INDONESIAN BANKRUPTCY LAW (2)

4)    Ongoing issues

Risks

The general risks that those using the bankruptcy legislation face are both the lack of experience and the lack of knowledge on the part of those with the responsibility to administer the law. The special risk that debtors face is the relative ease with which a declaration of bankruptcy can be obtained. But this was the specific intention of the drafters of the law–to force debtors to pay. While this ease is the basic criticism that the law faces, it is its basic strength in the hands of genuine creditors.

Who may petition?

Who may petition for bankruptcy? Art 2(1) defines this as a creditor of a debtor with two or more creditors with at least one debt due and payable. The creditor must, therefore, establish in his petition:

1. That there is another creditor besides himself; and

2. That a debt (not necessarily his own) is due and payable and has not been settled in full.

It is important that the amount of the debt be clearly established and that the debt is due and payable. It is not sufficient that an invoice has been issued. An invoice must always state when the amount becomes due and payable. And it is not sufficient that the creditor claims that the debt is due.

It must be clear that the debtor acknowledges the debt, but refuses to pay. It is this point that has caused much controversy in some recent high profile cases (e.g. the Manulife matter), where the court did not grasp this basic requirement, and brought the law into disrepute.

It is not for the creditor to claim that it is clearly solvent. That is not the basic issue. It is firstly and above all the duty of the claimant to show that an agreed debt has not been paid in full, and then it is the duty of the creditor to explain why it has not paid all its debts.

Does bankruptcy mean insolvency?

Unlike in other jurisdictions, this is not the case in Indonesia. Bankruptcy is a simple declaration pursuant to Article 2 that a debtor with two or more creditors has not fully paid a debt which is due and payable. It is a separate issue from insolvency. Insolvency may follow. Formal insolvency does not occur until a composition (plan of action) is either not presented or is rejected.

Bankruptcy was a difficult declaration to achieve previously. The old repealed law provided that bankruptcy (still not insolvency) would be pronounced “if it appears… that the debtor’s condition is such that he has stopped making payments”. So, judges previously held that if a debtor paid even a small fraction of an agreed payment, he could not be declared bankrupt. This confusion has now been cleared away.

May a petition be withdrawn?

The nature of a bankruptcy petition is that there is always more than one creditor whose interests are to be considered. This distinguishes it from other civil actions. However, it appears that a petition may be withdrawn before bankruptcy is declared. After bankruptcy has been declared, progress on the matter becomes the decision of all creditors.

May a secured creditor petition?

The law is silent, meaning that a secured creditor may petition. While this is an issue of some debate, the fact is that the law does not prevent a secured creditor from petitioning.

 

Is there a minimum debt?

There is no minimum debt. But, there is public criticism of this coming from “big business”. The basic purpose of the law is to force debtors to pay, regardless of the amount they may owe, big or small.

What if there is an arbitration agreement?

It may be necessary to arbitrate to determine whether a debt is in fact due and payable, and/or the amount of the debt. If there is no doubt regarding this, then a petition for bankruptcy may be made. This is then no longer a matter of arbitration, but debt recovery.

What if a debtor pays a reduced amount of agreed instalments?

The new law clarifies beyond doubt that a debt must be settled in full, or the debt may become the basis for a petition for bankruptcy.

Liabilities of directors and commissioners

Directors (Company Law Article 85) and commissioners (Company Law Article 98) may be held liable for fault or negligence. But fault and negligence are not defined. Some commentators view this as placing reliance on the common law concept of fiduciary duty. There are provisions in the Criminal Code (KUHP) to deter directors and commissioners from entering into certain loans, but it is not clear whether these provisions would extend to penalties for continuing to trade when in a state of inability to repay (common law insolvency). The Bankruptcy Law itself is silent on this matter though, under common law, unless a director is fully informed and acts reasonably, he or she can be held personally liable for all faults of the company.

Can a guarantor be declared bankrupt?

The Indonesian Civil Code has been interpreted by the Supreme Court to mean that the civil status of the principal debtor cannot be transferred to a guarantor, even though the guarantor can be held responsible for the primary debt. Therefore, the guarantor cannot be declared bankrupt. However, if the guarantor waives its preferential rights (as is generally required by creditors), then it appears it may be able to be declared bankrupt.