Indonesian bankruptcy and suspension of debt payment proceedings in the Covid-19 era

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Michael S Carl
SSEK Legal Consultants, Jakarta
michaelcarl@ssek.com

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 cut back their activities. The Indonesian Chamber of Commerce and Industry stated on 1 May 2020, that the number of employee layoffs due to the pandemic was approximately 15 million, not the two 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. Banks have been urged to provide debt relief and the Indonesian Financial Services Authority (Otoritas Jasa Keuangan or OJK) 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 virus-related health and safety measures.

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 a more rapid examination and adjudication than a civil lawsuit. A bankruptcy proceeding has to be resolved within 60 calendar days of the date the application was made, while a PKPU proceeding must be resolved within 20 calendar days at most, 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, continue to be held, although some meetings now take place online via digital meeting platforms.

After a PKPU application is granted, there is a maximum temporary PKPU period of 45 days. This can be extended to a permanent PKPU, which can last a maximum 270 days from the date when the temporary PKPU was granted. During the temporary and permanent PKPU periods, a debtor can present and negotiate a composition plan with creditors, the success of which determines whether the debtor goes into bankruptcy. If the creditors do not agree to the debtor’s composition plan during the PKPU period, 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 repayment hierarchy. Indonesian bankruptcy or PKPU proceedings recognise three types of creditor:

• Preferred creditors, which have special rights conferred by law, granting 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.
• Unsecured creditors, which is the category for all other creditors.

As mentioned above, preferred creditors hold preferential rights conferred by law for repayment in the event of liquidation of the debtor’s assets. Unpaid salaries, taxes and severance pay for employees hold such preferential rights in the event of a debtor being 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 secured creditors’ interests. 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 the request, the secured creditor can submit the same request to the supervisory judge. Within a day of receiving the second creditor’s request, the supervisory judge must order the receiver to summon the secured creditor for a hearing. The supervisory judge will then issue a decision no later than ten days after the hearing. The supervisory judge may decide to lift or retain the suspension and/or confirm whether the secured creditor can execute their debt over the bankruptcy asset.

If the debtor is then declared to be insolvent and their 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 which of the debtor’s remaining assets will be disbursed as repayment to the unsecured creditors after repayment to the preferred and secured creditors.

Filing a bankruptcy or PKPU application

Applications for a bankruptcy or PKPU proceeding are similar, depending on the type of entity of debtor. An application requires that the debtor has two or more creditors, and at least one debt which is due and payable. It should be noted that Law 37/2004 requires simple proof 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 No 3/KMA/SK/I/2020 regarding Guidelines for the Handling of Bankruptcy and Suspension of Debt Payment Obligation Proceedings, dated 14 January 2020 (Decree 3/2020). This provides technical and practical guidelines for the application of bankruptcy and PKPU proceedings.

Restructuring the obligations

The number of bankruptcy and PKPU proceedings was increasing earlier in 2020, even before the outbreak of Covid-19. Now, with more businesses in default due to the pandemic, proceedings are expected to pick up again following the recommencement of businesses activities.

Being in a bankruptcy or PKPU proceeding does not necessarily mean the debtor will have to be liquidated, as there are possibilities for creditors to agree to the restructuring of a debtor’s obligations. The debtor in a bankruptcy or PKPU proceeding can offer creditors a composition plan, which is subject to a creditors’ vote before 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.