Prudent ruling at last

Prudent ruling at last

The Supreme Court, as widely expected, duly overturned the
Jakarta Commercial Court's bankruptcy ruling of April 23 against
the Indonesian subsidiary of British insurance company Prudential
PLC, asserting that the case had been mishandled.

Supreme Court Justice Mariana Sutadi explained after the
awarding of the verdict early last week that the case between
Prudential and one of its former insurance agents is not about a
debt due and payable, as stipulated in the bankruptcy law, but a
dispute over an agreement.

Businesspeople certainly welcome the ruling as further
evidence that the justice system in the country is not entirely
hopeless, as many have perceived.

However relieved PT Prudential Life Assurance should have been
with the prudent ruling, the damage had nevertheless been done.
Most businesses, especially foreign investors, remain greatly
apprehensive, worried about the uncertainty arising from what has
widely been perceived as one of the most corrupt judicial systems
in the world.

Businesspeople are concerned about the great risk of falling
into legal black holes, unless several provisions within the 1999
Bankruptcy Law that allow judges to declare even solvent
companies bankrupt are amended.

Remember the case of the Indonesian subsidiary of Canadian
Manulife in mid-June, 2002? The fourth-largest insurance company
in the country was declared bankrupt by the Jakarta Commercial
Court because of its failure to pay dividends (not even debt) to
its Indonesian shareholders. Even though this absurd verdict was
eventually overturned by the Supreme Court, companies then had
expressed great apprehension that they could fall into the same
legal quicksand.

The government, also, had immediately realized after the
bizarre ruling against Manulife that the bankruptcy law should be
amended to prevent such an insensible decision. However, the
draft amendments that were submitted to the House of
Representatives more than two years ago remain untouched.

It was later the unfortunate turn of Prudential, with total
assets of more than US$180 million, to fall into the quicksand
late last April after the Commercial Court ruled that it had
failed to pay a disputed $400,000 debt to one of its former
insurance agents.

Apart from the absurd bankruptcy rulings, there is a long
string of other bizarre court verdicts by district courts on
commercial disputes, which have severely damaged public trust in
the justice system and worsened legal uncertainty.

Just to mention a few of them: As recently as mid-May, British
Rowe Evans agro-group, was hit by the ruling of a district court
in Medan, North Sumatra, which arbitrarily annulled its $2.3
million purchase of a plantation in that province from a local
businessman. Also, early that same month, the district court in
Serang, Banten province, ruled that the issuance of $185 million
in bonds by PT Tri Polyta in 1996 was illegal and did not need to
be repaid to creditors, including Merrill Lynch and Lehman
Brothers. In August, 2003, PT Danareksa Jakarta International
gained a court ruling in Jakarta that freed it from the
obligation to repay $180 million in syndicated loans to foreign
creditors, including U.S. Lone Star Fund.

Another bizarre bankruptcy ruling, such as that against
Prudential, could have been prevented had the amendments been
approved by the House.

The proposed amendments include stipulations that an
insurance company can be declared bankrupt only by the finance
minister. Such provisions are similar to the stipulations in the
same law that allow banks to be declared bankrupt only by the
central bank and securities companies by the Capital Market
Supervisory Agency (Bapepam).

The planned amendments, also, will raise the criteria for
filing a bankruptcy case. At present, the criteria is simply two
debts, one which is due and payable, even though the debtors, as
in the cases of Prudential and Manulife, have assets that far
outweigh their liabilities.

To be sure, we need a bankruptcy system to force debtors to
repay their debts in good faith but the rulings should be
designed to be fair to both the debtors and creditors.

It is needless to reiterate the urgency for the House to
enact the proposed amendments to the bankruptcy law to close any
loopholes that may be used by corrupt judges or lawyers. True,
the amendments would not immediately make the bankruptcy regime
more effective and credible, yet better rules of the game would
be a good start to improve the system, to make the procedures
more clear cut.

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