(a) Where a corporate borrower is in financial difficulty and an unsecured debt has become due, would it be usual or customary for an unsecured creditor (particularly, a bank creditor) and/or the corporate borrower to attempt to negotiate some suitable arrangement for repayment of the debt before the creditor invokes legal recovery methods?

Yes. A corporate borrower will attempt to negotiate an arrangement suitable to the corporate borrower before the creditor evokes the enforcement mechanisms of the Indonesian courts. If, however, the debtor does not feel that the arrangement is suitable, the debtor will tend to wait for the creditor to take enforcement action. Experience suggests that the debtor will thus use the unpredictable Indonesian judicial system as part of the negotiation process.

(a) What mechanisms are available under the legal system of this economy for unsecured creditors to collect debts owed to them by the corporate debtor?

There are two mechanisms available under the legal system in Indonesia for unsecured creditors to collect unpaid debts from corporate debtors. The first is to sue the corporate debtor by submitting a law suit to the district court based on a breach of contract by the corporate debtor. The second is to bring a bankruptcy action against the corporate debtor, to wind up and liquidate the corporate debtor.

(b) In practice, which method(s) of recovery of unsecured debts are most commonly employed by unsecured creditors of a corporate debtor?

Prior to the adoption of the Bankruptcy Law, breach of contract actions in the District Court were far more common than bankruptcy proceedings. With the adoption of the Bankruptcy Law, it is expected that bankruptcy proceedings will become more common, especially so long as Indonesia's economic crisis continues.

E3. Effectiveness of judicial system

(a) How effective is the judicial and court system for the purposes of debt collection?

As noted above, opinions may differ on this question generally and also among creditors and between debtors and creditors. We believe the majority opinion is that the Indonesian judicial system has not been an effective tool for purposes of debt collection or bankruptcy. Judicial remedies are time-consuming and expensive. Even more importantly, the Indonesian judicial system's decisions have been inconsistent and unpredictable and may be subject to a variety of extra-judicial influences.

(a) What effect, if any, does the commencement of insolvency proceedings against a corporate debtor have on debt recovery proceedings?

The commencement of insolvency proceedings can halt a debt recovery proceeding. Article 7(1) of the Bankruptcy Law allows for a temporary seizure of a majority or all of the assets of the debtor prior to the declaration of bankruptcy.

(b) What effect, if any, does the formal pronouncement of an insolvency administration in respect of the corporate debtor have on debt recovery proceedings?

In addition to the seizure discussed in (a) above, a formal pronouncement would result in a stay or enforcement of a secured creditor's rights over collateral (see Article 56A of the Bankruptcy Law). The secured creditor's foreclosure must be deferred for up to 90 days from the date of the bankruptcy declaration, except for set-off and certain other rights. (See our discussion in reply to Section DD above). Enforcement requires prior authorization of the receiver or the supervisory judge. The stay applies to (i) assets of the debtor which are encumbered with a security right and (ii) assets that belong to third parties.