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.