New bankruptcy law

The government moved yesterday to act on an important component of the IMF-brokered reform package of Jan. 15 when President Soeharto instructed Minister of Justice Muladi to draft a new bankruptcy law and the first antimonopoly law as quickly as possible. They are among the business and commercial laws Indonesia urgently requires to ensure the fair and smooth running of its market economy.

Analysts and corporate lawyers have often complained about complex problems and unfair practices in economic transactions and in enforcing contracts due to the opaque legal framework of the business sector. The nation has steadily moved toward a market economy but without the support of adequate commercial laws, leaving many segments of the market operating in a jungle. In the absence of clear-cut rules of the game, the strongest players rule the market as they choose and engage in monopolies, cartels and other forms of unfair business practices.

No wonder commercial law reforms have always been an important component of any economic reform package prepared by the International Monetary Fund (IMF) and World Bank for developing nations like Indonesia. Effective commercial laws permit business parties to agree freely on the terms of a transaction, discourage fraud and abuse and place the power of the state behind the enforcement of legal rights arising from consensual agreements.

A new bankruptcy law is also prominent in the agenda of the current IMF-Indonesia negotiations on a new package to revise the Jan. 15 reform program. Without an effective bankruptcy law, the banking and corporate debt problems -- which have been blamed more than anything else for causing the crisis -- may never be solved under legal procedures acceptable to all parties involved. The protracted process of liquidating 16 insolvent banks last November shows how pivotal this law is for addressing insolvency problems.

That the nation is in dire need of a new bankruptcy law to accommodate modern business practices is quite obvious because corporate and personal insolvency in the country is still governed by the 1905 Insolvency Ordinance enacted by the Dutch colonial rulers. So obsolete has this ordinance become that it has rarely been used to address insolvency cases. This obviously is a source of uncertainty in the corporate world.

A well-designed bankruptcy law facilitates business transactions and capital flows as it protects both creditors and debtors with clearly defined rules. A market economy requires not only an easy entry to businesses through simplified licensing procedures but also a smooth exit. After all, insolvency is not the end of the world for innovative, hard-working entrepreneurs. Most successful businesspeople have one or more business failures in their records. The most important thing is that entrepreneurs have an easy entry into businesses as well as an exit out of one business in order to enter another one.

All this is made possible because a bankruptcy law usually includes procedures for both liquidation and reorganization of problem firms. It provides failing firms with an orderly means of being wound up, it allows ailing but potentially viable firms to restructure and promotes the flow of credit by protecting creditors.

Under a bankruptcy law, the control of financially suspect firms is handed over to their creditors before all the assets have been misused or dissipated and gives creditors the information and power to direct the use of the remaining assets to recover debts. Without this safeguard, creditors will either refuse to make loans or turn to the state for support.

A large number of companies are now technically bankrupt but the government and their creditors have been barred by the opaque procedures of the 1905 Insolvency Ordinance from declaring them legally bankrupt and acting quickly on their liquidation.

Seen in this context, a new bankruptcy law is a vital part of the efforts to resolve the issues of unhealthy banks and the huge amount (US$73 billion) of outstanding corporate foreign debt. It will provide clear procedures for enforcing both the termination of insolvent companies and the rights of creditors to the remaining assets. Under this law, creditors will rest assured that the laws stand behind their right to repayment and they can better estimate the degree of risk they are undertaking when, for example, loaning money.