Recourse set in bankruptcy law

JAKARTA (JP): A new bankruptcy act which will come into force in July promises simple and swift court actions that will give better protection to creditors and other claimants than the existing legislation.

Enacted through a government regulation and replacing a 1905 law on bankruptcy, the law states that a person or institution with debts owed to two or more creditors can be declared bankrupt by a court order if he/she or it defaults on at least one of the debts.

The regulation, in lieu of a law, was made available to the media by the State Secretariat yesterday. It was signed by President Soeharto on April 22 and will come into force three months thereafter.

It bypasses the House of Representatives, which has the constitutional right to pass all laws in the country.

The government is justifying the move to circumvent the House on the grounds that any solution to the current economic crisis, particularly pertaining to the massive corporate offshore debt, hinges on the introduction and implementation of a more effective bankruptcy law.

Many companies with mountains of unpaid foreign debts -- totaling $68 billion -- are technically bankrupt. They continue to exist at least in name because the complexity of the existing law discourages creditors from taking legal action.

Under the new law, a creditor or the government's prosecution office can petition a court for a ruling to declare the debtor bankrupt.

In the case of debtor banks, the petition must come from Bank Indonesia, the central bank, while for publicly listed companies, it must come from the Capital Market Supervisory Agency.

The regulation requires a court to set a hearing date within 48 hours of the petition being registered, hold the hearing within 20 days, and make a ruling within 30 days.

The government is currently preparing to establish new commercial courts to deal specially with bankruptcy cases. Initially, they will be set up in Jakarta's five mayoralties.

The regulation allows for parties to a dispute to appeal against the court's ruling to the Supreme Court. The Supreme Court is also required to make its ruling within 30 days of an appeal being registered at the Supreme Court.

The parties to the dispute can also apply for a judicial review by the Supreme Court after it has made its ruling.

The rule allows plaintiffs or state prosecutors, pending a court decision on bankruptcy, to apply to a court to order the confiscation of part or all of the debtor's assets.

Alternatively, a court could appoint a receiver to monitor the management of the debtor's business affairs or oversee payments and transfers of assets to creditors.

In declaring an institution bankrupt, a court must appoint a supervising judge or a receiver that is independent and has no conflicting interests with parties to the dispute, to execute the decision.

The regulation allows a court to nullify some transactions conducted by a debtor up to one year prior to the declaration of bankruptcy, if there is sufficient evidence that the debtor was aware, or should have been aware, that the transactions would damage the creditors' interests.

Creditors can request a court to nullify grants made by a debtor within the last 12 months if the debtor knew, or should have known, that such actions were harmful to creditors.

A creditor can immediately execute claims to rights to guarantees, auctions and collateral.

The execution of other claims can be deferred up to 90 days to allow the receiver to use or sell the assets of debtors, as long as they are not against the interests of creditors.

The new regulation also empowers a court to mediate in a dispute between debtors and creditors.

A court can rule for deferral of loan repayments if a debtor is unable to meet its obligations, on condition that the debtor presents a proposal for a settlement.

The court must then set a date to hear the case within 45 days after it rules for deferral.

During this period of deferral and until a settlement is made, a debtor cannot conduct a transaction or transfer title to its assets.

A court may receive both a deferral of a loan repayment and a petition for bankruptcy. If that is the case, the court must first issue a ruling on the deferral. (prb/emb)