Skeptics unmoved by commercial court

Skeptics unmoved by commercial court

By Riyadi and Aloysius Unditu

JAKARTA (JP): Long before its first hearing opened in Jakarta
in August, the commercial court had been roundly trumpeted as the
solution to snip through red tape and bring quick closure to
bankruptcy cases.

Yet, despite being in opposing legal camps, both creditors and
debtors are united in complaining about its cost.

One month after it opened its doors and after much of the
fanfare has died down, the Jakarta Commercial Court has heard
only five bankruptcy cases, three of which involved the same
plaintiff.

The handful of cases belies the sobering fact that almost all
local companies with foreign exchange debts are technically
bankrupt -- meaning their liabilities exceed assets -- and are
incapable of servicing their debts following the 75 percent
depreciation of the rupiah to U.S. dollar since July last year.

Several bankers expressed pessimism over the way the
commercial court would handle bankruptcy cases, arguing that it
is still run by the same judges and personnel of the Central
Jakarta District Court in a legal system notorious for corruption
and incompetence.

Others were guardedly optimistic, choosing to wait until the
court hands down its first judgments before forming an opinion.

"We have confidence in the court. And we, bankers, were the
ones who asked the government to set up such a court," Indra
Widjaja, president of Bank Internasional Indonesia, told The
Jakarta Post.

He said Indonesia badly needed the bankruptcy court to force
debtors -- virtually free in the past to ignore creditors in the
absence of an enforceable bankruptcy law -- into negotiating
settlements.

The court was created at the behest of the International
Monetary Fund, the architect of the US$49 billion bailout package
for the country.

Nobody disputes the importance of establishing a commercial
court to clean up the mess of both domestic corporate and foreign
corporate debt, currently totaling a dizzying $70 billion.

Associate director of state-owned Bahana Securities Andre Cita
said the court would help restore foreign investor confidence if
it functioned as intended.

"I think everyone is going to watch it very carefully, and see
how it works. If it works, than I think it will help Indonesia in
strengthening perceptions among foreign investors."

First bank

American Express (Amex) Bank is the first foreign bank and so
far the only banking institution to use the court. It is suing
three of its local debtors -- publicly listed PT Ometraco
Corporation, its subsidiary PT Ometraco Multi Artha and publicly
listed cocoa producer PT Davomas Abadi.

Another case pits construction firms PT Jaya Obayashi and PT
Nusa Raya Cipta against real estate and golf course developer PT
Karabha Digdaya.

The case between contractor PT Lelco Trindo and PT Mustika
Prince Hotel, the owner of the Sheraton International Hotel
Yogyakarta, was dropped. They reached an out-of-court settlement
in which Mustika will pay Lelco its outstanding construction fee.

Prominent bankruptcy litigator Hotman Paris Hutapea of the
Makarim and Tiara law firm said there were nine other overseas
parties which planned to file bankruptcy cases against local
companies in the coming months.

"But most of them are waiting to see the outcome of the cases
currently in court."

Sentiment may not be positive, lawyers and experts agreed, if
the case pitting Jaya Obayashi and Nusa Raya Cipta against
Karabha Digdaya is used as a barometer of future judgments.

In its decision on the temporary suspension of payment filed
by Karabha Digdaya, the court mandated a fee of 5 percent of
Karabha's total assets of Rp 1.3 trillion for the appointed
administrator of the assets.

It adds up to a fee four times higher than the Rp 15.3 billion
owed by Karabha to the plaintiffs, said Edino Girsang from the
Yan Apul law firm, who represented Karabha.

Hotman Paris commented flippantly: "It's a lot of money ...
I'd better become an administrator instead of a lawyer then."

The bankruptcy law allows defendants to file for suspension of
debt repayments. The court must approve a temporary suspension,
which is valid for 45 days, and then appoint a supervisory judge
and an administrator to protect the debtor's assets.

As there is no stipulated administrator's fee in the law, it
is left to the court's discretion (if a debtor is declared
bankrupt, there could be a higher fee for the executor or
receiver who will help in the auction of the debtor's assets).

The court is required to convene a hearing within 45 days to
decide whether the temporary suspension should be made permanent.

If half of the creditors reject the proposal for permanent
suspension, the court must declare the debtors bankrupt.

If the creditors approve, the court issues a permanent
suspension, valid for 270 days (including 45 days' temporary
suspension of payment), during which time debtors and creditors
must agree on a reorganization plan.

If the parties fail to reach an agreement on settling the debt
hangover during the 270 days, the court must declare the debtors
bankrupt one day after the deadline.

The court could terminate the permanent suspension of payment
before its 270-day period is due and than declare the debtors
bankrupt if the supervisory judge, the administrator or one of
the creditors asks it to do so.

The court can also terminate the permanent suspension of
payment on its own initiative if it is found that the debtors'
actions could inflict losses to creditors or that the debtors
transfered their assets without the consent of the administrator.

In this event, the debtor is automatically ruled bankrupt.

But if creditors and debtors agree on a debt settlement within
the 270-day period, the court must legalize its terms.

The court can reject it only if it is found to be legally
flawed, if it was reached through manipulation or conspiracy with
one or more of the creditors or through other dishonest ways, or
the debtor had not paid the administrator's fee.

If the court rejects the debt settlement agreement, it must
declare the debtor bankrupt.

A debtor has one opportunity to appeal to the Supreme Court
and the appeal must be heard within 30 days.

Creditors' favor

Lawyers said the bankruptcy law, the foundation of the
commercial court, stacks the cards heavily in the creditors'
favor. It can easily push domestic companies into court-ordered
receivership since all it takes is one unpaid creditor and, at
most, 270 days, before a company is declared bankrupt. There is
almost no leeway for debtors to dispute the claims against them.

Nevertheless, creditors are still cautious on entrusting the
court with handling their nonperforming debtors.

Pursuing nonperforming loans through court could be too
expensive if the creditor ultimately ends up empty-handed, Indra
Widjaja said.

Banks have to bear in mind that once debtors are declared
bankrupt, their obligations to the government and administrator
must be settled first before creditors can get their share.

Banks also have to mull the costs to liquidate assets of the
bankrupt debtors, he warned.

"Moreover, if the assets have to be sold through auction, it
would be very cheap," said Indra, who is also a vice chairman of
the Federation of Domestic Private Banks (Perbanas).

He stopped short of identifying the cost as the main reason
for local banks holding off from taking delinquent debtors to the
court.

He contended local banks had yet to file any bankruptcy case
against their insolvent debtors because most were still in
negotiations with the debtors to recover the loans.

Another Perbanas vice chairman, Aninda Sardjana, agreed that
parties currently preferred to use negotiation over the debt
issue.

"We will only resort to commercial courts after all other
alternatives have failed," he said.