Ship Finance in Indonesia: Insolvency and Restructuring

Legal Updates
Ship Finance in Indonesia: Insolvency and Restructuring
3 December 2015

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.

Is there a general scheme of reorganization or insolvency administration in your jurisdiction?

A scheme of reorganization analogous to chapter 11 of the US Bankruptcy Code is the Suspension of Debt Payment Obligations (PKPU) proceeding, which is recognized in Indonesia's 2004 Bankruptcy Law and provides creditors and debtors a way to avoid liquidation bankruptcy. A PKPU gives a debtor the chance to prepare, negotiate and submit a composition plan to its creditors for their approval. The composition plan details how out­standing debts are to be restructured and typically provides, among other things, for rescheduled and extended payment terms, perhaps with a grace period, reduced interest rates and a waiver of penalties and overdue interest.

Secured creditors are included in the composition plan process, however, they may reject the composition plan and be compensated in the amount of either the value of their security or the outstanding amount of their claim (whichever is lower).

A ship mortgage cannot be foreclosed and the vessel encumbered by the mortgage cannot be sold before the PKPU process is completed.

Will the courts of your jurisdiction respect the rulings of a foreign court presiding over reorganization or liquidation proceedings?

Indonesian courts do not recognize foreign court judgments because Indonesia has not entered into any treaty with any country concerning the enforceability of foreign court judgments. As a result, Indonesian courts will not recognize the rulings of a foreign court presiding over reorganiza­tion or liquidation proceedings.

What is the order of priority among creditors? In what circumstances will creditors be required to disgorge payments from an insolvent company?

There are three types of creditors under the Indonesian Bankruptcy Law: secured creditors, preferred creditors and unsecured creditors. Secured creditors are those holding security interests over an insol√Ç­vent company's assets. In a bankruptcy or liquidation, secured creditors may immediately execute the collateral and receive repayment of their loans, which they may also do in a PKPU proceeding if they object to the compensation plan.

However, in 2014, the Constitutional Court revised article 95(4) of the Manpower Law (Law No. 13 of 2003) and held that this article shall now read as follows:

The payment of outstanding wages of workers/laborers shall take precedence over all other types of creditors, including secured credi­tors' claims and claims of states' rights, auction houses and public institutions established by the Government, whereas the payment of other rights of workers/laborers shall take precedence over all claims, including claims of states' rights, auction houses, and public institu­tions established by the Government, except for claims by secured creditors.

As a result of this decision, the rights of secured creditors are now subor­dinated to employee wage claims, as the source of wage payments may in some cases require the sale of secured assets. Thus, the order of priority among creditors, after the issuance of the Constitutional Court decision, is:

  • tax and customs claims;
  • employee wage claims;
  • secured creditors (in the sense their collateral can be sold to pay wage claims);
  • preferred creditors (among others, payment of other rights of work√Ç­ers/laborers; and
  • unsecured creditors.

May a vessel owner provide security on behalf of other related or unrelated companies? What are the requirements for it to be enforceable?

A vessel owner may provide security on behalf of other related or unrelated companies. The approvals required under the AOA of the company providing security need to be complied with. However, other than for security being provided by a parent company to its subsidiaries, the granting of the security should be unanimously approved by shareholders, the board of directors and the board of commissioners of the granting company.

Is there a law of fraudulent transfer that permits a third-party creditor to challenge, for example, the grant of a mortgage because of insolvency of the mortgagor or insufficient consideration received by the mortgagor in exchange for the grant of the mortgage?

Yes. The Indonesian Bankruptcy Law recognizes the concept of fraudulent conveyance, or actio pauliana, under which a third-party creditor may request the Indonesian Commercial Court to nullify and set aside any legal action of a debtor that has been declared bankrupt if such action was performed within one year prior to the bankruptcy declaration and caused loss to the creditor.

Nullification can only be made if it can be proven that at the time the legal action was conducted the bankrupt debtor and the other parties involved in the action knew or should have known that such action would cause losses to the creditor.

How may a creditor petition the courts of your jurisdiction to declare a debtor bankrupt or compel liquidation of an insolvent obligor?

Bankruptcy and PKPU proceedings are initiated in the Commercial Court. The only requirement to initiate either proceeding is that the party initiat­ing the bankruptcy proceeding petition must prove the obligor has at least two creditors and that one of the debts is already due and has not been paid.

Has your jurisdiction adopted the Model Netting Act of the International Swaps and Derivatives Association (ISDA)? If not, may a swap provider exercise its close-out netting rights under an ISDA master agreement despite an obligor's insolvency?

While Indonesia has not adopted the ISDA Model Netting Act, the con√Ç­cept of netting is protected by general principles of law, provided the offset provisions of the Indonesian Civil Code (ICC) are satisfied. Article 1425 of the ICC provides that when there are two persons who are debtors to one another, a set-off may be made, as a result of which the mutual debts shall be cancelled. However, if the close-out or offset right is not secured, the offsetting party will be deemed an unsecured creditor. Before setting off any obligation with another, the parties should obtain tax advice.

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.

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