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March/April 2013

Expert Guide

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A Brief Look at Suspension of Debt Payment Obligations in Indonesia By Michael S. Carl and Dewi Savitri Reni

s part of its groundbreaking restructur-ing, Indonesian shipping company PT Arpeni Pratama Ocean Line Tbk in early 2012 completed a court-supervised debt moratorium and restructuring process

known as a Suspension of Debt Payment Obliga-tions (Penundaan Kewajiban Pembayaran Utang, or “PKPU”). This was just one of the highest pro-file examples of this debt-restructuring tool that has gained a great deal of attention from Indone-sian businesses and the courts recently.

PKPU is part of Indonesia’s 2004 Bankruptcy Law and provides creditors and debtors with an avenue to avoid liquidation bankruptcy. A PKPU gives a debtor the opportunity to prepare, negotiate and submit a composition plan to its creditors for their approval. The composition plan details how out-standing debts are to be restructured and typically provides, among other things, for rescheduled and extended payment terms, perhaps with a grace pe-riod, reduced interest rates and a waiver of penal-ties and overdue interest. More sophisticated re-structurings, including debt buybacks and equity conversions, are also possible.

As regulated under the Bankruptcy Law, a PKPU may be initiated by either the debtor or a credi-tor. If it is the debtor which initiates PKPU pro-ceedings, and the debtor is a limited liability com-pany, the debtor must first obtain the approval of its General Meeting of Shareholders. If the debtor is an individual, the debtor must obtain the con-sent of his or her spouse unless there is a prenup-tial agreement. If it is the creditor which initiates PKPU proceedings, the shareholder approval and spousal consent requirements do not apply.

A debtor’s petition for a PKPU may also origi-nate in response to a creditor’s petition to put the debtor in liquidation bankruptcy. Where a credi-tor submits a petition to the Commercial Court for the debtor’s liquidation bankruptcy, the debt-or may respond by petitioning the Commercial Court for a PKPU. The shareholder approval and spousal consent requirements do not apply where the debtor is responding to a creditor bankruptcy

petition. If the debtor’s PKPU petition is granted, the creditor’s bankruptcy petition is automatically stayed for the term of the PKPU.

There is no insolvency test that must be satisfied to qualify for a PKPU (or for liquidation bankruptcy, for that matter) in Indonesia. However, there are nonetheless two requirements that must be satis-fied. The first requirement for a successful PKPU petition (or, again, for liquidation bankruptcy) is that the debtor have at least two outstanding debts of which at least one must be due and payable but not yet paid. The second requirement is that the unpaid debt must be capable of “simple proof.” The term “simple proof ” means that the debt must not be subject to messy contract defenses requir-ing complicated legal proceedings to resolve.

If it is the debtor rather than a creditor which initi-ates the PKPU proceedings, the debtor must addi-tionally prove to the Court that it is unable to pay the unpaid debt. This is to ensure that the pro-ceedings are bona fide.

The Bankruptcy Law requires that a PKPU peti-tion be submitted through a licensed advocate and that both the PKPU petitioner and its advo-cate sign the petition. In the event the debtor is a bank, securities company, insurance company, pension fund or state-owned enterprise, a special rule applies so that only a relevant government regulatory agency, namely Bank Indonesia, the In-donesian Capital Market and Financial Institution Supervisory Agency or the Minister of Finance, may submit the PKPU petition.

A In cases where it is a creditor which submits a PKPU petition, the Court must summon the debtor not later than seven days before the first hearing. If it is the debtor which submits a PKPU petition, the debtor must provide the Court with a list of its secured and unsecured creditors, the amount of each loan and evidence of the loans. Once the PKPU is registered with the Clerk of the Court, the Court must render its decision within 20 days if the petition is submitted by a creditor or within three days if the petition is submitted by the debtor.

The Bankruptcy Law divides a PKPU into two stages, a Temporary PKPU (PKPU Sementara or “PKPU-S”), potentially followed by a Permanent PKPU (PKPU Tetap or “PKPU-T”). The maxi-mum period of a PKPU-S is 45 days from the time the PKPU petition is granted by the Commercial Court. If followed by a PKPU-T, then the maxi-mum period for both the PKPU-S and the PKPU-T together is 270 days.

The Bankruptcy Law is clear that there is no ap-peal from a Court decision granting or rejecting a PKPU petition.

If the Commercial Court grants the PKPU peti-tion, the PKPU decision will be announced in the State Gazette and two newspapers determined by the Supervisory Judge. The newspaper announce-ments will include the initial schedule for the con-duct of the PKPU proceedings and invite creditors to register for the PKPU.

Creditors have the option whether or not they wish to register for the PKPU proceedings. If they register, they will gain the right to vote on the proposed composition plan after registering their claims and providing evidence supporting their claims for verification. Whether or not a credi-tor chooses to register for and participate in the PKPU, the Bankruptcy Law provides that all of the debtor’s creditors (and not just those creditors who register for and participate in the PKPU) will be bound by any composition plan which is even-tually approved by those creditors who do partici-

pate in the PKPU proceedings and legalised by the Commercial Court.

If the debtor submits a composition plan to credi-tors during the PKPU-S, the debtor may choose near the end of the PKPU-S either to put that plan to a creditor vote or to request that the creditors vote to extend the PKPU-S into a PKPU-T so that the debtor may have more time to prepare and ne-gotiate the composition plan.

Whether the vote is on a composition plan or to extend the PKPU-S into a PKPU-T, the vote is conducted by class. There are two classes, secured and unsecured creditors.

The Bankruptcy Law requires that a majority in number and at least ⅔ in value of the members of each class in attendance vote to approve the composition plan or to extend the PKPU-S into a PKPU-T, as relevant. These same voting require-ments apply to any subsequent debtor requests to extend the PKPU-T (up to the 270-day maximum provided by law) or to approve the composition plan during the term of the PKPU-T.

Each time there is a creditor vote, the Supervisory Judge will forward the vote results to the full Panel of Judges for the PKPU proceedings for ratifica-tion.

A successful vote and judicial ratification means an approved composition plan or extension of the PKPU, as relevant.

By contrast, any failed vote means the Panel of Judges must terminate the PKPU proceedings and must additionally place the debtor in liquidation bankruptcy. Except in very limited circumstanc-es, there is no second chance once creditors vote against a proposal to approve a composition plan or to extend a PKPU. The debtor must therefore be very careful in determining the timing and cir-cumstances of any vote.

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Michael Carl is a senior for-eign advisor at SSEK with nearly 20 years of experience practicing law in Southeast Asia. He specialises in secu-rities, mergers and acquisi-tions, and banking transac-tions. He led the SSEK team that served as Indonesian counsel in the restructur-ing of Indonesian shipping company PT Arpeni Pratama Ocean Line, one of the most complex restructurings in Indonesian history. The Arpeni project was named Asian Restructuring Deal of the Year for 2012 by the International Financial Law Review and an Asian-MENA Counsel Deal of the Year. Michael received his J.D. in 1994 from the University of California at Berkeley (Boalt Hall) School of Law and is a member of the California State Bar. He obtained an M.A. in economics from the University of Hawaii in 1990. While in Hawaii, he was a graduate fellow at the East-West Center. Prior to entering legal practice in Singapore, Michael spent a year studying Indonesian commercial law at Gadjah Mada University in Yogya-karta. He received an Indonesian law degree in 2012 from Atma Jaya University in Jakarta. He is fluent in Indonesian and proficient in Thai. Michael Carl can be contacted by telephone on +62 21 304 16700, 521 2038 and via email on michaelcarl@ssek.com

Dewi Savitri Reni is a senior associate at SSEK. Her areas of practice include debt re-structuring and insolvency, oil and gas, shipping law, mergers and acquisitions, and civil litigation. She was the lead associate in the PT Arpeni Pratama Ocean Line restructuring. Vitri received her LL.B. from the University of Indonesia, where she was honored as the Leading Stu-dent for both the Faculty of Law and the university. She earned her LL.M. in 2008 from the University of Cali-fornia at Berkeley (Boalt Hall) School of Law, which she attended on a Fulbright scholarship.

Dewi Savitri Reni can be reached by telephone on +62 21 304 16700, 521 2038 and via email on dewireni@ssek.com