A recent ruling by an Indonesian court that fully admitted claims worth $560 million by private lenders to PT Visi Media Asia, allowing them to participate as creditors in the debt restructuring mechanism of the media company, has been hailed as “unprecedented” by the country’s lawyers.

Going against the general trend of favouring domestic lenders in debt restructuring, Judge Kadarisman Al Riskandar of the Central Jakarta Commercial Court overturned a decision by court administrators who had earlier rejected the claims.

The ruling marks a pivotal moment in the landscape of corporate restructuring within Indonesia, highlighting both the strengths of the Penundaan Kewajiban Pembayaran Utang (PKPU) – the country’s chief debt restructuring mechanism – and the reforms needed to enhance its effectiveness and attractiveness to foreign creditors.

The group of private international lenders in the Visi case includes Varde Partners, Tor Investment Management, AB CarVal Investors, Arkkan Capital, Goldman Sachs, and UBS Group.

POSITIVE SHIFT

The commercial court's ruling indicates a shift towards recognizing the rights of foreign creditors within the Indonesian insolvency framework, potentially encouraging more international investment in the region, legal experts from the region say.

“Although the Indonesian legal system does not follow precedent (stare decisis), the decision by the Jakarta Commercial Court in this case still sets a positive precedent for claims filed by international creditors during PKPU proceedings in Indonesia,” say Rahayu Ningsih Hoed, senior partner, and Rudy Sitorus, senior associate, from Indonesian law firm Makarim & Taira S.

In the past, a number of private lenders have been strategically excluded by administrators and courts from the verified creditor list in debt restructuring so as to ensure that the companies’ proposals can be passed unopposed.

In this case, the court administrators had initially rejected the lenders’ claims on account of a pending lawsuit filed by Visi Media’s subsidiary, Intermedia Capital, which alleged the private lenders had unlawfully seized and enforced the shares backing their loan, according to court documents seen by Bloomberg.

In July, the company submitted a fresh restructuring proposal that would delay repayment of the principal amount to the private lenders by as much as 30 years. As the private debt funds were not included in the verified creditors list, they could not participate in any discussions on the plan.

On appeal, Judge Riskandar reversed the court administrator’s ruling, determining the lawsuit was meritless as the shares had not been transferred, allowing the private lenders to join the list of verified creditors.

The decision “offers reassurance that if claims by foreign lenders are rejected by the appointed administrators, they still have a procedural mechanism to challenge the rejection,” say Hoed and Sitorus.

“However, for a successful challenge, international creditors must follow the procedural mechanisms of the relevant Commercial Court and provide strong evidence to support their claims against the debtor declared under PKPU by that court,” they add.

STRENGTHS AND WEAKNESSES

The decision is an examination of the strengths and weaknesses of the PKPU system for international creditors, particularly as foreign investors look to ramp up investments in the country.

“One of the strengths of the PKPU process in Indonesia is the availability of mechanisms for creditors to challenge the rejection of their claims by appointed administrators. Another strength, as demonstrated in Garuda Indonesia’s notable PKPU case, is that decisions from Indonesian courts have been recognized in foreign jurisdictions. This recognition indicates that the PKPU process in Indonesia is respected and honoured internationally,” Hoed and Sitorus explain.

Indonesia’s PKPU mechanism, formulated in 2004, is relatively nascent when compared to regimes of other countries in the region, including Singapore and Malaysia, which offer international creditors multiple restructuring options, transparent and clear procedural guarantees and a line of judicial precedents to rely on for regulatory certainty.

While Indonesia’s regime is quite effective in facilitating debt recovery, given the maximum timeline of 270 days, Hoed and Sitorus say foreign investors do raise some concerns about the process.

First, they are worried about the admittance of their claims, which often arise from sophisticated transaction schemes.

Second, the lack of notification about the ongoing PKPU process poses a significant threat to international creditors who may not have feet on the ground.

“Foreign creditors may not be aware of the process if the debtor or appointed administrator fails to notify them. Although international creditors can submit their claim at any time, late submission will significantly impact their ability to protect their rights and interests from the outset of the PKPU process,” Hoed and Sitorus explain.

Third, the absence of a creditors’ committee during large and complex PKPU processes. Despite being regulated under Law No. 37 of 2004 on Bankruptcy and Delay of Payment, creditors’ committees are rarely used in practice, preventing foreign lenders from effectively participating in the debt resolution process.

Indonesia's PKPU mechanism plays a critical role in the country's debt restructuring landscape, and the recent favourable ruling for private credit lenders highlights its evolving nature. While the PKPU has strengths, including a structured framework and judicial oversight, significant reforms are necessary to enhance its effectiveness and protect creditor interests. Addressing these issues could improve the PKPU process and foster greater confidence among foreign creditors, ultimately contributing to a more robust economic environment in Indonesia.

“The most recent development is the ongoing discussion among stakeholders to revise Law No. 37 of 2004 on Bankruptcy and Delay of Payment. Although the revision is still under discussion, it is expected to cover certain aspects to further protect the creditors’ and debtors’ rights,” say Hoed and Sitorus.