(a) Is the system of ownership rights in respect of both land and other property reasonably stable and certain in this economy?

Yes. However, there are a number of different types of land ownership and these sometimes cause confusion among foreigners, including foreign lenders. Land ownership is regulated by Law No. 5 of 1960 Regarding the Basic Agrarian Law (the "Basic Agrarian Law") and its implementing regulations. These stipulate the following two general types of land ownership rights:

1. Primary Titles: These are titles derived directly from the State, consisting of:

a. Right of Ownership ("Hak Milik");

b. Right to Cultivate ("Hak Guna Usaha"):

c. Right to Build ("Hak Guna Bangunan");

d. Right of Use ("Hak Pakai"); e. Right of Management ("Hak Pengelolaan").

2. Secondary Titles: These are titles granted by holders of Primary Titles on the basis of mutual agreement, such as:

a. Right of Lease for Building (Hak Sewa untuk Bangunan);

b. Right of Share Cropping (Hak Usaha Bagi Hasil);

c. Right of Pledge (Hak Gadai);

d. Right of Lodging (Hak Menumpang).

In both categories of titles, the title holder is entitled to make use of the land for profit. The Secondary Titles are based on an agreement whereby a Primary Title holder grants the Secondary Title to a third party. Only Primary Titles are appropriate for establishing a business in Indonesia.

Set out below is a brief summary of the principal features of each type of Primary Title.

(i) Hak Milik ("HM"): This title is the most complete form of ownership of land in Indonesia. The holder can use the land for any purpose whatsoever, including housing. The title may only be held by individuals of Indonesian nationality and special legal bodies stipulated in Government Regulation No. 38 of 1963 Regarding the Appointment of Indonesian Legal Entities Which May Obtain Land with a Right of Ownership (June 9, 1963). These legal entities are government banks, cooperatives, religious and social bodies. Consequently, Indonesian legal entities, foreigners and foreign legal entities cannot obtain land with an HM title.

(ii) Hak Guna Usaha ("HGU"): An HGU may be owned by Indonesian citizens or by corporations established under Indonesian law and domiciled in Indonesia, to be used for agricultural purposes. Foreigners and foreign legal entities, in principle, cannot be granted an HGU. However, Foreign Capital Investment Companies engaging in agriculture are permitted to obtain an HGU, even if they are one hundred percent foreign-owned.

(iii) Hak Guna Bangunan ("HGB"): The holder of this title is entitled to erect buildings on the land. The title is granted for an initial period of 30 years, which may be extended for a further 20 years and thereafter can be renewed, as long as the use of the land is in accordance with applicable zoning regulations. Indonesian individuals and Indonesian legal entities, including Foreign Capital Investment Companies, may hold this title.

(iv) Hak Pakai ("HP"): This right gives the holder the right to use a plot of land and obtain the produce from such land. Land on which an HP can be bestowed includes state land, land under a Hak Pengelolaan title and land under an HM title. A Hak Pengelolaan title cannot be placed on an HGB, but an HGB can be downgraded to an HP. This right can be held by Indonesian citizens, Indonesian legal entities, and by both resident foreigners and foreign companies with representatives in Indonesia. The duration of an HP is for 25 years and may be extended for a further 20 years or for an unlimited time, depending on the project concerned.

(v) Hak Pengelolaan ("HPL"): The HPL right is given to state companies and regional governments with respect to the planning and development of state land. The right is usually given for land to be used for industrial and business purposes. The holder has the power to grant HGB and HP rights.

 

(b) In particular:

(i) is the system of land ownership and rights sufficiently developed to encourage lending on the security of land; and

Yes. Security interests over land are regulated by Law No. 4 of 1996 Regarding Security Rights over Land and Objects Relating to Land, Law. No. 4 of 1996 (April 9, 1996) ("Law No. 4") and its implementing regulations.

We note that pursuant to Law No. 4, the land titles on which a security right ("Hak Tanggungan") may be imposed are the HM, HGU, HGB, and HP on state land. These titles may become the object of Hak Tanggungan because they are registered with the local Land Office and are also transferable, which means that, if necessary, they can be transferred in payment of debts.

 

(ii) is the system of ownership and rights in relation to property other than land sufficiently developed to encourage lending on the security of such property?

Yes, but improvements can be made to the system.

Book II of the ICC generally distinguishes between movable and immovable property. Pursuant to the ICC, all movable and immovable properties, whether existing in the present or the future, can be given as security for a debtor's personal agreements.

Hypothecs and pledges are expressly recognized by the ICC. Hypothecs are given as security interests on land, vessels weighing at least 20 M3 (Article 314 of the CC) and aircraft (Article 12 of Law No. 15 of 1992 Regarding Aviation) (September 17, 1992) ("Law No. 15"). In case of Law No. 4, hypothecs on land now take the form of Hak Tanggungan.

Pledge agreements are security interests over movable property.

Fiduciary transfer agreements are not referred to in the ICC but are creatures of Indonesian jurisprudence. Under this concept, title is transferred to the secured party in a fiduciary capacity and is discharged upon repayment of the debt.

Assignments of accounts receivable are also recognized by the ICC, but there are no clear provisions governing their use or rights.

In the case of Aircraft, Article 12 of Law No. 15 provides:

(i) aircraft and helicopters which have obtained Indonesian registration and nationality codes may be subject to Indonesian hypothecs;

(ii) such hypothecs must be registered;

(iii) Law No. 15 provides that a government regulation will be issued to implement Law No. 15. However, no government regulation has been issued to date.

The Elucidation of Article 12 of Law No. 15 provides that hypothecs on aircraft and helicopters are subject to the rules on hypothecs in the ICC.

It would be helpful in the development of lending on security of various types of property if the rules pertaining to fiduciary transfer agreements, assignments of accounts receivable and pledges were codified and if a security registration system was put in place to record such security interests over movable and intangible property as a means of perfection of security interests in these types of assets.

(a) What mechanisms for taking of security over assets of a corporate borrower are available to financiers in this economy (for example mortgages over land; fixed and/or floating charges over personal property; legal and/or equitable mortgages; debentures; pledges; liens, etc.)?

The mechanisms for taking security vary depending on the type of property involved:

1. Mortgages Over Land (in Indonesia, known as a "Hak Tanggungan" or "Security Right"): Law No. 4 now governs land mortgages, replacing Book II of the ICC.

The land titles on which a Hak Tanggungan may be imposed by a corporate borrower are the Right of Ownership (Hak Milik), the Right to Cultivate (Hak Guna Usaha), the Right to Build (Hak Guna Bangunan) and the Right of Use (Hak Pakai). Please note that when a corporate borrower acquires a Hak Milik land title, it must be "downgraded" to a Hak Guna Bangunan title.

If a borrower is unable to fulfill its obligations, then the holder of the first registered Hak Tanggungan can sell the secured property through a public auction.

Prior to the issuance of the auction notice, the sale of the land can be avoided by payment of the debt and auction costs incurred to date.

Land subject to a Hak Tanggungan can be informally sold without using the public auction process, if all interested parties agree. Such a sale can only be executed if the owner-debtor and/or the secured party have submitted a written notice to interested parties one month before the transaction is to occur and have announced the sale in at least two newspapers, and/or otherwise in the local mass media, that circulate in the area where the land is located, and if no parties have objected to the sale.

2. Pledges: A pledge is a statutory security interest over movable assets. (The term "movable assets" is used in Indonesia to refer to personal property, as that term is generally understood in common law jurisdictions). Pledges and assignments are the only security interests over movable and intangible property recognized by statutory law. Article 1153 of the ICC provides that a pledge of intangible property is made by giving notification of the pledge to the party against whom the right is to be exercised. With regard to pledges of shares, a company's articles of association will typically provide for internal corporate approval requirements before a pledge of shares can be given and will set forth the formalities with regard to such a pledge.

There is no GOI registration system by which pledges of movable assets or intangible assets may be recorded.

3. Fiduciary Transfer Agreements ("FTA"): An FTA is an entirely private arrangement between a debtor and a creditor which requires no government approval and for which there is no governmental registration process. A fiduciary transfer agreement is an agreement by which title is transferred to a secured party, while the debtor is allowed to remain in possession of the collateral. Title is transferred "for security purposes", meaning that title will automatically be reconveyed to the debtor once the indebtedness has been discharged.

The FTA does not create an immediately executable title to the goods. Therefore, the creditor must first deliver a notice of default to the debtor revoking the debtor's right to use the encumbered property. The creditor must also apply to the court for an order to permit a foreclosure sale on such property. Assuming the creditor's rights under the FTA are clear, an impartial Indonesian court should enforce the creditor's rights to such property. Unless the debtor agrees, the collateral must be sold by way of public auction.

The FTA is a recognized security interest under Indonesian law, and the holder of an FTA has priority over unsecured creditors. However, since there is no system for recording a security interest in movable assets, it is not possible for a lender to ensure that an Indonesian debtor has not previously granted security over the same collateral. If the debtor has fraudulently entered into more than one FTA for the same property, the first in time prevails, unless the second in time has in good faith seized and sold the property. For this reason, a secured party under an FTA should label the property secured. For example, if machinery is secured by an FTA, the secured party often will require the debtor to place a permanent label or plate on the machinery indicating that it is subject to an FTA in favour of the secured party. By this device, the secured party will put all other potential lenders on notice that such equipment is subject to the secured party's FTA and thus defeat any good faith claim by a second secured party.

There are issues of conflict between the holder of an FTA and a holder of a Hak Tanggungan. Typically, the terms of the Hak Tanggungan will provide that any equipment or plant permanently affixed to the land will become subject to the Hak Tanggungan. This may create a situation where competing and conflicting rights exist between the secured party under the Hak Tanggungan and the FTA. It is not clear under Indonesian law which of the two secured parties would prevail in the event of a dispute. We believe that the majority of legal opinion in Indonesia would favour the holder of the Hak Tanggungan, since that security device is recognized by statute. However, the matter is not free from doubt. The holder of the FTA would be well advised to obtain a waiver from the holder of a Hak Tanggungan with respect to such property.

4. Fiduciary Assignments of Accounts Receivable ("Assignment of Accounts Receivable"): This security interest is perfected only when notice is given to the account debtor. Notice need not be given to the account debtor until such time as the creditor becomes concerned that default will occur or has occurred. In practice, no notice is normally given to account debtors until an event of default occurs. Upon the notification of such an assignment, the account debtor is required to pay the accounts receivable directly to the creditor.

Due to the fact that the Assignment of Accounts Receivable cannot be legally registered so as to give notice to third parties, it is difficult to determine if this security has been given previously. If the account is fraudulently transferred to a third party who in good faith collects the account, the third party shall prevail over a creditor holding the Assignment of Accounts Receivable for such account.

 

(b) In practice, which of these types of security are most commonly employed by financiers?

All are commonly used, but in practice, mortgages and pledges of shares and pledges of cash accounts are preferred. Personal and corporate guarantees are commonly employed by financiers, but these are not security interests.

 

(c) Is there a system of registration in this economy for any of these types of security taken by financiers?

Under Indonesian law, there is a registration system for mortgages of land (security rights), fiduciary transfers over aircraft and ship mortgages. There is no system of recording or registering security interests in other movable assets or intangible assets.

The system of registration for the grant of a Security Right ("Hak Tanggungan") over land is as follows. The Security Right is initiated by the landowner's execution of the Deed of the Grant of Hak Tanggungan (the Akta Pemberian Hak Tanggungan or ("APHT") before a Land Deed Official (a Pejabat Pembuat Akta Tanah or "PPAT"). The PPAT is required to deliver the APHT and other necessary documents to the local Land Office not later than seven working days after the APHT is signed. The Head of the local Land Office then registers the grant of the Hak Tanggungan in a Hak Tanggungan Land Book, and records the APHT on the Certificate of Land Title. Finally, the Head of the local Land Office issues and hands over a Certificate of Hak Tanggungan to the creditor within seven working days after the complete application for Hak Tanggungan registration, which includes the APHT and all other necessary documents, has been filed.

 

(d) To what extent are priorities between competing securities regulated?

The first in time to register or obtain a security interest prevails.

(a) When a corporate borrower is in financial difficulties and a secured debt has become due, would it be usual or customary for a secured lender and/or the corporate borrower to attempt to negotiate a suitable arrangement for repayment and/or refinancing before the secured lender invokes legal enforcement methods?

Yes. Lenders and borrowers almost always attempt to negotiate an amicable agreement for repayment of debt or refinancing of debt before a lender, secured or not, evokes legal enforcement methods in Indonesia. Both are aware of the uncertainty of enforcement methods. If it is not possible after a suitable period of time for the secured lender to reach an agreement, then enforcement methods may be used by the lender, including foreclosure of security by a secured lender.

 

(b) What mechanisms are available to security holders to enforce their securities under the legal system of this economy (For example, power to take possession of the property, power to appoint a receiver, power to foreclose on a mortgage, power to sell the secured property, power to wind up the corporate borrower)?

A secured creditor must exercise its foreclosure rights against its security through the courts, if the debtor resists foreclosure. The foreclosure procedures vary depending upon the type of security involved. There are no self-help remedies in Indonesia. Accordingly, if the debtor resists repossession by way of security foreclosure, court intervention is required.

 

(c) Do these methods include that a secured creditor may 'self-enforce' the security (ie, without the need for an order of a court or the consent of a regulatory authority)?

Please see our answer to question (b) above.

 

(d) In practice, which method(s) of enforcement are most commonly employed by security holders?

Holders of security interests in collateral most often use the Indonesian courts to enforce their security.

 

(e) Briefly describe the process involved in these method(s).

The process involved in foreclosing security is to file a law suit against the debtor at the District Court level. Once a final judgment is received in favor of the secured party (i.e., appeals have been exhausted or no appeal is taken by the debtor), the secured party can proceed to foreclose the security and commence the sale of the collateral. Foreclosure is conducted through the State Auction Office under the supervision of the District Court.

In most cases, the debtor will appeal from the District Court's judgment to the High Court and then to the Indonesian Supreme Court. Only when a final judgment has been issued by the final court of appeal (or the debtor does not appeal) can security be foreclosed. The appellate process generally consumes three to five years and can be longer.

In Indonesia, a notarial deed acknowledgment of indebtedness is sometimes used to document debt. If the debtor defaults, the lender may request the District Court to enforce the acknowledgment of indebtedness. In this case, the judgment of the District Court is a final judgment, from which no appeal can be taken. Based upon the District Court's judgment that the debt is due under the acknowledgment of indebtedness, execution of security may proceed and an executive order, or fiat execusi, will be issued. It should be noted, however, that acknowledgments of indebtedness have been disfavored by the Indonesian courts over the last 10 to 15 years and are not generally enforced in the manner discussed above. The Indonesian courts have required acknowledgments of indebtedness to be "pure" in form, meaning the typical loan terms, covenants, conditions, representations and warranties cannot be contained in the document. As a result, this form of document is no longer as often used as it was once was.

(a) How effective is the judicial or court system for the purpose of enforcing secured property rights?

Opinions may and probably do differ on this subject. However, we believe that most secured creditors regard the Indonesian judicial system as highly ineffective in general, including the system for the enforcement of security rights. This is true with regard to all security rights, including mortgages. The process is time consuming, expensive and unpredictable.

(a) What effect, if any, does the commencement of insolvency proceedings in respect of the corporate borrower (ie where an application has been filed for some type of insolvency procedure but has not yet been adjudicated) have on the process of security enforcement?

Answer: Prior to a default under the secured creditor's loan agreement and security document, the secured creditor has no rights with respect to the collateral.

If the debtor has defaulted under a secured creditor's loan agreement, then the secured creditor may foreclose the security under the terms of his loan and security agreement. The filing of an application for bankruptcy is most often an event of default under such documents. This would allow the secured party to commence foreclosure proceedings against the secured property. However, under the Bankruptcy Law, once an application for bankruptcy has been filed, no action may be taken by a secured party until 90 days after the declaration of bankruptcy.

In order to prevent the possibility of the debtor disposing of his assets, and possibly prejudicing the interests of the creditors in settling the debtor's debts, Article 7 of the Bankruptcy Law provides that any creditor or the public prosecutor may, prior to the declaration of bankruptcy, file a petition with the court to:

(i) seize part or all of the assets of the debtor; or

(ii) appoint an interim receiver to:

(a) supervise the management of the debtor's business; and

(b) supervise payments to creditors, and transfers or encumbrances of any assets of the debtor which, in the framework of bankruptcy, require the approval of the receiver.

The above petition may only be granted if such actions are necessary to protect the interests of creditors. The court may require the creditors to provide security in a reasonable amount if such petition is granted.

(b) What effect, if any, does the formal pronouncement of an insolvency administration in respect of the corporate debtor have on the process of security enforcement?

In general, after a bankruptcy declaration, the debtor, including the corporate debtor, forfeits his right to manage his assets. The management and settlement of the bankrupt estate, which includes the total wealth of the bankrupt debtor at the time of the bankruptcy declaration, together with any property acquired during bankruptcy, comes under the control of the supervisory judge. The Commercial Court is obligated to hear the opinion of the supervisory judge before deciding upon any matters related to the management and settlement of the bankrupt estate. All decisions by the supervisory judge may be appealed within five days to the Commercial Court.

Secured assets are not included in the bankrupt estate. As stipulated in Article 56 of the Bankruptcy Law, any creditor holding security rights, pledges, or collateral rights over other property may execute such rights as if no bankruptcy has occurred. However, once a bankruptcy declaration is issued, the execution rights of the secured creditors must be deferred for up to 90 days from the date of the bankruptcy declaration. Thereafter, the secured creditors must exercise their rights not later than two months after the debtor is deemed to be insolvent. This occurs after a declaration of bankruptcy and the marshalling of the assets by an appointed receiver. The deemed date of insolvency is the date on which the receiver determines that there are insufficient assets to pay in full all unsecured creditors.

There are some conditions where the 90 day deferment does not apply:

(i) claims of creditors which are secured by cash and rights of creditors to reconcile debt by the exercise of set-off rights;

(ii) during the period of the deferment, the receiver uses of the property of the bankrupt estate under his supervision to continue the debtor's business, provided reasonable protection is given to creditors and to third parties;

(iii) if there is an earlier termination of bankruptcy, or if the debtor is deemed insolvent prior to the expiration of 90 days; and

(iv) if creditors or third parties file a petition with the receiver to remove such deferment or to change the conditions of such deferment.

In the event the debtor submits a petition for permanent suspension of payments before the bankruptcy decision is pronounced, a temporary suspension of payments is issued immediately. Within 45 days, the unsecured creditors and the debtors must meet to determine if they can agree on a permanent suspension of payments. If they agree, the permanent suspension of payments is extended for not more than 270 days after the date of the decision on the temporary suspension. Secured creditors must defer the execution of their security interests until the expiration of this latter period, to allow all creditors and the debtor time to agree to a permanent reconciliation.