World Bank's arm ends legal dispute with POF

Berni K. Moestafa, The Jakarta Post, Jakarta

The World Bank's commercial financing arm, the International Finance Corporation (IFC), said it had reached a deal with wayward debtor PT Panca Overseas Finance (POF), ending a legal dispute that had turned into an indictment of Indonesia's unpredictable legal system.

The IFC said POF's majority shareholder had agreed to repay the US$13 million it owed IFC in a decision that marked an unexpected end to three years of legal battles between the two.

"The settlement puts to an end a dispute that had attracted the keen attention of both domestic and overseas creditors of Indonesian companies," the foreign institution said in a statement received on Wednesday.

The IFC filed a bankruptcy petition against POF in 2000, after two years of trying to recoup some $13 million in debts from POF.

A court ruling last year turned down the petition on the grounds that other POF creditors had voted against it, but the IFC alleged that some of these creditors were fictitious, which allowed the voting to swing in favor of POF.

POF, which claimed it owed creditors $40 million, won the vote to repay its debt over a three-year period. The IFC's appeal to the Supreme Court ended in vain.

The IFC did not say whether its recent deal with POF was part of a court-approved debt restructuring scheme.

Its resident manager here Amitava Banerjee told Reuters he did not know why POF's shareholders had agreed to repay the debt.

The case turned high profile when the World Bank took issue on IFC's plight, and as another foreign investor got into trouble over a similar legal dispute.

Canada-based insurance firm Manufacturer's Life Insurance (Manulife) became embroiled in a court battle with the owners of the now defunct PT Dharmala Sakti, its former partner in insurance firm PT Asuransi Jiwa Manulife Indonesia.

Manulife charged the former owners with blocking the sale of Dharmala's shares to Manulife, using paper companies to suddenly produce backdated deals and to claim the shares were already sold.

Separate investigations by the IFC and Manulife led to suspicions of there being one mastermind, as a number of the same names appear in both cases.

The IFC and Manulife cases underscored the weak protection local bankruptcy courts afforded creditors against errant debtors.

As a result, foreign lenders stepped up pressure against the government to shake up the country's corruption prone courts.

"Increased protection for investors through the courts or otherwise will act as an important catalyst of the further recovery of the Indonesian economy," Banerjee said.

The latest deal with POF could pave the way for IFC to resume its lending program to Indonesia, which had been suspended following its dispute with POF.

The institution has an exposure of some $720 million in Indonesia, its seventh largest country portfolio.

The IFC's investment activities are aimed at promoting investment in developing countries, but the ongoing suspension here could have the effect of deterring purely commercial foreign investors from entering Indonesia.

The IFC also said it would drop legal action against POF over the irregularities it believed had occurred during its earlier court battle.

POF explained to the IFC that "these irregularities have been the unintended result of an overambitious pursuit by management of POF of its commercial objectives when IFC filed for bankruptcy, and have also been the direct results of important errors in judgment."