Under the Bankruptcy Law, two types of proceedings may be commenced:

• Bankruptcy proceedings, by which the debtor loses its power to manage and dispose of its assets (i.e., a liquidation type of bankruptcy).
• A legal debt moratorium or suspension of payments proceedings, by which the debtor, on request by a creditor or the debtor itself, is given temporary relief to restructure its debts and continue in business, and ultimately to satisfy its creditors (i.e., a debt reorganization type of bankruptcy).

Bankruptcy proceedings

Application

The Bankruptcy Law requires that the bankruptcy petition be filed by a lawyer admitted to practice before the commercial court having jurisdiction over the debtor's legal domicile. If the debtor is a legal entity, the legal domicile of the debtor is that which is stated in its articles of association. Under the Indonesian insolvency regime, as long as there are two creditors to whom unpaid debts are owed and the debtor has failed to pay in full one of its debts that is already due and payable, a petition can be filed to force the debtor to pay.

Creditors

The creditors affected by the bankruptcy are not all in the same position. Preferred/secured creditors have a priority claim on the proceeds of the sale of any assets that have been granted as security in their favor. Unsecured/concurrent creditors, on the other hand, share in the division of the remaining assets and obtain satisfaction of their debts in a proportionate percentage, i.e., unsecured/concurrent creditors will share in the money proportionately rather than the first creditor that applies being the first to receive payment. From the date of the declaration of bankruptcy, the unsecured/concurrent creditors can obtain satisfaction of their claims only in the bankruptcy procedure and not through individual enforcement proceedings.

The secured creditors' right to enforce their security is stayed for a maximum of 90 days from the date the debtor is declared bankrupt. Following the stay period, the Bankruptcy Law generally refers to a period of two months for the enforcement of security by secured lenders after the debtor enters into an insolvency situation (i.e., if the debtor does not offer any composition plan during the debt registration meeting, the composition plan is rejected or the approval of the composition plan is rejected by a final and binding decision). The stay period does not apply to any secured creditors' claims that are secured by cash and the creditor's right to a set-off.

Only creditors having a claim in relation to the bankrupt debtor at the time of the bankruptcy declaration may claim payment from the proceeds of the bankruptcy estate. Further, all payment obligations of the debtor that occur after the bankruptcy declaration cannot be paid from the proceeds of the bankruptcy estate, unless the fulfillment of the payment obligations brings benefits to the bankruptcy estate.

Claims

The Bankruptcy Law requires that every creditor submit to the curator (similar to a liquidator) its claim in the form of a prescribed written statement that includes whether the creditor concerned has a security right in rem or a statutory priority right. The creditors' claims are then verified at the creditors' meeting.

After all acknowledged creditors have received the full amount of their claims or as soon as the final distribution plan (made by the curator) has become binding, the bankruptcy will end. The curator must announce the completion of the bankruptcy in the same manner as the announcement of the declaration of bankruptcy. The curator will account for its administration and liquidation of the bankruptcy estate to the supervisory judge 30 days after the end of the bankruptcy.

Appeal or review

Any cassation (a type of appeal) or civil review process does not affect any action taken by the curator, who is empowered by law to administer and liquidate the bankruptcy estate. If for any reason the declaration of bankruptcy is reversed in a cassation or civil review, actions that are taken prior to the curator being served notice of that cassation or civil review are legal and binding on the debtor.

Suspension of payments proceedings

Petition

A creditor that foresees that its debtor would not be able to continue to pay its debts when they become due and payable and a debtor that is unable or predicts that it will be unable to pay its debts when they become due and payable may file a petition for the suspension of the payment of debts with the relevant commercial court. The aim of the suspension of payments is to provide the debtor with more time to either meet its obligations or come to an agreement with its creditors to restructure the debts. A suspension of payments can easily be converted into a bankruptcy when it is clear that the suspension will not be successful.

A suspension of payments is initially granted for a maximum of 45 days. This is known as a "temporary" suspension of payments.

Pursuant to the Bankruptcy Law, a debtor may also file a petition for the suspension of payments after a petition for bankruptcy declaration has been filed against it. If petitions for both a suspension of payments and bankruptcy are reviewed by the court at the same time, the petition for the suspension of payments prevails and it must be decided first. Although it is not a legal remedy as such (i.e., appeal or civil review), a petition for the suspension of payments will effectively postpone the bankruptcy process for a certain period.

Composition plan

The Bankruptcy Law requires the debtor petitioning the suspension of payments ("Applicant") to submit its settlement or composition plan with its creditors at the time that or after the debtor files the petition for the suspension of payments. A composition plan with creditors is an agreement made between the Applicant and its creditors for the settlement or arrangement for a discharge of the debts of the Applicant. The composition plan must set out the proposed timetable under which the Applicant will repay its debts and whether the debts will be fully or partially repaid. In order to be valid and effective, a composition plan must be approved at a creditors' meeting by the following:

1. Affirmative votes of more than half of the concurrent creditors that are present at the meeting, provided that concurrent creditors voting in favor hold at least two-thirds of all accepted or provisionally accepted unsecured claims held by the concurrent creditors present at the meeting (Votes are only taken from the concurrent creditors present at the meeting); and
2. Affirmative votes of more than half of the secured lenders that are present at the meeting, provided that secured lenders voting in favor hold at least two-thirds of all accepted or provisionally accepted secured claims held by the secured creditors present at the meeting (Votes are only taken from the secured creditors present at the meeting).

The composition plan, once ratified, binds all of the unsecured creditors and secured creditors (who voted in favor of the plan), including those unsecured creditors that voted against the acceptance of the composition plan and that were not present or represented at the creditors' meeting.

Declaration of bankruptcy if a composition plan is not ratified

If the composition plan is not available at the first hearing, during the temporary suspension of payments or when the creditors have not yet cast votes in relation to the composition plan, the creditors, at the request of the Applicant, may grant an extension so that the suspension of payments situation becomes a "permanent" suspension of payments (i.e., a reference to the period beyond the temporary suspension of payments). However, the total suspension of payments period may not exceed 270 days. During the permanent suspension of payments period, the Applicant and the creditors may continue to negotiate the composition plan. If a permanent suspension of payments is not granted, or if at the expiry of the suspension of payments period there is no decision in relation to the composition plan, the administrator (a person appointed during the suspension of payments proceedings who, together with the debtor, administers the assets of the debtor) must notify the court and the court will immediately declare the Applicant bankrupt.

Effect on the payment of debts and secured creditors

The debtor cannot be forced to pay its debts during the suspension of payments period. However (unlike in a bankruptcy situation), a debtor subject to a suspension of payments may manage or dispose of its assets and obtain loans and secure its unsecured assets, provided that those acts have been authorized by the administrator and/or the supervisory judge.

A secured creditor cannot enforce its rights during a suspension of payments period.

Termination of the suspension of payments

A suspension of payments may be terminated by the commercial court on a request submitted by the administrator, the supervisory judge or any of the creditors, or at the commercial court's initiative in certain circumstances, including if the Applicant transfers rights to any part of its assets without authorization from the administrator or if the Applicant's position is such that a suspension of payments is no longer feasible.

Yes. The procedure to obtain a moratorium (known as a suspension of payments in Indonesia) is set out in the answer to question 1 of this section.

Yes. Under Indonesian law, there are two different routes by which pre-insolvency transactions can be set aside.

ICC

Under the ICC, any action taken by a debtor may be nullified if:

• That action was not required by law or pursuant to the terms of a bona fide agreement (nonobligatory action).
• The action prejudiced the interests of (other) creditors.
• The debtor and the party that benefited from the action (or counterparty) knew or should have known that the action would prejudice creditors.

Bankruptcy Law

The Bankruptcy Law recognizes the concept of fraudulent conveyance (actio pauliana).

Under the Bankruptcy Law, a transaction or action carried out one year prior to a bankruptcy declaration may be nullified or set aside. There is a legal presumption of deemed knowledge of prejudice of other creditors if the action was performed within the one-year period prior to the bankruptcy declaration and that action:

• Constitutes an agreement under which the obligations of the debtor were more onerous than the obligations of the counterparty.
• Constitutes the payment of or granting of security for debts that were not due and payable.
• Was performed with an affiliated party (which is detailed in the Bankruptcy Law).

In addition, under the Bankruptcy Law, payment of a due and payable debt (or satisfaction of claimable obligations) by the debtor may also be nullified if one of the following can be proved:

• It is evident that the counterparty that received the payment was aware that a petition for a bankruptcy declaration had been filed against the debtor.
• The payment was made pursuant to deliberations (or a collaboration) between the debtor and the counterparty with the intention to pay the counterparty ahead of other creditors.

The lender can enforce the security after the occurrence of an event of default subject to the terms of the relevant security documents. However, a secured lender may need to obtain a court order permitting the enforcement of its security where, for example, the enforcement of security involves a public auction through a court. The qualifications, as well as the enforcement processes in relation to the different types of security, are also set out below.

Qualifications

If the debtor is subject to a declaration of bankruptcy or a suspension of payments, one of the following qualifications will apply in relation to the processes:

• The right of enforcement of the secured creditor (i.e., the lender) after the declaration of bankruptcy is subject to a stay period of up to 90 days (counted from the date of the decision declaring bankruptcy), during which the secured creditor (i.e., the lender) is prevented from enforcing its rights over the security. The stay period will be terminated if, following the declaration of bankruptcy, the debtor enters into an insolvency situation or when the Supreme Court annuls the bankruptcy. This stay period, however, does not apply to creditors that have rights over secured cash deposits or rights to set off debts.
• The right of enforcement of a creditor (i.e., the lender) is deferred during a suspension of payments of the debtor.

As far as we are aware, no restrictions apply before a creditor may enforce its security apart from the stay periods mentioned above.

Specific security interests

Enforcement of a hypothec over a vessel

If there is an event of default, a creditor must serve the borrower with a clear and unequivocal letter of demand to enforce its security rights.

The creditor, without obtaining a court order, may proceed to sell the hypothec object by public action or private sale (if the highest price could be achieved and it would be profitable for all parties concerned) if the following events occur:

• The borrower does not comply with the letter of demand.
• The grosse deed of hypothec contains an agreement or a promise for the holder of the security/creditor (as the hypothec grantee) to sell the object of security on the default of the debtor.

Both the auction and private sale methods must follow the procedure set out in the statutory regulations.

This holder's right of self-enforcement is referred to as simplified enforcement (parate executie) because there is no court involvement in this process.

If the grosse deed of hypothec does not contain an agreement or a promise for the holder of security to sell the object of security on the debtor's default, the holder of hypothec must submit an application of enforcement to the court. After a prescribed process has been completed, the court will issue an auction order for the object of hypothec to be sold by public auction.

If there is resistance from the hypothec grantor at the enforcement stage (even if the deed of hypothec contains an agreement or a promise for the hypothec holder to sell the vessel on the debtor's default), the hypothec grantee may apply to a court for a court order.

Enforcement of a pledge

If the pledgor defaults, the pledgee may serve the borrower with a clear and unequivocal letter of demand, and if it is not complied with, the pledgee can use the letter of demand to establish the borrower's failure to comply.

If the pledgor does not comply with the letter of demand, the pledgee may enforce its right over the pledged property by way of public auction or by private sale if the pledgor and the pledgee agree. It is generally accepted in practice that the pledgee can sell the shares through a private sale, as long as the pledgor has authorized the pledgee to do so.

There are no statutory provisions in relation to the method of enforcement for a pledge over bank deposits. However, in practice, the enforcement can be conducted by means of a set-off of the monies deposited in the account against the outstanding debt. This means that the enforcement of pledge over bank deposits does not follow the general procedures for the enforcement of a pledge.

Enforcement of a fiducia security and a hak tanggungan

A creditor must serve the borrower with a clear and unequivocal letter of demand before enforcing its security rights. There is no strict timeline in relation to when the letter of demand must be served. Unless it is specifically stipulated under the financing documents, the letter of demand can be served on the occurrence of an event of default. If the borrower does not comply with this letter, then the creditor may proceed with the following methods to enforce its security rights:

• Rely on the executory title in the certificate of fiducia security or certificate of hak tanggungan.
• Sell the fiducia object or hak tanggungan object (if the deed of hak tanggungan contains an agreement or a promise for the holder of hak tanggungan to sell the hak tanggungan object on the default of the debtor) by public auction.
• Sell the fiducia object or hak tanggungan object by private sale if the highest price can be achieved and it would be profitable for all the parties concerned.

The private sale must follow the procedure provided for in the statutory regulations (e.g., an announcement regarding the proposed private sale must be published in at least two newspapers circulated in the area where the fiducia object or hak tanggungan object is located).

Enforcement of a security over warehouse receipts

A creditor must serve the borrower with a clear and unequivocal letter of demand before enforcing its security over warehouse receipts. If the borrower does not comply with this letter, then the creditor may proceed with the enforcement of its security rights.

The creditor (the security grantee) can sell the goods without first obtaining a court order. However, it must notify its intention to the owner of the warehouse receipt (the security grantor), the warehouse manager and the Registration Center at least three days before the sale of the goods.

To enforce the security over a warehouse receipt, the creditor can sell the goods as follows:

• By public auction in accordance with the prevailing laws and regulations.
• By private sale if this method will yield the best price that will benefit both parties.

The creditor can apply the sale proceeds to the loan after making deductions for the sale and management costs.

Generally, the procedures of enforcing a guarantee in Indonesia are the same as suing a party that is in default of its contractual obligation. A lender will need to lodge a lawsuit against the guarantor in a court. The guarantor will have a chance to present its pleadings, documentary evidence and witnesses to challenge the enforcement of guarantees.

The limitation period that applies in respect of bringing an action to enforce security relates to the concept of statutory limitation under the ICC, which generally states that claims in relation to the repayment of a loan are permitted to be filed within 30 years.

If a claim is not brought within 30 years, such claim will be barred. However, Article 1967 of the ICC does not stipulate when the 30-year period commences. Several legal scholars are of the opinion that the 30-year period commences when a right can be exercised (i.e., when the right first arose).

As discussed in the answer to question 1 in this section, after the stay period of up to 90 days following the bankruptcy declaration, the secured creditor only has two months after the debtor enters into an insolvency situation (i.e., if the debtor does not offer any composition plan during the debt registration meeting, the composition plan is rejected or the approval of the composition plan is rejected by a final and binding decision) to enforce its rights over the collateral but subject to the qualifications set out in the answer to question 4 of this section. After the two-month period, the curator has the right to sell all collateral of the debtor to pay off its debts. This includes collateral over which the debtor has granted security. If the curator exercises this right (in practice, after discussions with any secured creditors), the proceeds of the sale in relation to collateral over which the debtor has granted security will be given to the relevant secured creditor.

Please see the answer to question 4 of this section in relation to the enforcement of security generally.

In Indonesia, the process of the enforcement of security is usually subject to challenge by the debtor/obligor (e.g., to seek to invalidate the loan and frustrate the enforcement). In practice, debtors and obligors are often uncooperative during the enforcement process and often take defensive legal action to maintain their assets.

In addition, a provision in a loan or security document that a calculation, determination or certificate will be conclusive and binding will not apply to a calculation, determination or certificate that is given unreasonably, arbitrarily or without good faith, or that is fraudulent or manifestly inaccurate and will not necessarily prevent a judicial enquiry into the merits of any claim.

Further, the enforceability of an obligation in Indonesian-law-governed documents in general may be affected or limited by the following:

• The general defenses available to obligors under Indonesian law in respect of the validity and enforceability of loan and security documents.
• The provisions of any applicable current or future bankruptcy (kepailitan or faillissement), insolvency, fraudulent conveyance (actio pauliana), reorganization, moratorium/suspension of payments (penundaan kewajiban pembayaran hutang or surseance van betaling) and other or similar laws of general application relating to or affecting the enforcement or protection of creditors' rights.

There are no specific requirements for an offshore lender to enforce its security.

It is common for the parties to choose arbitration to resolve their disputes in relation to cross-border transactions, and there are various reasons for doing so. Firstly and most importantly, by virtue of the New York Convention, an arbitration award is enforceable in Indonesia. Secondly, the parties can typically choose arbitrators who have relevant expertise to hear and resolve the dispute. Thirdly, arbitration is a neutral way to resolve the parties' dispute (in contrast to the local courts). Fourthly, the arbitration process is relatively quick in most cases. Although arbitration is generally preferable in a cross-border transaction, the parties should be cautious in choosing the seat of arbitration. The choice of the seat of arbitration will have a significant impact on the arbitration process, as the law governing the arbitration process will be the law of that seat of arbitration.

While there are advantages to choosing arbitration as set out above, there are also some disadvantages. Foreign arbitration awards are not automatically enforceable in Indonesia. Enforcement involves a three-stage process. The award must be registered in Indonesia. On registration, a winning party files an application to obtain leave for enforcement ("Exequatur") from the Central Jakarta District Court. Once the Exequatur is granted, a successful party can seek the district court's assistance to enforce the award in Indonesia. There is also a possibility that the opposing party will try to avoid or obstruct the arbitration proceedings by not participating in the constitution process of the arbitral tribunal. Further, if the unsuccessful party does not want to voluntarily honor the award, the court's assistance will be required to enforce the award.

A foreign (non-Indonesian) court judgment is not enforceable in the Republic of Indonesia, although this type of judgment could be admissible as inconclusive evidence in proceedings on the underlying claim in an Indonesian court. Although Indonesian courts are in a position to determine the applicable rules of foreign laws, in practice however they have from time to time applied the laws of the Republic of Indonesia notwithstanding the choice of law provisions in the relevant documents. A non-Indonesian judgment may be given the evidentiary weight an Indonesian court considers appropriate and reexamination of the issues de novo would be required before an Indonesian court to enforce the claim in the Republic of Indonesia. The entire civil proceedings process to obtain a final and binding court judgment in Indonesia up until the Supreme Court level could take more than one year.

With regard to a hybrid provision that allows the parties to opt for either arbitration or litigation, at the outset, the provision is not prohibited under Indonesian law to be included in an agreement based on the freedom of contract principle. However, the Indonesian court may view that there is no "exclusive jurisdiction" for disputes arising from an agreement to be settled through arbitration. Therefore, an Indonesian court may decide that it has jurisdiction over claims submitted by the borrower in relation to the agreement to the Indonesian court.

Further, if the hybrid provision only allows the lenders to opt for arbitration or litigation as they see fit, the Indonesian courts may deem the provision not enforceable on the basis that the arrangement is one-sided (only for the benefit of the lender). Additionally, the court may apply the right to opt for arbitration or litigation to the borrower as well. 

Despite the freedom of contract principle under Indonesian law, there is a risk that Indonesian courts would take the view that asymmetrical jurisdiction clauses are not enforceable because the arrangement is one-sided (only for the benefit of the lender). Further, the risk from an Indonesian court proceedings perspective is that the court may apply the right to choose the jurisdiction and the right to litigate to the borrower as well. This will allow the borrower to bring a claim related to the Finance Documents in a different jurisdiction as it sees fit.

In addition, if the clause allows the lender (only) to choose to litigate through court litigation or arbitration, the Indonesian courts may view that there is no "exclusive jurisdiction" for disputes arising from the Finance Documents to be settled through arbitration. Consequently, an Indonesian court may decide that it has jurisdiction over the dispute submitted by the borrower to the Indonesian court.