.

Bank Indonesia's regulations do not allow derivative
transactions of a speculative nature, but they do not define what
is meant by speculative. Companies are exploiting the gray area
to take legal action against banks.

Mayora and JIHD

PT Mayora Indah and PT Jakarta International Hotel &
Development (JIHD) are two listed corporations which followed the
path of Suryamas, bringing lawsuits against Bankers Trust
International PLC of the United Kingdom over their derivative
transactions.

According to Dermawan who represents Bankers Trust, the two
corporations entered into cross-currency forward swap
transactions with Bankers Trust after raising fresh funds through
bond issues.

The derivative contract between Mayora and Bankers Trust,
signed in 1997, falls due in 2004, with Mayora to exchange $50
million with rupiah at an agreed rate to Bankers Trust. But,
their transactions also involve an interest rate swap, which
should be executed quarterly.

The contract was signed in 1995 and contained different
maturity dates, ranging from 2002 to 2005, with net delivery
value of $88 million. Their transactions also involve an interest
rate swap.

"We had no problems with JIHD until June 1997. Our
transactions went smoothly between March 1995 and June 1997. But
after June 1997, we got problems and finally they sued us at the
South Jakarta District Court for misleading them into entering
into such a transaction and so forth," Dermawan said.

He argues that the South Jakarta District Court actually held
no power to hear the cases because the agreements signed by all
parties stipulate that any dispute, controversy or claims arising
from the agreement shall be resolved by arbitration under the
rules of the London Court of International Arbitration.

Problems arose because the arbitration clause is written in
the schedule to the ISDA Master Agreement, not in the signed
master agreement itself.

Hotman Paris insists that the schedule was not included in the
master agreement which executives of Mayora signed. This formed
the basis for his argument for the South Jakarta court to hear
Mayora's lawsuit.

Dermawan contends that the schedule was an integral part of
the master agreement, which is a standard form written by the
International Swaps & Derivatives Association, Inc. (ISDA).

"Without such a schedule, the master agreement would not be
signed by any bank because specific rules are governed in the
schedule," he said.

During the trial, he repeatedly demanded that the panel of
judges call Mayora's executives who signed the master agreement
to ask them whether they were aware of the document.

But presiding judge J.M.T. Simatupang rejected Dermawan's
demand, arguing that the action would only be needed when both
parties -- defendant and plaintiff -- did not have any evidence.

Dermawan is confident of winning his case against Mayora and
JIHD because, unlike Mayora, JIHD included the schedule in its
documents.

"It means that the South Jakarta District Court should declare
itself as not having the authority to hear both cases as they
have arbitration clauses," he said.

Only ploys

Deni Daruri, president of the Center for Banking Crisis,
believes that most derivative cases brought before the South
Jakarta District Court are only opportunistic ploys to sponge
more money from the banks.

After major business groups find their ways to tap money
through Bank Indonesia liquidity credits had run dry, they are
using derivative transactions entered into by their subsidiaries
with government-recapitalized banks to funnel their money through
various derivative lawsuits.

In the Suryamas case, Deni says, Bank Niaga, which has been
taken over by the government, would lose the battle.

"So, because now banks could no longer steal Bank Indonesia's
money directly, they would steal the money through lawsuits,"
Deni said.

Dermawan concurs with Deni's argument, saying Bank Indonesia
paid Bank Niaga's $50 million in obligations to Chase Manhattan
Bank despite Bank Niaga's failure to collect the $50 million from
Suryamas.

After entering a swap transaction with Suryamas, Bank Niaga
hedged that position by entering another swap transaction with
Chase Manhattan.

"So, under the government's guarantee scheme, BI has paid
Niaga's obligations to Chase. And again, now the court has
ordered Niaga to pay another amount to Suryamas. Is that fair for
the people of Indonesia, who are the owners of Bank Niaga?"

He says the government through the Capital Market Supervisory
Agency (Bapepam) should investigate Suryamas, Mayora and JIHD for
their derivative transactions.

"People who manage those companies must be held accountable
for the public funds they have raised through initial shares
offering or bond issues. So Bapepam should investigate why they
entered into such derivative transactions."

Something wrong

Dermawan suspects the involvement of Hotman Paris in most of
the cases and also judge Simatupang in trying them is more than
just a coincidence.

"Why do most derivative cases go to Hotman Paris, why does Pak
Simatupang take care of most of these derivative cases?" he
queried.

"Why did Pak Simatupang reject the demand of the defendants'
lawyers to present independent expert witnesses?"

Hotman dismisses Dermawan's suspicions. "That's only garbage
from those who lost in the court battle or those who are sure to
lose. They are stupid.

"Why did those companies come to me? The answer is obvious --
because I have been fighting derivative cases for so long, and I
won all of my cases, except one (on Dharmala Agrifood). And I'm
the only local lawyer who dares to challenge international
lawyers, even those of the International Monetary Fund. So, it is
only logical if they come to me to fight for their cause."

Last month, bankers took some heart from a Supreme Court
judicial review which ruled in favor of Bank Niaga after it sued
PT Dharmala Agrifood in the bankruptcy court for breaching a
derivative contract.

Still, their lingering fear is that it will be an isolated
case which will be overshadowed by other decisions in favor of
the reneging firms.