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.