Restructuring and Insolvency Guide

Indonesia

Nusantara Legal Partnership

1. Overview of Statutory Regimes Governing Restructurings, Reorganisations, Insolvencies and Liquidations

Restructurings and Reorganizations

In Indonesia, any restructuring or reorganization that relates to bankruptcy is regulated under Law No. 37 of 2004 concerning Bankruptcy and Suspension of Payment (“Bankruptcy Law”). The law defines two methods of restructuring or reorganization:

1. Bankruptcy is defined as the general confiscation of all assets of the Debtor that will be managed and settled by the administrator (“Administrator”) under the supervision of a Supervisory Judge (Article 1 paragraph 1 of Bankruptcy Law).

2. Suspension of Payment or Penundaan Kewajiban Pembayaran Utang (PKPU) is recognized as the court-supervised debt restructuring process, in which the Debtor is permitted to submit a settlement plan known as the “Composition Plan” to their Creditor(s) upon the Debtor’s or Creditor’s application (Article 222 of Bankruptcy Law).

A Bankruptcy and PKPU statuses can be declared by the Commercial Court, if the Debtor has two or more Creditors, and has failed to pay, at least, one of its due and payable debts. A bankruptcy can be submitted voluntarily upon the Debtor’s application, or involuntarily based on Creditor’s application. Further, such application must be granted if the preceding facts can be proven in a simple manner.

A bankruptcy or PKPU application can be submitted by the Debtor or Creditors to the Commercial Court, if the Debtor has more than one Creditor, and has failed or might not be able to pay, at least, one of its due and payable debts.

Insolvencies

Insolvency is defined as the state of inability to pay debts. In some cases, a company does not have to be insolvent to be declared bankrupt.

Liquidations

Bankruptcy and liquidation are defined as different legal actions under the Indonesian law.

Liquidations are specifically regulated under Law No. 40 of 2007 on the Company Law (“Company Law”). In general, a liquidation process is made by the appointed liquidator upon dissolution of the company.

The dissolution of a company could be for the following reasons as per Company Law; (i) it is made based on a resolution of the General Meeting of Shareholders; (ii) it is made based on the expiration of the establishment term of the company; (iii) it is made based on a court order; (iv) where the bankruptcy status of the company is revoked but the company assets are not sufficient to pay the cost of bankruptcy; (v) the bankruptcy assets are in a state of insolvency; or (vi) due to the revocation of the company’s business license, the company should be dissolved by operation of law.

During the liquidation process, the company is prohibited from conducting any legal actions, unless such action is required for the liquidation process. Once all outstanding debts and other obligations are paid, the liquidator must distribute the remaining company assets to the company’s shareholders. Any creditors who have not received their due payments may submit a claim to the district court within two years since the announcement of dissolution. Moreover, the district court is entitled to request back (“claw back’”) distributions of the assets paid to the company’s shareholders to settle outstanding payments to be made to any unpaid creditors. After the liquidation process has been completed, the company will be deregistered from the company registry managed by the Ministry of Law.

2. Out-of-Court Restructurings and Consensual Workouts

2.1 Out-of-Court Financial Restructuring or Workout

In general practice, any out-of-court financial restructuring or workouts is based on contractual agreement between the parties, which may vary on a case-to-case basis. This may include restructuring the loan, extending the period of loan repayment, removing the penalties, amending or reducing the interest rates (i.e. flat rates), adding securities from other company groups or shareholders (i.e., corporate guarantee), asset settlements distribution, loan haircuts, debt to equity conversions, transfers of debt or receivables, mergers, acquisitions, consolidations, dissolutions, etc.

Without undergoing the PKPU process under Bankruptcy Law, any financial reorganizing or restructuring/workout will provide the Debtor with rights to claim as conferred under Bankruptcy Law (i.e. right to be suspended from its payment obligations), and thus, no Creditor is permitted to enforce any security rights against the secured object.

2.2 Consensual Restructuring and Workout Processes

Typically, a consensual restructuring and workout process will be made between the parties if the Debtor is either unable to, or is predicted to be unable to, repay the loan as well as any accrued interest on time. The process will involve amending the original loan agreement or entering into a restructuring loan agreement, in which the Debtor and Creditor may agree as follows: (i) removing any incurred penalties due to the late loan repayment, (ii) reducing the interest or changing the interest to the flat rates, (iii) extending the term of repayment, (iv) adding some securities from the Debtor or the Debtor’s company group, etc.

In addition, if the creditor is not a bank, the parties may enter into a debt/loan conversion to equity agreement, where the debtor will issue the shares to off-set the loan.

3. Creditors. Rights and Remedies

3.1 Types of Securities

Based on Articles 1131 and 1132 of Indonesia Civil Code, all movable and immovable assets of a Debtor, at present or in the future, can be served as securities for any of the Debtor’s contracts. The assets may be divided among the Creditors in proportion to their loans. In practice, we note that the types of securities can be identified in the following forms, based on Law No. 4 of 1996 on Mortgage Right over Land and Law No. 42 of 1999 on Fiducial Guarantees, as follows:

Real estate assets including lands, buildings and all fixtures attached to them, vessels, each with a gross tonnage (GT) weight of 20 cubic metres or more, encumbered by way of mortgage;
Tangible movable assets that include machineries and equipment, vehicles including vessels, each with a GT weight of less than 20 cubic metres, stock and inventory, encumbered by way of fiducia;
Intangible/immovable objects (financial instruments) include shares, bank accounts or cash deposits, encumbered by way of pledge; and
Intangible/immovable assets (claims and receivables) including receivables and intellectual property rights, encumbered by way of fiducia.

3.2 Rights and Remedies

Based on Bankruptcy Law, these securities provide the right for the creditors to be the “secured/separatist creditors”, which distinguish them from other creditors without security, (unsecured/concurrent/parri passu creditors) who will only receive the loan repayment on the remaining assets following the asset distribution to the preferential creditors, whose claims are prioritized over other debts due to their nature (court fee, curator fees, employees, tax) and secured creditors.

Once the bankruptcy is declared, the secured creditors may enforce their rights against the secured assets upon the lapse of 90 days since the bankruptcy declaration. This period will expire by law upon the early termination of bankruptcy, or the commencement of the state of insolvency (insolvent).

4. Statutory Restructurings and Reorganisations

Pursuant to Bankruptcy Law, statutory restructuring and reorganization is referred to as “PKPU” (Penundaan Kewajiban Pembayaran Utang). It occurs if the Debtor, who has more than one Creditor, and is unable or predicts that it will be unable to repay, at least, one of its due and payable debts, proposes to offer a composition plan comprising partial or full debt settlement plan.

If the PKPU application is submitted to the Commercial Court, the court must issue a “temporary” decision approving PKPU within three days (if it is made by the Debtor) or 20 days (if it is made by the Creditor), appoint a Supervisory Judge and assign at least one administrator.

Following 45 days after the issuance of the temporary decision, the Commercial Court will invite the Debtor and Creditor to attend a court hearing for a permanent PKPU decision. If the Debtor is unable to attend this hearing, PKPU will be deemed terminated and the Debtor is considered bankrupt. This temporary PKPU decision will survive until the court hearing is made.

Following the issuance of PKPU temporary decision, the administrator is required to make announcements in State Gazette of the Republic of Indonesia and two daily newspapers.

During the temporary PKPU decision, the Debtor has the right of no longer being forced to settle their debt, and all parts of the execution process already commenced by the Creditor(s) to obtain payment must be delayed. The Debtor also cannot be subject to bankruptcy. Moreover, the Debtor cannot perform management or ownership actions on its assets without prior approval of the administrator.

During PKPU, the Debtor is entitled to apply for a settlement plan on the repayment of their debts to the Creditor(s), to be approved by the Creditors Meeting alongside the Supervising Judge. Depending on whether the settlement plan is approved or declined by the Creditors, the Supervisory Judge will submit a written report on the result to the Commercial Court for its ratification.

If the settlement plan is declined by the Creditors, the Debtor is immediately declared bankrupt by the Court. If it is instead approved by the Creditors, the Court will declare the PKPU process is terminated, and the settlement plan must be carried out within 270 days at maximum. Afterwards, the administrator is required to make announcements on either result in the State Gazette of Republic of Indonesia and two daily newspapers.

5. Statutory Insolvency and Liquidation Proceedings

Insolvency process in relation to bankruptcy proceeding as defined in Bankruptcy Law, will be carried out with the following procedures:

The judge will summon the Debtor and Creditors for a hearing to assess the bankruptcy petition.
At this stage, the Creditors may file for security seizure on the Debtor’s assets and the Judge may appoint a Curator to supervise the Debtor’s assets and the debt payments.
A Judge shall issue the verdict on Debtor’s bankruptcy within a maximum of 60 days starting from the date the Creditors filed their bankruptcy petition.

Please note that the above procedures are applicable when the Debtor does not file for PKPU, which can postpone the bankruptcy petition. Generally, there are two options for the Debtor to counter the bankruptcy petition filed by the Creditor; (i) PKPU and (ii) Appeal of Bankruptcy decision.

Based on Company Law, the liquidation process shall be carried out with the following procedures:

The company should hold a General Meeting of Shareholders (“GMS”) approving the proposed dissolution of the company;
In such GMS, the shareholders may appoint a designated liquidator or the board of directors as the liquidator. It is practically common that the liquidator has the legal background to avoid conflicts of interest during the process of liquidation;
Within 30 days since the GMS decision approving the dissolution of a company, the liquidator must notify any and all of Creditors of the Company, by announcing information concerning the Company’s dissolution in State Gazette of the Republic of Indonesia and two daily newspapers (the First Announcement), as well as the Minister of Law to record the liquidation process of the company in the Company Register;
Within 60 days since the First Announcement, the Creditors must submit their claims against the company. In any case, the Creditors who have not submitted their claims within such period may submit their claims through the respective domicile of the District Court within two years after the First Announcement;
During the liquidation process, the liquidator is responsible in settling the company assets by conducting the following actions
(i) recording and collecting the company assets and debts;
(ii) announcing in the daily newspapers and State Gazette regarding the asset distribution plan resulting from the liquidation (the Second Announcement);
(iii) repaying the creditors’ debts;
(iv) distributing the remaining assets resulting from the liquidation to the shareholders; and
(v) other necessary actions to settle the Company assets.
Within 60 days following the Second Announcement, the Creditors may object to the asset distribution plan. If it is declined by the liquidator, the Creditors may file a lawsuit to the District Court within 60 days since the objection is declined by the liquidator;
Following that, a GMS will be held to approve the liquidator’s report including granting the release and discharge of the liquidator of their rights and obligations, before the company then terminates its status as a legal entity, marking the completion of the liquidation process;
Within 30 days since the GMS accepts the accountability report, the liquidator must notify the Minister of Law and make a final announcement in the daily newspapers containing the result of the liquidation process (the Third Announcement); and
The Minister of Law will announce the termination of the Company’s legal entity status and delete the company’s name from the register of companies.

In case of bankruptcy, the liquidation process is conducted by the administrator, who is responsible and reports directly to the Supervisory Judge.

6. International / Cross-Border Insolvency Issues

Foreign Creditor: If the Creditor is a foreign entity and runs its business within the jurisdiction of Indonesia, Bankruptcy Law does not discriminate against their rights as a Creditor in the same manner as other Indonesian entities. Please note that if a foreign entity intends to pursue insolvency proceedings against an Indonesian entity, they are permitted to file a bankruptcy petition in Indonesia.
Foreign Debtor: Despite the definition of Debtor, Bankruptcy Law does not explicitly stipulate that the relevant Debtor must be an Indonesian entity. However, the Commercial Court in Indonesia does not have the jurisdiction to stipulate Restructuring or bankruptcy status to foreign debtors, even if there are two or more creditor(s) in Indonesia.
Debtor Located Overseas: Based on Bankruptcy Law, the court that holds the jurisdiction to issue a judgment on the bankruptcy of the Debtor would be the court of the relevant bankruptcy subject’s domicile. If the Debtor has left the territory of the Republic of Indonesia, the court having the authority/jurisdiction to render a bankruptcy judgment would be the court of the latest legal domicile of the Debtor. If the Debtor is not located in the territory of the Republic of Indonesia but has conducted its professional or business activities in the territory of Indonesia, the relevant court that has jurisdiction over such Debtor would be the court located in Indonesia. If the Debtor is a legal entity, the competent court having jurisdiction over the Debtor is the one as stated in its Articles of Association.
Foreign Court Decision: Non-Indonesian court decisions are not enforceable in Indonesia. Consequently, in any cross-border insolvency dispute where the Debtor is a foreign entity and has been subjected to a foreign court decision mandating a restructuring/bankruptcy procedure, that decision will not be recognized in Indonesia. To obtain an Indonesian court judgment, an applicant would be required to pursue claims in Indonesian courts under the Indonesian law. A foreign court judgment could be admissible as non-conclusive evidence in a proceeding on the underlying claim in an Indonesian court. The judgment may therefore be given evidentiary weight as the Indonesian court may deem it as appropriate evidence, although this is subject to their sole discretion. Therefore, re-examination of any underlying claims de novo would be required before the Indonesian courts.

Nusantara Legal Partnership

Indonesia

Nusantara Legal Partnership
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