Wed, 23 Jun 2021

Out of court restrucuring, an alternative to litigation in Indonesia

(Op-ed) Agus Dwi Prasetyo
21 Oct 2020, 18:38 GMT+10

JAKARTA, Indonesia - The economic impact of coronavirus crisis has been perceived. We have seen hundreds or even thousands of employees were laid off from their jobs, and most contractors stand their projects down because of strict restrictions during the pandemic. The next phase that we are currently facing is disputes, arising as the effect of unpaid debts or unfulfilled obligation. In some commercial courts the trend of cases registrered during this first half year is higher than last year. In the precedented future if it is not anticipated the trend will likely continue.

Rather than to be reactive, a debtor should be proactive to restructure its debts. Not only to the banks, but also to vendors or other business partners. Being passive and waiting for creditors to take legal action first is definitely the reactive approach. On the contrary, proactive approach is if the debtor initiates to restructure its debts.

Financial Service Authority (OJK) has issued regulations to control bank and non-bank financial institutions industries bad loans. The regulation gives relaxation for debtors affected by coronavirus to restructure its debts. The main threat may come from unpaid debts to vendors or other business partners. Unlike banks and non-banks financial institutions, other industries' overdue claims are not protected by government. Therefore, litigation is most likely the option.

Indonesia recognized a court-supervised restructuring namely suspension of debt payment obligation (PKPU) which is regulated under Law Number 37 of 2004 on Bankruptcy and Suspension of Debt Payment Obligations (PKPU). PKPU proceedings allows a debtor to restructure its debts by proposing its restructuring plan to all creditors under supervision of relevant commercial court. Either the debtor or creditor may initiate PKPU proceedings as long as it is proved that the debtor has a minimum two creditors and at least one of the debts has matured and is payable. Once the debtor is declared under PKPU by the court, any business activities will be supervised by the court and the appointed administrator(s).

The advantages of exercising PKPU proceedings is during PKPU any litigation involving the debtor will be suspended. However, a majority of debtors do not prefer to initiate PKPU because there has to be publication of the PKPU status in a national newspaper. Hence, it will affect the reputation of the company. Another factor that restrains the debtor to voluntarily initiate PKPU is a risk of being declared bankrupt if the debtor does not pass the threshold. These considerations are the reason why PKPU proceedings are mostly initiated by creditors.

While PKPU is not a favorable choice for the debtor, the law is silent on out of court restructuring. Unlike Indonesia, where out of court restructuring is uncommon, in the United States of America and in Europe, out of court restructuring is becoming popular as an alternative option to court-supervised restructuring.

Out of Court Restructuring Practice

Referring to INSOL International as published in the World Bank Study on Out-of-Court Debt Restructuring, there are eight principles for a successful out of court restructuring, among others are:

  1. all relevant creditors should be prepared to cooperate with each other to give sufficient (though limited) time (a "Standstill Period") to the debtor for information about the debtor to be obtained and evaluated and for proposals for resolving the debtor's financial difficulties to be formulated and assessed;
  2. during the Standstill Period, all relevant creditors should agree to refrain from taking any steps to enforce their claims against debtor;
  3. during the Standstill Period, the debtor should not take any action which might adversely affect the prospective return to relevant creditors (either collectively or individually);
  4. the interests of relevant creditors are best served by coordinating their response to a debtor in financial difficulty.
  5. during the Standstill Period, the debtor should provide, and allow relevant creditors and/or their professional advisers reasonable and timely access to, all relevant information relating to its assets, liabilities, business and prospects, in order to enable proper evaluation to be made of its financial position and any proposals to be made to relevant creditors.
  6. proposals for resolving the financial difficulties of the debtor and, so far as practicable, arrangements between relevant creditors relating to any standstill should reflect applicable law;
  7. information obtained for the purposes of the process concerning the assets, liabilities and business of the debtor and any proposals for resolving its difficulties should be made available to all relevant creditors and should, unless already publicly available, be treated as confidential.
  8. if additional funding is provided during the Standstill Period or under any rescue or restructuring proposals, the repayment of such additional funding should, so far as practicable, be accorded priority status as compared to other indebtedness or claims of relevant creditors.

It is unfortunate, however, the House of Representatives has not included amendment of bankruptcy law in the current national legislation program (2020-2024). With the current pandemic situation, the need of reforming the insolvency system should be a high-priority and the scheme of out of court restructuring is an interesting option to take.

If the current pandemic situation does not recover soon, there will be a glut of bankruptcy and PKPU petition fileds in commercial court. An existence and applicability of out of court restructuring should lighten the burden of commercial court who has relatively limited judges. More importantly, the implementation of out of court restructuring in the new insolvency system should benefit and improve the business climate and attract more investors.

Since the new bankruptcy law will not be legislated in the near future, it is a challenge for the government and the authorized bodies to resolve the current situation. Hopefully, the relevant stakeholder will consider to incorporate out of court restructuring as a part of the new bankruptcy law.

Agus Dwi Prasetyo is a Managing Partner of ADP Counsellors at Law (, a law firm based in Jakarta. The firm is specialized in bankruptcy and debt restructuring, corporate law, litigation and dispute settlements, employment law.

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