Indonesia's bankruptcy law, Law 37 of 2004 (BRL), provides mechanisms for restructuring and liquidation supervised by one of Indonesia's commercial courts. Although an Indonesian debtor may enter into a private workout with some or all of its creditors without the supervision of a court, the focus here is on court-supervised mechanisms.
Bankruptcy proceedings
Bankruptcy and requirements for an actionable claim
Bankruptcy is the general statutory attachment of all of a debtor's assets (the bankruptcy estate) established by a declaration of bankruptcy by the court, whereby such assets are placed under the management of a curator (roughly equivalent to a receiver in common law jurisdictions), as supervised by a supervisory judge, for the benefit of the debtor's creditors. The requirements for a declaration of bankruptcy are prima facie evidence that the subject debtor has two or more creditors and has failed to pay at least one debt that has become due (or otherwise mature) and payable. If a final and binding judgment on bankruptcy has been entered, the debtor's assets may be liquidated and distributed to creditors based upon their respective priorities, unless a proposed composition plan is approved by the creditors and ratified by the court.
Generally, the debtor, or one or more of its creditors, can submit a bankruptcy petition. A public prosecutor can also file a bankruptcy petition if in the public interest. In order for a corporate debtor to file, it must also comply with (1) the corporate governance procedures provided in Indonesia's Company Law, for example, approval of three-quarters of shareholders with voting rights that vote at a general meeting of shareholders (GMS) at which the necessary quorum is present, and (2) any additional requirements set forth in the debtor's articles of association (which may include quorum requirements and/or requirements for passing a resolution that exceed those provided in the Company Law). The minimum quorum requirements under the Company Law in respect of a GMS for a bankruptcy filing are as follows: (a) three-quarters of shareholders with voting rights at the first such GMS, and (b) if no such quorum is present at such first GMS, two-thirds of shareholders with voting rights at a second GMS, and (c) if no such quorum is present at such second GMS, a quorum stipulated by a district court on the request of the company at a third GMS. If the debtor is a bank, insurance company or one of the other specified financial services institutions, however, the petition can only be filed by the relevant regulatory authority (Bank Indonesia, Ministry of Finance or the Capital Markets and Financial Institutions Supervisory Board, also known as BAPEPAM-LK, respectively). The same rules apply to an application for suspension of payments.
The BRL sets forth a timetable for reaching a decision on a bankruptcy petition: however, in practice the time periods may be much longer. Proceedings are initiated by court registration of a filed petition. Within three days of the petition's registration, the court must set a public hearing date (first bankruptcy hearing), which must be within 20 days of the petition's registration (subject to postponement, based on the debtor's showing of sufficient cause, for up to five additional days). In the case of a creditor-submitted petition, the court must summon the debtor for such hearing, at least seven days earlier, by registered mail. In the case of a debtor-submitted petition where there is doubt that the conditions for bankruptcy have been met, the court also may summon creditors. Ultimately, the court must render a decision on the petition within 60 days of its registration.
Pending the court's decision, a creditor may apply to the court to: (i) issue a conservatory attachment on part or all of the assets of the debtor; or (ii) appoint an interim curator to oversee the management of the debtor's business, the payment of creditors and/or the transfer or use of the debtor's assets. Such application may be granted if considered necessary to protect the interests of the creditors.
Notably, the debtor or any of its creditors can file an intervening application for suspension of payments (SoP) any time before the declaration of bankruptcy (whether or not a bankruptcy petition has been filed), in which case a temporary SoP (TSoP) is automatically granted. If the SoP application has been filed by the date of the first bankruptcy hearing, the SoP proceedings supersede any pending bankruptcy petition proceeding.
Cassation and civil review
The debtor, or any creditor party to the bankruptcy case, may seek review of a declaration of bankruptcy by filing a petition for cassation directly to the Supreme Court. Only legal issues may be reviewed and considered in review by cassation; by comparison, in Indonesian practice, appeals may be based on review and consideration of factual and/or legal issues. A cassation petition may also be filed by a creditor that was not a party to the case but is dissatisfied with the declaration of bankruptcy. A cassation petition must be filed with the clerk of the court that heard the underlying bankruptcy petition no later than eight days after the date of the decision. The Supreme Court must render its decision within 60 days from registration of the cassation petition.
The cassation decision of a Supreme Court panel may be subject to further civil review by the Supreme Court if: (i) important new written evidence is discovered, which, had it been known during prior proceedings, would have resulted in a different outcome; or (ii) such decision contained a serious error in the application of the law.
Consequences
Administration of bankruptcy estate
Upon declaration of bankruptcy, the court designates a curator and a supervisory judge, and the debtor loses the power to manage and/or dispose of its assets. Generally, only the curator has such authority, subject in some circumstances to approval of the supervisory judge. The curator is obligated to report to the supervisory judge on the condition of the bankruptcy estate and performance of its duties every three months. A creditor may propose appointment of a particular curator when filing its petition, but the court is not bound to appoint such person. The court can appoint one or more curators.
The curator has a general duty to preserve the assets of the bankruptcy estate and the authority to terminate agreements, to nullify preferential transfers and/or to enter into new agreements on behalf of the debtor's estate. Additionally, the curator is responsible for the administration of the debtor's estate, liquidation of its assets and distribution of the resulting proceeds based on the creditors' respective priorities. The curator is entitled to exercise its powers in administration of the bankruptcy estate and, provided it has the prior approval of the supervisory judge or, as the case may be, a creditors committee (if one was appointed in the declaration of bankruptcy decision), to continue to operate the debtor's business, notwithstanding any review by cassation of the declaration of bankruptcy or civil review. The court may replace a curator on the request of such curator, another curator (if any), the supervisory judge or the debtor. The court must replace a curator if requested to do so by more than half of the unsecured creditors present or represented at a creditors' meeting, representing more than half of the total unsecured debt claims present or represented at the meeting. However, a request for replacement of a curator by unsecured creditors can only be done after the verification meeting (as defined below) has occurred.
No later than 14 days from the declaration of bankruptcy, the supervisory judge must determine: (i) the deadline for filing claims; (ii) the deadline for tax verification; and (iii) the date and venue of the creditors meeting for verification of claims (verification meeting). The curator is charged with verifying the claims submitted by the creditors and consulting with them if any objections are made to the submitted claims.
The court may, either upon or after a declaration of bankruptcy, establish a temporary creditors committee (TCC) comprised of three members appointed from acknowledged creditors for the purpose of advising the curator. Although the curator is not bound by the TCC's advice, he is obligated to provide all information requested by the TCC and to request such advice before filing any lawsuit, handling ones in-process, continuing any pending ones, or defending himself against any lawsuit. The TCC is entitled to request at any time inspection of the books and records relating to the bankruptcy.
Following completion of the verification meeting, the supervisory judge must offer the creditors an opportunity to form a permanent creditors committee (PCC). Upon request of creditors based on a resolution approved by a simple majority vote of the unsecured creditors present or represented at a creditors' meeting, the supervisory judge must: (i) replace any TCC with the PCC; or (ii) if no TCC was established in the decision on declaration of bankruptcy, establish a PCC and appoint its members.
Stay on enforcement of security and rights of third parties to claim assets
The declaration of bankruptcy triggers an automatic stay on the enforcement of security and the rights of third parties to claim assets under the possession or control of the debtor or curator until the earlier of: (i) 90 days from the date of the declaration of bankruptcy; (ii) termination of the bankruptcy; or (iii) commencement of a state of insolvency. Such stay is applicable to enforcement actions initiated before the declaration of bankruptcy, as well as those initiated afterwards. During the stay, however, the debtor must pay adequate protection to compensate creditors or such third parties for any diminution of the value of assets. Additionally, notwithstanding the stay, a creditor may set off any cash deposits of the debtor in accounts held with the creditor against outstanding debt owed by the debtor to the creditor, so long as both the claim and the debt existed, or resulted from transactions entered into, before the declaration of bankruptcy. Note that creditors' debt owed to the bankrupt debtor need not be due and payable in order for the creditor to validly exercise its set-off rights. Third parties or secured creditors that are affected by the stay may request that it be lifted or modified by petition, first to the curator, then to the supervisory judge and finally to the court itself.
Secured creditors must exercise their security enforcement rights no later than two months following the commencement of a state of insolvency. The elucidation to this provision of the NBRL states that secured creditors must have at least started to exercise their security rights within such period. If the secured creditor fails to do so, the curator is obligated to demand delivery of the secured assets for enforcement sale by public auction. Under such circumstances the secured creditor is liable to share in the bankruptcy administration costs. Notwithstanding such appropriation by the curator of the encumbered assets, the secured creditor remains entitled to receive the proceeds of sale of such assets up to the amount of its secured claim.
Limited rights of secured creditors to claim and vote in bankruptcy
Generally, in bankruptcy proceedings, secured creditors are not entitled to submit claims against the bankruptcy estate and do not have voting rights on the theory that secured creditors retain their security rights. However, a secured creditor that can prove that the proceeds resulting from enforcement of its security will probably be insufficient to fully discharge its claim may request rights as an unsecured creditor to the extent of such anticipated shortfall without jeopardising its priority rights as a secured creditor over the encumbered assets. If the proceeds from enforcing the security are insufficient to cover the entire amount of the secured creditor's claim, such creditor is entitled: (i) to make a claim for the deficiency as an unsecured creditor, provided such creditor files a request for verification of such unsecured claim; and (ii) to vote on matters in bankruptcy, but only to the extent of its capacity as an unsecured creditor under the aforementioned circumstances.
Formal restructuring proceedings
There are two formal restructuring options, namely: (i) SoP; and (ii) composition in bankruptcy (CIB). The purpose underlying restructuring is the same for SoP and CIB, that is to give the debtor who is, or expects to be, unable to pay its due and payable debts a chance to present a composition plan that includes an offer to pay all or part of its debts to unsecured creditors. A composition plan, if approved by the creditors (both secured and unsecured creditors under SoP, but only unsecured creditors under CIB), permits the debtor to reorganise and carry on its business pursuant to terms and conditions agreed to by its creditors.
For SoP, the debtor may submit a composition plan any time before the declaration of bankruptcy, regardless of whether there is any pending bankruptcy petition. For CIB, the debtor may submit a composition plan only after a declaration of bankruptcy has been issued but before it becomes a final and binding judgment. However, CIB is not available to the debtor where bankruptcy has been declared because of a prior failed SoP. The underlying policy is to deny the debtor more than one chance to enter into a settlement with its creditors.
SoP: composition before declaration of bankruptcy
SoP provides the debtor with relief from creditors by means of a moratorium during which a debtor and its creditors attempt to agree upon a composition plan to restructure the debtor's outstanding debts. The debtor or any of its creditors (provided it has more than one creditor) may apply for SoP at any time before the declaration of bankruptcy (except if the debtor is a bank, insurance company or one of other specified financial services institutions, in which case only the relevant regulatory authority may so apply). Often, in practice, a debtor will file an SoP application to prevent declaration of bankruptcy under a previously filed bankruptcy petition and to provide additional time to consider and/or attempt restructuring.
The debtor may attach a composition plan to the SoP application at the time of filing or propose one after filing. The filing of an SoP application automatically defers consideration of any pre-existing bankruptcy petition relating to the same debtor if the SoP application has been submitted by the first bankruptcy hearing date. In case the SoP application has been filed in the absence of any bankruptcy petition, any subsequent bankruptcy petition filing will be barred until the SoP process has been completed.
After an SoP application is filed, the court will: (i) grant a TSoP; (ii) appoint a supervisory judge and an administrator; (iii) set a date for a creditors' meeting regarding the SoP (first SoP creditors meeting, which must occur within 45 days of the filing); and (iv) through the administrator, summon the debtor and publicly announce the court's granting of the TSoP and invite its known creditors to appear for the first SoP creditors meeting. The administrator and the debtor are jointly responsible for managing, and disposing of, the debtor's assets: during SoP proceedings, the debtor cannot take any action in this regard without the administrator's approval.
The court must also appoint a creditors' committee if: (i) the case involves debts of a complex nature or numerous creditors; or (ii) the court is so requested by unsecured creditors representing at least half of all acknowledged claims. In the course of performing its tasks, the administrator is required to ask for, and consider, the advice of the creditors' committee.
The TSoP continues until the date of the first SoP creditors' meeting. If the debtor fails to appear at the first SoP creditors' meeting, the debtor is declared bankrupt. At the first SoP creditors' meeting, if a composition plan has already been proposed, the creditors may vote on whether to approve it. If a composition plan has not yet been proposed, the creditors may vote on whether to grant the debtor a definitive SoP (DSoP) for up to 270 days from the date of the granting of the TSoP, with the intent that at a later hearing the creditors will vote on whether to approve a composition plan. If neither a composition plan nor a DSoP is approved by an SoP required majority (as defined below), the debtor will be declared bankrupt. Such declaration of bankruptcy decision arising from an unsuccessful SoP is a final and binding decision and will not be subject to review by cassation or civil review.
The SoP required majority for approving a composition plan or instituting a DSoP is as follows.
- For unsecured creditors: approval of more than half of those unsecured creditors whose claims are acknowledged or provisionally acknowledged present or represented at the hearing representing not less than two-thirds of all acknowledged or provisionally acknowledged claims of unsecured creditors present or represented at the hearing.
- For secured creditors: approval of more than half of those secured creditors present or represented at the hearing representing not less than two-thirds of all secured claims of secured creditors present or represented at the hearing.
Separate approval from both unsecured and secured creditors is required. One big difference between the current BRL and the former law, Law 4 of 1998 regarding bankruptcy, is that the BRL entitles both secured and unsecured creditors to vote on whether to approve the composition plan and otherwise participate in SoP proceedings, whereas under the 1998 law only unsecured creditors were entitled to so vote and participate.
There is a stay on enforcement of security and the rights of third parties to claim assets under the possession or control of the debtor or curator throughout the duration of any TSoP and/or DSoP. However, if the outcome of SoP proceedings is declaration of bankruptcy, then the state of insolvency immediately ensues and there will be no stay on enforcement of security under such circumstances. Secured creditors will be required to start to enforce their security within two months of the declaration of bankruptcy.
A duly approved composition plan is still subject to court ratification. If the court refuses to ratify the approved composition plan, then the debtor will be declared bankrupt. If the approved composition plan is duly ratified, it is binding on all creditors except those secured creditors that refused to approve it, and the SoP (whether TSoP or DSoP) is terminated. Such termination ends the stay on enforcement of security and enables secured creditors to freely enforce their security rights, provided that secured creditors who approved the composition plan are subject to any of its terms that may relate to enforcement of security. Disapproving secured creditors are entitled to compensation, the amount of which is the lower of their security's value and their secured claim amount.
The BRL also contains provisions for terminating the SoP process at the initiative of the court, supervisory judge or one or more creditors under certain circumstances. Court termination of the SoP process results in the debtor being declared bankrupt with no further right to review by cassation or civil review.
CIB: composition after declaration of bankruptcy
Under CIB proceedings, the debtor may submit a composition plan to unsecured creditors only after a declaration of bankruptcy has been issued. This option is not available to the debtor where bankruptcy has been declared because of a prior failed SoP in respect of the same debtor.
A debtor that intends to pursue a CIB must, no later than eight days before the verification meeting, present a draft composition plan to its creditors (secured and unsecured) and to each member of the TCC, and make such draft composition plan available for public inspection. The curator and the TCC must give a written opinion regarding the draft composition plan at the verification meeting.
Secured creditors are not eligible to vote on approval of the composition plan submitted in CIB proceedings unless they first surrender their security rights. In that case, they will be deemed as unsecured creditors regardless of whether or not the composition plan is ultimately approved.
A composition plan in bankruptcy requires the approval of more than half of the unsecured creditors (whose claims have been acknowledged or provisionally acknowledged) present or represented at a creditors' meeting (first meeting) representing at least two-thirds of the total claims acknowledged or provisionally acknowledged of unsecured creditors present or represented at such meeting (CIB 1 required majority). If the composition plan is not approved at the first meeting but is approved by more than half of the unsecured creditors present or represented there representing at least half of the total claims of unsecured creditors present or represented there (CIB 2 required majority), then a second vote at a subsequent creditors' meeting (second meeting, separate notice of which is not required) must be held within eight days of the first meeting.
If approved by the CIB 1 required majority at the first meeting or the CIB 2 required majority at the second meeting, the composition plan is still subject to ratification by the court. The court must reject ratification if: (i) the debtor's assets considerably exceed the total settlement amount stipulated in the composition plan; (ii) implementation of the composition plan is not guaranteed; or (iii) the composition plan is based on fraud or conspiracy involving one or more creditors, the use of unfair means, whether or not with the complicity of the bankrupt debtor. If the court refuses to ratify the composition plan, the debtor cannot propose any other composition plan.
If the court refuses to ratify the composition plan, the debtor and the unsecured creditors who approved the composition plan are each entitled to file an application for cassation.
If the court ratifies the composition plan, the following parties may request review by cassation:
- unsecured creditors that either rejected the composition plan or were absent from the meeting where voting to approve the composition plan occurred; and
- unsecured creditors that approved the composition plan later discovered to have been based on fraud or conspiracy.
In any case, filing for cassation must be done within eight days of the court's decision.
If the composition plan is approved and ratified, and the ratification has become final and binding, the composition plan becomes binding on all unsecured creditors (but is not binding on secured creditors) and bankruptcy proceedings are terminated, thereby ending the stay on enforcement of security and enabling secured creditors to freely enforce their security rights.
If the bankrupt debtor fails to proffer a composition plan to the unsecured creditors by or before the verification meeting, the state of insolvency is deemed to have commenced. Similarly, if the composition plan is so proffered but is either rejected or approved but not ratified by the court, subject to the debtor's and/or approving unsecured creditors' rights to review by cassation against the court's refusal to ratify the composition plan, the state of insolvency is deemed to have commenced.
The significance of the commencement of the state of insolvency is that it ends the stay on enforcement of security, enabling the secured creditors to freely enforce their security rights, and triggers the creditors' entitlement to effect a forced liquidation of the bankruptcy estate's assets. The date of the state of insolvency is also significant because the two-month period within which the secured creditor is required to start enforcement of its security rights begins to run as of such date. In forced liquidation proceedings, the curator liquidates the bankruptcy estate's assets under the supervision of the supervisory judge. Proceeds from the liquidation are to be distributed among the creditors in accordance with the respective priorities of their claims.
| Author biographies |
Sandi Adila
Mochtar Karuwin Komar
Sandi Adila graduated cum laude from the Faculty of Law of the University of Indonesia in 2005 and joined Mochtar Karuwin Komar (MKK) shortly thereafter. Sandi deals with foreign investment, aviation and general corporate matters and has been involved in various bankruptcy and insolvency cases, as well as commercial litigation cases.
Email: sandy@mkklaw.net
Karl Park
Mochtar Karuwin Komar
Karl Park has worked at Mochtar Karuwin Komar (MKK) and other Indonesian law firms for over eight years, accumulating extensive experience in handling Indonesian and cross-border bankruptcy, suspension of payments and liquidation cases. MKK, established in 1971 and with a long-standing reputation as one of Indonesia's leading law firms, has a solid background in handling debt workouts and restructuring and bankruptcy cases, many of which were resolved in the aftermath of the 1997 to 1998 Asian monetary crisis. At that time, MKK assisted IBRA, the Indonesian agency assigned to restructuring the banking industry, in reorganising and liquidating Indonesian debtors.
Karl is working on various projects involving bankruptcy and restructuring.
Email: Karl.park@mkklaw.net |