The Bankruptcy Law does not specifically mention the types of
claims of creditors that are admissible for payment. However,
Articles 1131 and 1132 of the ICC provide in general that a creditor
is entitled to recourse against the general assets of a debtor
for non-payment of its debts, and that the proceeds of any sale
of such general assets are to be divided among all of the creditors
on a pro-rata basis based on the respective amounts owing to each
creditor. Article 1131 of the ICC stipulates in full that: “Any
and all movable and immovable properties of a debtor, whether
those are present or future debts, shall account for his personal
obligations”. Article 1132 of the ICC states in full that: “The
debtor’s goods will serve as a joint guarantee for his creditors;
their proceeds shall be divided pro rata among them, in proportion
to the debt of each, unless a legal priority among the creditors
exists”.
While the Bankruptcy Law and the ICC do not directly address
what types of claims might be admitted in a bankruptcy proceeding,
we believe that all types of claims can be admitted. The court
would need to determine whether a particular claim should be admitted
as an unsecured claim against the bankruptcy estate and the amount
of such claim.
One recent decision of the Commercial Court is noteworthy in
this regard. While the decision is not publicly available, the
Indonesian press has reported that a judge of the Commercial Court
dismissed a creditor’s application for bankruptcy because the
debt had been accelerated for reasons of a default in payment.
The Court in that case considered the action as premature until
the debt matured according to the original repayment date.
We note that not all claims are treated equally under the ICC.
Certain privileges under Indonesian law are created pursuant to
Articles 1139 and 1149 of the ICC. These provisions will be further
discussed below.
While a privilege under these Articles does not create a security
interest in a particular asset of the debtor, the holder of a
privilege will be entitled to a preferential distribution of certain
of the debtor's assets over unsecured creditors that do not hold
a privilege if the proceeds of the sale do not cover all creditors’
claims.
A secured creditor’s rights to its collateral will rank ahead
of such privileges but behind the legal costs of foreclosure and
taxes. Pledges and mortgages are the only devices recognized by
statutory law for creating security interests in, respectively,
movable and immovable property (Article 1134 of the ICC) and creditors
who hold pledges and mortgages are categorized as secured creditors.
We assume that the holders of fiduciary transfers and assignments
of accounts would be similarly treated.
If bankruptcy proceedings are commenced against a debtor, secured
creditors must exercise their rights within two months after the
bankrupt is deemed to be insolvent. This state of insolvency will
occur after a final declaration of bankruptcy is issued and after
the verification meeting is held to reconcile claims.
Article 1134 of the ICC also provides that secured creditors'
claims based on pledges and mortgages have priority over all unsecured
claims "except where otherwise specifically provided by law".
Article 1139(1) of the ICC provides that foreclosure court costs
have priority over secured creditors’ liens. These expenses must
thus be paid out of the proceeds of the sale of assets prior to
payment to the secured creditors.
Article 21 of Law No. 9 of 1994 Regarding the Amendment to Law
6 of 1983 on General Tax Provisions and Procedures (November 9,
1994) provides that the State has a preferential right and priority
over all other rights, except for court costs incurred in the
auction of assets, expenses incurred to safeguard goods, and court
costs incurred with regard to inheritance. Accordingly, the proceeds
from the sale of both secured and unsecured assets must be used
for the payment of the debtor’s taxes prior to any other claims
except those noted for court costs and auction expenses.
Article 110 of Law No. 25 of 1997 Regarding the Labor Code (which
was to have been effective on October 1, 1998, but which has been
postponed) provides that in the event an employer is declared
bankrupt or is liquidated, the employees’ wages are given a priority
based on the “prevailing regulations”. This ambiguity has not
yet been clarified by a government regulation.
As mentioned above, under Indonesian law, certain creditors are
given privileges over specific assets under Article 1139 of the
ICC and over the entire property of a debtor under Article 1149
of the ICC.
Pursuant to Article 1138 of the ICC, the privileges conferred
by Article 1139 rank above those created under Article 1149. Thus,
specific priorities rank ahead of general priorities. As noted
above, claims for national and local taxes take priority over
either type of privilege.
Article 1139 of the ICC provides that certain specific assets
of the debtor are subject to the priority claims of certain categories
of creditors, and that such claimants are entitled to the proceeds
of the sale of these specific assets prior to the claims of general
unsecured creditors.
Article 1139 of the ICC provides that certain specific assets
of the debtor are subject to priority claims from certain categories
of creditors, and that such claimants are entitled to the proceeds
of sale of these specific assets prior to claims from general
unsecured creditors. The privileges created by Article 1139 of
the ICC are as follows:
(i) claims for court costs arising solely from the auction of
movable or immovable property (these claims also have an expressly
stated priority over claims based on a pledge or mortgage);
(ii) claims relating to leases of real property attached to the
property concerned;
(iii) claims of unpaid sellers of movable goods for the sale
price of those goods attached to such goods;
(iv) claims for costs incurred in connection with the storage
or conservation of goods attached to such goods (e.g. the claims
of an unpaid warehouseman or conservator);
(v) claims of workmen for work performed upon movable goods attached
to such goods, regardless of the location of the goods;
(vi) claims of an innkeeper attached to goods of the debtor in
the custody of the innkeeper;
(vii) claims with respect to freight costs and related expenses
attached to the goods carried;
(viii) claims of workmen, such as carpenters, for work performed
in connection with the construction and repair of immovable property
attached to the property, provided that the claims are not more
than three years old and the debtor still owns the property; and
(ix) certain claims against public servants as a result of a
breach of their obligations.
Article 1149 of the ICC sets out general priorities as follows:
(i) legal fees, exclusively arising from auction and the safeguarding
of estates. (These costs have priority over pledges and mortgages.);
(ii) reasonable claims for burial costs;
(iii) claims for medical and hospital expenses in connection
with a terminal illness;
(iv) employee wage claims for the current and preceding year;
(v) claims for supply of basic necessities to the debtor and
his family for the preceding six months;
(vi) claims of boarding schools; and
(vii) claims relating to debts of minors and persons under guardianship
and claims relating to expenses incurred in the maintenance and
education of minors.
In summary, the assets of the bankrupt estate will be applied
to the creditors’ claims in the following order of priority:
(i) court and auction costs;
(ii) taxes;
(iii) claims of secured creditors;
(iv) privileged creditors; (v) unsecured creditors.
