Formal insolvency proceedings and restructurings are relatively recent developments in Indonesia and they were first developed in the context of the 1998 Asian financial crisis. As part of the general continuation of the application of Netherlands-Indies legislation, Indonesia inherited the Bankruptcy Ordinance, first enacted in 1906. After independence, use of the Bankruptcy Ordinance declined rapidly and it was never amended.
In response to the need for more effective bankruptcy legislation to address the then-existing economic crisis, in 1998 the Indonesian House of Representatives amended the Bankruptcy Ordinance by enacting Law 4/1998 (the Bankruptcy Law). Other issues affecting bankruptcy and restructuring in Indonesia included the non-confrontational nature of Indonesian business customs and perceived difficulties in the administration of justice. Revisions to remove ambiguities and correct fundamental problems were enacted in 2004 as Law 37/2004 (the New Bankruptcy Law).
A formal procedure
A forced liquidation of a company takes place under the Bankruptcy Law. Under the Bankruptcy Law, one or more creditors may file for the debtor's bankruptcy if the debtor has at least two creditors and the debtor has failed to pay at least one of its debts which have become due and payable.
If the debtor is a bank, only Bank Indonesia (the central bank) may file the bankruptcy petition. If the debtor is a security house, only Bapepam-LK (the Capital Markets and Financial Institutions Supervisory Board) may file the bankruptcy petition. If the debtor is an insurance or reinsurance company, a pension fund or a state company engaged in public interest business, only the minister of finance may file the bankruptcy petition. A bankruptcy petition may also be filed by the debtor itself or, if public interest so requires, by the public prosecutor.
In reality, the Commercial Court has not interpreted the bankruptcy test consistently thus far. Some examples of its decisions to date include the following:
- not recognising that the debt was due and payable when the loan had been accelerated;
- not recognising debt under a swap transaction as a valid debt for these purposes;
- disallowing an unpaid claim for damages as the basis of a bankruptcy filing;
- not recognising as creditors (foreign) holders of bonds sold through the market; and
- not differentiating partial restructurings which result in disparate treatment between lenders.
One reason for the enactment of the New Bankruptcy Law was to give precise interpretations of certain provisions under the Bankruptcy Law.
Liquidation of the bankrupt company is triggered by the state of insolvency, which occurs when, after all claims have been submitted, no plan has been proposed by the debtor, or a proposed plan has been rejected by creditors or has failed to be ratified by the court.
The receiver will liquidate the debtor's assets under the watch of the supervisory judge. The proceeds will be distributed among the creditors in accordance with the priority of their respective claims. Receivers must hold a licence to act as such. The receiver is responsible for administration and control of the bankruptcy. The supervisory judge oversees the performance of the receiver's duties and his approval is required for certain material transactions, such as termination of contracts and sales of assets. He or she also hears petitions from the creditors and the debtor relating to the receiver's actions.
The Commercial Court may appoint a creditors' committee to advise the receiver. If the receiver does not follow the committee's recommendation, the committee may appeal to the supervisory judge. In addition, a creditors' meeting must be convened when so requested by at least five unsecured creditors representing at least 20% of the total unsecured claims admitted. In practice, creditors' committees will generally be informal in order to facilitate more effective and efficient negotiations.
Cases show that benefits gained by creditors triggering a formal insolvency or debt restructuring procedure are considerably less than as expected, and this results in the number of bankruptcy/suspension of payments petitions steadily decreasing. There have been few major bankruptcy cases filed. Formal insolvencies of small and medium-sized enterprises are not uncommon, although for cultural reasons they are below the rate commonly seen in other jurisdictions.
This is consistent with the Indonesian cultural preference for negotiation and face saving. It is often considered inappropriate for a creditor to resort to court proceedings. What might be achievable through a negotiated settlement becomes unattainable if the approach taken is apparently hostile to the interests of management and majority shareholders. This may remain true even if negotiation has failed after considerable efforts and a long period of time.
Formal corporate rescue
Only one formal corporate rescue process is available: a suspension of payments (moratorium) under Chapter II of the Bankruptcy Law. During this suspension the debtor is excused from making payments to its unsecured creditors and secured creditors cannot enforce their security without the court's consent.
The purpose of a suspension of payments is to enable the debtor to propose a composition plan.
Petitions for suspension of payments can be filed by either the creditors or the debtors. If the a petition is filed the Commercial Court must grant a provisional moratorium and appoint a supervisory judge and an administrator to assist the debtor in managing its estate. The debtor will be entitled to manage and dispose of its assets jointly with the administrator.
The Commercial Court must call a meeting of the unsecured and secured creditors within 45 days of granting a provisional moratorium. At this meeting, unsecured creditors and secured creditors may either:
- approve a composition plan, if the debtor has submitted a plan to the court; or
- agree to convert the provisional moratorium into a permanent moratorium of a maximum of 270 days from commencement of the provisional moratorium. The permanent moratorium is extendable if the creditors and the court consent.
Any creditors' meeting to consider the plan must be held before the permanent moratorium expires.
Decisions require affirmative votes of more than 50% in number and 66.67% in value of the unsecured creditors present or represented at the meeting, and more than 50% in number and 66.67% in value of the secured creditors present or represented at the meeting. If no plan is submitted and the creditors fail to extend the moratorium, the court will declare the debtor bankrupt. If the creditors approve the plan, the Commercial Court must hear an application to ratify the plan and will hear dissenting creditors. The Commercial Court must refuse to ratify the plan if:
- the value of the debtor's assets considerably exceeds the amount agreed in the plan;
- performance of the plan is insufficiently assured; or
- the plan was concluded as a result of fraudulent transactions or undue preference of one or more creditors, or other unfair means, regardless of whether the debtor or any other party cooperated to this effect.
Once ratified, the plan becomes final and binding on all creditors, except dissenting secured creditors, which are entitled to compensation from the debtor at the lowest of either the value of the security or the amount of the outstanding secured claims. There are no implementing regulations as to how this recent change for dissenting secured creditors will work. A plan can be submitted only once. If it is rejected by the creditors or not ratified by the court, a bankruptcy declaration will be made and the debtor's assets will be liquidated.
If a plan submitted by a bankrupt debtor is not approved or ratified, a state of insolvency will be triggered. In practice, however, the receiver may call for meetings between the lenders and the debtor prior to the final vote in order to negotiate the terms of the plan. Following ratification of a plan, the suspension of payments or bankruptcy proceedings and the appointment of the administrator or receiver (as applicable) will be discharged. The business and assets of the debtor will be returned to the debtor's control, subject to any specific provisions contained in the plan.
Cross-border insolvencies
Indonesia is not a party to any treaty with other countries regarding the enforcement of commercial judgments. Accordingly, foreign judgments generally will not be enforceable in Indonesia. As a result, the claimant will have to take out fresh action in Indonesia in order to enforce its rights, but a commercial judgment obtained in another county may be adduced in evidence in the Indonesian proceedings. How much weight will be given to such evidence will be determined at the sole discretion of the presiding judge. However, Indonesia is a signatory to the 1964 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and thus will recognize foreign arbitral awards issued in the countries that ratified the convention, subject to registration of such awards in the Indonesian court.
Only three sections in the Bankruptcy Law deal with cross-border aspects of bankruptcy, and unfortunately these provisions are not very clear. There are no other rules in the Bankruptcy Law with respect to the consequences of international bankruptcies.
The Bankruptcy Law adopts the theory of universality, that a bankruptcy declared in Indonesia includes the bankrupt's total assets, wherever in the world they may be located. Obviously, this principle is limited by the concept of sovereignty; the powers and authorities of the Indonesian receiver under the Bankruptcy Law can be exercised in a foreign country only if the laws of the country in which the receiver attempts to exercise them allow it.
The Bankruptcy Law obliges creditors who, in one way or another, seek recourse against the foreign assets of the bankrupt, to pay to the bankruptcy estate the amount for which they have thus sought recourse. In practice, this could mean that a foreign creditor who obtains payment from an Indonesian bankrupt debtor-company by the execution of its foreign assets may be confronted with a claim of the receiver, who could even enforce such a claim against the assets of the foreign creditor located in Indonesia.
An Indonesian receiver is required to verify whether there are any assets abroad. He may institute proceedings based on the preferential transfer provisions (see below) with respect to acts which took place in a foreign state so that proceeds are refunded to the bankruptcy estate. An Indonesian receiver may try to liquidate assets located abroad and the debtor may be forced to co-operate with the receiver to obtain these assets.
On the other hand, a bankruptcy declared outside Indonesia does not theoretically affect those assets of the bankrupt foreign company which are located in Indonesia, unless a specific treaty provision exists. The Code of Civil Procedure provides that foreign judgements cannot be enforced in Indonesia, except on the basis of a treaty (in which case the foreign judgement must be validated by the chairman of the Indonesian court by means of an exequatur). The recognition of a foreign bankruptcy judgment and the actions of a foreign receiver, however, are presumably not considered enforcement of a foreign judgment.
In respect of foreign bankruptcies, therefore, the Bankruptcy Law adopts the principle of territoriality. A foreign bankruptcy has, in principle, no effect in Indonesia. Assets located in Indonesia belonging to a debtor declared bankrupt outside Indonesia are not considered part of the bankruptcy estate. Consequently, the debtor can also be declared bankrupt in Indonesia. In the same line, a foreign bankruptcy does not prevent the attachment of the debtor's assets in Indonesia. The provisions relating to foreign jurisdictions apply accordingly to suspension of payments.
Finally, it should be noted that foreign and Indonesian creditors have the same rights and obligations in any insolvency proceedings (either bankruptcy or suspension of payments).
Conglomerates and families of companies
Indonesian law does not permit a joint proceeding. There must be a single court file, a single judge, a single list of creditors, a single notice list, and the insolvency for each member of the family must proceed separately with no practical acknowledgment of the related proceedings.
The Bankruptcy Law does not provide for joint proceedings for a family of companies. The case for each member of the family must proceed separately and there will be no practical acknowledgment of the related proceedings. If the members of the family are organised under, or operate in, different locations within Indonesia, a company from a distant location cannot commence its bankruptcy proceeding where as affiliate of that company is located merely because the affiliate has already commenced its bankruptcy proceeding. The bankruptcy filing must be made in the Commercial Court competent for the region in which the individual member of the family is established according to its constituent documentation. This is regulated under Article 3 (5) of the Bankruptcy Law. The fact that it undertakes activities elsewhere in Indonesia is of no effect, and the fact that an affiliate may have commenced bankruptcy proceedings in another Commercial Court is also not of any effect.
Indonesian bankruptcy procedures also do not permit a single administrator/trustee/receiver to administer the assets and the liabilities of the entire corporate family. Under the Bankruptcy Law a receiver in bankruptcy proceedings is authorised to manage the estate of bankrupt company only (and thus not the estate of the entire corporate family), and the administrator of a company under suspension of payments is, together with the management of the respective company, authorised to manage the estate of that company only (and thus not the estate of the entire corporate family). However, the same person may be appointed as receiver or administrator in the bankruptcy/suspension of payments of more than one company, regardless whether the companies belong to a family.
Cash sweep procedures as these are recognised in some jurisdictions abroad, under which the cash from all subsidiaries are swept out to one account controlled by one of the family entities and then redistributed among the family members to pay debts, cannot be implemented. This would likely be considered ultra vires, unless the cash sweep can be proven to be in the corporate interest of the subsidiary whose cash is swept. This would normally only be the case if the cash swept is not disproportionate to the debts being paid or the subsidiary received another fair value consideration for allowing its cash to be swept. Certainly if the redistribution results in a healthy subsidiary funding the shortfalls in another subsidiary that is losing money, the proportionality test referred to above would most likely not be satisfied.
Claw-backs
Transferring assets among corporate family members is not restricted per se but under certain circumstances may amount to preferential treatment: certain transactions favouring one creditor over the other creditors entered into at a time when the bankrupt foresaw that his bankruptcy was forthcoming, can be set aside under the Actio Pauliana principles embodied in articles 30, 41 and 42 of the Bankruptcy Law. In order for such setting aside of pre-bankruptcy transactions it must be shown that:
- the transaction concerned was voluntary, i.e. without contractual obligation to do so,
- the transaction has harmed the interests of creditors, and
- the debtor and the contracting party had knowledge of such harm to other creditors.
Examples of voluntary transactions include the granting of security to one particular creditor, the payment of a debt which is not yet due and payable, the sale of an asset against non-cash payment or with set-off of the purchase price against a debt.
Examples of transactions where the interests of other creditors are harmed are manifold, and include most situations where the condition of the bankrupt estate would have been better off had the transaction not been entered into. Obviously a sale of goods below their fair market value would qualify as such, but also transactions resulting in the increase of the debtor's liabilities, such as the granting of a guarantee or other form of security by a subsidiary for the debt of its parent company.
Finally, the knowledge of harm to the other creditors is presumed in a number of circumstances. Generally such knowledge is deemed to exist in the case of the following categories of transactions performed less than one year before the bankruptcy:
- transactions in which the value received by the debtor was substantially less than the value of the asset that was alienated,
- payments of a debt which is not yet due and payable, or the granting of security for such debts,
- transactions between the debtor and related parties (relatives or companies controlled by relatives, insiders and legal entities belonging to the same group), and
- donations In all these cases there is a presumption of knowledge, which may, however, be proven to be unfounded by the transacting party.
Even the payment of a debt that was due and payable may be annulled if it is shown that either the recipient of the payment knew that the bankruptcy had at the time of receipt been petitioned for, or if that payment was the result of consultation between the debtor and the creditor with the intention of preferring that creditor over the other creditors. It is generally believed that the latter requirement is only fulfilled in case some measure of collusion between the parties is proven.
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About the author
Theodoor Bakker is a senior foreign counsel at Ali Budiardjo Nugroho Reksodiputro (ABNR). Bakker has considerable experience in: direct foreign investment; capital markets transactions and derivative products; project finance work, including telecommunication, private power and petrochemical projects; ship finance; infrastructure development; and general manufacturing investment.
Bakker has worked with international agencies as well as for institutional investors in the region. During the first Asian financial crisis, he was involved in many aspects of restructuring and insolvency, and has advised on foreign law issues of bankruptcy reform in Indonesia. His work now also encompasses large capital market transactions and mergers and acquisitions.
Bakker is admitted to the Amsterdam bar. He has worked in south-east Asia since 1984 and he has published various articles on insolvency and cross-border investment issues and teaches at the Faculty of Law of University of Indonesia and at the Department of Law and Human Rights. |
Contact information
Theodoor Bakker
Ali Budiardjo Nugroho Reksodiputro
Graha Niaga 24th Fl Jl Jenderal Sudirman Kav 58 Jakarta 12190 – Indonesia
Tel: +62 21 250 5125
Fax: +62 21 250 5001
Email:tbakker@abnrlaw.com
Web:www.abnrlaw.com |
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About the author
Herry Nuryanto Kurniawan joined ABNR as an associate in February 1999 after having completed several months of internship with ABNR and has been a senior associate since 2005. He graduated from the Faculty of Law, University of Indonesia, majoring in Economic Law. He has been involved in corporate matters, foreign investment, capital market, project finance and corporate finance, restructuring and bankruptcy projects, and has regulatory knowledge in these areas.
He was involved in project of monitoring the implementation of the bankruptcy law in 1999 and thus regulatory knowledge in bankruptcy and suspension of payments. He is a co-writer for various articles and publications concerning bankruptcy, merger and acquisition. He also participated as speaker in seminars and workshops on bankruptcy and suspension of payments, investment, merger and acquisition.
In his current practice, he has also intensively involved in numerous bankruptcies and suspension of payments and commercial litigation/arbitration. Kurniawan is a member of Peradi (Indonesian Advocates Association) and AKHI (Association of Indonesian Legal Consultants). |
Contact information
Herry Nuryanto Kurniawan
Ali Budiardjo Nugroho Reksodiputro
Graha Niaga 24th Fl Jl Jenderal Sudirman Kav 58 Jakarta 12190 – Indonesia
Tel: +62 21 250 5125
Fax: +62 21 250 5001
Email:hkurniawan@abnrlaw.com
Web:www.abnrlaw.com |