8. OPERATION OF THE COURTS IN THE INSOLVENCY LAW SYSTEM

The great majority of countries operate their insolvency law system through the courts. With the exception of the Philippines and the Danharta regime in Malaysia, the five economies have all followed that tradition. The operation of the formal insolvency law system is therefore heavily dependant on the way in which it is applied and administered by the courts.
As mentioned in the ADB report, there have been considerable difficulties because of problems with the court and judicial system. In many economies, processes are slow, judges are not suitably qualified or experienced, and the judicial process is unpredictable and unreliable. Many judges are not competent to understand even the most basic of the complexities involved in a case of corporate insolvency. The ability to handle a complex case of corporate reorganisation and financial restructuring appeared to be beyond the knowledge and experience of many judges. There was also evidence of corruption within the judiciary in some RETA economies.
This section reviews the performance of the courts in the five economies.

8.1 Korea
The main problem is that there are insufficient judges with expertise in cases of bankruptcy and reorganisation. Although the judges presently handling such cases are, generally, competent, there are an insufficient number of them. These judges are also required to handle other, non-bankruptcy, cases and their work-load is, accordingly, very heavy. It is suggested that Korea would benefit from the creation of a specialist or dedicated bankruptcy court.
8.2 Malaysia
The main problems are identified as:
- Inexperienced judges handling formal insolvency cases with very little understanding or appreciation of the philosophy underlying insolvency law and the commercial application of such law;
- A significant volume of work load for judges and consequent delays;
- Considerable delay in appeals processes.
It is suggested that a special insolvency court(s) are required and more experienced and trained judges.
8.3 Indonesia
The judicial handling of insolvency cases has improved. The establishment of the Commercial Court has been viewed as an important and necessary step toward judicial reform. Time limits are enforced, decisions are made public and, generally, the processes of the court are much more transparent (unfortunately this is not the position regarding formal cases of suspension of payments - very little information is publicised about these). In August, 1999 a further four commercial courts were established to help decentralise the work of the court throughout the country.
However, problems still exist and some of these appear to be severe.
A main problem is the lack of consistency in the decisions. Although not many cases have been before the courts (see earlier analysis of statistics), judicial decisions in insolvency cases often arouse seemingly irreconcilable conclusions. Part of the cause of this problem may be due to the fact that there is no real or any system of 'precedent' in the Indonesian judicial system, and thus judges are free to apply the law as they see fit. In part, this problem is compounded by an absence of published writings on decisions of the Indonesian courts that might otherwise help to establish a base for what might be considered 'good' or justifiable decisions.
This leads to considerable commercial uncertainty and scepticism about the court system and the judiciary generally. For example, of the 59 cases in which decisions were given, 25 were appealed to the Supreme Court and 14 of these went to a further review before a different panel of the same court.
Another major problem is that the judges of the Commercial Court who handle insolvency cases come from a non-commercial background. It appears that many of these judges have little commercial knowledge or experience. The Indonesian consultant comments that 'many of the (cases) involve modern and sophisticated (commercial transactions)' and the judge 'presiding over the hearing does not understand the transactions' which 'leads to misinterpretations or narrow interpretations of the documents'.
8.4 Experience of a recent case in Indonesia
Evidence of these problems may be found in a recent bankruptcy case involving the International Finance Corporation (IFC).
A corporation borrowed a long term facility from the IFC. Two other banks provided shorter term working capital facilities. Each of the three banks took security in some shape or form over the assets of the company. The IFC loan provided for regular payments of interest and for repayment of principal in tranches at dates in the future. The loan agreement contained the usual provision for acceleration of repayment in the event of default by the borrower. Default in the payment of interest and other terms of the IFC loan occurred. Default also occurred under the terms of the loans from the two other banks. Discussions and negotiations with the corporate debtor were unsuccessful.
IFC and the two other banks joined together to make an application for the liquidation of the corporate debtor. In the proceedings in the Commercial Court it was argued on behalf of the debtor that there was no debt due to IFC because the time for repayment of principal amounts had not yet been reached (this despite the clear evidence of default in payment of interest and the acceleration terms of the loan agreement). In the case of the other two banks it was argued that the money advanced had been used for swap/derivative transactions which was an illegal purpose and the loans could not be recovered by the banks. The Commercial Court upheld these arguments.
IFC and the other banks appealed to the Supreme Court. There it was further argued on behalf of the debtor that because the 3 banks held security for the loans they could only seek to recover in the District Court. The Supreme Court upheld that argument.
The case was taken further to a separate panel of the Supreme Court for a review of the appeal decision. This panel of the Supreme Court in a well reasoned and authoritative judgment rejected the previous decisions and found for IFC and the other banks.
The case has been important for investor confidence in Indonesia, but it also serves to illustrate the type of difficulties mentioned above. Some endeavour is being made to improve the standard of judges appointed to the Commercial Court by recent 'ad hoc' appointments through a steering committee of the Supreme Court. But, if the standard of the judiciary is to be raised, serious attention must be given to issues such as independence, remuneration and status. With the passage of time and the benefit of additional resources, the court may well become more consistent in its decision making and earn the confidence and respect of the commercial community. It seems clear, however, that in the meantime prolonged education and training for the judges would greatly assist.
8.5 Thailand
The new Bankruptcy Court was established and commenced operation in June 1999. This was regarded as a positive step because specialist judges and court officers can better implement the legislation and proceedings should move more rapidly. Some 60 judges were initially wanted for appointment to the court but only 12 have been appointed. They are said to be handling over 3000 cases which is a high case load (these include the many personal insolvency cases).
It is the view of some that assessment of the judicial handling of formal insolvency processes under the new law should wait a longer period of trial. Since the new court was established there has been an increase in case numbers. So far only the Central Bankruptcy Court is operating. It is intended to establish regional bankruptcy courts in the future.
Changes are also proposed by the government of Thailand to the administration of the court system in Thailand. At present this is under the control of the Ministry of Justice but a separate agency is now proposed. This may afford better administration of the courts and the judiciary and may give the latter much needed independence and transparency.
8.6 Philippines
As mentioned elsewhere, the issue of judicial control of insolvency cases really does not arise for consideration in the Philippines. In reality the courts are simply not involved because in the area where they do have jurisdiction, cases of liquidation, no cases have been filed for years. In the area of reorganisation, the courts have not had jurisdiction since 1982 when the jurisdiction was given to the SEC.
Elsewhere in this report mention has been made of the SEC and its largely administrative role in the application of the formal reorganisation law. This has not gone without criticism. Some view the SEC as having too many functions and not sufficient time or resources to administer such an important commercial area. Others are basically distrustful of a non-judicial system of administration. This may be due to the fact that up to now the SEC has largely been its own master and able to conduct its processes as it has seen fit. That has, of course, undoubtedly produced a feeling of uncertainty and the absence of 'rule of law' comfort. The proposed new rules may help to overcome some of these difficulties.
Despite the criticisms, the 'experiment' of this approach appears to have worked in the Philippines. It is a model that should not be dismissed or overlooked.
8.7 Conclusions and proposals
- The reports of the consultants all appear to underscore the need for specialised courts and judges with experience and knowledge. A specialised court need not be one that is solely devoted to cases of insolvency. It may be one with a broad commercial jurisdiction, of which insolvency cases are a part.
- But, clearly the need is for judges who are capable of dealing with cases of corporate insolvency. That requires a wide knowledge and appreciation of commercial and corporate affairs. It seems that in some of the economies, training and education in those areas would be of considerable benefit. A high priority should be accorded for intensive and ongoing education and training of judges and court officials in those economies.
- Another area in which assistance might be appropriate (although it is an area that is clearly outside the scope of this Project) is in the organisation of the courts, the status and general accountability of judges and court officials. These are areas that appear to require considerable improvement.