Bill Guerin, Jakarta – A sense of deja vu surrounded the astonishing news that an Indonesian court has once more declared a major foreign enterprise bankrupt, despite its healthy financial state. The case, involving largely British-owned PT Prudential Life Insurance (Prudential), is yet another major public relations disaster for Jakarta and could thwart government efforts to woo foreign investment and boost growth.
The operations of PT Prudential Life Insurance (Prudential) were brought to a halt last Friday after the Central Jakarta commercial court declared it bankrupt on the strength of a petition filed by Malaysian Lee Boon Siong on April 7. Siong had cited the failure of the company to pay him out after his agent-recruiting and agent-training contract was terminated in January for undisclosed reasons. In the petition, he claimed he was owed Rp 366.8 billion (US$42.5 million) in unpaid bonuses and travel allowances and for the loss of future earnings.
The surprising verdict drew waves of censure from various groups and sparked a strong protest from the British Embassy in Jakarta. The embassy said on Monday that it was in "urgent discussions" with the company about action with the Indonesian authorities. "We are deeply concerned about the case, which has strong similarities with the Manulife case," the statement said.
This was a reference to a similar ruling delivered by the same court in 2002 when it handed down a bankruptcy verdict against PT Asuransi Jiwa Manulife Indonesia, a subsidiary of Canadian insurance giant Manulife, in a legal battle against its former local shareholder. Like Prudential, Manulife Indonesia was solvent, but the judges ruled Manulife Indonesia bankrupt for not paying a 1999 dividend. The company shut down operations for six days. The Supreme Court eventually overturned the ruling, but not until it was faced with strong intervention from the Canadian government.
Manulife alleged that the decision was influenced by bribery. Judges in the case denied the accusations, but after several months the minister of justice suspended the three judges involved on suspicion of bribe taking.
Prudential President Charlie E Oropeza, though he did not allege bribery, said the company also would appeal to the Supreme Court over the commercial court's decision. "We are surprised by the court's decision ... The petition, which is from a disgruntled former consultant, is wholly without merit," said Oropeza.
Many others agree, as hundreds of company staff and self-employed insurance agents staged a peaceful protest on Monday outside Prudential's main office in a show of support for the company. The protesters signed a petition demanding that the government look into the matter. The ironic twist is that these were Indonesian workers protesting on behalf of a foreign company: Prudential is 94.5 percent owned by UK-based Prudential Plc, with the few remaining shares held by a local company, PT Sasana Dwi Paramitra.
Not in line with the law
Both the Manulife and Prudential verdicts, against bona fide, large, healthy enterprises, are not in any way in line with the intent of Bankruptcy Law No 4/1998, which is directed at business debtors that have no intention of paying their debts. The law came into force in 1998 after pressure from the International Monetary Fund (IMF) to set up a legal way of forcing local debtors to repay their debts to foreign creditors.
A commercial court was formed, and the judges of the new court were supposed to have undergone rigorous selection and training in order to make them immune to corruption and also to give them expertise in bankruptcy matters, which were to be the exclusive focus of the commercial court.
The logic of the law is questionable, to say the least, given that a company that does not repay even a single debt can be declared bankrupt by the commercial court regardless of whether it is solvent or not.
As Siong's lawyers put it when arguing that the case was a contractual dispute and that the move to force the unit's bankruptcy was perfectly legal under Indonesian law: "Even if you are rich, even if you are profitable, if you don't pay your debts, you can be declared bankrupt."
One of the many oddities about this particular case is that the current bankruptcy law requires more than one creditor for an action to be successful. However, there has been no information released on any creditor other than the Malaysian consultant.
Though Prudential has denied that its operations will be affected by the verdict, there is some concern about security. A company representative, Nini Sumohandoyo, told the press on Monday that the firm had shut down "to avoid unwanted things from happening to us".
Twenty-four hours later, Yuhelson, the receiver appointed by the court, suspended Sumohandoyo and three others and warned that if the directors did not hand over the liquid assets of the company within two days, they would be deemed in breach of the court's instructions. The matter would then be reported to the police.
Prudential's lawyers hit back with demands that the court replace Yuhelson, claiming that he used to work as a lawyer at Lucas SH & Partners, which is representing Siong. The lawyers said that prior to any verdict issued by the Supreme Court, a receiver will run Prudential and the company's assets will be temporarily frozen. If the Supreme Court were to uphold the bankruptcy ruling, "Prudential will be liquidated and its assets distributed to Prudential's creditors, who include policyholders".
Healthy as healthy can be
Last year, Prudential Life's premium income more than doubled to reach Rp 1 trillion ($117 million) from Rp 477 billion in 2002. Its risk-based capital (RBC) rate, at 255 percent, was way above the minimum requirement of 100 percent. Another parameter used by the Ministry of Finance to determine the financial standing of insurance companies is their liquidity rates. Prudential Life's was a healthy 110 percent in 2003.
Since last Friday, on top of recent developments regarding the bankruptcy law, the director general of financial institutions at the Ministry of Finance, Darmin Nasution, was the first to engage in damage limitations.
His office oversees the insurance industry, and Nasution promised on Monday to lobby the House of Representatives to amend the "flawed" law immediately. He pointed out that the ministry had proposed an amendment to the law last May under which the ministry would have the final say before dissolving an insurance company.
Nasution said the case had created uncertainty in the country's business climate, and told reporters it "should serve as a wake-up call to speed up the revision of the bankruptcy law". "This case will indeed affect the investment climate," echoed Coordinating Minister for Economic Affairs Dorodjatun Kuntoro-Jakti on Tuesday.
There are some 80,000 life-insurance agents nationwide, and by coincidence, the Indonesian Life Insurance Association (AAJI) chose this week to confirm that a policy aimed at standardizing the quality of all life-insurance agents in the country had been approved by the government. All life-insurance agents across the country will henceforth have to register with the association for training and certification. The Singapore College of Insurance helped with designing a certification program.
Siong was one of several Malaysian and Singaporean entrepreneurs who have seized the initiative to build sales forces for Prudential in Indonesia, where the company has no direct sales staff. There are fortunes to be made. Business written in Indonesia and the rest of Asia for Prudential is said to be twice as profitable as that written in the United Kingdom and six times as profitable as that previously written through the now-disbanded UK direct sales force.
Indonesia also has the lowest ratio of policyholders to population, less than 6 percent, and thus the greatest potential, among the countries in the region. The ratio is above 12 percent in Singapore, Thailand and Malaysia.
Insurance comes to Indonesia
Prudential's expansion in Indonesia was motivated by a 2001 government regulation that exempted investors in the sector from the minimum capital requirement of Rp 100 billion ($10 million at the time). This incentive was meant to facilitate the take-over of struggling insurance companies, part of efforts to stem the rapid decline of the sector. Although new investors were allowed to invest less than Rp 100 billion, they were expected to improve the performance of the ailing companies.
Then, in June 2001, Prudential acquired the US-based Allstate Corp's majority holdings in Pt Asuransi Jiwa Allstate in Indonesia and Allstate Life Insurance Co in the Philippines for $7.5 million, a deal that gave the group more than 14,000 new policyholders, 4,400 agents and 230 staff in both countries.
Prudential Asia Corp (PAC) currently employs more than 6,000 staff and serves some 5 million customers, making it the leading European life insurer in Asia, with operations in 12 countries or territories – China, Hong Kong, India, Japan, South Korea, Malaysia, the Philippines, Singapore, Taiwan, Vietnam, Thailand and Indonesia.
Mark Norbom, the director of Prudential's Asian businesses, was appointed this January and awarded a salary package worth up to $5 million. He replaced Mark Tucker, who had earned even more than Prudential chief executive Jonathan Bloomer when he was running the Asian side.
"All the ingredients were there: an increasing population, emerging middle class and a shift in pension provision away from the state," Tucker said when taking over.
In addition, analysts expect PAC to account for 50 percent of new business premiums by 2005, compared with 11 percent in 1999.
The Indonesian arm of PAC, first established in 1995, now has upwards of 8,000 self-employed sales personnel and 230 permanent staff. It has six main sales offices, 61 agency offices and 14 financial advice centers nationwide.
Thus, wags might argue that it is Indonesia's notoriously inept, delay-ridden and corrupt court process itself that is bankrupt, not Prudential. As Nasution pointed out, with exquisite understatement: "The verdict was obviously decided using legalistic technicalities and terms that don't equate with reality. Prudential is financially fit, and by logic it does not deserve to be dissolved."