Does Indonesia need new bankruptcy laws?

By Hafzan Taher and Ludo Mees

JAKARTA (JP); A number of recent newspaper reports have suggested that the Indonesian government is preparing a new bankruptcy law to deal with the many business ventures rendered insolvent by the monetary crisis.

Sound and clear insolvency laws are a minimum requirement for an effective and healthy economy and Indonesia certainly needs such laws to recuperate from the current financial chaos and to restore confidence among foreign investors.

However, there is a common misconception about Indonesia's need for new bankruptcy laws which exists among businessmen, bankers, financial analysts, journalists and even government officials.

Many of them claim either that Indonesia does not have any bankruptcy laws at all, or that existing laws are inadequate.

Both claims are incorrect because Indonesia does possess a comprehensive bankruptcy law which includes adequate provisions for situations in which payments are temporarily suspended.

It is true that these bankruptcy laws are very rarely used in Indonesia today, but this is not due to perceived inadequacies in the legislation, but to the prevailing business culture and the absence of adequate ways and means to enforce legislation. A lack of confidence in the impartiality and efficiency of the institutions involved in bankruptcy and insolvency proceedings also contributes to this state of affairs.

Regulations pertaining to bankruptcy in Indonesian law are not found in the Commercial Code, but in a special 1904 Regulation on Bankruptcy, (Failliesements-verordening. The regulations closely follow the bankruptcy law of the Netherlands, a law which is still highly effective and which has only had minor alterations over the past one hundred years.

Indonesia's legal system is firmly based on the civil law tradition inherited from the Netherlands. The rights and obligations of those who are party to any kind of private legal relationship, including debtors and creditors, are based on the provisions made in the Indonesian Civil Code, which is based on the code of the pre-war Dutch administration.

The present bankruptcy law in Indonesia reflects terminology used in the Dutch legal system and is based on a clear and straightforward concept of preferred and non-preferred creditors. Any debtor can offer a plan of composition to creditors which, if accepted by the creditors and approved by the court, will discharge the debtor and terminate the bankruptcy.

The law contains additional provisions allowing acts detrimental to the creditors to be challenged if the acts were undertaken prior to the bankruptcy adjudication.

In Indonesia, a petition for bankruptcy can be filed either by the debtor himself, by a creditor, or by the public prosecutor for reasons of public interest.

The petition must be submitted to the district court. If, after the debtor has spoken, the court is convinced that the debtor has ceased paying debts, the court will declare the bankruptcy to be effective.

The decision of the court can be appealed. At the same time the court appoints a supervisory judge to oversee the administration and distribution of assets among the creditors.

A governmental body called Balai Harta Peninggalan(BHP), or Public Trustee, is responsible for day to day administration of the bankrupt's estate and for distributing the assets.

BHP, acting as custodian and receiver, has the duty to preserve the assets of the bankrupt in so far as is possible and is entitled to continue to operate the bankrupt business if beneficial to the estate of the bankrupt party.

The debtor, or management in the case of bankrupt companies, cannot enter into contracts or commitments. Only BHP can represent the debtor toward third parties.

In cases of insolvency, insolvent parties are entitled to claim protection under Section 212 of Indonesia's bankruptcy code regulations by requesting a moratorium on payments.

A moratorium generally offers suitable shelter for a company facing temporary difficulties with finance or liquidity. When a court grants a debtor suspension of payments, all of the debtor's payment obligations to ordinary (non-preferred) creditors are stopped from the time the suspension takes effect.

Preferred creditors are not affected. This is similar to bankruptcy proceedings, except that in a bankruptcy proceeding preferred creditors must decide whether or not to enforce their security within a specified period.

The debtor can still manage the business operations, but needs the cooperation of BHP and, on specific matters, of the supervisory judge.

The law needs to be properly implemented and enforced in it is to be effective. Of greatest benefit to Indonesia would be a professional judiciary trained to deal with the often complicated legal issues which are inherent in cases of bankruptcy and insolvency.

Professional and impartial administrators are also needed. Special training programs for judges and BHP staff could help achieve this end.

It would be useful to review the existing provisions of the bankruptcy code and try to improve the efficiency of the related legal proceedings.

BHP may need institutional review. In other jurisdictions, professionals are hired to perform receivership tasks, for example accountants act as receivers in the United Kingdom and lawyers perform the same task in the Netherlands.

Much work needs to be done. However, it seems that by focusing on improving and disseminating information on the existing system, rather than drafting a new law, the position of creditors would be improved and the country would be able to concentrate its resources on more urgent matters.

Hafzan Taher is a partner of the Jakarta law firm Soemadipradja & Taher. Ludo Mees is a Dutch citizen and works as a foreign legal consultant in Jakarta.