Update bankruptcy laws

By Dewi Anggraeni

MELBOURNE (JP): While entering the world of global economy in leaps and bounds, Indonesia's legal infrastructure has not quite caught up with the time. We inherited our bankruptcy law for instance, Faillisement Verordening, from the Dutch Colonial legal structure of 88 years ago. Hence, early last month, Dr. Sunaryati Hartono, Director of the National Law Development Body, proposed that a new bankruptcy law was needed to bring that aspect of the law to the practices of today. The outdatedness of the law, it seems, has been exploited by some unscrupulous individuals and companies, who chose bankruptcy rather than pay their debts.

Australia's Bankruptcy Act 1966 is based on the British law. This act deals with persons who, according to the court, fail to meet their payment obligations to various creditors. It is amended frequently to keep up with recent practices in the business world, the latest amendments passed in 1995. Corporation law which deals with insolvent companies, is also regularly amended.

Management of the act is carried out by the Insolvency and Trustee Service Australia, under the Attorney General's Department, and registrars in bankruptcy, who are part of the Federal Court of Australia.

Amendments are crucially needed, as the general technology aiding businesses is becoming increasingly sophisticated. Richard Mansell and Anne King, respectively partner and manager of Reconstruction & Insolvency of management consulting firm Deloitte Touche Tohmatsu, confirmed this. In fact, each amendment was made usually because there had been events where the law had been unable to adequately deal with certain practices deemed unethical. Often as soon as an amendment was passed, new practices were found in the field.

"The law is always trying to catch up with new practices," said Mansell.

According to Bankruptcy Act 1966, a person may voluntarily lodge a petition to the court to be declared bankrupt. Alternatively, the creditors may prove that the person is no longer solvent and have the court declare the person bankrupt.

Following a declaration of bankruptcy, the creditors may appoint a trustee to investigate and ascertain the liability of the bankrupt, to bring whatever assets are available into a pool to distribute among the creditors. If no registered trustee is appointed by creditors, a government agent, known as an official trustee or receiver, will automatically handle the case. Appointing a registered trustee gives the creditors more service than the basic services given by an official trustee.

The trustee is responsible for preventing the bankrupt from transferring assets such as land and houses to another family member. The 1990 amendments to the Bankruptcy Act 1966 allow a trustee the legal right to go back five years, in certain circumstances, to investigate the bankrupt's financial transactions.

The trustee also has the legal right to look behind what is commonly known as the corporate veil, where a person may try to put assets in the name of a company or a trust, thus trying to separate himself from his assets. He may try to use the corporate structure, or trust structure, to hide what he really has. A trustee must try to recover those assets.

"It is not an easy task," Anne King said, "because everything has to be proven in court."

King added that rarely do such cases end up in court. Generally, as soon as the trustee begins an investigation, the bankrupt voluntarily surrenders the assets sought by the trustee, because court proceedings can be extremely costly -- mentally and financially. This is especially so if the bankrupt loses the case.

A declared bankrupt has restrictions imposed on him. He is barred from holding any managerial position and obtaining bank loans exceeding A$3000 (US$ 2,400) without advising everyone involved of his bankrupt state. He must hand in all his bank documents and passport to his trustee. While he may conduct limited business without establishing a company, he may not do so under a different name.

A bankrupt may apply to the court for release from bankruptcy provided he fulfills all legal obligations for the release. This means that he has to come to some agreement with his creditors, in terms of payment of his debts. The creditors may agree to a fraction of the amount owed to them. From the moment his application is officially lodged, it generally takes at least three years for the bankrupt to be discharged of his obligations.

For this purpose the provisions of the 1991 amendments to Bankruptcy Act 1966 clarify the proceedings. It provides a formula setting the permissible maximum income for a bankrupt. Half of any sum above the maximum income will be confiscated to repay his debts. If the bankrupt fails to observe this obligation, his trustee is liable to report him and have him pay under court order. Failing to comply at this stage may land the bankrupt in prison for contempt of court.

While there are bankruptcy cases slipping through the Australian legal net, most are administered effectively. And the act aims to do this in a manner as socially acceptable as possible.

The writer is a freelance journalist based in Melbourne.