Govt drafts new law on corporate restructuring

Rendi A. Witular, The Jakarta Post, Jakarta

In order to improve legal certainty for local and foreign businesses in Indonesia, the government is now drafting a new law on corporate restructuring which will be analogous to Chapter 11 of the U.S. Bankruptcy Code.

Bankruptcy expert Sutan Remy Sjahdeini, who heads the special government team drafting the corporate restructuring law, told The Jakarta Post on Tuesday that the draft law, if enacted, would mark a milestone in the country as regards legal certainty for business and investors.

The draft will complement the bankruptcy bill, which is currently still under deliberation in the House of Representatives.

"The two draft laws will replace the existing bankruptcy law, which has been widely condemned by businesspeople for its uncertainty and lack of logic," said Remy.

Remy explained that the draft laws would be enacted as a single package because both were related to each other, with the bankruptcy draft law serving more or less the same purposes as the U.S.'s Chapter 7.

Chapter 7 is that part of U.S. bankruptcy law that specifically deals with bankruptcy, while Chapter 11 deals with the reorganization of a company facing financial difficulties.

Remy said that the draft law on corporate restructuring, which was currently still being discussed in the Ministry of Justice and Human Rights, would hopefully be submitted to the House by the end of this year.

He explained that under the draft law, a company experiencing financial difficulties could ask for bankruptcy protection from the commercial court. However, only companies that still had prospects of survival could be granted protection by the court.

The court would ask for the opinion of an independent auditor or business advisor on the company's business prospects, he said.

"Under the planned laws, the decision to allow a bankruptcy petition will be the last resort as bankruptcy imposes huge costs on the country, such as unemployment and the loss of taxes to the state," said Remy.

Under the existing law, a company can easily be declared bankrupt by the court, even if it owes a debt of Rp 5 (less than 1 U.S. cent), as the law does not set a minimum amount of debt that must be owed to a creditor in order for him to file for bankruptcy.

But Remy said that under the draft laws, there would be a stipulation on the minimum amount of debt that would be required for a creditor to be eligible to bring a bankruptcy petition against a debtor company.

He said that the minimum nominal debt should be more than half of the company's total debt.

A good example of the mischief that can result from the lack of such a minimum debt level is the commercial court's decision in the case of insurance firm PT Asuransi Jiwa Manulife Indonesia (AJMI).

The Central Jakarta Commercial Court declared the company bankrupt despite its ability to pay its debts. The bankruptcy petition was filed by the receiver of the now defunct PT Dharmala Sakti Sejahtera over unpaid dividends in 1999. AJMI said that no dividends were declared during the period.

The ruling was then overturned by the Supreme Court after a wave of protest by the international community.

This case, however, once again painted a bleak picture of the country's judicial system and its laws.

Many local and foreign business players have since then been urging the government to revise Bankruptcy Law No. 4/1998 as it fails to provide legal and commercial certainty for investors.