RI court annuals local firm's debt

RI court annuals local firm's debt

Associated Press, Jakarta

An Indonesian district court has annulled a bond agreement between a local petrochemical company and its U.S. creditors, adding to perceptions the country's legal system doesn't protect foreign investors.

The Serang District Court ruled on Wednesday that a US$185 million bond issued by PT Tri Polyta in 1996, and underwritten by a number of U.S. investment banks, was against Indonesian law, officials said on Thursday.

The ruling frees the company of any obligation to repay its debt, and it's likely to deepen worries that Indonesia's courts often favor local companies at the expense of foreign creditors. The World Bank said last year that failure to overhaul the graft- ridden legal system was a major reason why investment and economic growth here lag behind other Asian countries.

A number of foreign companies, including Britain's PT Prudential Life Assurance and Canada's Manulife Financial Corp., have had their Indonesian subsidiaries declared bankrupt by questionable court decisions.

Tri Polyta launched the lawsuit against its underwriters and other creditors last year in an attempt to counter efforts in a U.S. court to force it to repay its debt.

"This is a very ironic verdict which shows that there is no legal certainty in Indonesia," Todung Mulya Lubis, a lawyer representing underwriters Merrill Lynch & Co., Lehman Brothers and Credit Suisse First Boston, told Dow Jones.

Tri Polyta, owned by Indonesian businessman Prajogo Pangestu, issued international bonds in 1996 to fund expansion of its petrochemical business. But the company was unable to make payments on the debt after the Asian financial crisis hit the following year.

In April 2003, a Federal District Court in New York ordered Tri Polyta to pay $310 million to creditors to cover the debt and interest payments. The court rejected Tri Polyta's claim that it should be excused from repayment due to the crisis.

But creditors, led by the Bank of New York acting as trustee, were unsuccessful in subsequent attempts to get Indonesia's courts to enforce that ruling.

The Indonesian company launched its own legal counteraction last year in Serang, a town near its petrochemical factory on the west coast of Indonesia's main island of Java. The suit named 97 defendants, including the bond's underwriters and local and foreign creditors.

In its ruling, the court granted Tri Polyta's claim that underwriters broke Indonesian law by issuing the bonds through a special purpose financing company set up in the Netherlands.