New law protects creditors, debtors

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.