ASIAN DEVELOPMENT BANK

REGIONAL TECHNICAL ASSISTANCE

TA NO: 5795-REG

INSOLVENCY LAW REFORM

CASE STUDY

FROM INDONESIA

Darrell Johnson Soewito, Suhardiman, Eddymurthy & Kardono

INDONESIA CASE STUDY:

Bankruptcy and Enforcement of Bank Letter of Support

Background Facts:
Debtor : Indonesian finance company
ParentBank : Indonesian listed bank under IBRA recapitalization program
Creditors : Three lending syndicates (international and domestic banks including state-owned bank)
Security :

Syndicates A and B : Assignments of Overlapping A/R Streams
Syndicate C : unsecured
All Syndicates : Identical Letters of Comfort from ParentCo

Syndicate Debt : Syndicates A + B + C : USD 65,000,000
Other Debt : Unsecured bank debt : USD 1,000,000+/- including debt to a bank taken over by IBRA

Negotiation History:
- Debtor defaults on all syndicated loans simultaneously
- Each syndicate begins separate negotiations to reschedule debt
- Syndicate C obtains $ 5,000,000 preference payment
- Syndicates A,B,C agree to negotiate collectively
- Protracted voluntary liquidation negotiations
- Debtor assets: $30,000,000 from foreign exchange transaction, $10,000,000 A/R (not independently verified / source unclear)
- A and B each demand $5,000,000 as condition for continuing negotiations
- Debtor agrees to make the following payments unconditionally by deposit at ParentBank to induce Syndicates to continue negotiations:

- For A : $ 5,000,000
- For B : $ 5,000,000
- For all creditors : $ 5,000,000

- Accounts established, payments made but Debtor/ParentBank refuse to deliver certificates of deposit
- Withdrawal instructions of Syndicates A and B rejected by ParentBank for failure to present certificates of deposit
- Each version of draft agreement offered by Creditors rejected by Debtor
- Breakdown of negotiations - Jakarta Initiative contracts parties and attempts to mediate; efforts fail - Issuance of formal pre-litigation demand letters (somasi) by litigation counsel
- Bankruptcy action against debtor
- Civil actions against ParentBank for Letters of Comfort / Certificates of Deposit

Litigation:
Petitioners request Commercial Court to declare Debtor bankrupt as a debtor in arrears having at least two or more unpaid creditors
Respondent alleges that Debtor and Syndicates have agreed to voluntary liquidation and enters in evidence an early draft of the proposed settlement agreement that had been signed by the Syndicates as an offer
Petitioners introduced evidence that the Debtor, ParentBank and their legal counsel had each rejected that draft and demanded multiple revisions over the next several months as reflected in many subsequent drafts of the agreement
Commercial Court Decision: - Syndicates A, B and C are creditors - Petition dismissed on basis that parties had settled
Supreme Court Decision: - Commercial Court decision upheld (reasons pending)

Final Result:
Parties continued settlement negotiations during litigation proceedings
During the Supreme Court appeal, ParentBank and Debtor offer 75 cents on the dollar (no interest) provided that all Syndicate members accept
All syndicate members accept other than Indonesian state bank
Syndicate members reluctantly waive equal treatment covenant and Indonesian state bank negotiates private arrangement
ParentBank management replaced by IBRA before settlement
Settlement Agreement signed, release given, civil actions withdrawn

Main Comments and Issues:

- Civil Procedure Cumbersome

- notarized and consularized powers of attorney
- evidence in support of petition must be translated and filed with petition
- 30 day trial period means prompt decision but limited time to prepare pleadings, reply evidence and sworn translations

- Impact of Indonesian Bank Restructuring Agency

- Debtor and ParentBank alleged need for IBRA approval to sign settlement agreement since ParentBank under recapitalization program
- IBRA verbally advised that settlement was not subject to IBRA approval but did not confirm the same in writing to concerned parties

- Settlement Negotiations as Barrier to Bankruptcy

- existence of "insolvent" condition a non-issue given simple test for bankruptcy, in principle
- well established that litigants may conduct settlement negotiations during litigation
- important past ruling of Supreme Court that demand letters (somasi) were defective and bankruptcy petition dismissed since settlement negotiations ongoing at the time of issuance of demand letters
- despite absence of stare decisis, this principle may have influenced the court decision regarding settlement as basis for dismissal

- International Standards in Banking Practices

- no basis for ParentBank to refuse to deliver certificates of deposit to syndicates as bank customers
- ParentBank position on Letters of Comfort as unenforceable puffery
- efficacy of complaint to regulatory authority (BI) uncertain

- Impact of Litigation Proceedings on Eventual Settlement

- debtors perceived risk of adverse outcome minimal
- indirect effects more significant impact on ParentBank decision to settle
- adverse public relations for listed ParentBank
- regulators' (IBRA / BI) enhanced awareness of creditors' plight and conduct of ParentBank management

- Treatment of Secured vs. Unsecured Creditors

- All syndicates negotiated on an equal basis principally because
(i) difficulty of allocating A/R between secured creditors given overlapping descriptions of secured income stream (highlighting need for central system for registration of personal property security interests);
(ii) difficulty of creditors realizing security through collection of A/R (highlighting disadvantage of such security given need for active debtor cooperation).

- Impact of State-Bank/Jakarta Initiative

- State Bank: represented at Jakarta Initiative negotiations but State-Bank policy of no haircut meant no flexibility/no authority
- Jakarta Initiative: no sanctions to compel good faith negotiation