04 Oct 2021
Constitutional Court Reaffirms Fiduciary-Security Enforcement Rules

In 2020,[1] the Constitutional Court handed down a judgment that established new rules for the enforcement in certain circumstances of fiduciary-security interests under Articles 15(2) and 15(3) of the Fiduciary Security Law (“FSL”). [2]

The Court held that executorial title under a fiduciary-security certificate is enforceable if the agreement between the parties sets out a mechanism governing default by the borrower, and if the borrower voluntarily surrenders the secured asset.

The Court added that the right enjoyed by a fiduciary security holder to resort to self-help to seize and sell a fiduciary secured asset at its own behest (atas kekuasaannya sendiri) upon default depended on the default not being determined unilaterally by the creditor. In other words, it is not enough for the creditor to point to a particular event and claim it is a default. Rather, the determination of a default must be based on the agreement between the creditor and debtor, or take place only after the exhaustion of other legal remedies that reveal the occurrence of a default.[3]

Since then, the rules have given rise to complaints from debt recovery practitioners, particularly individual debt collectors employed by finance companies, one of whom petitioned the Constitutional Court to reconsider its 2020 judgement on Article 15(2) of the FSL, arguing that the decision undermined his constitutional rights to work and to live with dignity.

The petitioner highlighted the increased difficulty faced in repossessing fiduciary-secured assets from defaulting debtors who refused to voluntarily surrender the assets. He claimed that the requirement under the new rules for the borrower to voluntarily surrender the secured asset frustrated his work as a licensed debt collector, and ultimately the rights of creditors to resort to self-help to repossess and sell fiduciary-secured assets at their own behest.

The Constitutional Court rejected the petition in a decision handed down on 8 June 2021.[4]

The key takeaway from the decision is that executorial title under a fiduciary security certificate is constitutional if the method of its enforcement is provided for in the agreement between the parties, including a detailed mechanism for dealing with a default.

The Constitutional Court’s earlier decision in 2020 came against a backdrop of widespread public concern over perceived arbitrary and high-handed action by debt collectors acting for consumer finance companies against defaulting borrowers. In that particular case, the finance agreement failed to set out a detailed mechanism for dealing with a default. The Constitutional Court held that, in such a situation, if the debtor did not voluntarily surrender the secured asset, the fiduciary security holder would need to seek the assistance of “the authorities” (read: the courts and the police), rather than resorting to the traditional remedy of self-help.[5]

ABNR Commentary

As with the 2020 decision, the 2021 decision should, in practice, not result in any significant changes, as the same enforcement remedies remain available under the FSL as existed prior to the decision. The 2021 decision reaffirms the importance of negotiating the mechanism governing a default as part of the finance agreement, including what precisely constitutes an event of default, how notice of default should be given, and what remedial actions may be taken by the creditor in an event of default. Further, in major infrastructure projects where project assets are provided as security in return for financing, the negotiation process should be availed off by the lender to insert clauses that clearly set out its rights upon an event of default, thereby avoiding any doubts as to enforceability using the self-help mechanism.

Should you have any queries or require legal advice on how you can best protect your interests, please email us atinfo@abnrlaw.com.