ASIAN DEVELOPMENT BANK

REGIONAL TECHNICAL ASSISTANCE

TA NO: 5795-REG

INSOLVENCY LAW REFORM

SECURED TRANSACTIONS

INDONESIA

Darrell Johnson
Soewito, Suhardiman, Eddymurthy & Kardono

Security Interests in Indonesia: Problems of Creation and Registration

1. Existing Registration System

(i) Indonesia has security registration systems for land and buildings and goods attached to land, ships and aircraft.

· Recently, Indonesia has enacted a Fiduciary Law which recognizes fiduciary transfer and contemplates the creation of a registration system.
· In 1996, Indonesia passed a law on Security Rights which clarified prior rules for mortgages for land and buildings.

2. Outstanding Issues

· Overlap Between Security Interests under the Law on Security Rights and under the Law on Fiduciary Rights.
(i) Typically, the terms of a Security Right (Hak Tanggungan) will provide that any equipment or plant permanently attached to the land will become subject to the Hak Tanggungan. This may create a situation where competing and conflicting rights exist between secured parties under the Hak Tanggungan and under the Fiduciary Transfer.
(ii) It is not clear under Indonesian law which of the two secured parties would prevail in the event of a dispute. The holder of the Fiduciary Transfer would be well advised to obtain a waiver from the holder of Hak Tanggungan with respect to such property.

· Central Registration
(i) There is no central registration system. Local land offices do not have integrated information for land title searches. In addition, the registration of secured land is still not computerized. Land offices do not provide written confirmation on land title and security interests.
(ii) Pledges of movable assets are not registrable, but this may not be critical.

· Problems of Enforcement
(i) Executorial Title: Both the Law on Security Rights and the Fiduciary Law provide for an immediately executable title to secured assets. Both types of holders may request the district court to issue a court order to enforce their rights ("fiat eksekusi"). In practice, however, such a court order could take months to be issued.
(ii) Law No. 4 of 1999 permits the holder and the grantor of Hak Tanggungan to agree to foreclose Hak Tanggungan collateral by private sale. However, there are no specific guidelines on this procedure or on the requirements for a private sale.

· The Concept of Horizontal Separation
(i) Law No. 4 of 1996 requires the parties to a Hak Tanggungan Deed to expressly state the object of the security rights.
(ii) The practice in the sale and purchase of land tends to ignore the principle of horizontal separation. This is due to a circular letter issued by the Department of Agriculture and Agrarian Affairs No. Unda 9/1/14 dated February 8, 1964. This circular letter prohibits land deed officials from drawing deeds on transfers of land without also transferring any attached buildings. To date this circular letter has not been revoked and has caused problems in separating titles.

3. Possible Improvements

· Create a centralized, computerized registration system for all security interests. Hak Tanggungan, FTAs, Ship Mortgages and Aircraft Mortgages.
· Require written confirmations to be issued and require the agency concerned to bear liability for mistakes.
· Improve the courts and the administration of justice. The improvements should cover the human resources and the judicial system itself. Increased independence and transparency in the courts is also needed. Written decisions should be required. Stare decisis should be incorporated in the law.