RI revamps judiciary and bankruptcy laws

RI revamps judiciary and bankruptcy laws

NEW YORK (Dow Jones): As many international creditors will
tell you, Indonesia's legal system is long overdue for a revamp.

The country's bankruptcy laws and the judicial infrastructure
for enforcing them are outdated, unreliable and virtually
unworkable, critics say.

That's why an international effort has been mustered for an
overhaul of the system, to prepare it for what may well be a rash
of bankruptcy cases.

Under the apparently enthusiastic leadership of newly
appointed Justice Minister Muladi, a team of Indonesian lawyers
is working closely with foreign legal advisors and staff from the
International Monetary Fund to devise a new legal framework for
debt settlement. Details of the team's reform proposals, obtained
by Dow Jones Newswires, point to two key goals.

The first is to make Indonesia's existing bankruptcy law
workable - the code is virtually unchanged from the Dutch
bankruptcy law of 1905 adopted under colonial rule. One amendment
to the law was approved Wednesday, but details weren't released.

The second goal is to restructure, train and reform the
Indonesian judiciary.

Redesigning the system presents a classic dilemma of
bankruptcy law: how to balance the interests of creditors seeking
to recover assets from debtors that go belly-up with those of
viable companies who need temporary debt relief. It's a key
problem for Indonesia's economy, which needs both foreign
investor confidence and a solid corporate base to move beyond its
current crisis.

"If there is no law that permits creditors to pursue debtors,
then you don't very much have a bankruptcy law," said Richard
Levin, a bankruptcy lawyer with Scadden, Arps, Slate, Meagher &
Flom in Los Angeles.

"The flipside," he said, "is if you let the creditors get too
aggressive in enforcement you can just make the economic
situation worse and dry up the money supply."

Significantly, the bankruptcy reform is proceeding
concurrently with talks between international bankers and private
Indonesian borrowers, who are struggling to repay some US$68
billion of outstanding foreign debt.

In fact, lawyers involved in the draft argue that the
breakthrough in the talks last week in New York -- where the
parties agreed to adopt a specific framework for repayment
rollovers -- might not have been possible without the promise of a
more predictable legal environment in Indonesia.

That's because bankers see the heavy hand of the law and the
threat of liquidation it carries as necessary sticks to bring
debtors to the negotiating table.

Under existing conditions, complains one foreign banker in
Jakarta, "there's no incentive for a company to pay up.

"The best cash management strategy for them is to sit on their
hands," the banker said. "They know there's precious little a
creditor can do to get at their assets."

Bankers and lawyers agree that their major concern is with
judicial, rather than legislative, reform. The proposed
amendments to the bankruptcy code were fairly straightforward,
but nonetheless important, updates to bring the Act into line
with existing, modernized laws in the Netherlands. Improving the
judiciary is a more daunting task.

Indonesian judges have a notorious reputation for corruption.
The experiences in 1996 of Supreme Court Justice Adi Andojo, now
retired, who was severely reprimanded for blowing the whistle on
collusion between litigants and his colleagues on the top court's
bench, highlighted the deeply institutionalized practice of
bribery within the judiciary. The systemic nature of the problem
makes it all the harder to overcome, say lawyers and political
scientists.

This is of serious concern for creditors. "The last thing you
want is to have a crony appointed to run an insolvent business,
because you won't have anything left", says on New York-based
bankruptcy lawyer with specialized knowledge of Asian legal
systems.

If nothing else, the bankruptcy reform team is showing a
determination to remove such fears. Proposed reforms such as one
requiring judges to provide written judgments are aimed at
"raising accountability and transparency", says one lawyer
involved in the draft. Its now just up to Indonesia's rubber
stamp parliament, and ultimately President Soeharto, to sign them
into law.

On top of changes aimed at preventing graft, bold schemes are
also being devised to improve the competence and ability of
judges assigned to complex bankruptcy cases.