Civil code for bankruptcy law

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.