Legal uncertainty puts off investors

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.