New bankruptcy law
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.