Jakarta – Indonesia's first real attempt at a bankrupcty case in 95 years came unstuck on Tuesday and analysts warned it would make investors even less comfortable with the country's cloudy legal system.

An Indonesian commercial court rejected a suit under the one-month old bankruptcy law against PT Ometraco Corp (OMTR.JK), because a similar suit is pending against one of its subsidiaries. "This certainly is not sending a good signal about the bankruptcy law," said the head of research at a foreign brokerage in Jakarta.

The verdict is the first under the new law, replacing one imposed during Dutch colonial rule in 1903 and hardly ever used, meant to help the crisis-hit country deal with its huge corporate debt burden. "It is going to make foreign investors lose their confidence with commercial courts over the bankruptcy law. The law is good but they have not been able to implement it because the judges don't understand it," PT Trimegah Securindo Lestari head analyst David Chang said.

He predicted that creditors would eventually give up and seek out-of-court settlements, a move that should also appeal to debtors rather than pay exorbitant administration charges.

Ometraco's lawyer called the court decision "courageous," though others were less enthusiastic and its creditors are considering an appeal. "This is a new and highly controversial decision. It's going to spark concerns on the willingness (of the government) to implement the law fairly," said James Purba of Makarim & Taira law firm, adding that the two cases should be tried separately.

Some analysts were less downcast, seeing it as no more than a predictable bump as courts try out the new law. "It is inevitable that we are going to have these technical obstacles. What is terribly important is that they are overcome," said William Daniel, president director of ABN-AMRO Asia Securities Indonesia.

Merrill Lynch head of research Alex Wreksoremboko said the problem also lay in the fact that imprudent banks had in the past been so willing to lend to holding companies without any collateral other than now worthless share certificates of their subsidiaries. He said plenty of other creditors would be watching the early bankruptcy cases to see if it was worth suing.

"I think the government is buying time," said the research head of another securities house. "It is in their interest to delay the verdict. If the companies are declared bankrupt it will lower GDP and also create more social problems."