Ship Finance in Indonesia: Due Diligence

SSEK Indonesian Legal Consultants founding partner Dyah Soewito, senior foreign legal advisor Michael D. Twomey and Stephen Igor Warokka, an associate at the firm, have contributed the Indonesia chapter of the new Getting the Deal Through global guide to Ship Finance. SSEK Legal Consultants has one of the leading shipping practices in Indonesia. SSEK advises multinational and joint venture shipping and offshore drilling companies on all aspects of their operations in Indonesia, including advising on the establishment of joint venture companies, the opening of representative offices and the acquisition and sale of vessels. SSEK is ranked as a tier-one shipping firm by The Legal 500 and is highly recommended for its shipping practice by Asialaw.

The following is an excerpt from the Indonesia chapter of the Getting the Deal Through global guide to Ship Finance written by SSEK Legal Consultants.

How does one demonstrate title to or legal ownership of a vessel registered under the laws of your jurisdiction?

Title to and legal ownership of a vessel registered under Indonesian law is evidenced by a registration deed issued by the Indonesian Directorate General of Sea Transportation (DGST) at the Ministry of Transportation in Jakarta or a DGST official appointed by the DGST at an Indonesian port.

How can one determine whether there are any liens recorded over a vessel?

Upon receipt of a written request, the DGST may, but is not required to, issue an official statement in a letter verifying the registration deed or list√Ç­ing the mortgages of record registered against the vessel.

How does one determine whether there are any security agreements, liens, charges or other encumbrances granted by a vessel owner or affiliated party who might be a borrower, guarantor or other credit party in connection with a vessel finance transaction?

In addition to mortgages, generally speaking, security interests can be created over tangible property, accounts receivable and insurance pro√Ç­ceeds, and shares. Security interests are created over tangible property, accounts receivable and insurance proceeds by the borrower signing a security agreement known as a fiduciary security deed (FSD) and regis√Ç­tering the FSD in the Fiduciary Registration Office (FRO). The FRO does not maintain a computerized database of the FSDs registered in the FRO. Searches for registered FSDs can only be done manually at the FRO but the searches are not very reliable.

To conduct a search against the grantor of the security interest, the person conducting the search must have been given a power of attorney by the grantor. A pledge of shares can also be evidenced by an FSD and registered at the FRO but pledges of shares are most often signed as pledges and perfected by having the pledge noted in the Register of Shareholders of the company whose shares are subject to the pledge. Registers of Shareholders are maintained by each company and are not publicly available.

There is no company register maintained by the Indonesian government where share pledges executed as a pledge and not as an FSD can be checked.

Can one determine whether an obligor registered in your jurisdiction is duly organized and in good standing from a search of a public registry?

Indonesia does not recognize the concept of good standing. Until recently, there was no way of checking the status of an Indonesian company. The Ministry of Law and Human Rights (MOLHR) recently established a regis√Ç­ter that will reflect the composition of a company's shareholders, board of directors and board of commissioners, as well as its deed of establishment and amendments to its articles of association (AOA). A member of the public may request the MOLHR to provide information from the register by submitting a request to the MOLHR. However, there is no certainty that the register or the information provided by the MOLHR will be accurate.

Can the shareholders or other equity interest holders, directors and officers or other authorized signatories of an obligor organized in your jurisdiction be determined from a search of a public registry? If not, how are these parties customarily identified?

Directors are the only persons authorized to represent a company and the scope of a director's authority will be set out in a company's AOA. AOA and amendments thereto must be submitted to and approved or acknowl­edged by the MOLHR and then published in the Indonesian State Gazette. However, it is not currently possible to rely on the information in the State Gazette because publication of AOAs in the Indonesian State Gazette (cop­ies of which can be obtained at the State Printing Office) can occur months, if not years, after an AOA or an amendment thereto was signed.

Changes in directors do not require an amendment to the AOA, but the shareholder resolution electing directors will, nevertheless, need to be reported to the MOLHR within a prescribed time and reported to the Ministry of Trade. To confirm the directors of a company, one reviews the company's AOA, the resolution of the shareholders electing the current directors and evidence that such resolution has been submitted to the MOLHR in a timely manner.

In addition, a request can be submitted to the MOLHR for information on a company. If the information obtained as a result of these efforts is consistent, one can be reasonably certain as to the identities of the company's directors.

For publicly listed Indonesian companies, information on shareholders, other equity interest holders, directors and officers can be found on the website of the Indonesian Stock Exchange or in the audited financial reports of a company, which are usually publicly available.

With respect to a company's officers and employees, their powers and the determination of people who are authorized signatories will be based on board of directors' and shareholders' resolutions and powers of attor√Ç­ney, but none of these are publicly available. To bind a company, an officer or other employee must have obtained a power of attorney or other specific authorization to do so because Indonesia does not recognize the doctrine of apparent authority.

What corporate or other entity action is necessary for an obligor to enter into or guarantee a debt obligation? When is action by the board of directors or other governing body required? Must shareholders approve a guarantee?

The AOA will set out the actions necessary for an Indonesian company to borrow money or guarantee another party's debt obligation. It is common for the AOA to require a board of directors' resolution, board of commissioners' approval or shareholders' resolution and sometimes more than one of the foregoing before entering into a material debt obligation, any guarantee or any encumbrance of the company's assets.

All of these approvals would usually be required for any guarantee except for a guarantee by a parent company of one of its subsidiaries' debt obligation (in which case only the approvals required by the AOA are required). In addition, shareholder approval is required if the assets being encumbered exceed 50 per cent of the company's net assets.

Must foreign lenders qualify to do business in your jurisdiction to extend credit to a borrower organized in your jurisdiction? Will foreign creditors be deemed resident as a consequence of making a loan or other extension of credit to an obligor within your jurisdiction?

No, foreign lenders do not have to qualify to do business in Indonesia to extend credit to an Indonesian borrower and foreign creditors will not be deemed resident in Indonesia solely by virtue of making a loan or other extension of credit to an Indonesian obligor.

This publication is intended for informational purposes only and does not constitute legal advice. Any reliance on the material contained herein is at the user\'s own risk. You should contact a lawyer in your jurisdiction if you require legal advice. All SSEK publications are copyrighted and may not be reproduced without the express written consent of SSEK.