Legal uncertainty puts off investors

Dadan Wijaksana, The Jakarta Post, Jakarta

Aside from prolonged domestic, social and political turmoil, legal uncertainties -- highlighted by dubious settlement of corporate disputes in the commercial court -- also share the blame for discouraging foreign investment.

Throughout last year, analysts say, the handling of legal disputes in the corporate sector has been disappointing, reflecting the need for further reform of Indonesia's legal system if the country wants to win back dwindling investor confidence.

In all too many cases, rulings made by the courts have been regarded as inconsistent, mostly favoring debtors.

Since the enactment of the Bankruptcy Law three years ago, only a small number of creditors have been successful in winning their bankruptcy suits.

This situation has become increasingly worrying to investors who need a credible commercial court to ensure the safety of their investment funds.

Todung Mulya Lubis, a prominent lawyer, says the government's lack of reform-oriented legal policies has further hampered the inflow of much-needed foreign investment.

"The way I see it, our commercial court has been ruling in favor of local debtors ... (the debtors) often get what they ask for," Todung told The Jakarta Post.

"This will definitely hurt our business climate as we cannot provide creditors with legal certainty."

Last year alone, the fairness of the country's legal system has been tested in several major business disputes that have drawn international attention.

They are, among others, the Manulife, Panca Overseas and Davomas cases as well as the state electricity company PT PLN's dispute with a number of independent power producers.

In the Manulife case, it took no less than then-president Abdurrahman Wahid's intervention to revive investor confidence, by ordering the Attorney General's Office to halt an investigation into PT Manulife Asuransi Jiwa Indonesia (AJMI).

Gus Dur, as he is widely known, said he had to take that action so the case did not damage Indonesia's relations with foreign creditors.

The high profile case revolved around a dispute between Canadian insurance company Manufacturer's Life Insurance (Manulife) and British Virgin Island-based Roman Gold Assets.

In 2000, Manulife bought a 40 percent stake in PT Asuransi jiwa Manulife Indonesia (AJMI) from PT Dharmala Sakti Sejahtera (DSS) following a Jakarta Commercial Court ruling declaring DSS bankrupt.

But the sale was disputed by Roman Gold Assets, claiming to be the owner of Dharmala's 40 percent stake in AJMI. Roman said it had purchased the shares from Hong Kong-based Harvest Hero International Ltd. before Manulife made its purchase.

Manulife said Harvest was a paper company established to allow fictitious transactions to take place, but police instead detained a senior local Manulife official, who was only released after objections from the Canadian government.

Another similar case involved PT Panca Overseas Finance and its main creditor, International Finance Corporation (IFC), which is the World Bank's lending unit for the private sector.

Controversy surrounding that case started when the Jakarta Commercial Court rejected a bankruptcy petition filed by IFC against Panca and instead agreed to Panca's proposal to ratify a debt restructuring program.

Panca owed some US$13 million to IFC of its total $230 million debt.

The court argued that the agreement was based on support from the majority of Panca's creditors. But IFC, which appealed the ruling, said many of the creditors were bogus companies.

IFC suspected Panca of fabricating 14 of the 31 creditors to enable it to win the creditors' vote for its debt restructuring proposal.

Under the Bankruptcy Law, a company survives a bankruptcy petition if the majority of its creditors, representing at least two-thirds of the total outstanding debt, vote to accept the company's debt restructuring proposal.

The court's ruling was believed to be a huge blow to IFC, as it later suspended its lending program to Indonesia, saying that the country needed to speed up legal reforms to lure back foreign investors.

IFC is reported to have an investment exposure of some $720 million in Indonesia. Indonesia is IFC's seventh largest country portfolio.

Other creditors, as well as the Indonesian Bank Restructuring Agency (IBRA), have had similar experiences.

Analysts blame such questionable rulings on rampant corruption and collusion at court.

All these have aggravated the already deteriorating investment sentiment in the country, as there are no guarantees that investors will get a fair legal settlement if they need to go to trial over a dispute.

A World Bank report says that these cases have raised suspicions that authorities here take biased, systematic, stands against foreign investors and practice an unequal application of the law in favor of domestic debtors.

"The commercial court, through a number of questionable judgments, has not gained the confidence of the investor community, and has not played a significant role in corporate restructuring," it said.

Advocate Luhut Pangaribuan warned that if these bad practices keep taking place, it will keep weighing heavily on efforts to improve the investment atmosphere.

The country's new Bankruptcy Law was enacted in 1998 to replace the Dutch East Indies Bankruptcy Law of 1905.

Both the commercial court and the Bankruptcy Law were established on Aug. 20, 1998 with Law No. 4/1998, specifying that the jurisdiction of the commercial court is limited to bankruptcy cases.

Todung says that there are at least two major prerequisites to the country improving its image in the legal arena before the international community.

He said that aside from improvement within the law itself, the government should also improve its legal infrastructure and human resources, which include judges and lawyers.

The judges have to master the complexities of the problems they face and do their tasks properly so that the legal system can become what the business community relies on.

To get there, according to Todung, there are steps that have to be met first.

A tight selection process should be conducted to choose judges for the commercial court, and candidates should not be restricted to career judges but also include those from other backgrounds, including academics.

The trial process should also be made transparent so that the public, debtors and creditors can all keep a close eye on what is going on at a trial.

"Last, but not least, there has to be sanctions for judges found guilty of abusing their authority for their own interests," Todung said.