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The country's bankruptcy laws and the judicial infrastructure for enforcing them are outdated, unreliable and virtually unworkable, critics say.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