Supreme Court's ruling on Dharmala upsets experts

JAKARTA (JP): An insolvency expert and financial analysts deplored on Tuesday the Indonesian Supreme Court's latest verdict which rejected a bankruptcy appeal by the International Finance Corporation and other creditors against PT Dharmala Agrifood.

They said the appeal ruling did not bode well for impatient offshore creditors struggling to recover debts from Indonesia's troubled firms.

Jerry Hoff, an insolvency expert of Loeff Claeys Verbeke law firm, said most foreign creditors were very disappointed with the ruling which could have an adverse impact on the lending and borrowing climate in the future.

"A lot of my clients are very disappointed with the bankruptcy court ruling," he told The Jakarta Post on Tuesday.

"I fear that it will have a very negative impact on the borrowing capacity of Indonesian firms trying to secure credits in the future," he said.

The Supreme Court on Monday turned down an appeal by IFC -- the private investment arm of the World Bank -- together with ING Indonesia Bank and publicly listed Bank Niaga to declare food producer Dharmala Agrifood bankrupt.

The three banks filed an appeal petition with the Supreme Court after their initial bankruptcy claim against the listed Indonesian agricultural food producer was thrown out by the Jakarta Commercial Court early December.

The commercial court ruled that the loans of IFC and ING Indonesia Bank to Dharmala Agrifood, totaling US$51.7 million, were not "due and payable," a prerequisite for a bankruptcy claim.

It further ruled that the claim of Bank Niaga over its loans worth Rp 16.04 billion (US$2.1 million) to Dharmala Agrifood was "null and void" because the credit agreement was granted to cover foreign exchange losses and such an arrangement breached Bank Indonesia's regulations on derivative transactions.

Hoff, one of the insolvency trainers for Indonesian bankruptcy judges, noted that as seen from their rulings, the judges had not acquired full knowledge of the bankruptcy law.

"What's more to the point is that I have trained all the Indonesian judges but their rulings have disappointed me," he said.

He said the Indonesian government should quickly take drastic and comprehensive steps to improve the bankruptcy court as failure to do so would pose more difficulties for the country's economy.

"I am curious to know what the Indonesian government is thinking of this negative development," he said.

David Chang of Trimegah Securindolestari and Eddy S. Widjojo of Mashill Jaya Securities agreed and said the Supreme Court's ruling on Dharmala Agrifood could serve as a bad precedent in the eyes of offshore creditors.

They said that the bankruptcy court, which was originally designed to help offshore creditors settle their credits with debt-ridden domestic firms, has not worked properly as intended since its inception in August last year.

"The decision seems to be against foreign creditors. But it is the Indonesian borrowers that will have more difficulties in securing credits in the future," Chang told the Post.

"Or even if they want to secure credits, there will be more difficulties and costs will be very high."

Eddy added that the ruling would further weaken foreign investor confidence in Indonesia's legal process. And it could also hamper new lending for the country's corporations.

Nevertheless, lawyers and analysts said they were not surprised at the Supreme Court's ruling largely because the commercial court had handed down several decisions that were viewed as controversial.

As of the end of January, 38 bankruptcy cases had been filed, and 12 companies had been declared bankrupt, mostly small companies. Bigger companies, however, appeared to get off the hook easier.

Notable among the controversial verdicts was one involving the bankruptcy petition filed by an American Express Bank-led consortium against PT Ometraco Corporation, where the court threw out the case on the grounds that the banks filed two separate bankruptcy petitions instead of one lawsuit to cover both the Ometraco Corp and its unit PT Ometraco Multi Artha, the group's finance subsidiary. (aly)