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Insolvency Test Concerning The Bankruptcy Law Bill

The requirements for bankruptcy as referred to in the Bankruptcy Law also received the attention of the Constitutional Court in several decisions, namely in Decisions Number 071 / PUU-II / 2004 and Number 001-002 / PUU-III / 2005 stating that the legislators were negligent in formulating Article 2 paragraph (1) in the absence of the “unable to pay” requirement. As a result, Creditors can easily apply for a bankruptcy statement without first having to prove that the company is in a state of incapacity.

The application of bankruptcy requirements as stipulated in Article 2 paragraph (1) of The Bankruptcy Law creates logical consequences and a domino effect:

  • A debtor can be declared bankrupt with only 1 (one) maturity of debt as long as it can be proven that there is a second creditor even though the second creditor’s bill has not yet matured.

As a result of being declared bankrupt, all of the Debtor’s assets are subject to general confiscation to pay off debts. The logical consequences of this arrangement are as follows:

    1. The case of only one creditor as a bankruptcy Applicant is contrary to the nature and purpose of the Bankruptcy Law for Creditors.
    2. Creditors who are not the applicant for bankruptcy, namely the majority of Creditors whose invoices are either due or not yet due, do not necessarily intend to take legal action to bankrupt the Debtor, but the Debtor has been declared bankrupt by the Court with only one bankruptcy request from another creditor. Consequently, all Creditors are then forced to register as bankrupt creditors.
    3. With this provision, even though there are 100 (one hundred) Creditors, only 1 (one) Creditor is needed to be the Applicant for bankruptcy. This condition in the end will be detrimental to other creditors who do not experience difficulties in collecting Debtor’s bills.
  • There are no provisions regarding the minimum debt limit from creditors that can be applied for bankruptcy.

The Bankruptcy Law does not regulate the minimum debt value (minimum debt) that can be applied for bankruptcy. The absence of a minimum debt limit to apply for bankruptcy (minimum threshold) results in creditors with even very small bills being able to apply for bankruptcy. This can disrupt the business activities of the Debtor and the liquidity (financial flow) of the other creditors whose payments by the Debtor are still well executed. In the absence of a minimum limit, a bankruptcy debt with a value equal to the Regional Minimum Wage, even if it fulfills Article 2 paragraph (1) of the Bankruptcy Law, can become bankruptcy debt and qualify for creditors to apply for bankruptcy. Therefore, the Bankruptcy Law needs to set provisions regarding the minimum debt limit that can be applied for bankruptcy.

  • The phrase “… not paying off debts …”

This causes the Debtor to be declared bankrupt without paying attention to the financial health of the Debtor and the reasons behind whether the Debtor is truly unable to pay or simply because the Debtor does not want to pay. In other words, the Bankruptcy Law implicitly states the application of debt conditions in terms of bankruptcy based on the principle of presumption of law or presumption of bankruptcy in which it does not question whether the debtor is unable or unwilling to pay. This is in line with the opinion of Sutan Remy Sjadeini who argues that the Bankruptcy Law does not require the Debtor to be insolvent (unable to pay his debt) so that the Debtor can be declared bankrupt without questioning whether the Debtor is insolvent.

As the conditions and practices mentioned above, it is necessary to encourage efforts to improve the bankruptcy system in Indonesia. The following are solutions to consider in an effort to improve the Bankruptcy Law:

  • Additional requirements for the number of creditors with maturing debt;

There should be two creditors or more whose debts are due and collectible with a set limit on the minimum amount of debt in order to be applied for bankruptcy. The increase in the number of Creditors with maturing and collectible debts, which now is sufficient with only 1 (one) maturing debt, should be added to 2 (two) Creditors with two maturing debts. As a comparison with other countries, several countries have applied a limit on the amount of debt that can be applied for bankruptcy, as follows:

England

Under the bankruptcy law in the UK, the amount owed or the total amount owed at the time of filing for bankruptcy must equal or exceed the bankruptcy level. Furthermore, it is stated that the bankruptcy level is £ 5,079 (Pound sterling) or around Rp. 89,518,790.82.

Singapore

In the Singapore Bankruptcy Act, the debt threshold or limit on the amount of debt to be filed for bankruptcy was previously $ 10,000 (Dollar) and later in 2015 was increased to $ 15,000 (Dollar)

 

  • Creditors with one debt due but added with a minimum amount of debt;

The provisions referred to in Article 2 paragraph (1) of the Bankruptcy Law are deemed to ease each creditor to apply for bankruptcy against the debtor (as the creditors’ right to collect debts against the debtor) because based on this article the creditor only needs to prove that the debt against the debtor has matured and must be paid and to prove that there are debts/claims (of other Creditors) against the Debtor even though the debt is not yet due and can be collected. The minimum requirement for only 1 (one) creditor is considered to ease Creditors to gain access to fulfilling their rights to collect collectible debts against Debtors through the bankruptcy mechanism. However, the direction of change still takes into account the existence of a minimum debt requirement (minimum threshold) that can be submitted for debt collection on the condition that the minimum amount of debt and its exemptions are stipulated in an implementing regulation.

 

  • Application of the insolvency test in bankruptcy.

In the case of bankruptcy, ideally, bankruptcy is imposed on the Debtor who is in a state of insolvency, which is a condition in which the Debtor is not able to pay part / all of the debts, or the value of the assets is less than the value of his liabilities. A debtor cannot be said to be insolvent only because he is not able to pay his debt to one creditor, while other creditors continue to carry out their obligations to pay off their debts properly unless one such creditor controls a large part of the debtor’s debt. Therefore, a mechanism is needed to measure whether the Debtor is in a state of instantaneous liquidity difficulties, which is a situation where the Debtor is unable to pay his debt at that time but the Debtor’s assets are still sufficient to pay off the debt, or the Debtor is in a state of debt greater than the assets. This measurement mechanism is known as the insolvency test.

The encouragement to carry out the insolvency test was stated by the Constitutional Court in the judicial review of the Bankruptcy Law in Decisions Number 071 / PUU-II / 2004 and Number 001-002 / PUU-III / 2005 stating that the laxity of the conditions for filing a bankruptcy application is the negligence of the lawmakers in formulating Article 2 paragraph (1). In the absence of the “unable to pay” provisions, Creditors can easily submit a request for a bankruptcy statement without having to prove that the company is in a state of insolvency. This procedure has not been implemented in Indonesia, but in other countries, the insolvency test is an important procedure to determine whether a Debtor is bankrupt or not by examining the Debtor’s business capability. Practically, the insolvency test is mainly applied in several countries:

United States of America

The American legal system implements 3 (three) types of insolvency tests in corporate and bankruptcy law, namely;

    1. Cash-flow insolvency or the ability-to-pay solvency test / equitable solvency , which is a test to find out whether a Debtor can pay off the debt at maturity. In the cash-flow insolvency test, it is not enough to just look at current conditions, but this test involves predictions in the future because it is closely related to the ability of the debtor to fulfill his obligations in the future.
    2. The balance sheet insolvency test , which is a test to find out whether the value of assets owned by the debtor exceeds the value of the responsibility or debt that the debtor has.
    3. Capital-adequacy test , which is a test to find out whether the debtor has sufficient capital.

Thailand

It is concluded that in Thailand there are 2 (two) types of tests that must be passed, namely the insolvency test and reorganization test , where the insolvency test must be done first to determine the level of the Debtor’s financial health. If the Debtor can pass the insolvency test, where the Debtor is not declared bankrupt, the debtor must then pass a reorganization test to improve the Debtor’s company management.

England

In the UK, there are several types of tests that companies must pass to find out whether or not a bankruptcy attempt should be taken. The series of tests that must be passed are as follows:

    1. Cash flow test , regulated in Article 123 paragraph (1) letter (e) Insolvency Act 1986, which states that a debtor company can be said to be unable to pay its debts if it is proven by the Court that the company cannot pay its debts when they are due.
    2. The balance sheet test is regulated in Article 123 paragraph (2) of the Insolvency Act 1986, which states that a debtor company can be said to be unable to pay its debts if it is proven by the Court that the value of the assets owned by the company is less than the total liabilities (debts) that a debtor has, including obligations that will arise at a later date.
    3. legal action test is a test that is conducted to see if a company has statutory demands for payment or other outstanding bills from the Court that have not been answered.

Netherlands

The Netherlands assesses bankruptcy by using a test called the Liquidation Test where the Court can declare the Debtor bankrupt if the Debtor stops paying (cease to pay) the debt.

Thus, it could be concluded that Debtors who still have sufficient assets to pay their debts can be declared bankrupt by the court for not paying their debts by complying with the provisions of Article 2 paragraph (1) of the Bankruptcy Law. This of course is detrimental to companies that are still solvent. As a result, many investors do not trust anymore to invest in Indonesia.

Simple Verification

The Simple Verification provisions as referred to in Article 8 paragraph (4) of the Bankruptcy Law cannot be separated from the provisions of Article 2 paragraph (1), which constitute a condition for bankruptcy. The provisions of the article clearly state that an application for bankruptcy must be granted if there is a simple fact that there is debt as referred to in the Bankruptcy Law. Normatively, the provisions of Article 8 paragraph (4) should be read in line with Article 2 paragraph (1) of the Bankruptcy Law, which regulates the requirements for the Debtor to be legally declared bankrupt. The existence of two or more creditors ( concursus creditorum ) is a formal requirement to prove a bankruptcy situation so that debt payments can be made using the bankruptcy mechanism, given the nature of bankruptcy which is a procedure for collecting debts.

Article 8 paragraph (4) of the Bankruptcy Law has several problems in its implementation, as follows:

1. The Bankruptcy Law does not explain simple facts or circumstances

The consequence of the absence of this limit results in the opening of space for different opinions or interpretations among judges in interpreting the notion of simple evidence in the settlement of bankruptcy cases, where it seems as if one decision is inconsistent with another decision. The lack of consistency between the Supreme Court Decisions and the Commercial Court decisions in determining the existence of simple evidence between one decision and another in a bankruptcy case causes legal uncertainty in the practice of handling bankruptcy cases in the Commercial Court. For instance, the bankruptcy of PT Telekomunikasi Selular Tbk (Telkomsel) is the most obvious example of the application of a simple interpretation of the bankruptcy requirements and simple prima facie verification of bankruptcy.

2. The norms of Article 8 paragraph (4) of the Bankruptcy Law are very rigid and ignore the authority of the Judge to objectively assess the existing petition.

This article contains weaknesses because the word “must” in Article 8 paragraph (4) causes the Judge to have no discretion to assess the bankruptcy material as long as the fact of the debt is fulfilled or the debt condition is due. Changes that need to be made in the Bankruptcy Law regarding simple verification are as follows;

3. The Change from Simple Verification into factual Verification .

Factual verification itself is the verification towards the requirements that are contained in Article 2 paragraph (1) of the Bankruptcy Law plus an examination of the Debtor’s financial report to see whether the Debtor company is still solvent or not through a balance sheet insolvency test . The purpose of financial reports is to provide information about the company’s assets, liabilities, and capital which is useful for helping other parties evaluate the company’s financial strengths and weaknesses as well as the level of company liquidity and solvency.

4. Remove the “must” provisions in Article 8 paragraph (4) of the Bankruptcy Law

It will open up space for Judges to prove objectively without being shackled by the obligatory of “must”. With the absence of the provision in that Article, it is hoped that the appraisal of the bankruptcy application can be assessed by the judge both subjectively based on his considerations and objectively by assessing the debtor’s inability to pay debts to creditors. With the change in the phrase from “must” to the word “can”, it is hoped that the Judge in considering and deciding on a bankruptcy application can freely pay attention to several considerations such as Debtor’s capital, Debtor’s solvency / Debtor’s financial capacity, employment, consumer protection, and other public aspects.

 

ADCO Law earns the trust to represent clients from multinational companies to emerging entities across a wide range of industries to achieve their business objectives in Indonesia.

By combining commercial sensibilities and legal expertise, ADCO as a Law Firm Jakarta assists the clients to structure, organize and implement their business ventures and investments, including structuring, financing, and securing investments as well as establishing new foreign companies in Indonesia. Should you have more queries regarding this matter, please do not hesitate to contact us.

Dendi Adisuryo
dendi.adisuryo@adcolaw.com

Liza Mashita
liza@adcolaw.com

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This publication has been prepared for general informational purposes only to provide clients with information on recent legal developments and is not intended as legal advice or opinion.