Dealing with big debtors

Dealing with big debtors

Corruption, collusion and weak law enforcement are central to
the hugely controversial way in which the government has been
dealing with former bank shareholders who signed agreements in
1998 to settle over Rp 141 trillion (US$15.6 billion) in debts to
the state.

Even though almost all the shareholder settlement agreements
are already in default and the value of the assets they ceded
turned out to be way below their debts, almost none of them has
been brought to justice.

Further insulting the public's sense of justice are the
allegations by several businesspeople that many of these
recalcitrant debtors, who had robbed their own banks and state
banks through collusive borrowing, have succeeded in acquiring
their former assets at throw-away prices with new loans from
state banks.

Rubbing yet more salt into the wound is the government
announcement, after a Cabinet meeting on Monday, that two former
bank shareholders have been acquitted of all criminal charges
related to violations of connected-party lending limits and
seventeen others could obtain similar discharge after settling
their debts.

How could these tycoons, who were found by the Supreme Audit
Agency to have misused a large portion of the liquidity credits
in currency speculation, get such favorable treatment?

The problem dates back to 1998 when the B.J. Habibie
administration, afraid that the debtors might strip their assets,
hurriedly concluded agreements with the owners of closed and
nationalized banks to settle Rp 141 trillion in emergency
liquidity credits they received from the central bank during the
height of the banking crisis. Under the settlement agreements
they surrendered assets supposed to be equal in value to their
liabilities.

Even though the agreements were processed by high-caliber,
domestic and international lawyers and consultants under the
supervision of the International Monetary Fund, the deals turned
out to be greatly in favor of the debtors as the assets they
ceded were not subjected to independent financial due diligence.

Worse still, the government trapped itself with a clause in
each of the agreements that automatically releases and discharges
the former bank shareholders of all criminal charges related to
their violations of legal lending limits.

A legal advisory team assigned by the government in March to
review the shareholder debt-settlement agreements recommended in
July that the agreements could be declared null and void as the
debtors were proved to have signed the deals in bad faith.

The government is, however, faced with a dilemma. Bringing the
debtors to court would jeopardize the legal status of their
assets that had been sold by the Indonesian Bank Restructuring
Agency (IBRA) to new investors and this, in turn, could sabotage
the whole asset recovery process.

Moreover, even though IBRA is vested with quasi-judicial
powers that confer the authority of court orders on its legal
actions, this agency seems to have been rendered impotent to
exercise its legal authority, as most of its decisions or legal
claims have been rejected by either notoriously corrupt or
incompetent judges, who are not familiar with complex corporate
transactions.

Given this dilemma, out-of-court settlement seems to be the
most realistic way of enforcing most of the debt-settlement
agreements to achieve optimal debt collection while maintaining
the sanctity of contracts the government has signed. The greatest
challenge though is to ensure that this policy fully meets the
public's sense of economic justice and effectively forces the
former bank owners to repay their debts.

The public's sense of justice would be served only if the debt
settlements were transparent and credible, in that the government
could collect as much debt as possible without having to drop
legal enforcement against corruption and collusion.

The government should come out with detailed explanations
about each deal it will conclude with the debtors. Its assessment
of each debtor should be highly accountable, providing credible
arguments to justify the deal it will finally conclude with each
of the former bank owners.

Most important is that this policy should not rule out the
option of bringing uncooperative debtors to court. Jailing two or
three tycoons would be a deterrent to similar corporate fraud in
the future. After all, corrupt businesspeople who colluded with
senior government officials have been partly responsible for the
economic ruin the nation now faces.

However, out-of-court debt settlement that is too much in
favor of the debtors would only plant a time bomb that could
detonate another economic crisis in the future.

Yet more damaging is that a settlement that failed to meet the
public's sense of justice would burden tycoons with the heavy
baggage of negative public perception, which would create a
hostile social environment for the future development of big
business in the country.