Creditors Right in Insolvency – An Update on Indonesian Practice

In general, the strategy for debt recovery in Indonesia can be achieved through submitting (i) a litigation process in front of the Indonesian courts and (ii) a bankruptcy petition by foreign creditors against the Indonesian debtors.  This article will focus on some relevant issues that need to be taken into consideration by the foreign creditors when they opt to implement the bankruptcy proceedings in Indonesia. 
 
Indonesian Bankruptcy Law is governed by Law Number 37 of 2004 on Bankruptcy and Suspension of Payment (“Bankruptcy Law”).  Bankruptcy process can be initiated by debtor or creditor, provided that the debtor must have two or more creditors and does not pay in full at least one loan which is due and payable.  Once a company has been declared bankrupt, and: (i) no composition plan is submitted by the company to the creditors, (ii) a composition plan is submitted but subsequently rejected by the creditors, or (iii) a composition plan is submitted and subsequently approved by the creditors but is not ratified by the court, that is when the company will be under insolvency.
 
Within a maximum of five days from a court order declaring the bankruptcy of a debtor, a Receiver appointed by the Commercial Court must publish notification of such bankruptcy in at least two newspapers and the State Gazette.  In addition to that, the Receiver must alsosend notification to creditors those have been identified by the Receiver to notify the bankruptcy of the debtor.
 
Creditors’ rights
 
In general all creditors have the rights to receive repayment of their claims, as this is governed by Article 1131 of Indonesian Civil Code (“ICC”).  However Article 1133 of ICC and the Bankruptcy Law classified the following creditor with preferential rights:
 
a) Secured Creditor who has privilege rights in accordance with Article 1134 of Indonesian Civil Code that consist of creditor holding the following security rights: (i) pledge, (ii) mortgage, and (iii) fiduciary rights.
b) Receivables with particular privileges that consist of: (i) court proceeding fee for the enforcement of security; (ii) rental fee of immovable goods; (iii) unpaid purchase price of movable goods; (iv) expenses incurred to secure respective goods; (v) fees owing to a skilled labour for the performance of a certain task; (vi) transportation expenses; (vii) accommodation expenses; (viii) compensation to be borne by employees for any duties misconduct.
c) The following receivables have preferential rights over immovable and movable assets and will be repaid from the proceed of the sale of such immovable and movable assets: (i) court proceeding fees for the enforcement and settlement of legacy (such fees shall have preferential rights than mortgage right and pledge); (ii) expenses for interment; (iii) medical expenses; (iv) employee’s wages; (v) receivables arising for the delivery of foods to the debtors during the last six months period; (vi) receivables arising from the dormitory entrepreneur; (vii) receivables to be paid to children (for daily and educational expenses).
 
In bankruptcy of a debtor, in addition to its rights to receive payment a creditor is entitled to:
 
a) submit claims, attend creditors’ meeting and cast votes in such meeting; and
b) file objection letter against the receiver to the supervisory judge in relation to the action of the receiver.
 
Creditor’s rights aimed to meet claims
 
Following to the notification by receiver, Creditorshould submit their claims to the address as notified by the Receiver in public announcements.  The date and venue of the first creditors meeting will be determined by the Supervisory Judge, but must be conducted within 14 days from the date of the court order approving the petition.
 
Privileges for secured claims
 
Pursuant to Bankruptcy Law, bankruptcy has no effect on secured creditor, except that secured creditor isstayed from enforcing itsrights in bankruptcy.  Article 55 of the Bankruptcy Law, stipulates that secured creditor is acreditor holding security rights over mortgage, pledge, and fiduciary securities. 
 
However, arecent Constitutional Court Decision No. 67/PUU-XI/2013 dated 11 September 2014 has slightly changedthe preferential right of the secured creditor.  The court decision has further clarified the interpretation to Article 95 paragraph (4) of Law Number 13 of 2003 on Labor,that employees’ wages those are due must be firstly paid as priority over all types of creditors, including secured creditor, government’s claim, auction office, and offices established by the government.  As for other entitlements of the employee (e.g: severance pay) will have priority over the above claims but except the claims of secured creditor.
 
The grant of a bankruptcy petition automatically triggersa moratorium onlegal proceedings for enforcement of claims by secured creditor for a maximum period of 90 days commencing from the date of grant.  Once the stay is lifted, secured creditors are free to enforce their security but must do so within two months from the commencement of the state of insolvency or will, upon subsequent enforcement of their security, become liable to contribute to the costs of the bankruptcy.  The state of insolvency is stipulated in Article 178 paragraph 1 of the Bankruptcy Law, and will immediately commence once: (i) no composition has been offered, (ii) the composition plan has been rejected, or (iii) its ratification has been refused by the Commercial Court.  Following the state of insolvency, the receiver will distribute the bankrupt estate to creditors.
 
Continuation of contracts entered into with the debtor
 
Upon declaration of Bankruptcy Decision: (a) execution/sale of debtor’s assets will stop; (b) attachments was cancelled, except for: (i) secured creditor, (ii) auction which date has been determined, in such case the sale can proceed with the approval of the supervisory judge.  The sale proceed will become a part of the bankruptcy estate.
 
Once the bankruptcy was declared, contracts to transfer assets, security documents, mortgage, fiduciary security, may not be implemented, contracts for sale of goods, is also terminated.  Consequently any party who suffer loss may become unsecured creditor.  On the other hand if the bankruptcy estate suffers loss due to the cancellation of contracts, then the counter part to the contract must pay compensation to the bankruptcy estate.  Rent/lease, can be stopped provided that prior termination notice must be issued based on ordinary practice (at least 90 days).  However termination of rent/lease cannot be implemented to rental period those have been paid upfront.  Continuation of other contracts will depend on the decision of the receiver.  In the event that receiver refuse to continue the contract, the counter part who suffer loss may also become unsecured creditor.
 
Practical Tips to Creditor
 
Secured creditor must beware that the right to execute its rights in bankruptcy must be exercisedwithin twomonths after the involvency of the debtor.  The lapse of that will bring the effect that the execution will be done by the receiver.  Although this will not limit the rights of creditor over the securities, however creditor might be obliged to pay bankruptcy expenses from the sale proceeds of the securities.
 
Creditor should try to reach amicable settlement on the debt recovery issue in Indonesia.  This is particular true if the debts to be paid by the Indonesian debtors only involving non-substantial amount, and the agreements to support the creditor’s position are not well drafted and equipped with the necessary valid security documents. 
 
The strategy and the implementation for court settlement route in Indonesia are still complex, time consuming and expensive.  It is therefore, we always recommend that the foreign creditors should attempt at any time to reach negotiation process with the Indonesian debtors.  Only if the above attempt on the negotiation process has failed and the debtor has become uncooperative, then the creditor might consider the court settlement route.
 
 
Mr. Pheo M. Hutabarat, Ms. Rosna Chung and Mr. Asido Panjaitan, they are all partners of Hutabarat Halim & Rekan (“HHR”).  Ms. Rosna Chung specialises in Banking & Finance and Capital Markets & Securities, and sheis also a Indonesian licensed Receiver and Administrator.  Mr. Asido Panjaitan is a licensed advocateand he lead the Commercial Disputes ResolutionPractice Group in the firm.  HHR was established in 1996 and is one of the leading commercial law firms in Indonesia.  HHR has been acknowledged in the area of practice of commercial dispute resolution by the Asia Pacific Legal 500 since 2006 and is regarded as one of the leading individuals in Dispute Resolution in Indonesia.