Pay or liquidate
Pay or liquidate
The easy time will soon end for Indonesia's nonpaying debtors
who have adopted a laid-back attitude since the outbreak of the
economic crisis last year. It is no coincidence that the new
bankruptcy law, a government regulation in lieu of a law to amend
the 1905 Insolvency Ordinance, was enacted last week. This was
about 10 days before the Aug. 3 start of the Frankfurt agreement
on the overall restructuring of Indonesian corporate and bank
foreign debt, which totals more than US$72 billion.
The new bankruptcy procedures are designed specifically to
provide an effective, efficient legal mechanism to decide if
debtors are bankrupt and to deal with selling their assets. The
90 amendments contained in the new law are prompted by the urgent
need for a quick, fair, transparent and effective resolution of
company indebtedness which is crucial for legal certainty in the
business sector and for encouraging new bank lending.
Hundreds of companies are now technically bankrupt under the
huge burden of foreign and domestic debt, but the government and
creditors have been barred by the opaque procedures of the 1905
rulings from declaring them legally bankrupt and acting quickly
to implement their liquidation. This stalemate has virtually
stopped all new domestic and foreign lending to the business
sector, thereby paralyzing a huge number of industrial firms.
Many banks are failing because they cannot collect their loans.
Much has been written about the benefits of the new bankruptcy
procedures, including the setting of tight time limits of a
maximum of around 110 days after the filing of the bankruptcy
petition for the issuance of court decisions and their
enforcement. This already includes 30 days for the appeal process
that must go to the Supreme Court. The old procedures allowed
debtors indefinite delays that could protract proceedings for up
to more than 10 years.
The new bankruptcy legislation is among the business and
commercial laws Indonesia urgently requires to ensure the fair,
smooth running of its market economy. 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.
The law facilitates business transactions and capital flows
as it protects both creditors and debtors with clearly defined
rules. Investors need an easy entry to businesses through
simplified licensing procedures as well as a smooth way out if
needs be. The law is not made simply for the benefit of
creditors. It stipulates procedures not only for liquidation but
also reorganization of problem firms. It provides failing firms
with an orderly means of exit but also allows ailing, but
potentially viable, firms to restructure.
But the real test of the effectiveness of the new law will
take place later next month when the Commercial Court, set up to
handle bankruptcy cases, starts working in Jakarta with 45
special judges who have undergone special training since May.
Litigants must be confident the court has the power and the
capacity to judge objectively and get its judgments enforced.
At issue here are not only skills and knowledge about
commercial laws and modern business practices but also the
notorious reputation of Indonesia's judicial system. The nation's
court system, besides being over-loaded with a mountain of cases,
has so far been stigmatized by the widespread public perception
that many judges can be bribed and are highly vulnerable to
political pressures.
Laws are only as good as the institutions that enforce them.
It is competent and reliable courts and specialized enforcement
agencies on which all enforcement activities -- formal or
informal -- ultimately depend.
The government itself must abide by the rule of law so private
entities will trust it not to intervene arbitrarily in their
affairs.