Restructuring and Insolvency in Indonesia 2024

Restructuring and Insolvency in Indonesia 2024 – Indonesia’s Supreme Court

RESTRUCTURING AND INSOLVENCY 2024

INDONESIA

Hillman Sembiring, Rizki Imral Rakhim

(Oentoeng Suria & Partners in association with Ashurst – Ashurst OSP)

GENERAL

Legislation

1. What main legislation is applicable to insolvencies and reorganizations?

Law No. 37 of 2004 on bankruptcy and suspension of debt payment as partially revoked by Law No. 40 of 2014 on insurance and Law No. 4 of 2023 on the development and strengthening of the financial sector (the Bankruptcy Law) serves as the main regulation for the bankruptcy and insolvency process in Indonesia. It also provides stipulation on reorganization (in Indonesia, this commonly refers to ‘suspension of debt payment’ or PKPU).

The terminology used in Indonesian law regime for bankruptcy and reorganization may have a different meaning compared to that used in other jurisdictions. It is important, therefore, to understand the terms ‘bankruptcy’, ‘insolvency’, ‘dissolution’, ‘liquidation’ and ‘reorganization’ or ‘PKPU’ as regulated under Indonesian law:

• Bankruptcy occurs when a legal person is formally declared bankrupt by the Commercial Court, in which general confiscation is imposed to all of the bankrupt debtor’s assets, as well as the administration and settlement which is carried out by the receiver (curator) under the supervision of a supervisory judge. Consequently, the debtor forfeits the ability to take any legal action over its assets as those are considered the bankrupt estate and the authority is transferred to the receiver or curator in managing and settling the bankruptcy estate.
• Insolvency is when the debtor is unable to pay all the creditors with its assets. In this case, the supervisory judge will hold a meeting of creditors to settle the bankrupt estate and hold verification upon the receivables.
• Liquidation is the process of dividing, auctioning or selling the bankruptcy estate or assets to pay the creditors in accordance with their statutory entitlement and payment waterfall as regulated under the Bankruptcy Law.
• Dissolution refers to the process of striking one company from the list of companies under the Ministry of Law and Human Rights. Once it is done, the Minister of Law and Human Rights will announce the expiration of the company’s status as legal entity.
• reorganization or PKPU is a court-supervised restructuring process for a debtor who is unable to repay its debts to the creditors. This aims to provide the debtor with temporary relief in preparing, negotiating and submitting a restructuring plan to its creditors for their approval. The debtor will present the restructuring plan on how to restructure the outstanding debts and ask for the creditors for their approval before the Commercial Court.

Excluded entities and excluded assets

2. What entities are excluded from customary insolvency or reorganization proceedings and what legislation applies to them? What assets are excluded or exempt from claims of creditors?

Pursuant to article 1(11) of the Bankruptcy Law, individuals or corporations, including a corporation in the form of a legal or non-legal entity in liquidation can be subject to bankruptcy or PKPU proceedings. Therefore, there are no entities excluded from bankruptcy and reorganization or PKPU proceedings. However, there are different processes for state-owned entities and financial institutions to be declared bankrupt or under PKPU compared to regular or private entities.

Under article 3 of the Bankruptcy Law, the Indonesian Commercial Court may examine and declare a debtor bankrupt or subject to PKPU only if it has jurisdiction over the legal domicile of the debtor, the debtor’s domicile or the debtor’s office in Indonesia.

As regards the excluded assets, creditors in bankruptcy cannot claim the following:

• goods, including animals that are needed by the debtor in relation to their work, medical devices used for health purposes, bedding, food stock for 30 days that will be used by the debtor and their family;
• anything obtained by the debtor from their own salary for a position or service, as a wage, pension fund, waiting fee or allowance, insofar as it is determined by the supervisory judge; or
• money provided to the debtor to perform an obligation to provide a living under the law.

Public enterprises

3. What procedures are followed in the insolvency of a government-owned enterprise? What remedies do creditors of insolvent public enterprises have?

Pursuant to article 2(3) of the Bankruptcy Law, the Bank of Indonesia (Indonesia’s central bank) is the only institution authorized to file for bankruptcy and reorganization or PKPU against banks (including those that are state-owned). Meanwhile, article 2(5) stipulates that the Ministry of Finance has the sole authority to file for bankruptcy or PKPU against an insurance, reinsurance or a state-owned enterprise (SOE) (with a condition that the SOE’s entire capital is owned by the government and not divided into shares).

SOEs that are not in the form of banks, insurance or reinsurance companies, or whose entire capital is not owned by the government, are subject to the same procedures as other entities whose application of bankruptcy or PKPU can be filed by the creditors.

Protection for large financial institutions

4. Has your country enacted legislation to deal with the financial difficulties of institutions that are considered ‘too big to fail’?

The Indonesian government has regulations in place to offer aid for systemic financial institutions in need under Law No. 9 of 2016 on financial system crisis prevention and handling as partially revoked by Law No. 2 of 2020 on the stipulation of government in lieu of law on state financial policy and financial system stability for the management of corona virus disease 2019 and Law No. 4 of 2023 on the development and strengthening of the financial sector (Law 9/2016). According to Law 9/2016, among others, Bank of Indonesia or the Ministry of Finance can provide loans or financing to aid systemic banks in overcoming liquidity and solvability issues.

Furthermore, Law No. 2 of 2020 on the stipulation of government regulation in lieu of law on state financial policy and financial system stability for the management of corona virus disease 2019 (Law 2/2020), as amended by Law No. 7 of 2021 on harmonization of tax regulations, was legislated in response to the covid-19 pandemic to address threats that endanger national economy or financial system stability. Through Law 2/2020, among other things, the National Economy Recovery program was introduced to protect, maintain and improve economic capacities of businesses impacted by the covid-19 pandemic.

Both SOEs and private entities of various business sectors whose size, economic impact and roles in the nation’s economy meet the criteria set out by the government are eligible to become beneficiaries of government support during the pandemic in accordance with Law 2/2020. We have seen instances during the pandemic of SOEs obtaining loans or financing from the government to help their business.

Courts and appeals

5. What courts are involved? What are the rights of appeal from court orders? Does an appellant have an automatic right of appeal or must it obtain permission? Is there a requirement to post security to proceed with an appeal?

The Commercial Court has the authority to examine and adjudicate bankruptcy and reorganization or PKPU cases at the first instance level.

Unless otherwise stipulated in the Bankruptcy Law, all decisions by the Commercial Court on bankruptcy or PKPU are subject to the ordinary appeal process in the Supreme Court of Indonesia, which will examine and adjudicate cases at the final level.

In addition to the ordinary appeal process, an appellant can initiate an extraordinary appeal process in the Supreme Court against a certain final and binding Commercial Court or Supreme Court decision in relation to bankruptcy or PKPU. This process, known as judicial review, is subject to the acceptance of the Supreme Court if one of the limited grounds for filing a case review, as stated in Law No. 14 of 1985 on Supreme Court of the Republic of Indonesia and its amendments (Law 14/1985), can be proven to exist.

An appellant, whether they are the petitioner in a bankruptcy or PKPU case, a creditor, the debtor, an administrator or a receiver, has the right to appeal without needing permission from anyone nor post any security.

In accordance with Constitutional Court Judicial Review Decision No. 23/PUU-XIX/2021 on 15 December 2021, the Supreme Court may accept cassation appeals filed by creditors against PKPU decisions and by debtors against the rejection of the settlement proposal. Prior to the judicial review, legal remedies and cassation regarding PKPU decisions and decisions made under the Bankruptcy Law were mostly restricted.

TYPES OF LIQUIDATION AND REORGANIZATION PROCESSES

Voluntary liquidations

6. What are the requirements for a debtor commencing a voluntary liquidation case and what are the effects?

The voluntary liquidation process is the culmination of a company’s voluntary dissolution. The legal framework governing the sequence of voluntary dissolution followed by liquidation is stipulated in accordance with Law No. 40 of 2007 concerning company law (the Company Law).

Upon the dissolution of a company, it becomes imperative to initiate the liquidation of the company’s operations, which is overseen by a liquidator. During this phase, the company is constrained from engaging in most legal undertakings, except those necessary for the smooth execution of the liquidation process. Despite these restrictions, the company retains its legal existence until the liquidation process reaches its conclusion, and this status endures until shareholders provide their acceptance and authorization of the liquidator’s duties and responsibilities.

Upon fulfillment of the liquidator’s obligations, including the settlement of outstanding debts and other financial commitments, the remaining assets of the company are to be equitably apportioned among its shareholders. Should any creditor find themselves unpaid and owing, they hold the prerogative to file a claim within a two-year window following the declaration of dissolution.

Subsequently, the district court possesses the authority to retrieve distributions previously disbursed to shareholders to satisfy the obligations owed to the creditor. After the entire process is finalized, the company will be removed from the company registry of the Ministry of Law and Human Rights.

Voluntary reorganizations

7. What are the requirements for a debtor commencing a voluntary reorganization and what are the effects?

As per article 222 of Law No. 37 of 2004 on bankruptcy and suspension of debt payment as partially revoked by Law No. 40 of 2014 on insurance and Law No. 4 of 2023 on the development and strengthening of the financial sector (the Bankruptcy Law), the prerequisites for a debtor seeking to initiate a voluntary suspension of debt payment (reorganization or PKPU) are as follows:

• the debtor must have a minimum of two creditors;
• the debtor must be incapable or anticipates its inability to settle at least one of its outstanding and payable debts; and
• the substantiated existence of two creditors and the unresolved outstanding and payable debts should be easily demonstrable.

Upon submission of the voluntary PKPU application to the Commercial Court, a ruling from said court must be rendered within three days.

Specific endorsements from relevant parties are imperative for the ensuing categories of voluntary PKPU:

• for individual debtor PKPU constrained by marital asset communalities, the spouse’s consent must be obtained (article 4(1) of the Bankruptcy Law);
• in the case of legal entity debtor PKPU (eg, limited liability companies, foundations or cooperatives), approval must be garnered from the general meeting of shareholders (in the case of a limited liability company) or from the management as stipulated in its articles of association (for foundations and cooperatives) (Supreme Court Circular Letter No. 109/KMA/SK/ IV/2020); and
• non-legal entity debtor PKPU (eg, commanditaire vennootschap (CV), firms or other forms of civil partnerships) necessitate unanimous consent from all active partners (for CVs) or from all partners or owners of the firm or civil partnership (article for a firm and other forms of civil partnership).

Initiating a voluntary PKPU plea engenders no immediate repercussions for the debtor, except for the obligation to inform creditors, counterparts or the general public, provided that such obligation exists contractually within the debtor’s pertinent agreements with counterparts, or with stock exchange authorities if the debtor is a publicly listed entity.

Nevertheless, if the petition leads to the grant of a temporary PKPU, the following come into play during the PKPU:

• the debtor can no longer be compelled to fulfil its debt obligations, and all aspects of the enforcement process initiated by creditors for debt recovery must be postponed (article 242 of the Bankruptcy Law); and
• the debtor is precluded from conducting managerial or ownership actions on its assets without obtaining prior approval from the appointed administrator (article 240 of the Bankruptcy Law).

Out-of-court voluntary reorganizations and restructurings exhibit variability on a case-specific basis, often embodying agreements forged between a debtor company and its creditors. Such restructurings may encompass loan rescheduling, debt reduction, interest rate reduction, asset settlements, debt-to-equity conversions, debt or receivables transfers, mergers, acquisitions, dissolutions and more. It is important to note that without adhering to the PKPU process prescribed by the Bankruptcy Law, a reorganizing or restructuring debtor will not be entitled to the rights conferred under the Bankruptcy Law.

Successful reorganizations

8. How are creditors classified for purposes of a reorganization plan and how is the plan approved? Can a reorganization plan release non-debtor parties from liability and, if so, in what circumstances?

In the context of reorganization or suspension of debt repayment (PKPU), creditors are categorized into three primary groups:

• secured or separatist creditors, who possess specific assets of the debtor as collateral;
• preferred creditors, whose claims are accorded higher priority due to their inherent nature; and
• unsecured, concurrent or pari passu creditors, whose claims lack security or preferential status.

In line with article 281 of the Bankruptcy Law, approval for a reorganization or restructuring plan hinges on the following conditions:

• a simple majority of unsecured creditors are present, provided they represent a minimum of two-thirds of the value of all accepted unsecured claims held by concurrent creditors in attendance at the meeting; and
• a simple majority of secured creditors are present, provided they represent at least two-thirds of the value of all accepted secured claims held by secured creditors present at the hearing or meeting.

Indonesian law imposes no limitations on releasing non-debtor parties from liability within the ambit of a restructuring plan. Providing that the restructuring plan secures acceptance from creditors as outlined by the quorum specified in article 281 of the Bankruptcy Law and is subsequently ratified by the Commercial Court, the provisions outlined in the restructuring plan are legally binding upon all creditors regardless of whether the creditor’s registration occurred during the PKPU proceedings.

However, the assurance of liability release under the restructuring plan may be subject to challenge through litigation by the creditors or the debtor, especially if the released party breaches the terms of the restructuring plan or contravenes its obligations under prevailing laws.

Involuntary liquidations

9. What are the requirements for creditors placing a debtor into involuntary liquidation and what are the effects? Once the proceeding is opened, are there material differences to proceedings opened voluntarily?

Bankruptcy and liquidation are distinct procedures within the framework of Indonesian law.

Involuntary liquidation begins with the submission of a bankruptcy application as prescribed by the Bankruptcy Law. The process of bankruptcy commences with the creditor of the company initiating a bankruptcy application before the Commercial Court. Within 60 days of the registration of the application at the pertinent Commercial Court, a panel of judges must render their decision on the bankruptcy request. An approval for bankruptcy application by the Commercial Court is warranted if:

• the debtor has multiple creditors;
• the debtor has defaulted in the payment of at least one outstanding and payable debt; and
• the fulfillmentof the aforementioned conditions can be readily substantiated.

Following the court’s declaration of the debtor’s bankruptcy, one or more receivers are appointed by the court to oversee the administration of the assets belonging to the bankrupt entity. Consequently, upon a debtor’s bankruptcy declaration, the debtor forfeits its authority to control and manage its assets, relinquishing this responsibility to the receivers appointed for the bankruptcy case.

The duties of the receivers encompass not solely the administration of the assets owned by the insolvent entity, but also the facilitation of the liquidation process for the assets of the insolvent entity. In the course of liquidating these assets, the receiver is mandated to employ public auctions, and the proceeds derived from these auctions are allocated to (and among) the unsecured creditors.

Involuntary reorganizations

10. What are the requirements for creditors commencing an involuntary reorganizationand what are the effects? Once the proceeding is opened, are there any material differences to proceedings opened voluntarily?

The prerequisites essentially mirror those of voluntary restructurings or PKPU. As stipulated in article 222 of the Bankruptcy Law, the requirements for a debtor-initiated voluntary PKPU are the following:

• the debtor must possess a minimum of two creditors;
• the debtor must be incapable or anticipate its incapacity to settle at least one of its outstanding and payable debts; and
• the presence and status of the two creditors and the unresolved outstanding and payable debts should be easily verifiable.

Distinctive elements for involuntary PKPU are as follows:

• an involuntary PKPU plea brought forth by creditors does not necessitate endorsement from the debtor’s shareholders, management or owner; and
• temporal considerations dictate that a resolution regarding an involuntary PKPU must be rendered by the Commercial Court within a span of 20 days from the submission date of the involuntary PKPU petition.

Expedited reorganizations

11. Do procedures exist for expedited reorganizations(eg, ‘prepackaged’ reorganizations)?

There is no specific expedited reorganization process under Indonesian law. Nonetheless, the Indonesian PKPU procedure consists of two phases:

• first, the temporary PKPU, sanctioned by the Commercial Court subsequent to a successful PKPU petition, with a maximum duration of 45 days;
• second, the permanent PKPU, endorsed by the Commercial Court through creditors’ affirmative votes on the extension of the permanent PKPU, extending it by an additional maximum period of 225 days.

Therefore, the duration of a PKPU process hinges upon the debtor’s readiness to introduce a restructuring plan and the willingness of creditors to participate in voting.

In instances where a debtor successfully presents a restructuring plan during the voluntary PKPU petition submission or within the temporary PKPU time-frame, and creditors are amenable to casting their votes on the presented plan within this span, the PKPU may culminate by the end of the temporary PKPU duration, which could be as brief as 45 days following the initiation of the temporary PKPU.

Unsuccessful reorganizations

12. How is a proposed reorganization defeated and what is the effect of a reorganization plan not being approved? What if the debtor fails to perform a plan?

A reorganization process under the PKPU framework fails if the following take place:

• the debtor fails to present a reorganization or restructuring plan within the temporary or permanent PKPU period;
• the debtor manages to present a reorganization or restructuring plan within the temporary or permanent PKPU period, but the creditors’ voting on the approval of the reorganization or restructuring plan does not meet the approval quorum as stipulated in article 281(1) of the Bankruptcy Law; and
• a reorganization or restructuring plan is accepted by creditors voting in accordance with article 281(1) of the Bankruptcy Law, but the Commercial Court refuses to sanction the reorganization plan on the grounds set forth in article 285(2) of Bankruptcy Law as follows:
• the debtor’s assets, including the object against which the right to retain the object is exercised, are significantly greater in number than that approved in the reorganization plan;
• the implementation of settlement is not sufficiently guaranteed;
• settlement is concluded through fraud, conspiracy with one or more creditors or because of the use of other dishonest measures and regardless of whether the debtor or other parties are in collaboration to achieve this; or
• fees for services and costs incurred by experts and administrator have not been paid or no guarantee for the payment is provided.

In these instances, the Commercial Court declares the debtor bankrupt. If during the bankruptcy process neither the receiver nor any creditor proposes the continuation of the insolvent debtor’s operations (referred to as operating as a going-concern company), or if such a proposal is dismissed by creditor votes, the debtor succumbs to insolvency. This outcome prompts the subsequent liquidation and dissolution of the debtor.

Another occasion where the reorganization may be deemed unsuccessful is if the debtor fails to perform the restructuring plan that has been sanctioned by the Commercial Court. ln this event, creditors may file for the debtor to be declared bankrupt with the Commercial Court. This outcome prompts subsequent liquidation and dissolution of the debtor.

Corporate procedures

13. Are there corporate procedures for the dissolution of a corporation? How do such processes contrast with bankruptcy proceedings?

The dissolution process of a limited liability company is stipulated in detail in article 142 of the Company Law, where it could be commenced upon any of the following:

• the decision of general shareholders of shareholders;
• expiry of the duration of business as may be stipulated in the articles of association of the company;
• an Indonesian court judgment;
• in the event of bankruptcy, when the bankruptcy status is revoked but the company asset is not sufficient to pay the cost of bankruptcy;
• in the event of bankruptcy, when the bankruptcy assets are in the state of insolvency; and
• the revocation of the company’s business license, resulting in the mandatory dissolution of the company by operation of law.

The Company Law further stipulates that a decision to dissolve a company must be followed by the liquidation of its business by a liquidator. The company does not have the capacity to conduct any legal action except for certain acts required for the liquidation process. Nonetheless, the company remains in existence until the liquidation process is completed and the shareholders have accepted and approved the accountability or the performance of all of the liquidator’s duties.

Once all outstanding debts and other obligations are paid by the liquidator, the remaining assets of the company must be distributed by the liquidator to the shareholders. Any creditor who has not received payment of debt may submit a claim to the district court within two years of the announcement of dissolution. The district court may clawback distributions paid to the shareholders to settle the payments made against such creditor. After all processes have been completed, the company will be deregistered from the company registry held by the Ministry of Law and Human Rights.

The process contrasts with bankruptcy on the following matters:

• ability to propose a going-concern process to creditors in a bankruptcy process;
• the bankruptcy process is under jurisdiction of commercial court; and
• the receiver will be in charge of the company for the bankruptcy process instead of a liquidator.

Conclusion of case

14. How are liquidation and reorganization cases formally concluded?

Liquidation as an end result of bankruptcy concludes when all verified debts of the creditors have been paid using the available bankrupt estate that has been liquidated (sold by the receiver with the proceeds distributed to the creditors). After all processes have been completed, the company will be deregistered from the company registry held by the Ministry of Law and Human Rights.

However, a bankruptcy case may also be concluded if the unsecured creditors can agree on a conciliation proposal proposed by the debtor, and such conciliation proposal is ratified by the Commercial Court thereafter.

A reorganization case under the PKPU framework concludes when a creditor-approved settlement proposal (or composition plan) is ratified by the Commercial Court through a process commonly referred to as homologation. Once the composition plan is ratified, it is final and binding on all creditors (article 286 of the Bankruptcy Law). The PKPU status will then be concluded, and the debtor will repossess control over its assets, subject to provisions in the ratified composition plan.

If no restructuring proposal is agreed on by the creditors until the end of the granted PKPU period, the PKPU case concludes with the debtor being declared bankrupt, following which the debtor will proceed to the bankruptcy process.

INSOLVENCY TESTS AND FILING REQUIREMENTS

Conditions for insolvency

15. What is the test to determine if a debtor is insolvent?

The prerequisites for bankruptcy are:

• the debtor have at least two creditors;
• one of whom has an established claim against the debtor; and
• the unpaid debt can be proven in a simple manner.

The above requirements are regardless of the debtor’s financial condition. Nevertheless, according to article 178 of Law No. 37 of 2004 on bankruptcy and suspension of debt payment as partially revoked by Law No. 40 of 2014 on insurance and Law No. 4 of 2023 on the development and strengthening of the financial sector, if the bankruptcy estate becomes insolvent (where the bankruptcy estate is not enough to pay the debtor’s debt), the debtor’s bankruptcy will be followed by the settlement of the bankrupt debtor’s assets.

Mandatory filing

16. Must companies commence insolvency proceedings in particular circumstances?

There is no mandatory filing requirement as prescribed by Indonesian law.

DIRECTORS AND OFFICERS

Directors’ liability – failure to commence proceedings and trading while insolvent

17. If proceedings are not commenced, what liability can result for directors and officers? What are the consequences for directors and officers if a company carries on business while insolvent?

There is no mandatory filing obligation under Indonesian law. A company can still operate if it has unpaid debt. However, insolvency under Indonesian law refers to the financial or economic status of the debtor where the debtor’s assets under a bankruptcy state are insufficient to pay all of its creditors or the state of the debtor as a result of the failure to achieve agreement on a reorganization plan during a bankruptcy state. As insolvency occurs after a debtor is declared bankrupt, the directors and officers will no longer be in control of the company.

Directors’ liability – other sources of liability

18. Apart from failure to file for proceedings, are corporate officers and directors personally liable for their corporation’s obligations? Are they liable for corporate pre-insolvency or pre-reorganization actions? Can they be subject to sanctions for other reasons?

Based on article 26(1) and elucidation of article 3 of Law No. 37 of 2004 on bankruptcy and suspension of debt payment as partially revoked by Law No. 40 of 2014 on insurance and Law No. 4 of 2023 on the development and strengthening of the financial sector (the Bankruptcy Law), the receiver of a bankrupt debtor, as the party responsible to file or be subjected to legal actions pertaining to the right or obligation that concerns the bankrupt estate, may file a lawsuit with the Commercial Court against the board of directors of the bankrupt company that, due to fault or negligence, caused the company to be declared bankrupt or suffer a loss on the bankruptcy estate.

ln this lawsuit, the receiver can demand that the board of directors be personally held liable for the losses that the company has suffered as a direct consequence of their fault or negligence or be jointly held responsible to bear the bankruptcy estate’s responsibilities to the creditors, or both.

From a criminal sanction point of view, although there is no criminal sanction for a person or director who causes the bankruptcy or reorganization of a company, the director could be held liable if there is any allegation of fraud or embezzlement that leads to the bankruptcy.

Pursuant to article 1341 of the Indonesian Civil Code, creditors may apply for the annulment of all transactions or actions made by the debtor, provided that the actions were not required by law and aggrieved the interest of the creditors. This form of application is legally known as actio pauliana in Indonesia and may be used to invalidate any corporate actions made by the director that would aggravate the interest of creditors.

If an actio pauliana claim under these conditions is granted, the director could be held liable for the losses associated with the invalidated corporate action.

Directors’ liability – defenses

19. What defenses are available to directors and officers in the context of an insolvency or reorganization?

In general, article 97(5) of the Company Law provides that a member of the board of directors may not be held liable for the losses of the company if they can prove that:

• the losses did not result from their fault or negligence;
• the director has exercised management in good faith and prudence in the interests of the company, and within its objectives and purposes;
• the director has no conflict of interest, whether directly or indirectly, in the acts of management that result in losses; and
• the director has taken preventive measures against arising or continued losses, including steps to access information about the acts of management that result in losses, among other things, through a meeting of the board of directors.

The same understanding applies in bankruptcy. The board of directors may not be held responsible for the company’s bankruptcy or losses on the bankrupt estate if the directors can prove that:

• the bankruptcy is not due to their fault or negligence;
• they carried out the management in good faith, prudence and full responsibility in the interests of the company and within the objectives and purposes of the company;
• they did not have a conflict of interest, either directly or indirectly, over the management actions that have been performed by the board of directors; and
• they took measures to prevent the occurrence of bankruptcy.

Shift in directors’ duties

20. Do the duties that directors owe to the corporation shift to the creditors when an insolvency or reorganization proceeding is likely? When?

There is no circumstance where the duties of directors owed to the company can be transferred to the company’s creditors.

Directors’ powers after proceedings commence

21. What powers can directors and officers exercise after liquidation or reorganization proceedings are commenced by, or against, their corporation?

Referring to article 24 of the Bankruptcy Law and its elucidation, a debtor loses their right to control and manage assets that are included in the bankrupt estate from the date the bankruptcy declaration decision is pronounced. If the debtor is a limited liability company, the company’s organs (including the board of directors) will continue to perform their functions provided that, if doing so results in a reduction in the bankruptcy estate, then the disbursement of money that is part of the bankrupt estate is under the authority of the receiver.

ln the case of reorganization on the framework of suspension of debt payment or PKPU proceedings, article 240 of the Bankruptcy Law suggests that the debtor (including if the debtor is a company) can still perform any management and ownership action against their assets provided that the debtor obtains approval from the administrator.

MATTERS ARISING IN A LIQUIDATION OR REORGANIZATION

Stays of proceedings and moratoria

22. What prohibitions against the continuation of legal proceedings or the enforcement of claims by creditors apply in liquidations and reorganizations? In what circumstances may creditors obtain relief from such prohibitions?

Pursuant to article 242(1) of Law No. 37 of 2004 on bankruptcy and suspension of debt payment as partially revoked by Law No. 40 of 2014 on insurance and Law No. 4 of 2023 on the development and strengthening of the financial sector (the Bankruptcy Law), during the suspension of debt payment (PKPU) period, the creditor cannot force the debtor to repay the debt, and all execution actions that have been initiated must be suspended.

However, article 243 of the Bankruptcy Law stipulates that PKPU proceedings do not terminate ongoing civil legal proceedings or prevent the commencement of a new civil case, with the following exceptions:

• if the civil case concerns a request for payment of receivables that has been acknowledged by the debtor, and the plaintiff of the civil case has no interest in obtaining a decision to exercise rights against a third party, the judge may suspend the issuance of the decision until the end of the PKPU period; and
• if the civil case concerns the estate of the debtor, the debtor can only be involved as a plaintiff or defendant in the civil case based on the approval of the administrator.

As for the bankruptcy process, article 29 of the Bankruptcy Law regulates that each lawsuit filed against the debtor that aims to obtain fulfillment of obligations from the bankrupt estate and is still ongoing, will be null and void by law as the declaration of bankruptcy against the debtor is pronounced by the Commercial Court.

Doing business

23. When can the debtor carry on business during a liquidation or reorganization? Is any special treatment given to creditors who supply goods or services after the filing? What are the roles of the creditors and the court in supervising the debtor’s business activities?

Under a reorganization in the framework of PKPU proceedings, a debtor may continue carrying out its business. Nevertheless, the debtor must not perform administrative or ownership actions upon all or part of its estate without prior consent of the administrator (article 240 of the Bankruptcy Law).

Meanwhile, in a bankruptcy process, a debtor whose bankrupt estate is insolvent may be allowed to continue carrying out its business if:

• the receiver appointed by a creditor presents a proposal for going concerns through a creditor meeting (article 179(1) of the Bankruptcy Law); and
• this proposal gains the creditors’ approval who collectively hold over one-half of all receivables that are recognized and received on a temporary basis, which are not secured by pledge, fiduciary, hypotec or other forms of collateral right on property (article 180(1) of the Bankruptcy Law).

A debtor that is still functioning as a going concern is managed by the receiver, which can obtain loans and enter into agreements with a third party as long as this is done for the purpose of increasing the value of the bankrupt estate (articles 25 and 69 of the Bankruptcy Law).

A receiver or creditor may request for company’s status as a going concern to be terminated if the continuation of the business operations fails to yield benefits or even reduces the bankrupt estate (article 183 of the Bankruptcy Law).

Post-filing credit

24. May a debtor in a liquidation or reorganization obtain secured or unsecured loans or credit? What priority is or can be given to such loans or credit?

During a reorganization in the framework of a PKPU process, a debtor may obtain unsecured loans from a third party with the approval of the administrator for the purpose of increasing the value of the debtor’s assets. Also, the debtor can obtain secured loans as long as those are:

• approved by the administrator (article 240(4) of the Bankruptcy Law);
• approved by the supervisory judge (article 240(5) of the Bankruptcy Law); and
• the security for such loans is a fresh asset that has not been used as a security(article 240(6) of the Bankruptcy Law).

In a bankruptcy proceeding, the receiver (as the party responsible for the bankrupt estate) may obtain loans from a third party to increase the value of the bankrupt estate (articles 69(1) and 69(2) of the Bankruptcy Law). As for secured loans, the following requirements exist:

• approval must be granted by the supervisory judge (article 69(3) of the Bankruptcy Law); and
• the security for the loans must be a fresh asset that has not been used as a security (article 69(4) of the Bankruptcy Law).

The priority of the loan depends on the nature of the loans that applies generally (secured, preferred and unsecured).

Sale of assets

25. In reorganizations and liquidations, what provisions apply to the sale of specific assets out of the ordinary course of business and to the sale of the entire business of the debtor? Does the purchaser acquire the assets ‘free and clear’ of claims or do some liabilities pass with the assets?

reorganization in the framework of PKPU does not deal with the sale of debtor’s assets, as its main purpose is to restructure debts.

During liquidation, the sale of the bankrupt estate must be conducted via a public sale (article 185(1) of the Bankruptcy Law). If the public auction fails, the assets may be sold through a private sale with the approval of the supervisory judge (article 185(2) of the Bankruptcy Law). Unless specified otherwise during the sale by the receiver, the bankrupt estate is purchased with free and clear status as evidenced by the relevant transfer of the ownership document.

However, the sale may still be annulled by the Commercial Court if there is a third party who, on the basis of a valid ownership document, files a challenge against the sale of the bankrupt estate as made possible by the elucidation of article 3 of the Bankruptcy Law.

Negotiating sale of assets

26. Does your system allow for ‘stalking horse’ bids in sale procedures and does your system permit credit bidding in sales?

In essence, the sale of a bankrupt estate under ‘special arrangement’ can be made possible if the public sale of the bankrupt estate fails to be performed. It can be done through a private sale after the approval of the supervisory judge (article 185 of the Bankruptcy Law).

However, a special arrangement that eventually results in the setting-off of a creditor claim against a debtor after the declaration of bankruptcy is pronounced by the Commercial Court, if a detriment to a third party, may not be performed based on article 52(2) of the Bankruptcy Law.

Rejection and disclaimer of contracts

27. Can a debtor undergoing a liquidation or reorganization reject or disclaim an unfavorable contract? Are there contracts that may not be rejected? What procedure is followed to reject a contract and what is the effect of rejection on the other party? What happens if a debtor breaches the contract after the insolvency case is opened?

In principle, a creditor’s claim that aligns with the debtor’s own financial accounting and verified based on sufficient supporting documents must be accepted as a verified claim by the administrator or receiver. However, an ongoing reciprocal contract that has yet to be completed can be terminated by the receiver (in a bankruptcy) or administrator (in a reorganization or PKPU).

Based on article 36 of the Bankruptcy Law:

• if, at the time the bankruptcy declaration decision is made, there is a reciprocal agreement to which the debtor is party that has not been completed or has only been partially fulfilled, the counterparty to this agreement may request that the receiver provide certainty regarding the continuation of the implementation of the agreement within the period agreed upon by the receiver and the said party;
• if no agreement is reached by the receiver and the contracting counterparty on the period to provide certainty, the period is determined by the supervisory judge;
• if the receiver does not provide an answer within the specified period, or if the receiver is not willing to continue the implementation of the agreement, the agreement is terminated and, as a consequence, the counterparty can claim for damages, which will be treated as an unsecured claim; and
• in contrast, if the receiver declares their willingness to continue performing the agreement, the receiver is obliged to provide a guarantee for their performance, which can be executed by the contracting party upon the breach of contract by the receiver (in their capacity as the manager of the bankrupt debtor).

The same process is also recognized in the PKPU process, which is regulated in article 249 of the Bankruptcy Law.

Intellectual property assets

28. May an IP licensor or owner terminate the debtor’s right to use the IP when a liquidation or reorganization is opened? To what extent may IP rights granted under an agreement with the debtor continue to be used?

Yes, within the context of bankruptcy proceedings, the termination of specific goods leases (which may include IP rights) is permissible either by the receiver or the lessor, provided that the notice of termination is served at least 90 days prior to the end of the lease (articles 38(1) and 38(2) of the Bankruptcy Law).

However, if the lease has been paid in advance, the lease agreement remains in force until the expiration period concludes; termination prior to this period is not viable (article 38(3) of the Bankruptcy Law).

The Bankruptcy Law does not provide the same termination right for the lessor in the case of a reorganization in the framework of a PKPU process.

Personal data

29. Where personal information or customer data collected by a company in liquidation or reorganization is valuable, are there any restrictions in your country on the use of that information or its transfer to a purchaser?

The Bankruptcy Law does not impose any specific limitations or conditions addressing the use or transfer of customer information or personal data (except for customers’ financial institution data, which is subject to financial service authority regulations).

However, if the use of such information or personal data pertains to the business operation of the debtor, it will be subject to the discretion and approval of the appointed receiver (in bankruptcy) or administrator (in PKPU proceedings). Additionally, according to Law No. 11 of 2008 on information and electronic transactions and Law No. 27 of 2022 on personal data protection, personal data can only be used with the permission of the respective individual.

Arbitration processes

30. How frequently is arbitration used in liquidation or reorganization proceedings? Are there certain types of disputes that may not be arbitrated? Can disputes that arise after the liquidation or reorganization case is opened be arbitrated with the consent of the parties?

According to Law No. 30 of 1999 on arbitration and alternative dispute resolution (the Arbitration Law), arbitration is not a form of adjudication to resolve issues related to liquidation or reorganization. This judicial power falls within the authority of the Commercial Court (article 300 and article 1(7) of the Bankruptcy Law).

Furthermore, articles 1(1) and 2 of the Arbitration Law restrict arbitration to settle disputes solely within the power of the disputing parties. Since liquidation or bankruptcy and reorganization in the framework of PKPU entail the interests of third parties (ie, creditors), they cannot be settled via arbitration.

Similarly, arbitration is not used to settle disputes on criminal cases, military cases and certain types of industrial relations disputes.

The Commercial Court and, in the case of an appeal, the Supreme Court have jurisdiction for disputes arising after the bankruptcy and PKPU process (which we envisage relates to differences of debt calculation, distribution of assets, breach of the homologated composition plan, challenge to bankruptcy or PKPU decision and so on).

CREDITOR REMEDIES

Creditors’ enforcement

31. Are there processes by which some or all of the assets of a business may be seized outside of court proceedings? How are these processes carried out?

Yes, a seizure and execution of assets that are secured through certain securities, such as fiducia, mortgages or pledges, may be executed without court proceedings. For example, an asset secured through fiducia can be sold by the fiducia holder through a private sale or public auction.

ln a private sale, the fiducia holder and the security giver may agree on a sale to a third party if this is considered to be more beneficial to the security giver. For a sale via public auction, the fiducia holder will need to arrange the auction with the agreed auction house. Any proceeds exceeding the secured debt must be returned to the security giver.

Unsecured credit

32. What remedies are available to unsecured creditors? Are the processes difficult or time-consuming? Are pre-judgment attachments available?

An unsecured creditor may submit a civil (or arbitration) claim against the debtor in the event of default or breach of contract. After a final and binding judgment is obtained, the unsecured creditor may then seize and sell the debtor’s unsecured assets to fulfil its debt.

Although the process is straightforward, court and arbitration process may be time-consuming depending on how the debtor would challenge the dispute. Pre-judgment attachment can be requested but only to freeze the debtor’s assets so the debtor cannot assign or sell the corresponding assets requested to be seized until there is a final and binding decision related to the claim.

CREDITOR INVOLVEMENT AND PROVING CLAIMS

Creditor participation

33. During the liquidation or reorganization, what notices are given to creditors? What meetings are held and how are they called? What information regarding the administration of the estate, its assets and the claims against it is available to creditors or creditors’ committees? What are the liquidator’s reporting obligations?

Notices in liquidation, bankruptcy or reorganization in the framework of suspension of debt payment (PKPU) are given through formal announcements by the designated receiver or administrator to the creditors after the bankruptcy or PKPU decision is issued by the Commercial Court.

The notice encompasses essential details such as the schedule, time, place and deadline of the subsequent process, including creditor meetings, claim submission, claim verification and voting procedures. The receiver (in bankruptcy) and administrator (in PKPU) are obliged to also do the announcement via a nationally circulated newspaper.

It is common during the creditor meetings for the debtor to provide comprehensive updates concerning the company’s financial and operational status. On the other hand, the appointed receiver or administrator will furnish a comprehensive report covering the total claims submitted, the list of creditors (containing receivables that are acknowledged and accepted) and the overall details of the bankruptcy or PKPU process.

Creditor representation

34. What committees can be formed (or representative counsel appointed) and what powers or responsibilities do they have? How are they selected and appointed? May they retain advisers and how are their expenses funded?

Law No. 37 of 2004 on bankruptcy and suspension of debt payment as partially revoked by Law No. 40 of 2014 on insurance and Law No. 4 of 2023 on the development and strengthening of the financial sector (the Bankruptcy Law) does not explicitly address the formation of creditor committees. However, in practice, such committees are typically established for groups of creditors sharing similar debts or interests, or both. In any case, each of the creditors will still be treated separately in terms of their receivables (ie, syndicated loan creditors) per entity.

Representative counsel for each or some of creditors at once is possible, provided that they possess a valid signed power of attorney. These representative counsels are authorized to act for and on behalf of the creditor or creditors, in accordance with the authorities conferred under the power of attorney.

Expenses are paid by the creditors who employ the counsel and cannot be reimbursed to the debtor.

Enforcement of estate’s rights

35. If the liquidator has no assets to pursue a claim, may the creditors pursue the estate’s remedies? If so, to whom do the fruits of the remedies belong? Can they be assigned to a third party?

The Company Law limits the liability of the shareholders to the percentage of their shares and stipulates that the shareholders are not liable for the company’s debt. This safeguard stands, unless there is reason to pierce the corporate veil, for example, the shareholders:

• acted in bad faith in using the company for their personal gain;
• are involved in any unlawful act of the company; or
• are responsible for dissipating the company’s assets so the company is unable to pay its debts.

In such instances, the shareholders may become liable for the company’s debt. If there is a reason to claim from the shareholders, then the appointed liquidator retains the prerogative to initiate a claim on behalf of the company and any proceeds will be used to pay the creditors.

Claims

36. How is a creditor’s claim submitted and what are the time limits? How are claims disallowed and how does a creditor appeal? Can claims for contingent or unliquidated amounts be recognized? Are there provisions on the transfer of claims and must transfers be disclosed? How are the amounts of such claims determined?

After a liquidation or bankruptcy or a reorganization in the framework of PKPU decision is pronounced by the Commercial Court, the appointed supervisory judge (for a bankruptcy) or administrator (for a PKPU) will announce within five days the schedule of the subsequent process, which includes the time, place and deadline of submitting and verifying claims (articles 15(4) and 86 of the Bankruptcy Law).

During the claim verification stage, the appointed receiver (for a bankruptcy) or administrator (for a PKPU) will exercise their discretion in determining whether the claim submitted by the creditors may be acceptable either fully or partially.

There is no legally set threshold for this determination, other than that a debt (which will be submitted as a claim by the creditors) is defined under article 1(6) of the Bankruptcy Law as an obligation that is declared or may be valued in the form of money (in Indonesian or other currency), both directly or that may arise in the future or contingent, which arises from agreement or by law, which will be fulfilled by the debtor or otherwise may be settled by the debtor’s assets.

In practice, several factors such as, but not limited to, whether the claim is acknowledged by the debtor, is straightforward or is backed with evidence may contribute to the acceptability of a claim.

If the receiver or administrator fully or partially dismisses the claims, the relevant creditor has the right to lodge an objection and further evince its submitted claim. Upon failure to settle the objection raised by the creditor, the following will occur:

• under the bankruptcy process, the appointed supervisory judge may intervene to supervise the settlement between the creditor and the receiver. Given another failure to amicably settle, the supervisory judge could refer the objecting creditor to submit the issue before the court. This form of submission is referred to as the renvoi procedure; and
• under the PKPU process, the objecting creditor could send a letter to the appointed supervisory judge to make a decision on the disputed claim. The following decision from the supervisory judge cannot be appealed further.

Set-off and netting

37. To what extent may creditors exercise rights of set-off or netting in a liquidation or in a reorganization? Can creditors be deprived of the right of set-off either temporarily or permanently?

Article 51 of the Bankruptcy Law allows the debtor to set-off of any debts or receivables that exist before the bankruptcy or a reorganization in the framework of PKPU decision is issued. The Bankruptcy Law prohibits a set-off if it can be reasonably argued that such set-off will be done in bad faith.

Modifying creditors’ rights

38. May the court change the rank (priority) of a creditor’s claim? If so, what are the grounds for doing so and how frequently does this occur?

The Bankruptcy Law gives the authority to the court through the receiver in bankruptcy and administrator in PKPU to decide the ranking of creditors’ claims. This determination is based upon a thorough examination of available documents and legal grounds associated with the claim. The creditor and debtor may challenge the receiver (for a bankruptcy) or administrator (for a PKPU) determination to be reviewed by the supervisory judge.

In a PKPU, the decision of the supervisory judge should be final in the process. However, in bankruptcy, should attempts at amicable resolution falter again, the supervisory judge may ask the objecting creditor to submit the issue before the court. This form of submission is referred to as a renvoi procedure, under which a new case may be established where the decision could alter the rank of the creditor’s claim.

Priority claims

39. Apart from employee-related claims, what are the major privileged and priority claims in liquidations and reorganizations? Which have priority over secured creditors?

Under the Indonesian Civil Code claims, such as tax claims and fees incurred as a result of auction or settlement of inheritance, can be prioritized (under preferred rights). Fees related to rent, unpaid payment for movable property and maintenance fees for the debtor’s assets can also be considered to have privilege rights during bankruptcy or a reorganization in the framework of the PKPU process. Additionally, state receivables other than tax can also fall under preferred rights providing they are regulated specifically under the applicable law.

As an additional note, pursuant to Constitutional Court Judicial Review Decision No. 67/PUU-XI/2013 dated 11 September 2014, wages of workers take precedence over all claims, including secured claims, state receivables, state auctions and claims of government institutions. Other payments to which workers are entitled are treated similarly, excluding secured claims.

Employment-related liabilities

40. What employee claims arise where employees’ contracts are terminated during a restructuring or liquidation? What are the procedures for termination? (Are employee claims as a whole increased where large numbers of employees’ contracts are terminated or where the business ceases operations?)

If termination of employment occurs as a result of bankruptcy or a reorganization in the framework of PKPU, the terminated employees are entitled to obtain wage and severance payment as regulated under Law No. 13 of 2003 as amended by Government Regulation in Lieu of Law No. 2 of 2022 on job creation. There is no specific procedure for termination of employment that occurs during restructuring (PKPU), bankruptcy or liquidation processes.

Pension claims

41. What remedies exist for pension-related claims against employers in insolvency or reorganization proceedings and what priorities attach to such claims?

Pension-related claims (where the employee is of pensionable age at the time of bankruptcy) will be treated the same as employment-related claims (ie, to have a privilege and priority claim), based on article 95 of the Manpower Law.

Environmental problems and liabilities

42. Where there are environmental problems, who is responsible for controlling the environmental problem and for remediating the damage caused? Are any of these liabilities imposed on the insolvency administrator personally, secured or unsecured creditors, the debtor’s officers and directors, or on third parties?

In Indonesia, the existing environmental laws adhere to the ‘polluter pays’ and strict liability principles. These principles emphasize that anyone responsible for causing environmental damage is held strictly liable for their actions.

Liabilities incurred from causing environmental damage are enforced following a court decision that compels the accountable party to remediate or compensate for the damage caused. As a result, depending on the decision, it may be treated as a debt in the form of obligation or money under article 1(6) of the Bankruptcy Law, to be settled by the debtor subject to the prevailing bankruptcy or a reorganization in the framework of PKPU.

Liabilities that survive insolvency or reorganization proceedings

43. Do any liabilities of a debtor survive an insolvency or a reorganization?

Debtor liabilities against secured creditors could survive an insolvency or a reorganization in the framework of PKPU, because a secured creditor has the right to choose whether to follow the terms under the restructuring plan coming from the PKPU process or the distributions procedure in bankruptcy, or to execute the secured assets once the insolvency or PKPU process has been completed or terminated. If the latter is chosen, the secured assets may be executed as if there was no PKPU or bankruptcy.

Even so, most liabilities do not persist following the court ratification (homologation) of a PKPU restructuring plan, as they will be altered or restructured pursuant to the terms contained therein, which are binding on all creditors. Likewise, most liabilities do not survive a bankruptcy decision, as they will be settled subject to their ranks during the distributions process after the bankruptcy assets have been liquidated. Even if a debtor reaches a settlement with the creditors (conciliation), it is likely that the liabilities are altered to correspond to the settlement terms.

Distributions

44. How and when are distributions made to creditors in liquidations and reorganizations?

Distributions are made at the very end of the bankruptcy process.

Distributions under in-court bankruptcy-related liquidations are made after the debtor’s entire bankrupt estate has become insolvent and the list of distribution for creditors has been approved by the supervisory judge without receiving any further challenges from the creditors within the stipulated time frame. The receiver will then distribute the insolvent bankruptcy estate to the creditors based on their status and entitled portion by law.

Distributions under non-bankruptcy-related liquidations (ie, company dissolution) are made pursuant to the terms and conditions under a liquidated assets distribution plan made by the appointed liquidator. If the debts exceed the value of company assets, the liquidator is required to submit the company for bankruptcy, unless stipulated otherwise by law or agreed by all creditors.

In a reorganization in the framework of PKPU, distribution may be made in accordance with the ratified restructuring plan between the debtors and creditors. However, if a restructuring plan was not agreed, then the debtor enters into bankruptcy status and the above distribution process applies.

SECURITY

Secured lending and credit (immovables)

45. What principal types of security are taken on immovable (real) property?

The types of security that may be taken on immovable properties are:

• mortgages over land, building and fixtures thereon;
• hypothec over aircrafts and vessels; and
• fiduciary securities over land, buildings and fixtures under certain conditions.

Secured lending and credit (movables)

46. What principal types of security are taken on movable (personal) property?

The types of security that may be taken on movable properties are:

• pledges;
• fiduciary securities;
• personal guarantees; and
• corporate guarantees.

CLAWBACK AND RELATED-PARTY TRANSACTIONS

Transactions that may be annulled

47. What transactions can be annulled or set aside in liquidations and reorganizations and what are the grounds? Who can attack such transactions?

Under article 1341 of the Indonesian Civil Code, creditors may apply for the annulment of all transactions or actions, or both, made by the debtor, provided that the actions were not required by law and aggravated the interest of the creditors. This form of application is legally known as actio pauliana in Indonesia.

Under articles 41 to 50 of Law No. 37 of 2004 on bankruptcy and suspension of debt payment as partially revoked by Law No. 40 of 2014 on insurance and Law No. 4 of 2023 on the development and strengthening of the financial sector (the Bankruptcy Law), the Commercial Court may annul any legal actions done by the debtor up to a year prior to the bankruptcy decision, if the legal actions:

• were not required by law;
• aggravated the interests of the creditors; and
• were detrimental to the value of the bankruptcy assets.

The creditor or receiver may submit an actio pauliana claim against the debtor to nullify transactions or actions (or both) made by the debtor, provided that the actions were not required by law and aggravated the interests of the creditors.

Equitable subordination

48. Are there any restrictions on claims by related parties or non-arm’s length creditors (including shareholders) against corporations in insolvency or reorganization proceedings?

No. Anyone is eligible to submit a claim as creditor in the bankruptcy and suspension of debt payment process as long as they have receivables due under an agreement with the debtor or by law and fulfil the requirement to be approved by the debtor.

Lender liability

49. Are there any circumstances where lenders could be held liable for the insolvency of a debtor?

No. Under the Bankruptcy Law, there is no clear ground or procedure by which a party can formally request that a certain lender be held liable for the insolvency of a debtor. Even in the context of actio pauliana, a successful petition would solely lead to the cancellation of the debtor’s detrimental action.

In the most favorable outcome, the creditor who is proven to have taken part in the detrimental action with the debtor will be ordered to return the assets that they have gained from the detrimental action to the debtor’s bankruptcy estate. To date, practical instances of insolvency cases have not emerged that would prompt us to reconsider our standpoint on this matter.

GROUPS OF COMPANIES

Groups of companies

50. In which circumstances can a parent or affiliated corporation be responsible for the liabilities of subsidiaries or affiliates?

Article 3(1) of the Company Law in Indonesia upholds the principle of distinct legal personality for corporations. Consequently, the concept of a unified economic entity for group entities is not embraced. Shareholders bear no personal responsibility for legal transactions or deficits undertaken in the corporate name beyond their owned shares.

This implies that a parent company is not accountable for the obligations of its subsidiaries or affiliates. Nevertheless, exceptions can arise under the principle of piercing the corporate veil, elucidated in article 3(2) of the Company Law, under the following circumstances:

• the subsidiary company fails to meet its legal entity requisites (such as incomplete establishment or lacking at least two shareholders);
• the parent company, in bad faith, has directly or indirectly exploited the subsidiary company for personal gain;
• the parent company is complicit in illicit actions committed by the subsidiary company; and
• the parent company, either directly or indirectly, has unlawfully employed the assets of the subsidiary, culminating in inadequate assets for the subsidiary’s debt settlement.

The scenario differs for affiliated companies, which lack a relationship based on shareholding. For affiliated companies, the concept of piercing the corporate veil may be relevant in these scenarios:

• companies sharing common employees, boards of directors or commissioners;
• subsidiaries with insufficient operational capital;
• a parent company covering subsidiary expenses, including wages and salaries;
• subsidiaries primarily engaged with the parent company;
• asset commingling, where two companies share the same assets for business purposes; and
• boards of directors and commissioners prioritizing the interests of the group company over those of the subsidiary in which they hold positions.

However, the court is not empowered to independently order the dispersion of assets belonging to the parent or affiliated company to settle a debtor’s obligations. A creditor must present a claim against the parent or affiliated company and furnish additional evidence demonstrating that the corporate veil can be pierced.

Combining parent and subsidiary proceedings

51. In proceedings involving a corporate group, are the proceedings by the parent and its subsidiaries combined for administrative purposes? May the assets and liabilities of the companies be pooled for distribution purposes?

Indonesian judicial authorities acknowledge the option of consolidating proceedings, which is permissible when the involved multiple lawsuits share interconnected subject matters and entail a legal relationship between the parties implicated.

When dealing with legal proceedings encompassing a corporate group, the distinct legal persona principle applies, designating the parent company and its subsidiaries as distinct legal entities and separate entities within the legal case. Consequently, the aggregation of their assets for distribution objectives is precluded.

However, the presiding judge retains discretion, in accordance with the principle of piercing the corporate veil, to determine whether the assets of the parent company could be subject to the liabilities incurred by its subsidiary or subsidiaries, either partially or completely.

INTERNATIONAL CASES

Recognition of foreign judgments

52. Are foreign judgments or orders recognized, and in what circumstances? Is your country a signatory to a treaty on international insolvency or on the recognition of foreign judgments?

Indonesia has not ratified any international treaty or related to cross-border insolvency or the recognition of foreign court rulings.

In accordance with article 436 of the Indonesian Civil Procedural Law, foreign proceedings, including the legal products thereof (ie, decisions, decrees and sanctioned settlement plans) cannot be forced to be binding to Indonesian courts nor directly enforced in Indonesia. However, foreign decisions in the form of declarations and attributions may be recognized by the courts as they do not require further enforcement.

UNCITRAL Model Laws

53. Have any of the UNCITRAL Model Laws on Cross-Border Insolvency been adopted or is adoption under consideration in your country?

No. Indonesia has not adopted the UNCITRAL Model Law on Cross-Border Insolvency, nor has there been any announcement from the government to adopt it in the near future.

Foreign creditors

54. How are foreign creditors dealt with in liquidations and reorganizations?

Under the Bankruptcy Law, there is no distinction between or restrictions on domestic and foreign creditors. They possess equal rights to submit their claims before a bankruptcy or suspension of debt payment (PKPU) procedure of a debtor, or both.

Furthermore, an agreed settlement under a PKPU process is binding on all creditors according to article 286 of Law No. 37 of 2004 on bankruptcy and suspension of debt payment as partially revoked by Law No. 40 of 2014 on insurance and Law No. 4 of 2023 on the development and strengthening of the financial sector (the Bankruptcy Law).

Cross-border transfers of assets under administration

55. May assets be transferred from an administration in your country to an administration of the same company or another group company in another country?

According to article 240(1) of the Bankruptcy Law, a debtor is prohibited from managing its assets during a reorganization process in the framework of PKPU, unless approved by the appointed administrators.

Even if the transfer of assets is approved by the appointed administrator, the creditors still have the right to request that court invalidate this transfer (if conducted within one year before the bankruptcy or PKPU decision), if they can demonstrate that the transfer occurred with the knowledge that it could harm the interests of the creditors. This entitlement is commonly referred to as actio pauliana.

According to article 212 of the Bankruptcy Law, the payment of a creditor using offshore assets of the debtor compels the creditor to compensate the debtor’s bankruptcy assets equal to what it has received.

COMI

56. What test is used in your jurisdiction to determine the COMI (center of main interests) of a debtor company or group of companies? Is there a test for, or any experience with, determining the COMI of a corporate group of companies in your jurisdiction?

In general, Indonesia does not recognize the concept of center of main interests (COMI). However, under the international civil law theory commonly adopted in practice, the COMI of a company may be determined based on:

• where the company is legally established or constituted (the country where the company is formed);
• where the company is legally domiciled (usually where their head office is); and
• where the company’s main business is located.

This information is commonly regulated under the company’s articles of association. Such details become significant when determining court jurisdiction over the company. Courts typically only examine cases if the defendant or respondent is legally domiciled before the concerned court’s jurisdiction. In the case of the Bankruptcy Law, the Commercial Court may assume jurisdiction over foreign debtors, but this is contingent upon their establishment and engagement in business activities in Indonesia.

Cross-border cooperation

57. Does your country’s system provide for recognition of foreign insolvency proceedings and for cooperation between domestic and foreign courts and domestic and foreign insolvency administrators in cross-border insolvencies and restructurings? Have courts in your country refused to recognize foreign proceedings or to cooperate with foreign courts and, if so, on what grounds?

No. As outlined in article 436 of the Indonesian Civil Procedural Law, foreign proceedings, including the legal products thereof (ie, decisions, decrees and sanctioned settlement plans), cannot be forced to be binding on Indonesian courts or directly enforced in Indonesia. However, foreign decisions in the form of declarations and attributions may gain acknowledgement from the courts as they do not require further enforcement.

There are precedents where the Indonesian Commercial Court has dismissed a bankruptcy petition in Indonesia because the debtor had already entered into insolvency proceedings abroad. In one case, the debtor during the bankruptcy proceeding in Indonesia submitted the foreign insolvency proceedings decision as evidence, which was then recognized by the Commercial Court.

Furthermore, there has not been any cooperation between Indonesian and foreign insolvency administrators or courts other than as explained above.

Cross-border insolvency protocols and joint court hearings

58. In cross-border cases, have the courts in your country entered into cross-border insolvency protocols or other arrangements to coordinate proceedings with courts in other countries? Have courts in your country communicated or held joint hearings with courts in other countries in cross-border cases? If so, with which other countries?

No. Indonesia has not adopted any cross-border insolvency related conventions or protocols (eg, the UNCITRAL Model Law on Cross-Border Insolvency). Indonesia has also not communicated or held joint hearings with courts in other countries in cross-border cases.

Winding-up of foreign companies

59. What is the extent of your courts’ powers to order the winding-up of foreign companies doing business in your jurisdiction?

Article 3(4) of the Bankruptcy Law stipulates that Commercial Court may establish its jurisdiction over foreign debtors provided that they have a presence in Indonesia for conducting business activities. We have seen instances where a company established in the Cayman Islands but with a representation office in Indonesia was declared bankrupt by the Commercial Court because it was unable to pay its debt to the Indonesian creditor.

UPDATE AND TRENDS IN RESTRUCTURING AND INSOLVENCY IN INDONESIA

Trends and reforms

60. Are there any emerging trends or hot topics in the law of insolvency and restructuring? Is there any new or pending legislation affecting domestic bankruptcy procedures, international bankruptcy cooperation or recognition of foreign judgments and orders?

At the end of 2022, the Indonesian Supreme Court renewed the legal framework applicable to administration and electronic trial in court. At the same time, three Supreme Court regulations were enacted, including:

• Supreme Court Regulation No. 6 of 2022 on the administration of legal remedies and the electronic trial of cassation and judicial review in the Supreme Court;
• Supreme Court Regulation No. 7 of 2022 on the amendment of Supreme Court Regulation No. 1 of 2019 on the administration of cases and trials in court electronically; and
• Supreme Court Regulation No. 8 of 2022 on the amendment of Supreme Court Regulation No. 4 of 2022 on the administration and trial of criminal cases in the electronic court.

The Supreme Court also authorized the technical guidelines for the implementation of e-court for civil cases that was also updated by SK KMA 363 KMA/SK/XII/2022 (SK KMA 363/2022) and the technical guidelines for the implementation of e-court for criminal cases by SK KMA 365 KMA/SK/XII/2022 (SK KMA 365/2022). With the enactment of SK KMA 363/2022, the administrative procedures and electronic trial services will also reach the special civil case families, which includes bankruptcy and PKPU.

The issuance of SK KMA 363/2022 has brought about a transformative shift in the realm of post-bankruptcy or PKPU decision processes by embracing electronic administration and proceedings. This forward-looking directive has substantially redefined the landscape, with the majority of bankruptcy and PKPU-related meetings and procedures now conducted remotely through audio-visual means. Notably, electronic processes have become the primary mode, supported by the comprehensive utilization of the court information system (SIP) for document management and exchange.

Another significant factor introduced by SK KMA 363/2022 pertains to the receiver’s responsibilities, which encompass the creation of a work schedule before initiating management proceedings, along with the submission of a management progress report on a quarterly basis, or when specifically requested by the supervisory judge or creditors. Both these essential documents are mandated to be uploaded onto the SIP platform by the receiver.

Additionally, Law No. 37 of 2004 on bankruptcy and suspension of debt payment as partially revoked by Law No. 40 of 2014 on insurance and Law No. 4 of 2023 on the development and strengthening of the financial sector (the Bankruptcy Law) had some of its provisions updated due to the new Law No 4 of 2023 concerning development and strengthening of the financial sector (the Financial Sector Development Law) that was enacted in January 2023. The provisions and their subsequent revisions can be seen in the following table.

This is due to the Financial Sector Development Law reinforcing the authority of the Financial Services Authority as the only party authorized to file for bankruptcy or PKPU against debtors that are:

• banks;
• securities companies;
• stock exchanges;
• alternative market organizers;
• clearing and guarantee institutions;
• investor protection agencies;
• securities funding institutions;
• securities price valuation institutions;
• insurance companies;
• sharia insurance companies;
• reinsurance companies;
• sharia reinsurance company;
• pension fund
• guarantor institutions;
• financing institutions;
• microfinance institutions;
• organizers of electronic systems that facilitate the raising of public funds through securities offerings;
• organizers of information technology-based joint funding services; and
• other financial services that are registered and initiated by the Financial Services Authority as long as their dissolution or bankruptcy is not regulated differently by other laws.

* The information in this chapter was accurate as at September 2023.

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