BizCLIR

An economy that relies on business credit for growth must have a legal system that enforces obligations. Bankruptcy law is an integral party of such a legal system. When a business is no longer viable, its creditors must rely on bankruptcy law and various supporting institutions to salvage their claims fairly, predictably, efficiently, and transparently.

The text of Indonesian bankruptcy law attempts to accomplish these goals. As a tool to enforce obligations and promote commerce, the bankruptcy law offers creditors the legal tools they need to resolve the claims of a bankrupt debtor and to do so in a fair manner. Further amendments to black letter law will yield incremental benefits compared to the substantial benefits that may be accomplished through administrative reform.

The capacity and professionalism of implementing institutions is a significant obstacle to efficient administration of bankruptcy law. While progress has been made since the advent of recent legal reforms, judges and curators cannot fulfill their roles properly under present circumstances and with present skill levels. Record-keeping and the commitment to openness of public records are great challenges for those who administer bankruptcy law. When an NGO attempted to study the performance of bankruptcy policy, researchers found that many statutorily required records were not kept. Where records were kept and were defined by law as freely available public records, access was often denied. Curator reports, access to which is crucial to fair administration of bankruptcy law, were often not filed and rarely made available for inspection. Creditors with claims in a bankruptcy case may have as much difficulty gaining access to information as academic researchers. All this suggests that creditors do not view bankruptcy judges and curators as honest brokers, which they must be if the system is to work. Until substantial reform is achieved, the resolution of most creditor claims will likely be left to informal workarounds and workouts, in which some creditors will exert undue influence over others. Institutions must improve if Indonesia is to take advantage of the opportunity that the black letter law offers.

The level of recovery may also deter the use of bankruptcy law. Creditors perceive that curators do not aggressively pursue debtor assets, and disposition of the assets is inefficient, yielding low levels of proceeds. In a study of asset recovery in bankruptcy since 1998, secured creditors recovered about 24 percent of their claims, compared to 18 percent for unsecured creditors. According to the study, low asset recovery is attributed by creditors to: (a) poor transparency and accountability; (b) lack of professionalism among officials; (c) difficulties in discovering and controlling debtor assets; (d) problems in allocating and distributing the proceeds; (e) problems in selling assets; (f) failure to take full advantage of the law’s legal tools; and (g) lack of understanding of the new law and regulations.

The above table shows use of the bankruptcy law since 1999. Peak use occurred after the Asian financial crisis. However, on the whole the lesson to take from the table is that in Indonesia bankruptcy law is not seen as a serious tool for enforcement of obligations.

Institutional development efforts would have a direct effect on the long-term efficacy of the bankruptcy legal system.