Our legal black hole
This time it was the 94.5 percent-owned subsidiary of British Prudential Assurance Company Ltd. that plunged into Indonesia's legal "black hole".
Previously in mid-June of 2002, it was the Indonesian unit of Canadian Manufactures Life Insurance stuck in legal limbo because of our flawed bankruptcy laws, thereby setting off an international furor and prompting the International Monetary Fund to intervene.
However the Jakarta Commercial Court's bankruptcy ruling of April 23 against PT Prudential Life Assurance was assessed, the decision was utterly absurd. How could a life insurance company with of Rp 1.56 trillion (US$183 million) in assets and Rp 1 trillion in premium income last year be declared bankrupt for failing to pay Rp 10 billion in commission fees to one of its former insurance agents?
How could a finance company like an insurance firm be so easily bankrupted? Didn't the court's judges know that an insurance company is strikingly different from, say, a manufacturing firm with regards to the impact of a bankruptcy ruling? Bankrupting an insurance firm with tens of thousands of policy holders and multiple transactions with numerous other companies triggers an extensive chain of events.
In the Indonesian context where many judges in its commercial court are notorious either for their technical incompetence or corruption, either of these "viruses" could have caused the predicament of the British company.
Whatever the circumstances that made such an absurd bankruptcy ruling in favor of former Prudential insurance agent Lee Boon Siong from Malaysia possible, the legal imbroglio encountered by Prudential is only more evidence our bankruptcy laws urgently need a revision.
The government and the House of Representatives (DPR) should take most of the blame for this legal "black hole" because of their failure to immediately amend the 1998 bankruptcy law to protect a highly solvent insurance company from such an insensible closure.
When the Jakarta Commercial Court declared Manulife insurance bankrupt, through an incredibly bizarre ruling in mid-2002, for failing to pay dividends to its Indonesian shareholders, the government should have realized how imperative and urgent had been the amendments to the law to prevent a recurrence of such legal uncertainties.
The government did propose amendments to the bankruptcy law to the DPR almost two years ago, which would require, among other things, that insurance companies could be declared bankrupt only by the minister of finance. Such rules would be similar to provisions that allow banks to be declared bankrupt or insolvent only by the central bank.
However, the DPR had different priorities and the proposed amendments were left untouched on the shelf.
The Government White Paper on the new reform agenda unveiled last September also set out a revision of the bankruptcy law as an imperative to improve legal certainty. However, there is no definite time schedule set for the completion of the amendment process.
Amendments to the law certainly would not immediately make the bankruptcy regime more effective and credible, but it would be a good first step to improve the system, making procedures more clear cut and proceedings more accountable and transparent.
The government hurriedly revised the bankruptcy law in 1998 by issuing a presidential decree in lieu of a law, mainly due to strong pressure from the International Monetary Fund. However, while it stipulated a protective clause for banks, it overlooked the need for similar provisions for insurance companies.
However, protecting insurance businesses isn't the only reason that makes the amendments urgent. The 1998 revision caused the pendulum to swing from one extreme to another. Whereas before 1998 the bankruptcy law had been too debtor-friendly, the 1998 amendments made it too creditor-friendly, as can be seen from the rule that set a very low threshold for filing bankruptcy --allowing the filing of a bankruptcy case if a company has two debts, one of which is due and payable.
We are confident that, similar to the Manulife case, the Supreme Court will eventually overrule the Commercial Court's decision against Prudential. However, the damage has been done. The insurance business is founded on trust. Putting Prudential out of operations for almost two months, while it waits for the Supreme Court's ruling, does not build such trust.
In view of the DPR's preoccupation with the electoral process, the government should act immediately to amend the 1998 bankruptcy law by issuing a presidential decree in lieu of law -- as it did recently with the revision of forestry legislation.
-------