The Indonesian market has always been very attractive for
investors, both domestic and foreign. Statistics show that
during the first quarter of 2018, investments in Indonesia
reached Rp185.3 trillion (approximately $13 billion). This
year, the government has a focus on infrastructure development,
including toll roads, MRT and many other infrastructure
projects. These projects are expected to further boost foreign
investment into Indonesia, either through foreign direct
investment or through financing.
For the latter, apart from the financial terms, when a
lender advances a loan to a borrower for a certain period, the
protection that the credit requires and the mechanism for the
repayment of the loan may take various forms. One of them is
through creating security interest over the borrowers'/debtors'
This article discusses types of security rights available
under Indonesian law and the rights and protections granted by
each type of Indonesian security interest and each enforcement
Options for creditors
Security interests under Indonesian law vary greatly,
spanning mortgage, fiduciary transfer and pledges for in
rem security interest, to guarantees for personal security
Indonesian security interests are unique in their
characteristics and include a 'closed' security interest
system, meaning that security interests are limited to those
prescribed under law; and an 'accessory in nature', where the
existence of security is subject to the validity of the
associated underlying agreement and consequently, can only be
created once the underlying obligation is legally created.
The key characteristic of an in rem security is
that it gives a preferential right to its holder in the event
of the debtor's bankruptcy, whereby the holder has the
privilege to exempt the secured assets subject to the
bankruptcy estate. In rem security interests can only
impose upon assets and not agreements.
Personal security interest is enforceable against the
guarantor and the lender may, working through government
authorities, confiscate the guarantor's assets for public
In practice, due to certain limitations in in rem
and personal security interests, practitioners have developed
particular contractual arrangements in an attempt to have the
same effect of 'step-in' rights security found in other
jurisdictions. To name a few, these effects include:
conditional assignment, the novation of contractual rights or
the power of attorney to exercise contractual rights; the power
attorney to sell and vote shares; the power of attorney to
manage business; and the power of attorney to exercise rights
of the project documents. This contractual security contains no
preferential rights and is commonly found in a project
financing rather than a traditional bilateral or syndicated
loan financing. The enforceability of this contractual security
is not beyond doubt, particularly due to a lack of precedence
of enforcement and limited court cases.
How mortgages, fiduciary transfers and pledges work
Mortgages (Hak Tanggungan)
A mortgage covers the land described in the deed, buildings,
fixtures and other immovable appurtenances to the land
(including machinery affixed). The law allows the same object
to be subject to subsequent ranking mortgages.
A mortgage only secures up to the amount specified in the
mortgage deed (the Mortgage Secured Amount). The common
practice for a Mortgage Secured Amount is normally 110%
– 125% of the loan amount (in few cases it can be up
A mortgage is established through the following
- The signing of an Indonesian-language deed
before the appointed Land Officer (PPAT), whose jurisdiction
covers the land/assets.
- The registration of the mortgage deed with
the Land Office (BPN); at this stage, the mortgage is legally
- The issuance of the mortgage certificate
by the BPN, which proves the creation of the mortgage.
A fiduciary transfer is a transfer of ownership title for
security purposes, whereby the ownership title will
automatically return to the transferor upon full repayment or
release of the fiduciary transfer. Unlike in a mortgage, there
is no subsequent ranking in fiduciary transfer.
A fiduciary transfer can be imposed upon movable assets
(whether tangible or intangible) and certain immovable assets
(including buildings that cannot be the subject of a mortgage).
The creation of a fiduciary transfer is done through an
Indonesian-language notarial deed. Under Law No. 42 of 1999
concerning Fiduciary Security (the Fiduciary Law), a fiduciary
transfer must be registered with the Fiduciary Registration
Office. The fiduciary transfer comes into effect on the date of
registration. To evidence the registration, the Fiduciary
Registration Office issues a fiducia certificate.
Similar to a mortgage, a fiduciary transfer only secures the
amount specified in the fiduciary deed (the Fiduciary Secured
Amount). The range of the secured amount is similar to those in
A pledge can be created over tangible movable assets
(machinery, vehicles and equipment) and intangible movable
assets (shares and credit balance of a bank account).
Years ago, the fiduciary registration office issued a
circular letter rejecting the registration of a fiduciary
assignment over a bank account. This being the case,
practitioners now create pledges for bank accounts. Due to the
circular letter of the fiduciary registration office, the
enforceability of a pledge over a bank account remains
questionable and subject to arguments. If Indonesian courts
share the same view as the fiduciary registration office, bank
accounts could not be subject to a pledge. This is important
for investors because, pending precedence by Indonesian courts,
there is currently uncertainty on the type of security for a
bank account and its enforceability is not beyond doubt.
Indonesian law requires the pledgee (or its custodian/agent)
to possess the pledged assets, hence removed from the pledgor's
possession. In respect of intangible assets (such as shares),
the requirement of "possession" or physical transfer means that
the third party must be notified of the existence of the
pledge. For example, in relation to a pledge of shares, the
requirement of notification is generally considered to be
complied with by registering the pledge in the shareholders'
register of the company.
There is no formal legal requirement to have a pledge
agreement in writing. However, it is standard practice in
Indonesia that pledges are embodied in a deed of pledge
agreement (notarised or executed privately).
How to enforce security
On default, the creditor holding a mortgage, fiduciary
transfer or pledge is entitled to sell the property either by
public auction or private sale.
In the event of a debtor's default, the mortgagee, fiduciary
transferee and pledgee will have the right to enforce the
security interest based on the right of direct execution
(parate eksekutie) – meaning that the
enforcement does not require a court order – or
executorial title. For mortgage and fiduciary transfers, the
executorial title is provided under the Mortgage Certificate
and the Fiduciary Certificate.
The right of instant or direct execution entitles the
mortgagee, fiduciary transferee and pledgee to sell the assets
directly on their own authority through a public auction
without the consent of the security provider, without the need
of an executorial title and without having to obtain a writ of
execution (fiat executie) from an Indonesian
In practice, parate executie has rarely been used
since, among other reasons, the Indonesian State Auction Office
will not allow an auction without an Indonesian court
Private sales are permitted if a higher sale price can be
achieved for the benefit of the parties. In order to conduct
the private sale, it is necessary that on default, the parties
agree to a private sale. In the case of fiduciary transfers and
mortgages, private sales can only be conducted one month after
the date of written notification of the intended sale to
interested parties and once it has been published in at least
two daily newspapers with circulations in the relevant area, so
long as no third party has voiced an objection against the
Founder / managing partner, Walalangi &
T: +62 21 5080 8600
F: +62 21 5080 8601
Luky Walalangi is an Indonesian
qualified lawyer with nearly two decades of experience.
He is listed among Indonesia's Top 100 Lawyers by Asia
Business Law Journal and cited by Asialaw Profiles as
'one of the best corporate lawyers in Indonesia'. He is
also rated as 'highly regarded' by the IFLR1000. He is
a leading presence in M&A, banking, finance and
real estate transactions.
Luky has an outstanding track record of advising on
major strategic acquisitions in Indonesia across a
variety of sectors, from traditional M&A deals to
complex asset and portfolio loan acquisitions. He
stands among the leading M&A and finance
practitioners according to top legal surveys, with
recognition by international law journals.
Partner, Walalangi & Partners
T: +62 21 5080 8600
F: +62 21 5080 8601
Miriam Andreta (Reta) is an Indonesian qualified
lawyer with extensive knowledge and experience in
M&A, banking and finance, oil & gas and
antitrust. She graduated from the Gadjah Mada
University and attended a one-year undergraduate
exchange program at the University of Tokyo.
Reta was a partner at one of the biggest firms in
Jakarta before joining W&P. She has more than a
dozen years of experience acting for both foreign and
domestic lenders in high profile syndication financing,
including the issuance of bonds and medium-term notes,
convertible loans and subscriptions of convertible
bonds in a publicly listed company.
Sinta Dwi Cestakarani
Associate, Walalangi & Partners
T: +62 21 5080 8600
F: +62 21 5080 8601
Sinta Dwi Cestakarani is a licensed lawyer with more
than seven years of experience. Her main areas of
practice are banking and finance, M&A, mining and
fintech. Prior to joining Walalangi & Partners,
Sinta worked for the largest law firm in Indonesia.
During her years of practice, Sinta has assisted and
advised domestic and foreign companies on various
notable transactions predominantly in the areas of
banking and finance, M&A, mining and fintech