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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