Going bankrupt

Going bankrupt

Creditors and debtors expected some start-up problems when the
Jakarta Commercial Court, the first judicial institution in
Indonesia's 53-year history specially established to judge
bankruptcy proceedings, began operating on Aug. 20. But most
still seem perplexed by the court's first two verdicts it handed
down on insolvency cases.

The problem is not that the court has no real teeth, as many
had predicted, but rather it made ill-judged bites.

One of the decisions, made last month in favor of the debtor,
was considered completely insensible because the creditors' suit
against PT Ometraco Corp was rejected only because a similar case
was filed against another Ometraco subsidiary. The verdict, in
which US$125 million was at stake, was seen as utterly confusing
since the two debtors are two separate legal entities.

The other verdict, announced early this week in favor of the
creditors, was no less puzzling. The debtor, publicly listed PT
Modern Realty with Rp 215 billion ($21.9 million) in total
assets, was declared bankrupt because of a failure to settle Rp
94.13 million ($10,400) in debts to two individual creditors.

Though the decisions can still be appealed directly to the
Supreme Court, the rulings are seen as detrimental to the
momentum needed in settling the private sector debt overhang.

All creditors do agree that the bankruptcy court is merely a
remedy of last resort which should be taken only against debtors
whose dealings are in bad faith or those who are simply
unwilling, rather than unable, to repay their debts. But the
commercial court, established to enforce the new Bankruptcy Law,
is an essential component of the commercial laws needed to create
legal certainty in the business sector.

The new bankruptcy procedures are designed to ensure a quick,
fair, transparent and effective resolution of company
indebtedness within strictly set time limits. The objective
obviously is not to have as many default debtors as possible
declared bankrupt -- as this would surely cause a devastating
social and political backlash. It rather serves as a legal
recourse of last resort to force distressed debtors to negotiate
with their creditors in good faith or to expedite the liquidation
of default debtors who are beyond any bail out through debt
restructuring.

In fact, the first option that has to be offered by the
commercial court, as required by the new bankruptcy law, is a
petition by a debtor for a temporary suspension of payments to
the creditor during which the two sides try to negotiate a debt
restructuring plan under the supervision of a court-appointed
administrator.

Only if this option fails will the court allow creditors to
ask for immediate bankruptcy proceedings and appoint a receiver
to sell or liquidate the assets of the default debtor.

Provided debtors act in good faith and their business has new
prospects under debt restructuring, most creditors will prefer
rehabilitation programs to revive the debtor's business because a
going concern offers more value, thereby increasing the recovery
rate for the creditor's loan. The proceeds from the sales of
liquidated assets are usually only a fraction of their normal
market price.

But an effective, full-fledged commercial court is quite
essential, especially now when hundreds of companies have been
technically bankrupt under the huge burden of foreign and
domestic bank debts. Most of them have simply stopped making
payments. More damaging to business certainty is the fact that
many default debtors have refused to negotiate with their
creditors even though the government has set up a general
framework under the Indonesian Debt Restructuring Agency and
Jakarta Initiative for debt restructuring and rescheduling for up
to eight years.

The commercial court is designed to break such deadlocks which
have virtually stopped new domestic and foreign lendings to the
business sector, thereby paralyzing a large number of industrial
firms. Moreover, the settlement of $64 billion in private sector
foreign debts is crucial for the reopening of international
credit lines to Indonesian businesses.

The two controversial court decisions, however, should not
hastily lead businesspeople to a final verdict that the court is
ineffective and incompetent. The issue here has nothing to do
with the notorious reputation of Indonesia's judicial system that
has long been perceived as highly susceptible to corruption and
political pressures. None of the judgments raised questions about
the moral integrity of the presiding judges. Rather, they
reflected lack of the judges' technical competence, something
that is still understandable given the complete novelty of
bankruptcy rulings in the judicial system.

Even though the judges completed three months of special
training in bankruptcy proceedings and business practices in
August, we cannot expect them to master all the complex
ramifications of business deals right away. They require a
learning period.

We believe litigants, too, will see the problems simply as a
temporary confusion, which can still be straightened out in the
Supreme Court.

Most importantly, the power and capacity of the court to judge
objectively and have its verdicts enforced has not been called
into doubt because it is not a question of the judges' integrity
but rather their technical competence. This, we believe, will
eventually be ironed out as the court picks up more experience in
the months to come.