The system is bankrupt

The system is bankrupt

The steep decline in the number of bankruptcy lawsuits filed
with the Commercial Court in Jakarta by no means indicates a
strong recovery in the business sector but is simply further
evidence of distrust by businesses in the bombed-out, corrupt
court system, especially the bankruptcy regime.

The bankruptcy system itself is almost bankrupt. As the
Indonesian Association of Receivers (AKPI) said last week, the
number of bankruptcy litigations filed with the Commercial Court
fell 54 percent to only 27 cases in the first nine months, as
against the same period last year. That was much smaller than the
annual average of 100 cases filed in 1999 and 2000.

This sorry development has once again made it as imperative
and urgent as ever to speed up amendments to the 1998 Bankruptcy
Law, which has long been overdue.

The Government white paper on the new reform agenda, unveiled
last week to replace the International Monetary Fund program
later this year, stipulates revision of the law as one of the new
set of measures to be taken to improve legal certainty. However,
there is no definite time schedule set for completion of the
amendment process.

Amendments to the law would not immediately make the
bankruptcy regime more effective and credible, nor would they
make the court, which was established in 1999, and its judges,
much more credible. Yet, revision of the rules of the game would
nevertheless be a good start to improve the system, to make the
procedures more clear-cut and the proceedings more accountable
and transparent.

The absence of an efficient and effective bankruptcy mechanism
has not only undermined the process of corporate restructuring,
as debtors can make successive appeals to reduce the likelihood
of a quick resolution, but has also created a large number of
zombie companies. As these zombie firms have simply stopped
servicing their debts they possess advantages against those that
painstakingly endeavor to service their debts, thereby distorting
market competition.

Yet more damaging to the long-term foundation of sound
economic growth is the loss of opportunity created by the 1997
economic crisis to cleanse the corporate sector of inefficient
businesses, which had in the past thrived mostly on the benefits
of corruption.

The inadequate bankruptcy system should also be blamed for the
slow recovery in new lending by the banking industry. Commercial
banks will remain averse to new lending if their right to recover
loans is not secure. Experience in other countries has shown that
stronger powers for creditors to recover their claims in
insolvency are associated with more business access to credit.

The present law is perceived by businesses as being too
debtor-friendly, as can be seen from the much greater number of
cases won by debtors than creditors. Worse still, some of the few
court decisions that were given in favor of creditors were
greatly questionable and bizarre, such as the bankruptcy decision
against Indonesian-Canadian insurance company Manulife in mid-
2002.

Creditors agree that the bankruptcy court is merely a remedy
of the last resort that will be taken only against debtors in bad
faith or those who are simply not willing, rather than unable, to
settle their debts. Yet, a reliable and credible bankruptcy
regime is an essential component of the commercial laws needed to
create legal certainty in the business sector.

After all, creditors prefer debt workout to bankruptcy
proceedings because a viable company has a much higher value than
a liquidated one, thereby generating a higher rate of loan
recovery for creditors. The proceeds from the sale of liquidated
assets are only a fraction of their normal market price.

The main objective of a credible bankruptcy system is to force
distressed debtors to negotiate with creditors in good faith or
expedite the liquidation of default debtors who are beyond any
bailout through debt workout.

Amending the 1998 Bankruptcy Law should not mean establishing
a sophisticated bankruptcy regime modeled on those in developed
countries, since such a sophisticated system would not be
appropriate to our institutional capacity.

The proposed amendments should focus on addressing the
competence and integrity of the Commercial Court by strengthening
its mandate, streamlining its procedures and operations and
allocating more resources for the training of judges and
bankruptcy administrators in insolvency proceedings and practice.