Bankruptcy bill prone to abuse

Bankruptcy bill prone to abuse

Rendi A. Witular, Jakarta

The government and the House of Representatives seems set not
to learn from the debacles that have arisen under the existing
bankruptcy legislation, as proposed amendments of the law still
contain many loopholes that could allow creditors to easily
bankrupt solvent companies.

It is feared that a failure on the part of the government and
legislators to come up with a watertight bankruptcy law could
damage legal certainty for the business community, and dent the
flow of foreign investment into the country.

The House and the government are currently deliberating the
proposed changes to Law No. 4/1998 on bankruptcy.

One the main flaws of the revised bankruptcy bill, a copy of
which was obtained by The Jakarta Post, is that it allows
bankruptcy proceedings to be filed by any creditor against a
solvent company.

"The revised bankruptcy bill still contains classic flaws that
open the door for abuse," said bankruptcy expert Rahmat Bastian.

He pointed to the absence of a crucial article on the minimum
amount of debt before a creditor could file for bankruptcy
against an indebted firm.

Rahmat said such an article was needed in order to avoid
solvent companies from being easily declared bankrupt, as in the
case of British firm PT Prudential Life Insurance in March and
Canadian firm Asuransi Jiwa Manulife Indonesia in 2002.

"As in other countries, there should be at least a mechanism
for defining whether the company is solvent or not before the
court can entertain the bankruptcy petition. This is a crucial
point for the government and the legislators to consider," he
said.

Under the prevailing law, a bankruptcy petition may be filed
if a company fails to repay maturing debts to more than one
creditors, without regard to the size of the debts or the assets
of the company.

With only Rp 5 (less than 1 U.S. cent) worth of unsettled
debt, for instance, a company could be declared bankrupt, even if
it has assets worth Rp 1 trillion, which meant that the company
would be in no danger financially if the payment was made.

But senior legislator Faisal Baasyir, who is involved in
deliberating the proposed bill, argued that the bill contained
several articles that would help protect solvent companies, such
as the need for the approval of the Ministry of Finance to
declare insurance and reinsurance firms, and pension funds
bankrupt.

"The bill contains progress, and is deemed sufficient to
provide legal certainty for the business community," said Faisal,
adding that the deliberation of the bill would likely be
continued by the incoming new legislators.

The proposed bill also stipulates that approval from the
central bank is needed in order to declare a bank bankrupt, while
similar approval would be required from the Capital Market
Supervisory Agency (Bapepam) in the case of securities, stock
market, clearing and custodian firms.

However, Rahmat warned that the provision of protection by
government institutions for such companies would not fully
guarantee their safety against a bankruptcy ruling as litigants
could use the firms' holding companies as targets for bankruptcy.

Elsewhere, Rahmat said the proposed bill also contained
several problems connected with legal procedures after the
bankruptcy petition was ruled on by the court, such as a lack of
enforcement articles to punish debtors who refused to cooperate
in complying with a court ruling.

"Actually, there is already an article that provides for
incarceration under civil law for debtors who refuse to comply
with the court ruling. However, the punishment will come into
effect only if the debtors violate all of the regulations," he
said.

Some key points in the new bankruptcy bill

1. A debt is an obligation which may and can be stated in the
form of money, in Indonesian or foreign currency, either incurred
directly or otherwise, which arose as a result of an agreement or
by operation of law. The obligation must be fulfilled by the
debtor, and a failure to do so will give rise to a right on the
part of the creditor to redeem it from the debtor's assets.

2. A declaration of bankruptcy against a state-owned enterprises
needs to be approved by the Ministry of Finance.

3. The decision in a bankruptcy case should be handed down within
not more than 60 days from the date on which the petition was
lodged.

4. Dissenting opinions must be made public.

5. Before the commercial court hands down its ruling, a creditor,
the Ministry of Finance, Bank Indonesia, the Capital Market
Supervisory Agency or prosecutors can file a petition with the
court to the freeze the assets owned by the debtor, and appoint a
temporary receiver to supervise those assets.