The Indonesian insolvency and restructuring landscape
Danar Sunartoputra, Puji Atma, and Gery Fathurrachman of Melli Darsa & Co., Indonesian member law firm of PwC global network assess the corporate landscape in Indonesia, more than two years after the start of the Covid-19 pandemic
After more than two years since the first case of Covid-19 was officially declared to have occurred in Indonesia, the Indonesian government’s efforts to control the outbreak have succeeded in boosting national economic growth.
Through its press release, the Coordinating Ministry of Economic Affairs has announced that the national economic growth in 2021 shows emerging development, as can be observed through the growth rate of Indonesia’s GDP per capita, which increased to IDR 62.2 million ($4,124), higher than the pre-pandemic GDP per capita of IDR 59.3 million in 2019 (see Press Conference of Ministry of Coordinating for Economic Affairs of the Republic of Indonesia No: HM.4.6/56/SET.M.EKON.3/2/2022 regarding National economic growth in 2021 gives a positive signal to the economic prospects in 2022 on February 8 2022).
In 2022, GDP growth continues to increase, as shown by 5.07% growth in the manufacturing industry sector as the largest contributor to the GDP. Other major sectors also grew significantly, namely the transportation and warehousing sectors which recorded the highest growth of 15.79%.
Various other sectors such as health services and information and communications also show strong growth (see Government Regulation No. 23 of 2020 regarding Implementation of the National Economic Recovery Programme in Framework Supporting State Financial Policy for Management of the Corona Virus Pandemic Disease 2019 (Covid-19) and/or Facing Dangerous Threats to the National Economy and/or Financial System Stability and Saving the National Economy, as amended partially by Government Regulation No. 43 of 2020).
While the national economic situation has grown in a positive direction, the government still maintains its policies to anticipate any circumstances that may be detrimental to economic growth. One example is the National Economic Recovery or Pemulihan Ekonomi Nasional (PEN) programme that has been implemented since 2020.
The PEN programme provides support to business actors, through mechanisms such as tax incentives, interest subsidies, working capital credit guarantees, etc. (see Government Regulation No. 23 of 2020 regarding Implementation of the National Economic Recovery Program in Framework Supporting State Financial Policy for Management of the Corona Virus Pandemic Disease 2019 (Covid-19) and/or Facing Dangerous Threats to the National Economy and/or Financial System Stability and Saving the National Economy, as amended partially by Government Regulation No. 43 of 2020) with the aim to protect, maintain, and improve the economic capacity of business actors in running their businesses, especially during the Covid-19 outbreak.
Amidst the Covid-19 pandemic, the number of restructuring cases for financially troubled debtors in Indonesia is increasing. The case tracking system or Sistem Informasi Penelusuran Perkara (SIPP) of the commercial courts in Indonesia recorded 636 suspension of debt payment obligation (Penundaan Kewajiban Pembayaran Utang or PKPU) cases in 2020, which was a significant increase compared to only 433 cases in 2019.
Given the increasing number of cases and to further implement the PKPU and bankruptcy practices under Law No. 37 of 2004 on Bankruptcy and Suspension of Payment Obligation (Bankruptcy Law), the Supreme Court issued Chief of Supreme Court Decree No. 109/KMA/SK/IV 2020 on Implementation of the Guidebook for Bankruptcy and Suspension of Debt Payment Case (SC Decree No. 109/2020). Important issues that have been corroborated by SC Decree No. 109/2020 include, among other things, the authority of the Financial Services Authority or Otoritas Jasa Keuangan (OJK) to file a PKPU/bankruptcy petition against financial institutions, and electronic submission of PKPU/bankruptcy petitions.
In 2020, the Supreme Court issued Circular Letter No. 1 of 2020 on Conduct Guidelines during the Period of Preventing the Spread of Corona Virus Disease-19 (SC Circular Letter No. 1/2020), that allows judges to postpone the examination of a case which in nature is limited by a certain timeframe. As a result, there are a number of examinations of PKPU/bankruptcy cases that have been postponed due to the increasing number of Covid-19 cases.
At the end of December 2021, the Constitutional Court issued decision No. 23/PUU-XIX/2021 regarding judicial review of Bankruptcy Law, which ruled that a PKPU decision may be subject to cassation if it concerns a PKPU application initiated by the creditor and concerns the rejection of the composition plan submitted by the debtor. This decision is considered a monumental update to PKPU practices given the Bankruptcy Law does not provide any legal remedy to a PKPU decision.
While general corporate restructuring activities are largely regulated by the Indonesian company law, banking law and other laws and regulations depending on the industry the company is engaged in, the Bankruptcy Law provides the key legal framework for restructuring as it relates to insolvency/bankruptcy.
As a general overview, the Bankruptcy Law regulates two types of legal actions, being PKPU and bankruptcy. PKPU is essentially a court-mandated restructuring process aside from the available out-of-court restructuring process that may be agreed mutually between the contracting parties.
Under PKPU, the debtor will have the opportunity to present a settlement plan for debt restructuring. If the settlement plan is rejected by the creditors, the debtor will be declared bankrupt (Article 289 of Bankruptcy Law). On the other hand, if the settlement plan is accepted by the creditors, it will be reinforced by virtue of a court-ratified settlement agreement (Article 284 of Bankruptcy Law). Yet, if the debtor fails to perform its obligations under the settlement plan, the creditor may request cancellation of the settlement where the debtor will be declared bankrupt and undergo the bankruptcy process (Article 291 of Bankruptcy Law).
Under the Bankruptcy Law, a debtor can be declared as under PKPU/bankrupt by the Commercial Court based on a bankruptcy petition filed either by the debtor itself, or by one or more of its creditors if the debtor (i) has two or more creditors; and (ii) does not repay in full at least one debt that is due and payable (PKPU/bankruptcy conditions) (Article 2 paragraph (1) of Bankruptcy Law).
These low bar triggers present one of the main issues that contribute to the increasing number of PKPU/bankruptcy cases as creditors may easily file a PKPU/bankruptcy petition against debtors. Another contributing reason is that creditors tend to avoid the out-of-court debt restructuring process, as it may takes considerable time and efforts to negotiate privately. A court-mandated restructuring may provide more pressure and certainty given the limited restructuring timeframe and is supervised by the administrator and the supervisory judge.
Among other recent court decisions, there is case No. 578 K/Pdt.Sus-Pailit/2021 between the Ministry of Finance, the Directorate General of Tax of the South Sumatera Area and Bangka Belitung Islands cq Palembang Tax Office against the Team of Receiver of PT Tinindo Inter Nusa (under bankruptcy), which is considered a landmark decision according to the Supreme Court annual report of 2021. Pursuant to this decision, the Supreme Court affirms that the renvoi procedure, a procedure to challenge the list of temporarily admitted claims and the list of contested claims, must be settled prior to the ratification of the settlement plan.
Processes and procedures
In terms of process, the PKPU/bankruptcy proceedings can only be initiated against a debtor. In a transaction which involves multiple debtors including intragroup debtors, a separate PKPU/bankruptcy proceeding should be commenced against each concerned debtor, where the proceedings will be carried out individually.
In a PKPU/bankruptcy proceeding, if the judges consider that the PKPU/bankruptcy conditions have been met, the judges will render a decision to declare that the debtor is under PKPU/bankruptcy and appoint supervisory judges together with the administrator (for PKPU) or the receiver (for bankruptcy) to supervise the PKPU/bankruptcy process (Article 15 jo. Article 225 of Bankruptcy Law). Only after the judges render such a decision will the PKPU/bankruptcy process be legally commenced.
The number of restructuring cases for financially troubled debtors in Indonesia is increasing
Any such court decision will not automatically terminate the existing contract between the parties. However, under established practices, it is common for a contract to provide termination rights if a party has been declared as under PKPU/bankruptcy by a court decision. Another thing to note is that unless the debtor has been declared bankrupt, the debtor cannot be forced to pay their debts in the PKPU process (Article 242 paragraph (1) of Bankruptcy Law). All execution actions, including execution of the security, that have been initiated in the context of paying off debts, must be suspended (Article 242 paragraph (2) of Bankruptcy Law).
In a PKPU case, if the creditors’ voting does not meet the minimum threshold, the debtor will be declared bankrupt and shall undergo the bankruptcy process (Article 289 of Bankruptcy Law). If the court decides to grant the PKPU decision, the administrators that are appointed by the court will manage the debtor’s assets with the debtor (Article 225 paragraph (2) & (3) of Bankruptcy Law). Actions which are deemed to have an effect upon the debtor’s assets may only be performed upon approval from the administrators (Article 240 paragraph (1) of Bankruptcy Law).
As for the bankruptcy case, if the creditors’ voting does not meet the minimum threshold, the debtor will be entering an insolvency state (Article 178 of Bankruptcy Law), where the receiver will sell the debtor’s assets and distribute the proceeds to the creditors based on their priority. A receiver will be appointed once the court has decided to grant the bankruptcy petition and declared the debtor bankrupt (Article 15 of Bankruptcy Law). The receiver will assume the debtor’s board of directors’ power and authority to manage the debtor’s assets (Article 69 of Bankruptcy Law) as the debtor will lose such power and authority once it has been declared bankrupt.
In the PKPU/bankruptcy process, creditors may submit their claims by providing the underlying documents for such claims to the administrator(s)/receiver(s) (Article 115 of Bankruptcy Law). In the claim verification meeting, the Supervisory Judge will announce the list of temporarily admitted claims and the list of contested claims (Article 124 paragraph (1) of Bankruptcy Law).
Both the debtor and the creditors will have the right to challenge such these lists, and the dispute will be examined and decided in a separate court hearing (renvoi procedure) (Article 127 of Bankruptcy Law). Accordingly, the court will provide minutes of the claim verification meeting, and the admitted claim stipulated in the minutes will be final and binding (Article 126 paragraph (5) jo. Article 205 of Bankruptcy Law), save for any renvoi procedure.
Indonesian law recognises the principle of actio pauliana, which means the creditor or receiver in the bankruptcy process may request a cancellation of the debtor’s legal actions involving its assets that may be detrimental to the creditor’s rights before the bankruptcy decision was rendered (Article 41 paragraph (1) of Bankruptcy Law). The cancellation can only be granted if it can be proven that at the time the legal action was taken, the debtor and any other party knew that the legal action would be detrimental to the creditor (Article 41 paragraph (2) of Bankruptcy Law). Any legal action that was committed based on the agreement and/or the law is exempted from this cancellation (Article 41 paragraph (3) of Bankruptcy Law).
The Bankruptcy Law recognises three types of creditors, namely secured, preferred and unsecured creditors, based on the security they possessed and the regulatory priority under the law. For example, pursuant to Constitutional Court Decision 67/PUU-XI/2013 and Law No. 13 of 2003 on Labour, as amended by Law No. 11 of 2020 on Job Creation, creditors’ claims in the form of unpaid salaries for employees will precede those of any other creditors, including secured creditors and taxes.
It is worth noting that in some specific industries, a PKPU/bankruptcy petition cannot be filed by any creditors given certain regulatory institutions have their own set of regulations for restructuring. For instance, any bankruptcy petition against financial institution debtors such as bank, insurance, securities, stock exchange, clearing and custodian institutions, can only be filed by the OJK (Chief of Supreme Court Decree No. 109/KMA/SK/IV 2020 on Implementation of the Guidebook for Bankruptcy and Suspension of Debt Payment Case; Article 6 and Article 55 of Law No. 21 of 2011 on Financial Service Authority/Otoritas Jasa Keuangan jo. Article 2 paragraph (3) & (4) of Bankruptcy Law).
In addition to OJK’s authorities in respect of financial institutions, other regulations may set specific authorisations for filing bankruptcy petitions even if the companies are in financial distress. For example, the Minister of Finance has vested the power to file an application of PKPU/bankruptcy against certain state owned enterprises engaging in the public sectors. This is important because the insolvency of these specific entities may impact national stability in general.
Judgments of non-Indonesian courts are not enforceable in Indonesian courts. Consequently, in the case of cross-border insolvency where the debtor is a foreign entity and has obtained a foreign court decision which mandates a restructuring/bankruptcy, that decision will not be recognised in Indonesia. To obtain an Indonesian court judgment, a claimant would be required to pursue claims in Indonesian courts on the basis of Indonesian law. A foreign court judgment could be admissible as non-conclusive evidence in a proceeding on the underlying claim in an Indonesian court and may be given such evidentiary weight as the Indonesian court may deem appropriate in its sole discretion. Re-examination of the underlying claim de novo would be required before the Indonesian courts.
The Bankruptcy Law enables PKPU/bankruptcy proceedings to be initiated against a foreign entity that runs its business within the jurisdiction of Indonesia. The court that has the jurisdiction to examine the case is the court that has the jurisdiction over the debtor’s Indonesian headquarters (Article 3 paragraph (4) of Bankruptcy Law).
While the Indonesian court does not recognise the foreign court judgment, it may provide technical assistance to the foreign court proceeding upon receiving the letters of rogatory from the foreign judicial authority (This assistance is regulated under the Memorandum of Understanding of the Ministry of Foreign Affairs and the Supreme Court No. PRJ/HI/102/02/2018/01 and No. 01/NK/MA/2/2018 of 2018 on Handling of Judicial Assistance Requests in Civil Matters), for the legal information or documents, and the service of judicial process.
The increasing number of PKPU/bankruptcy cases has shown the need for regulatory reform of the Bankruptcy Law, not only because many businesses are surviving their financial distresses caused by the pandemic, but also to avoid any risk of exposing themselves to PKPU/bankruptcy conditions due to the relatively reachable PKPU/bankruptcy conditions. The most critical items to revisit include the criteria of debt which trigger a PKPU/bankruptcy proceeding.
As the market is expecting Indonesia’s economic recovery to continue gradually increasing, it is anticipated that many dominant market players will strategise their corporate actions to be more focused on escalating their business in a sustainable way, including through initial public offerings, joint ventures and acquisitions.
Ultimately, the PKPU/bankruptcy regime, while already providing sufficient protections to creditors, should also provide more balanced protections for businesses in their survival efforts, especially during difficult times, which in turn will allow the national economic continue to grow positively in the long run.