Our legal black hole
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.
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