Bill Guerin, Jakarta – In a closely watched, highly contentious court case, a German bank is in the dock in an ongoing legal battle against a Singapore-registered company over ownership of Indonesian assets that are now partly owned by the Singaporean government.

In a controversial and secretive deal, Deutsche Bank in 1998 sold off shares in Indonesia's largest coal mine after Singapore-based Beckkett Pte Ltd defaulted on a US$100 million bridging loan at the height of the 1997 Asian financial crisis.

The assets were bundled and sold off at a bargain basement price to PT Dianlia Setyamukti (DSM), a company controlled by Edwin

Soeryadjaya, son of the ethnic-Chinese tycoon William Soeryadjaya, the founder of Indonesia's biggest car group, Astra International. Another well-known tycoon, Benny Soebianto, was also privy to the deal.

The storyline is convoluted and features cameos by some of Indonesia's wealthiest tycoons. Beckkett previously owned 40% of the shares in Indonesia's second biggest coal miner, PT Adaro Indonesia (Adaro) and PT Indonesia Bulk Terminal (IBT), and is itself owned by three separate entities through the ASMEC group. The three principals are Indonesian pulp-and-paper tycoon Sukanto Tanoto, Hashim Djojohadikusumo and his sister-in-law, Titiek Prabowo, former president Suharto's second daughter, with their Tirtamas group, and Graeme Robertson, an Australian native who took up Indonesian citizenship.

Put simply, Beckkett accuses Deutsche Bank of colluding with Jakarta-based company Dianlia and the management group to buy the shares in the mine for a mere $44.2 million in a private deal in February 2002. With the recent upswing in global commodity prices, that stake is now estimated to be worth more than $400 million.

Beckkett is seeking the full restoration of its 40% stake. The company has also said in court that in the event neither Deutsche Bank nor Dianlia is able to procure the restoration of equity to their original respective percentages, Beckkett will seek a claim for damages to be assessed by reference to the present market value of the shares in their original percentages – or roughly $400 million.

In Tuesday's session in Singapore's High Court, Beckkett, as the plaintiff, said the sale of the pledged shares by Deutsche Bank to DSM, as the first and second defendants, was part of a "conspiracy" between the two companies. Among the team of lawyers representing Beckkett is one known by the single name Lucas, who gained notoriety for the successful bankruptcy application against Manulife's Indonesian unit.

In a bizarre 2002 ruling, a Jakarta commercial court declared insurance firm Manulife Indonesia, a unit of the Canadian firm Manulife, bankrupt for not paying a 1999 dividend to its former Indonesian partner, which it bought out after the partner got into trouble during the economic collapse of 1997 and 1998. By most internationally recognized standards, the company was solvent. The same court in 2004 controversially declared Prudential, one of Indonesia's top 10 insurance companies, bankrupt.

So, just as Indonesia struggles to regain favor among foreign and local investors, the battle for ownership of a stake in the country's second biggest coal mine puts the country's notoriously corrupt legal system back in the international spotlight. A string of questionable rulings against foreign investors has eroded confidence in the ability of Indonesian courts to enforce contracts or to protect firms' legal rights, and the lack of legal recourse is widely viewed as the top obstacle to doing business in Indonesia.

Although the legal action will ultimately determine the true ownership of the shares, the broader significance of the case is that, for once, the Indonesian legal system is not in the dock at all. The problems with Indonesia's judicial system are not only due to corruption, but also attributable to flawed laws and inexperienced judges. These issues are arguably being dealt with for the first time ever.

The Beckkett/Deutsche Bank case is not the average tale of pitched legal battles between indebted Indonesian companies and their foreign creditors over debt restructuring agreements and asset disposals. Rather, it is a rare, probably unique, example of a foreign bank successfully seizing assets in Indonesia. In a startling contrast to the many tales after the 1997 Asian financial crisis of slippery Indonesian businessmen and corrupt courts fleecing foreign investors, Deutsche Bank takes the stand accused of committing fraudulent price-fixing during an asset-disposal deal.

Depending on the final verdict, the case could demonstrate that it is not only local businesses but also foreign ones that sometimes exploit the many loopholes and blind spots in Indonesia's underdeveloped, flightily monitored regulatory regime to win ill-gotten gains. If found guilty, Deutsche Bank's reputation in the region would be in tatters, say observers monitoring the case.

Of course, the foreign bankers beg to differ. Deutsche Bank representatives have described Tanoto and Djojohadikusumo as "cynical Indonesian businessmen who believed that they would be able to refuse to repay their loans and yet prevent security from being enforced". The lack of a credible legal infrastructure makes seizing assets in Indonesia almost impossible, foreign investors often carp.

The case, watched closely by a bewildering array of international creditors, private equity investors and hedge fund managers, has been dogged by endless legal battles over document disclosure, marred by threats of intimidation and harassment, and complicated by the complex web of the company's operations and share holding structure.

The roller-coaster saga stretches back as far as 1991, when PT Asminco Bara Utama (Asminco) took over management of the Adaro concession. The corporate structure was complex, with Australia's Soul Patterson holding 69.3% of New Hope, which held 40.83% in Adaro. Naturalized Indonesian Robertson has been closely associated with developing Indonesia's infrastructure and coal mining industries, and at the time was a non-executive director and head of Australia's Soul Pattinson's coal operations, New Hope Ltd, which then owned 50% of Adaro.

Asminco, which owned a 15% stake in Adaro, borrowed $100 million from Deutsche Bank in October 1997, mainly to buy out the 25% stake in Adaro and 15% in the related bulk terminal held by Tirtamas. The guarantor of the loan was Beckkett, which owned Asminco and pledged all 40% of its shares as collateral.

In August 1998, at the height of the regional financial crisis, Asminco, which had management control of Adaro, was unable to repay the loan because of all-time-low global coal prices and a sharply depreciated rupiah. Attempts to restructure the loan over the next three years failed, and in February 2002, Deutsche Bank foreclosed on the loan and sold the pledged shares to Dianlia. Beckkett claims it was left in the dark about the deal and says it only found out about the sale three days after it took place.

The ownership structure has since changed dramatically, as has the Adaro concession's fortunes. In 2003 a consortium of Indonesian buyers led by Soeryadjaya bought New Hope's 41% stake in Adaro for $378 million and then the remaining 11% of Indonesian interests, giving it majority ownership and control.

Last June, a consortium of international banks and strategic investors bought Adaro from Dianlia for about $950 million, leaving Soeryadjaya and his cousin TP Rachmat each with about one-third of the company. The new foreign investors include the Government of Singapore Investment Corp, the Kerry Group and the private-equity arms of Goldman Sachs Group Inc and Citigroup Inc.

Lawyers for Deutsche Bank say they tried unsuccessfully for two years to restructure the loan before foreclosing on the shares in Adaro, but Wolfgang Topp, Deutsche Bank's Asia-Pacific managing director, talks of the bank "literally being held to ransom", according to court documents. He claims in documents submitted to the court that he was interrogated by Indonesian police over allegations he was party to "deception and fraud" over the sale of the Adaro stake.

The police investigation was dropped in September 2002 because "no criminal acts were committed", Topp says. And Deutsche Bank insists that the disposal of the shares in a private sale was in full accord with the loan contract. But, as Beckkett's Jakarta lawyer OC Kaligis notes, "If this were true, why did [Deutsche Bank] get court decrees prior to the sale?"

This would seem a telling point on its face. The South Jakarta District Court, through no fewer than 16 separate decrees issued at the request of the bank between December 2001 and February 2002, gave a green light to the sale, court records show. If the sale transaction was legal as per the loan contract, then Deutsche Bank never would have needed court endorsement.

Beckkett, however, successfully appealed to the Jakarta High Court, which declared the South Jakarta District Court decrees invalid. Dianlia later asked the Supreme Court to rule against the High Court decision, saying the decrees issued by the District Court could not be appealed, as they were not case-based verdicts. The Supreme Court has yet to make a pronouncement.

Deutsche Bank has strongly contested the case and says it plans to launch a counterclaim against Beckkett for more than $110 million in outstanding loan and interest payments. Certainly Beckkett will have to pay up if it loses the action, but the company could be forgiven for taking a stance that all bets were off once it had launched its case against Deutsche within weeks of the foreclosure.

It hardly needs the sophistry of a Singapore counsel to spot what is so ludicrous about the idea of such a counterclaim, particularly in view of what Steven Chong, Beckkett's senior counsel, claims was the real game. "The plan was to sell at under value and use the balance amount owing by Asminco to wind up Beckkett, the guarantor," he said.

Beckkett believes there was a conspiracy between Adaro's management team and Deutsche Bank and Dianlia to sell the shares at a fraction of their real worth to a consortium that included members of the management team. Chong told the court that documents provided by Deutsche Bank clearly showed that the bank and Dianlia acted together against Beckkett's interests.

In apparent anticipation of legal wrangles over the deal, the sale agreement reportedly shows that Dianlia agreed to fund all legal costs incurred by Deutsche in enforcing the action against Beckkett and also agreed to put $1.5 million into the kitty for the enforcement proceedings. This adds weight to Beckkett's claim that the whole deal was a fix between the bank and the buyer of the undervalued assets.

Looking the other way when it comes to sloppy disclosure may have worked in the Jakarta jurisdiction, but stalling tactics are unlikely to impress the Honorable Judge Kan Ting Chiu, court observers say. State-owned Bank Mandiri, Indonesia's biggest bank, is said to have given Dianlia an interest-free loan of $40 million. The Singapore Court of Appeal turned down a Deutsche Bank request to prevent one telling document from being disclosed – which revealed that the $40 million loan from Adaro to Dianlia was a "non-commercial" arrangement.

Court observers say Deutsche Bank presumably wanted the document suppressed because it pointed to the obvious consideration that Adaro, then in the hands of the management team, had handed over enough cash to Dianlia to buy the shares. According to the court transcript, counsel for Beckkett pointed out to the Court of Appeal that the documents revealed that most of the funding for DSM's (PT Dianlia) $46 million purchase of the shares from Deutsche Bank appeared to have come from a $40 million loan obtained by Adaro from Bank Mandiri and was later on-lent to DSM as an interest-free loan.

For its part, Bank Madiri is riddled with bad loans from politically powerful debtors on its hands, and there are a number of ongoing investigations which threaten to erode the bank's already suspect reputation.

The Indonesian media have intensively investigated Tanoto coincident with the action in Singapore, where he currently lives. At least three investigative pieces have focused on the tycoon's ownership of Unibank, whose operations were suspended by the central bank (Bank Indonesia) in October 2001.

The bank's assets of Rp4.4 trillion ($475 million) were frozen after it failed to pay trillions of rupiah in obligations to Bank Indonesia. Yet months before the bank was closed down, Tanoto and his companies held less than 5% of the shares in Unibank. Sources close to the case say the media coverage of the issue in Indonesia is no coincidence.

Neither is it a coincidence that several Indonesian reporters are on the case, as it were, in Singapore, with expenses paid by at least one public relations group linked to the plaintiff. Deutsche Bank has also brought up the allegedly poor credit history of his companies in an affidavit to the court. The trial is expected to run for three weeks and a verdict is not expected until June.

Regardless of the final verdict, would-be investors will once again note the risk of becoming embroiled in litigation over Indonesian assets and just what can go wrong with investing in the country.

If Beckkett loses the action, the company is expected to move the legal battlefield back to Jakarta, where it could initiate action against Deutsche Bank for breaches of Indonesian law. Deutsche Bank, says Beckkett, breached the Indonesian Civil Code, when it executed its rights in Indonesia and sold them to Dianlia.

If the court rules against it, the German bank will be seen as the architect of its own demise. Beckkett is asking for the full restoration of its 40% stake, but if it proves impossible to unwind the complicated transactions that followed the foreclosure, it will seek damages equivalent to the present market value of the shares in their original percentages. Shareholders will likely be up in arms should the sale be canceled and the shares returned, or if damages of about $400 million are awarded to the original shareholders.

More important, perhaps, a guilty verdict would be a major blow to Deutsche Bank's reputation and credibility in the region. International banks will get the message that although they lent vast sums of money to companies in a country where the legal system has consistently been found wanting, they will find it is not so easy to seize assets without the full backing of the law, even in Indonesia.

[Bill Guerin, a Jakarta correspondent for Asia Times Online since 2000, has worked in Indonesia for 20 years as a journalist. He has been published by the BBC on East Timor and specializes in business/economic and political analysis in Indonesia.]