Jakarta – Indonesia's top economics minister said on Tuesday that a controversial bankruptcy ruling against the local unit of Britain's Prudential Life insurance company will hurt foreign investment in the country.

The company remained closed for a second day Tuesday following a ruling by a Jakarta commercial court that declared the company bankrupt. The company has appealed Friday's ruling, insisting it is financially sound.

"This case will indeed affect the investment climate," said Senior Economics Minister Dorodjatun Kuntjoro-Jakti. He added that the government was studying the court's decision.

The ruling came out of an unusual claim filed by a former employee Lee Boon Siong. He demanded US$40 million in damages after the country's leading investment-linked insurance company terminated his agent-training contract last year.

The court ruled that Lee is owed $400,000 and appointed a custodian to take control of the business until Prudential – which is appealing the decision – pays the fee to Lee.

In response, Prudential shut its Indonesia offices on Monday but said it will keep honoring policy claims. It said it will seek to have the bankruptcy decision overturned by the Supreme Court as soon as possible.

The British Embassy also criticized the ruling and hundreds of employees rallied outside the company's office to have the decision overturned.

The case underscores the government's failure to reform its corrupt and ineffective court system which has handed down a string of questionable rulings against foreign investors and contributed to a sharp drop in investment in Indonesia.

In 2002, a court declared PT Manulife Indonesia, a unit of Canada's Manulife Financial Corp., bankrupt in a legal battle against its former local shareholder.

The Supreme Court later overturned the verdict after international financial institutions intervened and threatened reprisals against Indonesia.

Critics have said that the logic of Bankruptcy Law No. 4/1998 was weak because a company that does not repay even one of its debts could be declared bankrupt by the Commercial Court regardless of whether it was solvent or not.

The concept of the existing Bankruptcy Law was inspired by Dutch law expert Jerry Hoffe together with the International Monetary Fund in 1998 with the purpose of forcing recalcitrant local debtors to repay their debts to foreign creditors.