A. DOMESTIC FAMILY OF COMPANIES
1. If insolvency proceedings must be commenced for the family of companies, does your law permit a joint proceeding, ie, a single court file, a single judge, a single list of creditors, single notice list, or must the case for each member of the family proceed separately with no practical acknowledgment of the related proceedings?
Indonesian insolvency laws do not provide for joint proceedings for a family of companies, ie there can be no single court file, a single list of creditors, a single notice list for the combined members of the family. The case for each member of the family must proceed separately and there will be no practical acknowledgment of the related proceedings.
(a) What if the members of the family are organised under, or operate in, different locations within your country? Can a company from a distant location in your country commence its bankruptcy proceeding where its affiliate is located, if the affiliate has already commenced its bankruptcy proceeding?
The bankruptcy filing must be made in the Commercial Court competent for the region in which the individual member of the family is established according to its constituent documentation. The fact that it undertakes activities elsewhere in Indonesia is of no effect, and the fact that an affiliate may have commenced bankruptcy proceedings in another Commercial Court is also not of any effect.
(b) To the extent your country has different types of insolvency proceedings (such as Chapter 11 reorganisation and Chapter 7 liquidation in the US), do the members of the corporate family all have to proceed under the same type of proceeding?
No. There is total separation, and one member of the family may subject itself, or be subjected to, bankruptcy procedures whilst another member is subject to suspension of payments procedures.
2. Does your law permit, or prohibit, a single administrator/trustee/ receiver to administer the assets and the liabilities of the entire corporate family?
No, such administration is not authorised and may even be prohibited on the grounds that a single administrator/trustee/receiver may have a conflict of interest when acting as suggested.
(a) If so, is there a hearing for the court to determine whether the administration by a single party is appropriate? Are secured and unsecured creditors or other parties in interest allowed to object or be heard at such hearing?
Not applicable.
(b) What about joint representation by other professionals, such as law firms or accounting or auditing firms?
Not applicable.
3. Does your law encourage or discourage overlapping boards or management teams for separate members of a corporate family?
The concept of a family or group of companies is not a relevant notion under Indonesian company or insolvency laws, and accordingly there is neither encouragement nor discouragement of overlapping boards.
(a) If the directors of a parent company are not directors of the subsidiary, but they either directly or indirectly manage the affairs of the subsidiary anyway, do your country’s laws render such people ‘de facto’ or shadow directors of the subsidiary?
No. Indonesian company law adopts a notional approach, and only the person formally appointed as director of the subsidiary in accordance with the articles of association will be regarded as the director of the subsidiary.
(b) Do the duties or responsibilities of officers or directors of a family of companies change when the companies become insolvent? For example does their duty shift from a responsibility to the shareholders to a responsibility to the creditors. What if only one of the companies is insolvent?
No such change occurs. Insolvency arises in Indonesia as a result of a court judgment pronouncing bankruptcy or suspension of payments, not out of balance sheet or profit or loss developments. Directors of a company are jointly and severally liable for the losses suffered if, as a result of bankruptcy, claims cannot be paid because of a fault or the negligence of the board of directors. But directors who can establish that the losses were not due to their individual fault or negligence will not be held liable.
4. Are there rules and do they change regarding members of the corporate family transferring assets among one another (such as by way of loans, capitalisation, other transactions) when the members are insolvent?
Transferring assets among corporate family members is not per se restricted but under certain circumstances may amount to preferential treatment: certain transactions favouring one creditor over the other creditors entered into at a time when the bankrupt foresaw that his bankruptcy was forthcoming can be set aside under the ‘Actio Pauliana’-principles embodied in Indonesian law. In order for such setting aside of pre-bankruptcy transactions it must be shown that:
| (1) | the transaction concerned was voluntary, ie without contractual obligation to do so; |
| (2) | the transaction has harmed the interests of creditors; and |
| (3) | 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, the sale of an asset against non-cash payment or with set-off of the purchase price against a debt.
Examples of transactions where the interests of other creditors are harmed are manifold, and include most situations where the condition of the bankrupt estate would have been better off had the transaction not been entered into. Obviously a sale of goods below their fair market value would qualify as such, but also transactions resulting in the increase of 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.
Finally, the knowledge of harm to the other creditors is presumed in a number of circumstances. Generally such knowledge is deemed to exist in the case of the following categories of transactions performed less than one year before the bankruptcy:
Even the payment of a due and payable debt may be annulled if it is shown that either the recipient of the payment knew that the bankruptcy had at the time of receipt been petitioned for, or if that payment was the result of consultation between the debtor and the creditor ‘with the intention of preferring that creditor over the other creditors’. It is generally believed that the latter requirement is only fulfilled in case some sort of collusion between the parties is proven.
(a) Are cash sweep procedures allowed, that is, all cash from all subsidiaries is swept out to one account controlled by one of the family entities and then redistributed among the family members to pay bills?
No, this would generally be ultra vires, unless the cash sweep can be proven to be in the corporate interest of the subsidiary whose cash is swept. This would normally only be the case if the cash swept is not disproportionate to the bills being paid or the subsidiary received another fair value consideration for allowing its cash to be swept.
(b) What if the redistribution results in a healthy subsidiary funding the shortfalls in another subsidiary that is losing money?
The proportionality test referred to in our answer under (a) would most likely be deemed not to have been satisfied.
5. How does your law treat claims of one member of a corporate family against other members of the corporate family?
In the absence of statutory provisions relating to corporate group or family relationships such claims would in principle not be treated differently from claims on non-group parties.
(a) Are such claims invalid or unenforceable?
Not for the reason that they are payable by a family member.
(b) If not, are such claims on equal footing with those of third party creditors, or are they subordinated, or is there other treatment required or permitted under your law?
Yes, they are on an equal footing, but they may be subordinated by contract.
6. Does your law allow for the pooling of assets and liabilities of all members of the corporate family, so that a creditor of one member becomes, in essence, a creditor of all members (sometimes referred to as ‘substantive consolidation’).
No such provisions exist under statutory law. But the same effect can be achieved by a contractual joint and several liability undertaking combined with the vesting of third party security in assets of the individual members in favour of the creditor. Such arrangement would have to pass the corporate benefit test in order for it not be considered ultra vires.
(a) If so, is such pooling automatic or does it require a factual showing and court involvement?
It is not automatic and requires a contract and filing at the relevant register of charges.
(b) What proceedings (motion, request, trial, etc) are required for the court to order the pooling of assets and liabilities?
No Indonesian court could order such pooling.
(c) Does your country’s law contemplate any partial pooling of assets and liabilities?
No, but this can be achieved by contract in the manner outlined above
(d) If the pooling of assets and liabilities is called for, are there any protections for certain types of creditors, such as creditors with a lien or other security interest in particular assets?
Not applicable.
7. How are secured creditors treated with respect to a family of companies? For instance, if a creditor has a security interest in the assets of one member of the family, and a guarantee from another member of the family, are both such claims valid in insolvency proceedings of the entire family?
There are no family insolvency proceedings in Indonesia.
8. Do your laws or courts provide for post-insolvency commencement of new financing that allows continued operation of the business and provides adequate protection to the lender who made the loan? Explain.
The receiver in a bankruptcy may incur liabilities, and with the approval of the supervisory bankruptcy judge may impose free assets securing the liabilities for the purpose of administering the bankruptcy and running the business during bankruptcy. Such liabilities are preferred over pre-bankruptcy liabilities.
9. Are directors and officers subject to civil or criminal sanctions if:
(a) Fraud or misrepresentation of a company’s finances are discovered?
Yes: see under 3 (b) above.
(b) They allow the company to continue to operate while knowing it does not have the ability to pay the debt being incurred?
Probably this would constitute conduct that would be caught by the liability described under 3 (b) above.
(c) Same as (b) above but the directors believe that if some event occurs (eg chance to obtain new contract in prospect, new equity infusion, or new financing) it will be able to save the company and pay its bills.
Yes, this could, subject to the circumstances of the case, be a exculpating factor for the director(s) concerned.
1. If one or more members of the corporate family is incorporated under or governed by the laws of another country, does that change your answers to any of the questions set forth above?
No, for the purpose of Indonesian insolvency law a foreign family member in bankruptcy continues to be treated as separate in all respects from its family members, whether or not in bankruptcy.
Indonesia is not a party to any treaty relating to international insolvency issues. The Bankruptcy Law addresses international aspects only summarily. It adopts for Indonesian bankruptcies the universality principle, under which an Indonesian bankruptcy encompasses all of the debtor’s assets wherever they are located. In that case, the applicable international private law in the relevant jurisdiction determines to what extent the Indonesian bankruptcy will be recognised (including for instance Indonesian preferential transfer provisions).
As far as bankruptcies pronounced abroad are concerned, the principle of territoriality will presumably apply, and assets located in Indonesia of a foreign debtor will not be considered part of that debtor’s bankruptcy. This is the consequence of the general unenforceability of foreign judgments abroad. However, this need not prevent a foreign-appointed receiver being recognised by an Indonesian court as legitimately representing the foreign bankrupt estate in the same manner as a director of a corporation under foreign law will be recognised as a lawful representative of that corporation.
The universality rule is reflected by the provision that creditors in an Indonesian bankruptcy who obtain payment from enforcement of unsecured assets of the bankrupt outside Indonesia must reimburse the receiver for that payment. Similarly, if the creditor assigns his claim and the assignee receives payments from such assets, that payment must also be paid to the receiver.
As a consequence of the freedom of contract, a choice of foreign law will in principle be recognised, and an Indonesian receiver will therefore be bound by the consequences of, for instance, New York law governing a loan agreement under which a claim is entered into the Indonesian bankruptcy. However, to the extent the recognition of in rem security rights on assets located in Indonesia is concerned, the lex rei sitae would apply, and only security rights established under Indonesian law need to be respected.
2. If insolvency/restructuring proceedings are instituted for corporate family members in different countries:
(a) What controls as to where the case must be filed (eg, centre of main interests, principal place of business, location of parent, etc)?
This would be governed by the law of the country where the filing is made. For Indonesia this would be the place of its corporate seat.
(b) Do the courts attempt to exercise jurisdiction over the assets of the company filing domestically no matter where located (for example, overseas), or do they limit their jurisdiction to only those assets located in your country?
For all practical purposes the latter applies, although if the law of the country where assets are located so allows, a receiver should attempt to repossess such assets and liquidate them in the interest of all creditors.
(c) Would your courts enforce a court order from a foreign country that attempted to exercise jurisdiction over assets located in your country but owned by the company that is subject to the foreign insolvency proceedings?
No.
(d) Has your country adopted any procedures (such as the Model Law on Cross-Border Insolvency) to address the various issues that arise in dealing with cases of cross-border insolvency?
No.
Note: The preparation of this article was coordinated by Theodoor Bakker, a Foreign Lawyer, as regulated by the Indonesian Advocates Law. Any Indonesian law issues addressed in this article were formulated and submitted by the Indonesian lawyers of Ali Budiardjo, Nugroho Reksodiputro. This article contains a general description of cross-border insolvency issues under Indonesian law only, and should not be considered as advice for any particular set of facts and circumstances. The author expresses his gratitude to Henry N Kurniawan and Kevin O Sidharta of Ali Budiardjo, Nugroho, Reksodiputro for their valued assistance in the preparation of this article.
