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Bankruptcy Process up to Auction Proceedings in Indonesia

In the commercial world, capital lending is a natural thing, as it is a driving force for companies to run, expand or maintain their business. However, it is also not uncommon for companies as debtors to neglect their obligations to pay, which causes creditors to file bankruptcy lawsuits against debtors. Article 2 Paragraph (1) Law No.37 of 2004 concerning Bankruptcy and Suspension of Debt Payment ("Law No.37/2004") states that a debtor can only be stated to be bankrupt by the court under the following conditions:

  • Have two or more creditors; and
  • Not paying off at least one debt that is due and is billable.

Article 2 Paragraph (2) Law No.37 of 2004 states that bankruptcy submissions are submitted by creditors or legal parties regulated by Bankruptcy and Suspension of Debt Payment regulation in Indonesia. Here are several parties who can file for bankruptcy:

No. Parties Who Are Able to File for Bankruptcy Basis for Bankruptcy Filing
1. Debtor At their own will
2. Creditor People who have receivables due to agreements or laws that can be collected before the court
3. State Attorney For public interest
4. Bank of Indonesia In the event that the Debtor is a bank
5. Capital Market Supervisory Institute (Badan Pengawas Pasar Modal) In the event that the Debtor is a Security Company, Stock Exchange, Clearing Guarantee Institution or Depository and Settlement Institution.
6. Ministry of Finance In the event that the Debtor is an Insurance Company, Reinsurance Company, Pension Fund or State-Owned Enterprise operating in the field of public interest.

Debtors who are declared bankrupt are obliged to pay their debts in various ways, including by selling their assets in accordance with court decisions and applicable regulations. However, bankruptcy proceedings do not always end in bankruptcy and liquidation decisions. There is still reconciliation/homologation that can be achieved if the debtor's request for reconciliation is approved by the creditor.

Before the bankruptcy decision is pronounced, the debtor or creditor can apply for a Debt Payment Suspension (“PKPU”) to avoid having the company go bankrupt. If the bankruptcy decision has been pronounced, then it can no longer apply for a PKPU. PKPU is a period given by law to debtors and creditors to settle their debt problems through reconciliation (including debt restructuring). The benefits of PKPU are that creditors can get clarity on their claims, and commercial entities that are almost bankrupt can recover, avoid the bankruptcy of the debtor, avoid massive layoffs and avoid making economic conditions in society worse.

There are two methods for the PKPU request process, Temporary PKPU (PKPU-S) and Permanent PKPU (PKPU-T), each with a different delivery timeframe. Article 225 Paragraph (4) Law No.37 of 2004 states that for the PKPU-S stage, the debtor will be given a period of 45 days in which the debtor is obliged to resolve all issues related to the debt settlement scheme. If there is no indication of a decision between the parties for 45 days, the submission process to Permanent PKPU will continue. Furthermore, in accordance with Article 228 Paragraph (6) Law No.37 of 2004 states that the period given for the PKPU-T is 270 days, during which time the debtor and creditor are obliged to conduct regular discussions regarding the expiration of the debt settlement agreement, which will then be approved by the Commercial Court.

Here are some differences between bankruptcy and PKPU:

  • The decision on the bankruptcy petition still has an appellate phase, namely cassation and judicial review (peninjauan kembali), while the decision on the PKPU application is final (Article 14 jo. Article 235 Law No.37 of 2004);
  • In bankruptcy, the debtor's assets will be used to pay all debts that have been matched, while in PKPU, the debtor's assets will be managed so that they are productive and can be used to pay off the debtors' debts;
  • In bankruptcy, the case will be decided within a maximum period of 60 days upon the bankruptcy decision by the court (Article 8 Paragraph (5) Law No.37 of 2004), an appeal to judicial review can be filed, and one or more curators can be appointed. While in PKPU, the application submitted by the creditor must be decided no later than 20 days (Article 225 Paragraph (3) Law No.37 of 2004), and if the PKPU application is submitted by the debtor, the application must be decided on no later than three days, with one or more administrators appointed (Article 225 Paragraph (2) Law No.37 of 2004);
  • After the respondent is declared bankrupt, the debtor is not entitled to their assets since the bankruptcy decision is stated, and all debtor assets are under the supervision of the curator (Article 15 Law No.37 of 2004). Meanwhile, for PKPU, corporations, directors and commissioners still have the right to manage the company's assets under the supervision of the administrator;
  • Lastly, regarding completion period, in bankruptcy, after the decision of bankruptcy by the Commercial Court, there is no specific time limit for the completion of the entire bankruptcy process. In PKPU, PKPU and its extension may not exceed 270 (two hundred and seventy) days after the provisional PKPU decision is pronounced (Article 228 Paragraph (6) Law No.37 of 2004).

Bankruptcy and auction are correlated with each other because auction is one way of carrying out executions in bankruptcy. The relationship between bankruptcy and auction is at the stage of settlement of the bankruptcy estate and the state of insolvency (a state of inability to pay). The auction procedure includes several stages:

  • Collecting the bankrupt's receivables (if any);
  • Selling the bankrupt's assets;
  • Making a list of divisions;
  • Making payments to recognized creditors;
  • Announcing the end of the bankruptcy in two daily newspapers and the State Gazette of the Republic of Indonesia;
  • Providing an estimate of accountability to the Supervisory Judge;
  • Submitting books and documents regarding the bankruptcy estate to the debtor.

The next step to settle the bankruptcy estate is that the proceedings from the sale of the bankrupt assets will be added to the results of the collection of receivables and be deducted by the costs of bankruptcy and bankrupt assets payable. Then the proceeds of the sale will be distributed based on the order of priority. The Appendix of Article Number 2 Paragraph (1) Law No.37 of 2004 states that the distribution of the proceedings from the bankruptcy auction is based on the Structured Prorate (distribution of bankrupt assets according to the class of creditors), which is divided by the Bankruptcy and Suspension of Debt Payment law in Indonesia in order into:

  • Separatist Creditors (Secured Creditors), creditors with material rights.
  • Preferred Creditors, creditors who according to the law must prioritize the payment of their receivables, such as privilege rights holders, retention rights holders and so on.
  • Unsecured Creditors, creditors who do not have the right to be first and last paid.

One of the steps that can be taken when the debtor is faced with a bankruptcy trial is to be accompanied by an advocate who is an expert in the field of bankruptcy during the trial process. That is where the important role of the advocate is necessary to avoid incorrect steps that can harm the debtor.

If you, a prospective client, are facing a similar case as mentioned above, Schinder Law Firm is one of many corporate law firms in Indonesia that have handled a lot of similar matters, with many experienced and professional civil lawyers and dispute lawyers in its arsenal, making it one of the top consulting firms in Indonesia. Feel free to contact us at info@schinderlawfirm.com for further consultation.

Author: Suryani Lin

Schinder Consultant London Ltd.


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