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)