Bankruptcy bill prone to abuse

The government and the House of Representatives seems set not to learn from the debacles that have arisen under the existing bankruptcy legislation, as proposed amendments of the law still contain many loopholes that could allow creditors to easily bankrupt solvent companies.

It is feared that a failure on the part of the government and legislators to come up with a watertight bankruptcy law could damage legal certainty for, the business community, and dent the flow of foreign investment into the country.

The House and the government are currently deliberating the proposed changes, to Law No. 4/1998 on bankruptcy. One of the main flaws of the revised bankruptcy bill, a copy of which was obtained by The Jakarta Post, is that it allows bankruptcy proceedings to be filed by any creditor against a solvent company.

”The revised bankruptcy bill still contains classic flaws that open the door for abuse,” said bankruptcy expert Rahmat Bastian. He pointed to the absence of a crucial article on the minimum amount of debt before a creditor could file for bankruptcy against an indebted Firm.
Rahmat said such an article was needed in order to avoid solvent companies from being easily declared bankrupt, as in the case of British firm PT Prudential Life Insurance in March and Canadian firm Asuransi Jiwa Manulife Indonesia in 2002.

”As in other countries, there should be at least a mechanism for defining whether the company is solvent or not before the court can entertain the bankruptcy petition. This is a crucial point for the government and the legislators to consider,” he said. Under the prevailing law, a bankruptcy petition may be filed if a company fails to repay maturing debts to more than one creditors, without regard to the size of the debts or the assets of the company.

With only Rp 5 (less than 1 U.S. cent) worth of unsettled debt, for instance, a company could be declared bankrupt, even if it has assets worth Rp 1 trillion, which meant that the company would be in no danger financially if the payment was made. But senior legislator Faisal Baasyir, who is involved in deliberating the proposed bill, argued that the bill contained several articles that would help protect solvent companies, such as the need for the approval of the Ministry of Finance to declare insurance and reinsurance firms, and pension funds bankrupt.

”The bill contains progress, and is deemed sufficient to provide legal certainty for the business community,” said Faisal, adding that the deliberation of the bill would likely be continued by the incoming new legislators.
The proposed bill also stipulates that approval from the central bank is needed in order to declare a bank bankrupt, while similar approval would be required from the Capital Market Supervisory Agency (Bapepam) in the case of securities, stock market, clearing and custodian firms.

However, Rahmat warned that the provision of protection by government institutions for such companies would not fully guarantee their safety against a bankruptcy ruling as litigants could use the firms holding companies as targets for bankruptcy. Elsewhere, Rahmat said the proposed bill also contained several problems connected with legal procedures after the bankruptcy petition was ruled on by the court, such as a lack of enforcement articles to punish debtors who refused to cooperate in complying with a court ruling.

”Actually, there is already an article that provides for incarceration under civil law for debtors who refuse to comply with the court ruling. However, the punishment will come into effect only if the debtors violate all of the regulations,” he said.