Does Indonesia need new bankruptcy laws?

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.