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.