S. Karene Witcher, Jakarta – A unit of the World Bank aims to be among the first creditors to push a troubled Indonesian borrower over the brink by using Indonesia's new bankruptcy law.
The International Finance Corp., the World Bank's private-sector funding arm, plans to move against at least one, and possibly two, delinquent corporate borrowers as soon as new bankruptcy courts open for business later this month. "We're going to test the law," vows G.K. van der Mandele, an IFC debt specialist recently posted to Jakarta. Somebody, he says, has to send a signal to recalcitrant borrowers that "if you don't play ball, this is what will happen."
The IFC is more used to helping improve lives in developing countries than inflicting pain. But in a twist of fate, Indonesia's dire financial situation is, in essence, forcing the IFC to kill part of the patient to save the whole.
Ready for a fight
Indonesia is racing to implement the new law as part of conditions attached to a $43 billion bailout package led by the International Monetary Fund. Its purpose is to provide some means of clearing the overhang of bad debts by giving creditors a way to collect at least some of their loans, and, ultimately, to engender confidence among international lenders to reopen credit lines, by laying down ground rules.
There has been a bankruptcy law on the books in Indonesia since the early 1900s, but it is largely ineffective and seldom used. A special commercial-bankruptcy court has been established to preside over cases. Just how well the groundbreaking law will work, however, is uncertain. Among other things, there is a shortage of qualified lawyers and accountants, not to mention experienced local judges, to administer such complex commercial matters. What's more, a lack of professional indemnity insurance in Indonesia to protect the receivers and administrators from personal lawsuits threatens to complicate the court's start-up.
Nevertheless, people familiar with the situation say frustrated lenders, mostly foreign rather than Indonesian, are mustering their forces. "The cannons are loaded," says David Edmonds, an attorney who is a consultant to the Makarim & Taira S. law firm in Jakarta. "I have almost no doubt they will be fired."
If the court manages to do its job, some people worry that the social and political implications could be grave. Most of the companies likely to be pushed into bankruptcy belong to ethnic-Chinese Indonesians, who may view the move as one more reason to walk away from Indonesia. And because well-heeled foreigners are the most likely buyers of distressed assets as companies are broken up, that could provoke an antiforeign backlash. More importantly, the liquidation of busted companies would put more Indonesians out of work, exacerbating an already volatile social situation.
"It hasn't hit people yet how the unemployment" rate is going to climb, says the IFC's Mr. van der Mandele, whose two cases alone – if they are successful – will put 2,500 jobs at risk. Still, he says that as a lender, "you can't just sit back and wait to see when" these businesses might revive. The IFC has lent to or invested in a wide range of Indonesian businesses, including chemicals, textiles, tourism and financial services.
Two options
Under the new law, debtors and creditors have two options. One is a kind of breathing space, where a debtor can petition the court to grant a suspension of payments to creditors. That gives a company's directors time to work out a debt restructuring plan with creditors, but under the supervision of a court-appointed administrator. Any failure to get creditor cooperation along the way triggers bankruptcy proceedings.
The other option allows creditors to ask the court to immediately start bankruptcy proceedings and appoint a receiver to sell or liquidate the company. Creditors also can move against individuals, such as Indonesian tycoons who signed personal guarantees on corporate loans. State-owned enterprises are fair game, too. But Indonesian banks and securities concerns are off-limits, and can only be dealt with by government regulators.
So far, 16 people have qualified as kurators, who can act as receivers or administrators. This week, 60 more candidates will undergo an intensive training program in the hope of qualifying. How many kurators will be sufficient is anyone's guess. Timur Sukirno, a lawyer who is chairman of the newly created Indonesian Receivers and Administrators Association, thinks several hundred will be needed, or maybe even 1,000. All he knows for sure is that with Indonesia's floundering companies owing $80 billion in foreign debt, "We're going to be busy." With a host of complex details yet to be worked out, doubts about the law's practicality are growing. Still, Mr. Sukirno contends that in a sense the law already is biting, because it has scared a lot of debtors who otherwise "don't want to answer the phone" into negotiations with their lenders in recent days.
Meanwhile, a fleet of 32 judges has undergone intensive training courses. But, says Michael Dwyer, a partner at international accounting firm KPMG, who coached a session, "I'm not sure how much they took in." Despite proponents" best intentions, Mr. Dwyer adds, "I'd be skeptical about [the law] forcing a bankruptcy in the short term."
Keeping up the pressure
"The key to it all," contends Cliff Sanderson, who oversees Ernst & Young's new insolvency practice in Jakarta, is "whether the judiciary will do what it's supposed to do" and make the tough calls. Without a sign that the bankruptcy court has teeth, he warns, the recent momentum toward debt talks will dissipate.
Steps have been taken to try to make the fledgling commercial court more efficient, and less vulnerable to the corruption that has riddled Indonesian courts to date. For instance, judges will face tight deadlines to render decisions, and their judgments immediately will be posted on an Internet site to boost transparency. The commercial court's rulings can be appealed directly to Indonesia's Supreme Court, but that court, too, has to issue its verdicts quickly. Proponents also argue that international scrutiny will help police the process.
Further, talks are afoot to raise judges' salaries, which would lessen temptation, says Gregory Churchill, an American lawyer and longtime Jakarta resident who has been advising the IMF on the new law's formation and expects it to have ramifications far beyond Indonesia's debt morass.
"It's a wedge within the judiciary" to modernize it and clean it up, says Mr. Churchill, who adds that he senses a growing "degree of enthusiasm" among the commercial-court judges for their role as reformers. Still, given the ingrained vagaries of Indonesia's justice system, he adds, "I'm not going to be naive and say there won't be problems."