New bank liquidation rules aim to protect depositors

New bank liquidation rules aim to protect depositors

JAKARTA (JP): The government's new regulation on bank
liquidation, announced by Bank Indonesia (the central bank)
yesterday, provides better protection for depositors if a bank is
shut down.

The long-awaited regulation also gives legal certainty for
depositors, directors, commissioners and shareholders alike
regarding the manner and procedure of a bank's liquidation.

Heru Supraptomo, a director at Bank Indonesia, said that,
whenever a bank was liquidated, depositors must be paid after an
appointed liquidation team pays all salaries owed, court fees,
auction fees, taxes and administrative costs.

"Before this regulation, a bank's depositors were considered a
company's non-preferred creditors. With this regulation,
depositors are treated as preferred creditors. Thus, whenever a
bank is liquidated, they will have a better position," Heru said.

The previous rules on liquidating limited liability companies
-- including banks -- were very general. The banks needed a
special liquidation ruling because they differed from other
companies, he said.

"This ruling is lex specialis. Therefore banks must abide by
this ruling, not other rulings on liquidation," Heru said.

Hendrobudiyanto, another director at Bank Indonesia, said the
regulation was timely. The previous rules had often complicated
bank liquidation.

Complexity

Banking analysts often cite Bank Summa and Bank Umum Majapahit
which failed in 1992 as examples of this complexity. Their
liquidations are still proceeding.

Bank Summa, which was owned by the Soeryadjaya family, was
closed in 1992 because of bad loans worth around $500 million.

Before the new regulation, bank liquidation was based on the
1995 Companies Law, which stipulates that companies -- including
banks -- can be dissolved three ways: by resolution of the
company's shareholders, expiry of the company's operational life
(as stipulated in its incorporation deeds) or by a court
decision.

But the regulation on bank liquidation does not let
shareholders dissolve a bank even it they pursue it through court
proceedings.

Instead it empowers the finance minister to close an insolvent
bank, after advice from the central bank, and the Capital Market
Supervisory Agency if the bank is publicly listed.

After a bank's operating license is revoked by the finance
minister, an extraordinary shareholders meeting must be called to
dissolve the bank as a legal entity and appoint a liquidation
team within two months of the license being revoked.

Bank Indonesia must approve the liquidation team. Two thirds
of the team's members are not allowed to have sat on the bank's
board of directors, board of commissioners or be shareholders in
it.

If shareholders fail to appoint a liquidation team, the
central bank will appoint it.

The team must completed the liquidation in five years.

The regulation stipulates that members of the boards of
commissioners and directors become inactive when their bank is
liquidated. But they may not quit their positions without Bank
Indonesia's consent.

They must stand ready to provide information to the
liquidation team.

The regulation on bank liquidation also refers to the Company
Law, especially on matters related to the responsibility of
shareholders, commissioners and directors.

In the case of bank failure due to the mistake or negligence
of the board of directors or commissioners, all members of the
board are jointly responsible if the bank's assets are inadequate
to cover the liabilities, Heru said.

If a liquidation team member abuses his authority for personal
interest, he may be held responsible.

Hendrobudiyanto said the regulation aimed to complement the
central bank's efforts to cope with problem banks.

But Hendrobudiyanto dismissed suggestions that many banks
facing serious problems should be dissolved.

"If we suspect that a bank has problems and -- based on our
evaluation -- would be unable to meet its obligations or might
endanger our banking system, we will propose that the finance
minister revoke its license and dissolve it," Hendrobudiyanto
said. (rid)