The COVID-19 pandemic has caused more economic harm to Indonesia than the subprime mortgage crisis in 2008. As part of efforts to check the spread of the virus, the Indonesian government has implemented a policy of Large-Scale Social Restrictions (Pembatasan Sosial Berskala Besar or "PSBB"), requiring most businesses to cease or at least pare down activities. The Indonesian Chamber of Commerce and Industry stated on May 1, 2020, that the number of employee terminations due to the pandemic was approximately 15 million, not the 2 million reported by the Indonesian Ministry of Manpower and Transmigration.
To anticipate the effect of the pandemic on businesses, the government has issued regulations to provide economic relief for businesses in need of help. Banks are urged to provide debt relief and the Indonesian Financial Services Authority (Otoritas Jasa Keuangan or "OJK") has been equipped to supervise banks facing liquidity issues.
Indonesia and the New Normal
Indonesia has started the transition from the PSBB lockdowns to what is known as the "new normal," with businesses allowed to resume activities, on the condition that they implement certain health and safety measures in respect of the virus.
With business resuming, parties that were in default during PSBB will now have to face claims for payment of their obligations and debts. Banks will have to decide whether to restructure debts and non-performing loans, and creditors may seek resolution of unpaid debts through the available forums. Creditors ultimately may opt to pursue either bankruptcy or suspension of debt payment obligation (Penundaan Kewajiban Pembayaran Utang or "PKPU") proceedings through the relevant Commercial Court for the resolution of unpaid debts.
Bankruptcy and PKPU Proceedings
Bankruptcy and PKPU proceedings, as provided for in Law No. 37 of 2004 regarding Bankruptcy and Suspension of Debt Payment Obligations ("Law 37/2004"), are preferable to creditors because such proceedings are subject to quicker examination and adjudication than a civil lawsuit. A bankruptcy proceeding has to be resolved in 60 calendar days from the date the application is made, while a PKPU proceeding has to be resolved at the most within 20 calendar days, depending on the applicant.
Given the statutory requirements under Law 37/2004 for the resolution of applications, Indonesia's five Commercial Courts, in Jakarta, Makassar, Medan, Surabaya and Semarang, have not suspended any hearings during the PSBB. They have introduced safety measures and have limited the number of people who can attend hearings. Creditor meetings, which are convened after the bankruptcy or PKPU proceedings have been granted, are also still being held, though some meetings have been moved online using available digital meeting platforms.
After a PKPU application is granted, there is a maximum temporary PKPU period of 45 days from the date the temporary PKPU is granted. This can be extended to a permanent PKPU, which can last a maximum 270 days from the date the temporary PKPU is granted. During the temporary and permanent PKPU periods, the debtor can present and negotiate a composition plan with its creditors, the success of which determines whether the debtor goes into bankruptcy. If the creditors do not agree to the composition plan offered by the debtor during the period of the PKPU, the court will declare the debtor bankrupt.
Understand your Ranking
Before any creditor initiates a bankruptcy or PKPU proceeding, it is important to understand what type of creditor you are and where you stand in terms of the pecking order for repayment. There are three types of creditors recognized in any Indonesian bankruptcy or PKPU proceeding, which are:
- Preferred creditors, which have special rights conferred by law that grant these creditors preference over other creditors;
- Secured creditors, which hold specific security over specific assets/property from the debtor as a guarantee for the repayment of the debtor's debt. Secured creditors are also known as separated creditors and they have the right to execute the security they hold subject to Law 37/2004; and
- Unsecured creditors, which is the category for all other creditors.
As mentioned above, preferred creditors hold preferential rights conferred by the law for repayment in the event of the liquidation of the debtor's assets. Unpaid salaries, taxes, and severance pay for employees hold such preferential rights in the event a debtor is declared bankrupt.
The right of secured creditors to execute their right over the secured property may be suspended for a maximum of 90 days as of the bankruptcy decision. During the suspension period, the receiver, as appointed by the court, can use or sell the bankruptcy assets that are subject to a security interest in the framework of continuing the debtor's business, provided the receiver has already provided sufficient protection for the interests of the secured creditor(s). The suspension of the execution of secured property shall legally end should the bankruptcy proceeding end earlier or at the time the insolvency period commences.
Secured creditors whose rights have been suspended can submit a request to the receiver for the lifting of the suspension or to change the terms of the suspension. If the receiver rejects that request, the secured creditor can submit the same request to the supervisory judge. The day after the supervisory judge receives the request from the secured creditor, the supervisory judge shall order the receiver to summon the secured creditor for a hearing and the supervisory judge will then issue a decision no later than 10 days following the hearing. The supervisory judge may decide to lift or retain the suspension and/or confirm whether the secured creditor can execute its debt over the bankruptcy asset.
If the debtor is then declared to be insolvent and its assets are to be liquidated, a secured creditor has two months to execute its rights. After that period, the receiver can request the supervisory judge to permit the assets subject to the security to be sold by the receiver, without prejudice to the rights of the secured creditor to the sale proceeds.
The receiver will then determine the remaining assets of the debtor that will be disbursed as repayment to the unsecured creditors after repayment to the preferred and secured creditors.
Filing Bankruptcy or PKPU Application
The applications for a bankruptcy or PKPU proceeding are similar, depending on the type of entity of the debtor. An application requires that the debtor have two or more creditors, and at least one debt that is due and payable. It should be noted that Law 37/2004 requires simple substantiation of the debt being claimed, meaning that the amount owed by the debtor shall not be subject to a complex evidentiary process.
The Indonesian Supreme Court recently issued Supreme Court Decree Number 3/KMA/SK/I/2020 regarding Guidelines for the Handling of Bankruptcy and Suspension of Debt Payment Obligation Proceedings, dated January 14, 2020 ("Decree 3/2020"). Decree 3/2020 provides technical and practical guidelines for the application of bankruptcy and PKPU proceedings.
Restructuring the Obligations
We note that the number of bankruptcy and PKPU proceedings was increasing earlier this year even before the COVID-19 outbreak. Now with more businesses in default due to the pandemic, we can expect these proceedings to pick up again after businesses resume activities.
Being in a bankruptcy or PKPU proceeding does not necessarily mean that the debtor will have to be liquidated, as there are avenues for creditors to agree to the restructuring of a debtor's obligations. The debtor in a bankruptcy or PKPU proceeding can offer a composition plan to its creditors, which is subject to a vote by the creditors before the liquidation of assets is carried out. In consideration of current economic conditions, where a debtor's liquefied assets may yield a lower rate of return than might otherwise be expected, creditors may be more willing to agree to a settlement on the debtor's obligations. This could be an opportunity for creditors to be more active in participating in creditor meetings held as a result of a bankruptcy or PKPU decision.
Originally published 07 August, 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.