New law protects creditors, debtors

By M.C. Schroeder-van Waes

JAKARTA (JP): In an interesting article in The Jakarta Post of May 14, 1999, Frans H. Winarta commented on the new Indonesian Bankruptcy Law. Although his comments are generally agreeable, in reading between the lines there was a feeling about bankruptcy proceedings in general, which has become somewhat of a stereotype.

From his wording, one could conclude that bankruptcy proceedings are mainly in the interest of creditors and, although perhaps justified, a "business-like" punishment for debtors who are not paying their debts.

This article highlights that the Bankruptcy Law has other objectives as well, and may achieve these objectives in the near future, if the law is used and implemented properly by debtors, creditors, receivers and the judiciary. There are already many indications of a strong tendency toward this direction.

First of all, the Bankruptcy Law not only aims at protecting the rights of creditors, but also protects the rights of debtors. Especially in an economic crisis, debtors need time to restructure their businesses. Powerful creditors, such as suppliers or lenders, could use their position to force debtors to pay their debts by selling assets or using cash flow, which the debtor would have used differently (in a way more advantageous to a restructuring), if these powerful creditors were not pushing so hard.

The declaration of a bankruptcy, or the granting of a (provisional) suspension of payments, gives the debtor some breathing space. In that (limited) period the creditors are forced to wait to enforce their claims and the receiver and debtor together have time to investigate the possibilities of a restructuring.

Second, a debtor can be in a difficult position if it offers its creditors a reasonable restructuring of its debts but some creditors unreasonably withhold approval. Outside bankruptcy and suspension of payments, the approval of all creditors is required to reach a composition. Consequently, one creditor is able to block a whole restructuring process.

In bankruptcy and suspension of payments, no consensus is required to reach a composition plan that will bind all unsecured creditors (the only requirement is the approval of more than half of the creditors attending the meeting of creditors who represent two-thirds of the provisionally admitted unsecured claims of those creditors in attendance). This can be a very useful tool for a debtor to force dissenting creditors to accept a composition. It should be added though, that such a composition is only voted upon by, and therefore only binding upon, unsecured creditors. Secured creditors (i.e., creditors holding a mortgage, pledge or fiduciary transfer) are not bound by a composition plan. With all of them, the debtor must simultaneously reach a composition in order to keep relevant assets in the company during and after the restructuring.

Third, the Bankruptcy Law also protects the rights of employees. There is frequent confusion about the difference between "liquidation" and "bankruptcy". A bankruptcy declaration does not necessarily lead to a complete liquidation of the bankrupt company. The receiver will first investigate (with the help of independent specialists, such as accountants and appraisers) whether a composition plan (i.e., a restructuring of debts) is feasible. If not, the company will officially be "insolvent" and the receiver will start liquidating the assets.

Liquidating the assets does not, however, have to be a separate sale of all the assets. The receiver will always try to sell the assets as a "going concern", because the company as a whole will have a much higher value than a separate sale of each of the assets. If the assets are not sold as a going concern, a buyer has the opportunity to buy only the best bits. A purchaser buys the movable and immovable assets of a bankrupt company, including the name, licenses, know-how, goodwill and business prospects of the company.

The debts remain behind in the bankruptcy estate. The receiver will provide for the equitable treatment of similarly situated creditors and cover as much of the debts as possible from the purchase price of the business. It will be one of the tasks of the receiver to negotiate with the purchaser a contract requiring the purchaser to hire as many of the employees as possible. A supervisory judge checks whether the receiver fulfills his tasks properly.

Thus, from the moment of bankruptcy, there are still two possibilities that the bankrupt company will continue to exist and (most) employees keep their jobs: a restructuring of the debts through composition or a sale of the company as a going concern.

Apart from the possibility that the company will survive and the employees keep their jobs, the rights of employees are also protected in bankruptcy, because the receiver will guarantee the payment of salaries if he decides to continue the business after the bankruptcy declaration. Further, the receiver will treat the claims of the employees with preference, with regard to the salaries due before the date of bankruptcy. Whereas cash flow and assets often "disappear" without the employees being paid when a company voluntarily goes into liquidation, the rights of the employees are protected in liquidation through bankruptcy.

Fourth, bankruptcy proceedings are in the interest of Indonesia as a whole. When investors (both local and international) know that, if worst comes to worst, they have the possibility of recovering at least part of their claims and know that they can get back money and restore injustice in predictable and transparent court proceedings, they will be more likely to invest in Indonesia again.

One creditor can file successfully for bankruptcy when it is established that: (i) the debtor has two or more creditors; and (ii) the debtor failed to pay at least one debt that is due and payable. The Bankruptcy Law itself, as Winarta stated, indeed does not describe the exact meaning of the legal term "debt", but it means to refer to the law of obligations of the Civil Code.

According to Article 1233 of the Civil Code, obligations or debts can arise either out of contract or out of law. Further, Article 1234 of the Civil Code stipulates that there are obligations to give something and obligations to do or not to do something. Consequently, in the Modernland case, it was in my view decided correctly that not delivering apartments in accordance with the contract qualifies as a due and payable debt.

The Supreme Court, however, has expressed a different opinion about the meaning of a "debt". In its judgment, which overturned the bankruptcy declaration of Modernland by the Commercial Court, it decided that only loans qualify as debt in accordance with the Bankruptcy Law. The Commercial Court later (in a different case) took a different view on this issue.

The Commercial Court considered the legal term "debt" not only covered indebtedness out of loan agreements, but also obligations that arose from any other agreement or any transactions which required a payment to be made. It decided that a debtor who caused damage to his creditors by being in default under an agreement could be petitioned for bankruptcy because the debtor was not able to pay a debt that has fallen due and payable.

A "debt", as stated by Winarta, indeed is not limited to a certain minimum amount. Consequently, in theory a company having only one due and payable debt of Rp 10,000 and having one other debt with another creditor, can be declared bankrupt. However, such a situation can easily be circumvented by simply paying the debt if it is such a small amount. The total value of the assets of the company (which in the Modernland case was approximately Rp 600 trillion, as compared to a due and payable debt of Rp 90 million) is not relevant. A company may have high-value assets, but if it has no cash flow to fulfill its debts it is therefore in a de facto state of bankruptcy and something must happen to break the status quo in case the debtor is not willing or able to do so itself.

Bankruptcy proceedings are not meant to replace negotiations and peaceful settlements. Bankruptcy proceedings are only meant to maximize value for the benefit of all interested parties in the situation where, often without blame to any of the parties, there is not enough to recover all existing claims, and parties are not able or willing to reach an amicable settlement themselves. It is a meaningful institution which Indonesian cannot live without.

The writer is a Dutch lawyer working with Ali Budiardjo, Nugroho, Reksodiputro law firm. This article has been written in a personal capacity.