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On 18 October 2004, the government of Indonesia enacted Law No. 37 of 2004 on Bankruptcy and Suspension of Payment (the Insolvency Law) in response to the need for new legislation.
Under the Insolvency Law, two types of proceedings may be commenced: bankruptcy proceedings, whereby the debtor's assets will be liquidated to satisfy the creditors' claims; and legal debt moratorium or suspension of payment proceedings, known as Penundaan Kewajiban Pembayaran Utang (PKPU). PKPU is not an involuntary receivership, but a court-enforced suspension of payments of creditor liabilities. PKPU proceedings are intended to achieve an amicable settlement with the debtor's creditors and avoid a declaration of the debtor's bankruptcy and liquidation of the debtor. It is a process under which the debtor proposes to its creditors a restructuring plan to restructure its debts and reorganise its business operations.
The court that has jurisdiction over bankruptcy and PKPU proceedings is the Commercial Court. It is a specialised court in the commercial field, established within the framework of the court of general jurisdiction. Initially only the District Court of Central Jakarta had a separate chamber designated as the Commercial Court, but now the District Courts of Makassar (Ujung Pandang), Medan, Surabaya and Semarang also have such commercial courts.
Statutory requirements to start bankruptcy proceedings
The state of bankruptcy is determined by the court. Under the Insolvency Law, either a creditor or the debtor can file a petition for bankruptcy. The petition should establish that the debtor has more than one creditor and that the debtor's debt to one of the creditors is due and payable. These tests must be proven in an uncomplicated matter (eg, clearly evidenced without requirement for further analysis by the court) otherwise the Commercial Court is very likely to dismiss the bankruptcy petition.
Initially it was not entirely clear whether the Insolvency Law allowed a creditor to assign its claim to another party to meet the two-creditor requirement. This uncertainty was answered in Plaza Indonesia Realty v PT Sinar Monexindo (2012). In this case, the creditor's claim was due and payable on 13 August 2010. Subsequently the creditor assigned its claim to another creditor on 22 December 2010 and a notification of that assignment was served to the debtor on 4 January 2011. A creditor's petition was filed on 16 July 2011. Although the Supreme Court acknowledged that an assignment of a claim was a valid instrument under Indonesian law, the court decided that the two-creditor requirement was not fulfilled.
There is no requirement for the default debt to exceed a certain amount. And, unlike other jurisdictions, there is no net asset or cash flow test of solvency under the Insolvency Law. In 2012, PT Telkomsel - Indonesia's biggest telecommunication company - was declared bankrupt for a disputed debt of 5.26 billion rupiahs. The Supreme Court later overturned the bankruptcy judgment on the basis that the creditor's claim could not be proven in an uncomplicated manner. The fact that Telkomsel was a solvent company and the amount of the disputed debt was insignificant was not in the Supreme Court's consideration when it overturned the Commercial Court's judgment.
Time frame of bankruptcy proceedings
The decision on the petition for the declaration of bankruptcy must be rendered by the court within 60 days of the petition being registered. The court's decision on the bankruptcy petition can be appealed to the Supreme Court by the debtor, any petitioning creditor or any other creditors. The Supreme Court must give its decision within 60 days of the request for cassation being filed. The court's decision can be enforced immediately pending the appeal process at the Supreme Court.
After the court declares the debtor bankrupt, the bankrupt debtor loses its capacity to manage and dispose of the bankruptcy estate (at 00:00 local time). The power to undertake any legal action in respect of the bankruptcy estate passes to the receiver. Furthermore, all court enforcement procedures relating to security or otherwise are postponed and any attachment order is lifted upon the declaration of bankruptcy.
Attachment over the debtor's assets and temporary receiver pending the court's decision
Pending the court decision on the bankruptcy petition, any creditor may petition the court to put an attachment over a part or all the debtor's assets and to appoint a temporary receiver (which is akin to a judicial manager). Any assets subject to the attachment order cannot be transferred, encumbered or leased by the debtor.
Administration and liquidation of the bankruptcy estate
The main purpose of bankruptcy is the orderly liquidation of the debtor's assets and satisfaction of the creditors' claims. A receiver and supervisory judge are appointed to administer and liquidate the bankruptcy estate.
The receiver acts as the administrator and liquidator of the bankruptcy estate in consultation with and under the supervision of the supervisory judge. One of the main duties of the receiver is to transform the bankruptcy estate into cash (by selling the bankruptcy estate through public auction or private sale) to then be distributed to the creditors.
The supervisory judge is responsible for supervising the actions of the receiver in respect of the administration and liquidation of the bankrupt estate. Most of the receiver's major decisions are subject to the approval of the supervisory judge. Further, the supervisory judge is empowered to examine witnesses or order an investigation by experts in order to obtain any information on the bankruptcy proceeding.
The basic principle for the distribution of the proceeds of the bankruptcy estate to the creditors is the equality of the creditors, meaning that all creditors have an equal right to payment, and the proceeds of the bankruptcy estate must be distributed in proportion to the sizes of their respective claims.
Preferred or secured creditors have a priority claim on the proceeds of the sale of any assets that have been pledged as security in their favour, whether a pledge, fiduciary, mortgage or privilege. Unsecured or concurrent creditors, on the other hand, share in the division of the remaining assets and obtain satisfaction of their debts in proportionate percentage.
Unsecured or concurrent creditors will share the money proportionately, rather than having a situation in which the first creditor to apply will be the first to receive payment. As from the date of the declaration of bankruptcy, the unsecured or concurrent creditors can obtain satisfaction of their claims only in the bankruptcy procedure and not through individual enforcement proceedings.
The Insolvency Law allows the secured creditors to enforce their rights over the secured objects (collateral). However, those rights are subject to a stay period of 90 days after the court has rendered a bankruptcy declaration, during which the secured creditors are prevented from enforcing their rights over the collateral. The secured creditors may enforce the collateral after the stay period. The Insolvency Law provides an opportunity for the secured creditors to object to the stay period. A secured creditor may submit a petition to the receiver requesting acceleration of the stay period and, should the receiver decline its petition, the secured creditor may forward the petition to the supervisory judge. The supervisory judge must provide a decision within 10 days of the petition being submitted.
The Insolvency Law recognises the principle of actio pauliana, in which actions taken prior to insolvency to evade payment obligations to creditors can be cancelled. A transaction can be cancelled only if it is made within one year prior to the bankruptcy decision, the debtor is not obligated to do the transaction, and it is proven that the debtor and the party with whom the transaction was made knew or ought to have known that the transaction would be detrimental to the creditor.
The debtor and the other party with whom the transaction was made are deemed to have known or ought to have known that the transaction would be detrimental to the creditor in the following scenarios:
- if the transaction involved an agreement in which the obligations of the debtor far exceeds the obligation of the other party;
- if the transaction involved making payments or giving securities for debts that are not yet due or payable;
- if the transaction was made by an individual debtor for the interests of his or her family or company in which the debtor or a family member is a director or manager or majority shareholder;
- if the transaction was made by a company debtor for the interests of the directors or managers of the company or their family members, or majority shareholders of the company or their family members;
- if the transaction was made by a company debtor for the interests of other companies, and if:
- the directors or managers of the debtor or their family members are also directors or managers of the other company;
- the majority shareholders of the company or their family members are also majority shareholders in the other company (and vice versa);
- the debtor is a director or manager in the other company (and vice versa); or
- the same company or individual, or family member, is the majority shareholder of both companies in the transaction; or
- if the transaction was made by a debtor with a company that is within the same group as the debtor.
In circumstances where a debtor makes a gift prior to the bankruptcy declaration, that act can also be annulled provided that the receiver can establish that the debtor knew or should have known that the act would prejudice his or her creditors.
Upon successful annulment of a suspect transaction, the assets removed from the bankrupt debtor must be returned by the person against whom the annulment has been invoked. This is because there is no longer a valid title for the transfer. If this person is not able to return the assets in the same condition, he or she must compensate the bankruptcy estate for the damage that it suffers as a result.
On the other hand, the receiver should return to him or her the consideration received by the bankrupt debtor or the value thereof, to the extent that the bankruptcy estate has benefited therefrom. He or she may file a claim for the deficit as an unsecured creditor. However, if the assets have been transferred to a third party, the receiver may not be able to reclaim the assets from this third party.
Under Law No. 40 of 2007 on Limited Liability Companies (the Company Law), if a company becomes bankrupt through the fault or negligence of the directors, and the company's assets are not sufficient to discharge all creditors' claims, the directors will be jointly and severally liable for the shortfall in bankruptcy.
The Company Law stipulates that directors are not liable if they can prove that:
- the bankruptcy was not due to their fault or negligence;
- they performed their actions of management in good faith, with prudence and full responsibility for the interests of the company and in accordance with the company's purpose and objectives;
- they did not have any direct or indirect conflict of interest regarding the actions of management performed; and
- they took actions to avoid the occurrence of the bankruptcy.
If one of the above is not fulfilled, a director may be held personally liable.
While the Company Law and the Insolvency Law do not provide a basis for criminal liability, there is a basis under the Indonesian Criminal Code in which directors can be criminalised. Knowledge of the inevitability of bankruptcy is a qualification for a number of criminal sanctions, as explained below.
Under the Indonesian Criminal Code, a director or commissioner of a limited liability company that is declared bankrupt by a court is criminally liable if the director or commissioner:
- has participated in or given his or her permission to acts contrary to the articles of association, resulting in all or part of the losses of the company;
- with the intent to delay bankruptcy or settlement, participated or gave his or her permission to borrow money with unfavourable terms with the knowledge that the loan would not prevent the bankruptcy or settlement; and
- failed to fulfil his or her obligations to maintain the bookkeeping of the company or failed to show the books of the company.
Furthermore, a business person is criminally liable for reducing the rights of creditors to the bankruptcy assets if said business person:
- makes expenses that are non-existent, does not record earnings or takes something from the estate;
- has transferred assets for free or clearly less than the real value;
- has favoured a creditor at the time of bankruptcy or at a time when he or she knew bankruptcy was unavoidable; and
- cannot show the bookkeeping of the company.
Statutory requirements for commencing PKPU proceedings
In many court cases, the Commercial Court adopts the bankruptcy tests in hearing petitions for PKPU. As with bankruptcy cases, either a creditor or the debtor can file a petition for PKPU. Furthermore, under the Insolvency Law, the debtor may also file a petition for PKPU after a petition for bankruptcy has been filed against it. If petitions for both PKPU and bankruptcy are reviewed by the court at the same time, the petition for PKPU prevails and must first be decided. Although it is not a legal remedy as such (ie, it is not an appeal or civil review), a petition for PKPU will effectively postpone the bankruptcy proceedings for a certain period of time.
In recent years, the PKPU has been utilised to restructure numerous major Indonesian companies that conduct business internationally, including: PT Berlian Laju Tanker Tbk, PT Trikomsel Oke Tbk, PT Humpuss Intermoda Transportasi Tbk, PT Trans-Pacific Petrochemical Indotama, PT Mandala Airlines and PT Arpeni Pratama Ocean Line Tbk.
Time frame of PKPU proceedings
If the petition is submitted by a creditor, within 20 days of filing, the court is required to issue a temporary PKPU order. If the petition is submitted by a debtor, the time frame for issuing a temporary PKPU order is three days after filing. The temporary PKPU order is for 45 days.
If the debtor has submitted a restructuring plan during temporary PKPU proceedings, creditor voting on the plan can be conducted. If a plan is not submitted, the requisite majority of creditors must vote on whether a permanent PKPU order should be entered, and the time for the debtor to put forward its proposal should be extended and considered at a later court meeting or hearing (an extension may not last beyond 270 days after the date of the declaration of the temporary PKPU).
To extend the temporary PKPU, a majority in number and at least two-thirds in value of both secured and unsecured creditors of the debtor attending and voting at the meeting must vote in favour of the extension. All creditors have the right to vote regardless of any issues of economic interest. If the debtor fails to secure this extension, the debtor is declared bankrupt by the court.
Management of a company
Following the declaration of a PKPU order, the court will appoint one or more administrators, who, with the debtor, manage the debtor's assets during the PKPU proceedings. Obligations of the debtor incurred without approval of the administrators may only be charged against the debtor's assets insofar as they are profitable to the debtor's assets.
The secured creditors' rights to enforce their security interest are stayed during the PKPU proceedings. Furthermore, all enforcement processes against the debtor that were initiated before the PKPU proceedings are postponed, and all attachments over the debtor and its assets are required to be lifted immediately after the permanent PKPU is granted by the creditors.
Except for secured and other privileged claims, the debtor is also generally prohibited to pay any of its debts during the PKPU proceedings, unless the payment is made to all its creditors proportionally and without exception.
The requisite majority of creditors to accept the proposal is a majority in number and at least two-thirds in value of each class of debt of the debtor who attend and vote at the meeting. If the restructuring plan is not accepted by the requisite majority, the debtor is declared bankrupt, a receiver is appointed, and the debtor's assets are liquidated under the Insolvency Law.
If the plan is accepted by the requisite majority of creditors, it must be subsequently approved by the court. The administrators and the creditors have an opportunity to object to the approval of the restructuring plan. The court can reject a plan accepted by the requisite majority of creditors if, inter alia, the value of the debtor's assets is far greater than the amount agreed in the restructuring plan or the fees and costs of the administrators have not been paid. If the restructuring plan is rejected by the court, the debtor will be declared bankrupt by the court.
The debtor's failure to comply with the terms of an approved restructuring plan will result in the cancellation of the plan by the court and the immediate declaration of the debtor as bankrupt.
If the restructuring plan is accepted by the requisite majority of creditors attending and voting at the creditors' meeting, the plan binds dissenting unsecured creditors; but dissenting secured creditors are not bound by the restructuring plan. Under the Insolvency Law, the secured creditors who reject the restructuring plan must be compensated with either the value of the collateral or the actual value of their debt directly secured by the collateral rights to property, whichever is the lower.
There is still uncertainty as to how this provision for dissenting secured creditors will work, such as whether a dissenting secured creditor must be immediately awarded following ratification of the restructuring plan by the court.
The cramdown provision under the Insolvency Law poses a certain risk against unsecured creditors. However, unsecured creditors may face a greater risk by not participating in PKPU proceedings. There have been cases in which a creditor was recognised in the restructuring agreement, notwithstanding the fact that the creditor did not register its claim to the administrator. The creditor may lose an opportunity to negotiate and exercise its voting rights against the restructuring plan if it does not register its claim during PKPU proceedings. In addition, the creditor may be bound by the restructuring agreement even if it faces a major haircut.
Although the Insolvency Law also does not adopt the UNCITRAL Model Law on Cross-Border Insolvency of 1997, it does provide the following key features in this respect:
The Commercial Court can have jurisdiction over foreign entities or individuals that are not based in Indonesia if they conduct their business activities in Indonesia.
Indonesian bankruptcies will apply against the debtors' assets wherever they are located.
Generally, the Commercial Court is not bound to recognise the bankruptcy declaration of foreign courts as Indonesia is not a signatory to any treaty on recognition of foreign court judgments. It remains to be seen whether the Indonesian court can recognise a foreign-appointed receiver's authority to represent the bankruptcy estate in Indonesia.