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.