Civil code for bankruptcy law

By Frans H. Winarta

The following is an excerpt from a paper presented at a recent conference in Jakarta on 150 Years of the Indonesian Civil Code: The Civil Law Basis for a Modern Bankruptcy Law. The conference was jointly organized by the Ministry of Justice and the Netherlands' University of Leiden.

JAKARTA: The monetary crisis has put a number of companies in financial difficulties. Many do not have the ability to pay back their loans. Some companies wrote a letter to President B.J. Habibie asking him to declare the monetary crisis a force majeure. (Forum Keadilan, Sept. 7, 1998).

The letter demonstrates the skin-deep legal culture of Indonesian businessmen. The court of law is the institution which can make such a declaration, not the President.

Creditors will certainly try to protect their rights by demanding the repayment of the loans. If debtors do not have the assets or money (liquidity) to pay back their loans, creditors can file a civil lawsuit in a court of law on the basis of nonperformance. However, if a debtor does not have enough assets or cash, the creditors (at least two creditors) are obliged to file a bankruptcy lawsuit with the Commercial Court.

According to the bankruptcy law, a debtor who ceases to pay back its loan is considered bankrupt. In cases where only one creditor is involved, a civil lawsuit will be used to settle the dispute, but in cases where two or more creditors are involved the bankruptcy law is applicable.

Currently, creditors are prone to file bankruptcy lawsuits with the Commercial Court in expectation that their interests will be protected. During the monetary crisis it is important that both creditors and debtors show good faith in settling their problems according to the principle of pacta sunt servanda (agreement applies as law to makers of the contract) embodied in the contract.

Henry Campbell Black defines force majeure as follows: "In the law of insurance, it is a superior or irresistible force. Such a clause is common in construction contracts to protect the parties in the event that a part of the contract cannot be performed due to causes which are outside the control of the parties and could not be avoided by exercise of due care."

Debtors should not use the monetary crisis as an excuse to escape from paying their debts. Debtors who fraudulently file for bankruptcy to avoid paying creditors can be charged with violating articles 372, 378 and 263 of the Penal Code for embezzlement, racketeering and falsification.

In essence, the assets of a debtor basically are mortgaged to a creditor as provisioned in Article 1131 of the Civil Code. On the implementation of that provision, Article 1132 of the Civil Code stipulates the debtor's assets be sold publicly on the basis of the court's ruling and distributed proportionately among the relevant creditors, according to the ratio of each creditors' loan.

Unfortunately, further provisions on securing the debtor's assets are not detailed in the bankruptcy law, although such provisions are essential, particularly when the time comes to distribute the debtor's assets among creditors.

No matter what happens, the contract between the creditor and debtor should be carried out according to the pacta sunt servanda principle of Article 1338, Section 1 of the Civil Code. This article says agreements of the parties must be observed and the principle of freedom of contract must be honored.

Furthermore, Article 1338, Section 3 of the Civil Code stipulates that contracts must be signed in good faith. The term "in good faith" should be explicitly and firmly defined in our next national Indonesian Civil Code (ICC) Law on Contracts. What the legislators meant by article 1339 of the Civil Code has not satisfactorily explained the real meaning of "good faith". "What is just and equitable" or "What is reasonable and equitable" have more emotional than legal value.

In such conditions, it is difficult for the parties in a contract to interpret "good faith". The creditor is expected to treat the debtor fairly and reasonably. Businessmen usually pay less attention to the formulation of clauses in a contract. They consider a contract more as trust, commitment and friendship.

They believe more in economic than legal rational. That is the reason why the business society of the past, according to a survey conducted by Steward Macaulay, usually tried to avoid dispute settlement as provisioned in a contract.

Parties hesitated to argue for their rights as stated in a contract or to file a civil lawsuit as permitted by a contract. Business disputes were settled through mediation if there was no contract between the parties. They even settled their differences by telephone and conversed peacefully with business partners who could not repay loans.

Economic and practical considerations were behind such settlements because it was expected that business would continue as usual in the future.

That situation is drastically different from the Dutch context in which things are more business-like, and companies believe the court's, as the last bastion of justice, can settle business disputes. This is shown in Article 1266 of the Indonesian Civil Code.

The Indonesian contract law adopts various principles, including the equitable principle. This principle dictates the obligations of parties bound in a contract to implement their agreements. The creditor is entitled to demand performance of the debtor and, if necessary, seize the assets of the debtor. But the creditor also has the obligation to carry out the agreements in good faith. This means the strong and advantageous position of the creditor is balanced with its obligation to maintain good faith, resulting in an equal position for both the creditor and the debtor.

As far as the equitable principle is concerned, it is worthwhile to pay attention to the decision of the Commercial Court in Jakarta in case no. 07/Pailit/1998/PN. Niaga/Jkt. Pst. The Commercial Court declared PT Modernland Realty Tbk., a daughter company of the Modernland Group of Companies, bankrupt. The company had developed an apartment block in Tangerang comprising five towers each with twelve stories.

The apartments, amounting to Rp 50 billion, were marketed beginning in December 1995. By 1997, 1,000 units had been sold with a market price of Rp 30 million to Rp 90 million per unit. When the monetary crisis struck, some 30 percent of construction work had been completed. However, construction immediately stopped.

In anticipation of a worsening economic condition, the company offered the buyers compensation in the form of vouchers to use for the purchase at Modern Golf Bungalows. The majority of buyers refused the offer. A buyer who had paid Rp 90.4 million for an apartment unit filed a lawsuit against the company at the Commercial Court, with the court declaring the company bankrupt. (D&R. Oct. 24, 1998)

The Commercial Court's decision was considered controversial by many observers. The company, with Rp 600 billion in assets, was ironically declared bankrupt for a Rp 90-million civil lawsuit. The decision tarnished the image of the mother company and the reputation of the owners. The Modernland case had a negative impact on the business circle, with the possibility now existing for a bankruptcy lawsuit being filed at any time by creditors.

The speedy process of a bankruptcy trial should be accompanied by fairness and reasonable and equitable treatment of the parties. It should also protect the interests of the creditor and debtor. On the other hand, the independence and impartiality of the court should be guaranteed, without which there will always be controversial decisions.

The current bankruptcy law does not provide a limit on the debt which makes a company open to a bankruptcy lawsuit. Nor does it specify the type of debts which can lead to a bankruptcy lawsuit. Two or more creditors can file a bankruptcy lawsuit against a debtor regardless of the disputed amount as long as long as the lawsuit meets the requirements of Article 1, Section 1 of the bankruptcy law.

Even if the disputed amount is only Rp 10 million, creditors can file a lawsuit against a debtor with a large amount of assets.

Another important concept is that the protection of creditor's rights stipulated in Article 1341 of the Indonesian Civil Code is not a new concept in the bankruptcy law. It has been provided for in articles 41 to 44 of the bankruptcy law. The only difference is the termination time. In the bankruptcy law it is one year while in the civil code it is 40 days.

But the most important principle is the duty of the curator (including the temporary curator) to maintain equitable treatment of creditors and debtors in a bankruptcy proceeding. A curator should be independent and impartial, although in carrying out certain duties outside the court it is stipulated that he must obtain approval or notice from the debtor.

Furthermore, the problem of law enforcement in developing countries is not in the legislation or the law, but the people who administer the law. Therefore the business community expects the Commercial Court to act as the last bastion of justice in protecting the interests of creditors and debtors. No less important is the mastering of international business practices by the judges at the Commercial Court.

The concepts and principles of the Indonesian Civil Code are still relevant to the bankruptcy law. What we need is a Commercial Court concerned with the interests of creditors and debtors and which will protect both creditors and debtors in an honest, independent and impartial court of law. Whatever decisions are made by the Commercial Court, they have an immediate and direct implication to society, particularly the business society.

The writer is the managing partner of the law firm Frans Winarta & Partners in Jakarta. He is also a doctorate candidate at the University of Leiden majoring in law.