15/06/2010
CROSS-BORDER CORPORATE RESCUE PROCEDURE FOR GROUPS OF COMPANIES
Introduction
Cross-border insolvency proceedings and restructurings are relatively new to Indonesia and largely developed only after the 1998 Asian financial crisis. As part of the general continuation of Dutch colonial-era legislation, Indonesia inherited the Bankruptcy Ordinance, which was enacted in 1906. In response to the need for more effective bankruptcy legislation to address the economic crisis of 1998, the House of Representatives amended the ordinance by enacting the Bankruptcy Law (4/1998). Revisions to remove ambiguities and correct fundamental problems were enacted in 2004 by Law 37/2004.
Indonesia is home to a significant number of local subsidiaries of foreign conglomerates. As the 2008 financial crisis has hit these conglomerates in their main jurisdictions of establishment, companies should be aware of how a foreign insolvency
could affect Indonesian companies and how the Indonesian assets of the corporate family could be included in a global restructuring. This update examines features of the law which have developed since its enactment and which could facilitate or hinder an effective cross-border corporate family workout.
Cross-border insolvencies
Indonesia is not a party to any international treaty regarding the enforcement of commercial judgments.(1) Accordingly, foreign judgments are generally unenforceable in Indonesia. As a result, a foreign claimant must initiate a separate action in Indonesia in order to enforce its rights. A commercial judgment obtained in another country may be adduced in evidence in Indonesian proceedings, but the weight to be given to such evidence will be determined at the sole discretion of the presiding judge. Only three sections of the Bankruptcy Law deal with cross-border aspects of bankruptcy, and unfortunately these provisions are unclear. There are no other rules in the law that touch on the consequences of international bankruptcies.
The law incorporates the theory of universality - that is, the principle that a bankruptcy declared in Indonesia includes the bankrupt's total assets, wherever in the world these are located. This principle is limited by the concept of sovereignty, so that the powers and authorities of an Indonesian receiver acting under the Bankruptcy Law can be exercised in a foreign country only if the laws of that country so permit. The Bankruptcy Law obliges creditors that - in one way or another - seek recourse against the bankrupt's foreign assets to pay the bankruptcy estate the amount for which they have thus sought recourse. In practice, this could mean that a foreign creditor which obtains payment from a bankrupt Indonesian debtor company by the execution of its foreign assets may face a claim from the receiver, who could enforce such a claim against the foreign creditor located in Indonesia. An Indonesian receiver is required to verify whether there are assets abroad. He or she may institute proceedings based on the preferential transfer provisions with respect to acts that took place in a foreign state so that proceeds are refunded to the bankruptcy estate. An Indonesian receiver may try to liquidate assets located abroad and the debtor may be forced to cooperate with the receiver to obtain these assets. However, a bankruptcy declared outside Indonesia does not affect those assets of the bankrupt foreign company which are located in Indonesia - at least, not in theory - and no specific treaty governs this situation. The Code of Civil Procedure provides that foreign judgments cannot be enforced in Indonesia, except on the basis of a treaty, in which case the foreign judgment can be approved only by the chairman of the Indonesian court by means of an exequatur. However, the recognition of a foreign bankruptcy judgment and the actions of a foreign receiver are presumably not deemed to constitute 'enforcement' of a foreign judgment for this purpose. Thus, in respect of foreign bankruptcies the law adopts the principle of territoriality. In principle, a foreign bankruptcy has no effect in Indonesia. Assets located in Indonesia which belong to a debtor that has been declared bankrupt outside Indonesia are not considered part of the bankruptcy estate. Consequently, the debtor can also be declared bankrupt in Indonesia. On the same basis, a foreign bankruptcy does not prevent the attachment of the debtor's assets in Indonesia. The provisions relating to foreign jurisdictions apply accordingly to suspensions of payments. Foreign and Indonesian creditors have the same rights and obligations in any insolvency proceedings, whether a bankruptcy or a suspension of payments.
Conglomerates and families of companies
Indonesian law does not permit a joint proceeding (ie, a single court file, judge, list of creditors and notice list), and the insolvency of each company in a group must proceed separately with no practical acknowledgment of the related proceedings. If the companies are organized under, or operate in, different Indonesian or foreign locations, a company in one location cannot commence its bankruptcy proceeding in the place where its affiliate is located merely because the affiliate has already commenced its proceeding; rather, the bankruptcy filing must be made in the commercial court with competence for the region in which the individual company is established according to its establishing documentation.(2) The fact that such a company may undertake activities elsewhere within or outside Indonesia is irrelevant; so too, in principle, is the fact that an affiliate may have commenced bankruptcy proceedings in another Indonesian or foreign court. Indonesian bankruptcy procedures do not permit a single administrator, trustee or receiver to administer the assets and liabilities of an entire corporate group. The law states that a receiver in bankruptcy proceedings is authorized to manage the estate of
the bankrupt company only, not including the estate of the entire corporate family. Similarly, the administrator of a company that is subject to a suspension of payments is authorized to manage the estate of that company only, together with the management of the respective company. However, the same person may be appointed as receiver or administrator in the bankruptcy of more than one company, regardless of whether the companies belong to the same group.
In some jurisdictions, cash-sweep procedures can be used to 'sweep' cash from all of a company's subsidiaries into one account, which is controlled by a single group entity and redistributed among the group companies to pay bills. However, such an arrangement cannot be implemented in Indonesia: it would likely be considered ultra vires, unless it can be shown to be in the corporate interest of the subsidiary whose cash is swept. This will normally be the case only if (i) the cash thus swept is not disproportionate to the bills being paid, or (ii) the subsidiary receives a fair-value consideration for allowing its cash to be swept. If the redistribution results in a healthy subsidiary funding the shortfalls of another subsidiary that is losing money, the proportionality test would most likely not be satisfied.
Clawbacks
Transferring assets among corporate family members is not restricted in itself, but in certain circumstances this may amount to preferential treatment. Certain transactions which favour one creditor over another and which were entered into at a time when the bankrupt entity foresaw the onset of bankruptcy can be set aside under the actio pauliana principles (ie, rules preventing a creditor from being disadvantaged), as embodied in Articles 30, 41 and 42 of the law. In order for pre-bankruptcy transactions to be set aside in this way, it must be shown that:
• the transaction concerned was voluntary (ie, it was not performed under contractual obligation);
• the transaction harmed creditors' interests; and
• the debtor and the contracting party had knowledge of such harm to other creditors.
Examples of voluntary transactions include:
• the granting of security to one particular creditor;
• the payment of a debt which is not yet due and payable; and
• the sale of an asset against non-cash payment or with the purchase price being offset against a debt.
Examples of transactions where the interests of other creditors are harmed include most situations in which the bankrupt estate would have been better off had the parties not entered into the transaction. A sale of goods below fair market value would qualify, as would transactions resulting in an increase in the debtor's liabilities, such as the granting of a guarantee or other form of security by a subsidiary for the debt of its parent company. Knowledge of harm to other creditors is presumed in a number of circumstances. Generally, such knowledge is deemed to exist in the case of certain categories of transaction performed less than one year before the bankruptcy. These are:
• transactions in which the value received by the debtor was substantially less than the value of the asset that was alienated;
• payments of debts which are not yet due and payable, or the granting of security for such debts;
• transactions between the debtor and related parties (eg, relatives or companies controlled by relatives, insiders and legal entities belonging to the same group); and
• donations.
In all such cases there is a presumption of knowledge; however, the transacting party can rebut this. Even the payment of a debt that was due and payable may be annulled if it is shown that (i) the recipient of the payment knew that the payer had petitioned for bankruptcy at the time of receipt, or (ii) the payment was the result of consultation between the debtor and the creditor with the intention of preferring that creditor to other creditors. It is generally believed that the latter requirement is fulfilled only where some measure of collusion between the parties can be proven.
Endnotes
(1) However, Indonesia is a signatory to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
(2) This position is regulated under Article 3(5) of the law.
This article is written by Theodoor Bakker and Herry N. Kurniawan and available on ILO Newsletter.