This content is from: Local Insights

Indonesia

Increasing numbers of Indonesian obligors are trying to nullify their obligations under certain internationally practiced bonds issuance structures by claiming that the bonds and the underlying structure are invalid and thus unenforceable in Indonesia. Danareksa Jakarta International, Tri Polyta Indonesia, Indah Kiat Pulp & Paper (these are public companies) and Lontar Papyrus Pulp & Paper are among those obligors. The creditors, mostly international financial institutions, allege that these are merely the efforts of such obligors to avoid having to honour their obligations by taking advantage of the much-doubted Indonesian legal system.

In all major bonds issues, legal opinions from domestic as well as international lawyers are always sought to confirm the validity and enforceability of the bonds and the related structure (including collateral provided if the bonds are secured bonds) before the bonds are issued and subscribed by the relevant parties. The legal opinions in general say that the bonds constitute legal, valid and binding obligations of the obligors (issuers and guarantors) enforceable against them in accordance with the terms of the bonds and the underlying transaction documents. In addition, there will also be some confirmation that the obligors do not contravene any laws or regulations applicable to them or their corporate documents or, any court order, decree, writ, judgment, award, injunction or similar legal restriction applicable to them.

It is logical for creditors to rely on these opinions, especially those creditors from international secondary markets who would only be able, at the time of purchase, to determine the legality and validity of issues from opinions of (independent) lawyers to the obligors. However, should the bonds be determined invalid and unenforceable by the Indonesian court, the creditors might want to contemplate suing the lawyers issuing the legal opinions backing up the issuance. In this regard, there are two factors that need to be taken into account: first, the effort must be thoroughly implemented so as not to implicate the creditors' acknowledgment that indeed the bonds are invalid (this is particularly important when the said court judgment is not yet final and binding under Indonesian procedural law). Second, creditors must consider the existence of Article 16 of the Indonesian Advocate Law (Law 18 of 2003), which in essence stipulates that advocates cannot be sued before either civil or criminal courts in undertaking their duty in good faith for the purpose of defending their clients in court proceedings. Though logically this provision should not be applicable for the issuance of legal opinions, this new law has yet to be tested in relation to the civil liability of lawyers issuing erroneous legal opinions that cause loss to their clients.

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