Navigating commercial litigation in Indonesia

The business climate in Indonesia is characterised by a multitude of complexities and diverse business sectors with promising growth. As commercial disputes inevitably arise, there are primarily two settlement pathways: out-of-court settlements (Cession (Assignment), novation and subrogation) and court settlements (breach of contract lawsuit, bankruptcy and suspension of debt payment obligation, enforcement and arbitration). This article will look at the key features.

OUT OF COURT

Indonesian law permits the transfer of receivables or debt renewal. There are several means listed below.

Cession (Assignment) is a transfer of rights over intangible movable property, predominantly as receivables for one party to another party. The validity of transferring rights to claim through cession (assignment) relies on the existence of an authentic or private deed, which the debtor becomes obligated to honour once they are informed of the specific transfers, or on their acceptance of the cession (assignment). Legal remedies available to a party aggrieved by cession (assignment) include filing a lawsuit, terminating the agreement or resolving the matter through mediation and negotiation.

Novation refers to the process of renewing a debt, which can be accomplished through three distinct methods:

• Replacement of an existing obligation with a new obligation for the lenders (objective novation);
• Appointment of a new debtor to replace the existing debtor (subjective passive novation); and
• An event in which a new creditor is appointed to replace the existing creditor (subjective active novation).

Legal remedies available for novation include the annulment of the novation agreement or filing a lawsuit to court.

Subrogation is the transfer of a creditor’s rights to a third party who compensates the creditor. The third party is distinct from both the debtor and the creditor. There are two conditions:

• Whether the creditor, on receiving payment from a third party, concludes that the third party will exercise the creditor’s rights in his/her stead; and
• Whether the debtor takes out a loan to repay his/her debt and determines that the third party will assume the creditor’s rights.

The legal remedy for subrogation is the annulment of the subrogation agreement itself.

COURT SETTLEMENTS

Breach of contract. This type of lawsuit arises when a party to a formally constituted agreement fails to comply with its provisions. Claims for breach of contract can be pursued through out-of-court settlement or litigation. Negotiation, mediation or arbitration are all examples of out-of-court settlement. On the other hand, the litigation procedure involves filing a lawsuit to court to seek redress under the law.

There are two main factors that lay the groundwork for filing a breach of contract. First, the Indonesian Civil Code defines three primary types of breach of contract: complete non-performance; delay in performance; and incorrect fulfilment of obligations. Second, a claim for damages, which includes both actual experienced losses and the loss of potential gains (interest).

The pros of this course of action are:

• The litigation process serves as a legal recourse for parties;
• The litigation process can be used to obtain restitution for incurred losses; and
• Filing a breach of contract lawsuit is a basic legal remedy that can be taken by anyone to protect their rights under a contract.

The cons are:

• Litigation takes time due to complex steps and slow trial scheduling;
• The inability to substantiate a breach of contract could result in the dismissal of the case, causing time and pecuniary losses;
• The hearing process is open to the public; and
• The litigation processes can incur exorbitant costs.

Bankruptcy. There are two routes available under Indonesian Bankruptcy Law – suspension of debt payment (PKPU), and bankruptcy.

PKPU is a court-supervised debt restructuring that allows debtors to propose a settlement plan to their creditors. The plan will be enforced by a court-ratified settlement agreement if accepted, or the debtor will be declared bankrupt if rejected.

If the debtor or creditor decides to initiate bankruptcy rather than pursue a PKPU, there will be a complete seizure of all the debtor’s assets. These assets will be managed and liquidated by a receiver under the oversight of a supervisory judge.

PKPU and bankruptcy share similar prerequisites for filing a petition:

• At least two creditors; and
• The debtor has failed to pay at least one due and payable debt.

What differentiates the two is whether the petitioner is a debtor or a creditor. The petition should be submitted to one of Indonesia’s five commercial courts.

The key features of bankruptcy and PKPU are:

• The decision timeline for bankruptcy is 60 days, while a PKPU is three days if filed by the debtor and 30 days if filed by the creditors;
• There is no waiting period in bankruptcy, while a temporary PKPU needs 45 days and a permanent PKPU needs 270 days, maximum;
• The receiver will control the asset only if the debtor is bankrupt, conversely than a PKPU; and
• Legal remedies for bankruptcy are petitions to the Supreme Court or a judicial review, whereas a PKPU is solely a petition to the Supreme Court.

Enforcement. This is the process of implementing a legally authorised conduct or order. Parate enforcement and fiat enforcement are two available approaches. Parate enforcement refers to a creditor self-enforcing the sale of collateral if the debtor is incapable of performance. It does not require confiscation, a bailiff or a court order.

The alternative is fiat enforcement, or enforcement by court order. The court will employ enforcement measures against the property rights object by issuing respondents summons (Aanmaning) beforehand, releasing an order of enforcement, and seeking the State Auction Office’s (KPKNL) support to enforce the property rights.

Objects that could be enforced are:

• Civil case decisions;
• Settlement agreements based on the in-court mediation process;
• Notarial deeds and collaterals;
• Exequatur of arbitration; and
• Industrial Relations Court decisions.

The pros are:

• Fiat enforcement minimises legal opposition risks compared to parate enforcement;
• Fiat enforcement is swifter than parate enforcement, if the parate enforcement is opposed; and
• Fiat enforcement provides legal certainty.

The cons are:

• Legal remedies make fiat enforcement redundant compared to parate enforcement;
• Compared to parate enforcement, fiat enforcement order refusal may lead to legal uncertainty for the creditor; and
• Fiat enforcement requires a court order, which adds a layer of complexity and is more time-consuming than parate enforcement.

Arbitration. Indonesian arbitration law recognises arbitration as an alternative mechanism for resolving disputes outside the conventional court system.

It is imperative that the parties establish a written agreement through an arbitration clause that outlines the resolution of disputes originating from the agreement through arbitration. Arbitration proceedings in Indonesia are private.

Indonesia has arbitration institutions that serve as mediators in dispute resolution. However, this article primarily centres on proceedings by the Indonesian National Arbitration Board, as it is the most frequently utilised institution.

If a party in the arbitration process fails to adhere to an arbitration award, the decision may be presented to the Chief Judge of the District Court to enforce or execute the award.

On receiving an order from the Chief Judge, the arbitration judgment is enforced in accordance with the laws governing the enforcement of rulings in civil disputes that have attained permanent legal force.

The costs of arbitration are calculated according to the value of the claim made by the applicant in the arbitration petition. If the claim is below IDR1 billion (USD60,000), an administrative fee equal to 10% of the claim’s value is applied. For claims of IDR2 billion and higher, the highest percentage applicable is 0.6%.

The pros are:

• Parties can choose arbitrators that align with their interests;
• Arbitration proceedings are private;
• Arbitration awards are final, with no legal recourse or appeal; and
• They are faster than court litigation, with a 30-day determination limit.

The cons are:

• Arbitration costs vary and are often expensive; and
• Non-compliance brings enforcement complexities.