Background
The first case of Corona Virus Disease 2019 (“COVID-19”) in Indonesia was confirmed in early March of 2020. Since then, due to the rapid spread ofCOVID-19 among the Indonesian people, the Government of Indonesia (“GoI”) has issued new regulations as part of its efforts to stop the COVID-19 outbreak within the country, inter alia, (i) the Presidential Decree No.11 of 2020 concerning the Determination of Public Health Emergency regarding COVID-19 on 31 March 2020; (ii) the Government Regulation No. 21 of 2020 concerning Large-Scale Social Restrictions for Acceleration in the Handling of COVID-19 on 31 March 2020; and (iii) the Minister of Health Regulation No. 9 of 2020 concerning Guidelines on the Large-Scale Social Restrictions for Acceleration in the Handling of COVID-19 on 3 April 2020.
Through those regulations, the GoI has opted to implement regional Large-Scale Social Restrictions in handling the COVID-19 outbreak, which limit individuals’ activities and goods movement from certain provinces or regencies/cities that are suspected to have been infected by COVID-19. The said restrictions are in the forms of (i) temporary closure of schools and workplaces; (ii) restrictions on religious activities; (iii) restrictions on activities at public places or facilities; (iv) restrictions on social and cultural activities; (v) restrictions on modes of transportation; and (vi) restrictions on other activities especially relating to defense and security aspects.
Even though there are several permitted public and private sectors that are allowed to remain open during Large-Scale Social Restrictions, such as (i) defense and security; (ii) public order; (iii) food distribution; (iv) oil and gas fuel; (v) health service; (vi) economy; (vii) finance; (viii) communication; (ix) industry; (x) export and import; (xi) distribution; (xii) logistic; (xiii) other basic needs (with variation according to the regional regulation on Large-Scale Social Restrictions), it is inevitable, that such restrictions are causing disruption not only to the daily lives of Indonesians, but also to the operations and supply chains of businesses across sectors in Indonesia. As a result, many businesses are currently struggling to survive, dealing with cash-flow deficit and liability problems, e.g. aviation, hospitality, and retail.
Facing the possibility of losing income and accumulating more debts, distressed businesses are now in an exceedingly difficult position. As it is still unclear how long the COVID-19 outbreak will last, in order to mitigate its further impact, restructuring can be considered as one of the options to help distressed businesses to recover. For Indonesian businesses that have a business structure in the form of Limited Liability Company (Perseroan Terbatas/“LLC”) which are currently facing financial challenges due to the COVID-19 outbreak, restructuring options as described below can be a consideration.
Restructuring Options
In considering restructuring options, firstly an LLC should identify urgent issues regarding their business activities so that it can continue to operate (going concern) amidst the COVID-19 outbreak in accordance with the applicable laws and regulations in Indonesia regarding, among others: manpower, business competition, specific business activities, investment, capital market (if it is a public company), and state-owned enterprises (if it is a state-owned enterprise). Based on the identified issues, then the said LLC may opt for restructuring options, as follows:
1. Organizational Restructuring
1.1 Assets Selling
In order to make a leaner and more efficient business process, an LLC can sell its assets, such as (i) shares in its subsidiary companies (if LLC is a holding company); and/or (ii) fixed/immovable assets, that are not directly related to its main business activities or not adding any significant value to its final products or services. By doing this, the said LLC can use the proceeds from the sale to finance the business operation for its main business activities and it can also focus on expanding the main business activities. However, it is important to note that this option can be done if it has been approved in accordance with the internal corporate approval under the said LLC’s articles of association and the assets that will be sold are not being pledged as collaterals. If the assets are being pledged as collaterals, then approval from the security interest holder(s) is required. In this case, the security interest holder(s) will demand acceleration in debt repayment from the said LLC to release the collaterals. This will be difficult to do for the LLC that has cash-flow deficit issue. Therefore, it is better to sell the assets that have clean and clear titles (free from any kind of encumbrances).
1.2 Assets Utilization Cooperation
a. Build-Operate-Transfer (“BOT”) and Build-Transfer Operate (“BTO”) Schemes.
If an LLC found that it has idle fixed assets that are not being utilized in the maximal way or has projects that are not being developed, which resulting in the said assets/projects are not generating much revenue and instead lead to higher maintenance cost, the LLC can consider reducing unnecessary cost and at the same time utilize the assets by implementing assets utilization cooperation schemes with third parties, among others, BOT and BTO schemes. With BOT scheme and as agreed in the BOT agreement, the LLC will cooperate with a third party in which the said third party will build a project on the cooperated assets and after the completion of the project construction, the said third party will operate it for a certain period and gain the benefit from the operation of the assets/projects to cover the previous construction cost incurred by the third party and the profit intended. After the operation period as agreed in the agreement is expired, the said third party will return the assets/projects back to the LLC as the owner. On the other hand, with BTO scheme and as agreed in the BTO agreement, the LLC will cooperate with a third party in which the said third party will build a project on the cooperated assets and then after the completion of the project construction, the said third party will transfer the assets/projects to the LLC as the owner. Subsequently, the LLC will operate the said assets/projects and is obliged to pay back the previous construction cost incurred by the third party. BOT and BTO schemes are viable options for an LLC that has idle fixed assets or underdeveloped projects, but it does not have the capital and technical skill in building certain projects on the said assets.
b. Joint Operation
Assets utilization cooperation schemes with third parties can also be done through a joint operation scheme by (i) establishing a joint venture company; or (ii) entering into a joint operation agreement. With a joint operation scheme, the said LLC and third party might share the capital and technical skills that are needed in utilizing the cooperated assets in the maximum way. In establishing a joint venture company, the said LLC and third party will form a new and separate legal entity that will be assigned to manage and operate the cooperated assets. On the other hand, entering into a joint operation agreement will not lead to the establishment of a new and separate legal entity, but the said LLC and third party will stipulate certain terms on how to manage and operate the cooperated assets in the joint operation agreement. Joint operation schemes are a viable option for LLC that have either capital or technical skill in managing and operating certain projects on the cooperated assets, which will be shared with the third party.
1.3 Merger, Consolidation and Demerger
If an LLC identifies that a structural change is needed for it to be able to continue to operate its business activities, restructuring options such as merger, consolidation and demerger in accordance with the Law No. 40 of 2007 concerning Limited Liability Company (“Law No. 40/2007”) may be considered. In merger, one or more companies will be merged with another existing company which result in, by law (i) the assets and liabilities of the merging companies being transferred to the surviving company; (ii) the shareholders of the merging companies becoming the shareholders of the surviving company; and (iii) the merging company’s status as a legal entity ceasing to exist. The Board of Directors (“BoD”) of the merging and surviving companies shall compose a merger plan. The said merger plan must be approved by the Board of Commissioners (“BoC”) and the General Meeting of Shareholders (“GMS”) of each company.
Prior to the submission of the merger Plan to the GMS for approval, the BoD of each company are obliged by Law No. 40/2007 to compose the summary of the merger plan and must announce the said summary to the (i) public, at least via 1 national newspaper; and (ii) employees of each company in written manner, at the latest 30 days before the GMS’ summon of each company. Within the 14 days after the said announcement, the creditors will have the right to raise any objection to the merger plan. The creditors are considered to have approved the merger plan if they do not raise any objection during the given period. If there is an objection raised by any of the creditors, then the BoD of the said company must find a solution to settle such objection. If the BoD fails to resolve it by the time of the GMS, the said objection would be submitted to the GMS to find a resolution, and the merger cannot be conducted if no resolution is agreed on. If the objection is from the shareholders, then the aforesaid shareholders may only use their rights to ask the company to buy its shares at a fair price.
Subsequently, the GMS resolution on the approved merger plan must be stated in an Indonesian notarial deed. The said notarial deed must be submitted to the Minister of Law and Human Rights to be approved or to be notified (depending on the amendments being made to the articles of association of the surviving company). Afterward, the BoD of the surviving company shall announce the result of the merger in 1 or more national newspapers within 30 days as from the date the merger comes into effect.
As for consolidation where two or more companies consolidate themselves by means of establishing a new company, this results in, by law, (i) obtaining the assets and liabilities of the consolidating companies; and (ii) the consolidating companies’ status as legal entities ceasing to exist, thus the implementation process itself is similar to the merger process as mentioned above. On the other hand, a demerger process option will result in, by law, all of the assets and liabilities of a company being transferred to 2 or more companies (pure demerger: the demerging company will cease to exist) or a part of the assets and liabilities of a company being transferred to 1 or more companies (partial demerger/spin-off: the demerging company will remain in existence). Some provisions under Law No. 40/2007 on the merger and consolidation process can be applied to the demerger process. However, further stipulation specifically for the demerger process has not been set out in a Government Regulation as mandated by Law No. 40/2007.
1.4 Capital Injection
If an LLC identifies that fresh funds are needed for it to be able to continue operating its business activities, a capital injection option in increasing its capital, either through an Initial Public Offering (“IPO”) (of shares) or funds injection from new strategic investor(s) may be considered by the said LLC to resolve financial problems. For the IPO option, further compliance with the Indonesian capital market, stock exchange and Central Securities Depositoryregulations are mandatory. However, due to the compliance mandatory, the IPO process is rather time-consuming. Therefore, for the LLC that urgently need fresh funds, the IPO option is not a viable option. Capital injection by new strategic investor(s) is more reasonable to do considering the financial condition of the said LLC. It is also important to note that there is a possibility that the new strategic investor(s) will demand to control LLC through its majority shareholding and/or composition of BoD and BoC to influence corporate activities. This option can be done in accordance with the articles of association of the LLC regarding capital injection.
2. Debt Restructuring
If an LLC identifies that its debts need to be restructured, then the said LLC needs to re-review the terms and conditions as stipulated in its credit/loan agreement whether debt restructuring is allowed under the said agreement. Nevertheless, the LLC as the debtor may request to its creditor(s) to renegotiate certain terms in the said credit/loan agreement, such as rescheduling the repayment, extending the due date, requesting for interest rate and sanction relief, and changing the repayment method as well as the instalment amounts. As long as both parties consent, there is always room for negotiation to amend the previous binding credit/loan agreement under Article 1320 and 1338 of Indonesian Civil Code.
In addition, LLC as the debtor may opt for a debt to equity swap scheme to restructure the debt. This scheme may or may not be already stipulated in credit/loan agreement either as an option or a mandatory scheme if the debts are due and payable. If this scheme is already stipulated in the credit/loan agreement, the said due and payable debts will be converted into shares of the LLC, excluding the interest rate and penalties (if any). If this scheme is not stipulated in the credit/loan agreement, then the LLC as the debtor may offer the debt to equity swap scheme to the creditors. Generally, this scheme is allowed if it is approved by the creditor(s) and the GMS of the LLC. However, this scheme will be difficult to do if the creditor(s) are bank(s) since banks usually prefer not to own shares of an LLC. If the creditor(s) are affiliated to the LLC, the conversion will usually be conducted easily.
To help business owners in negotiating debt restructuring terms with their creditors, especially the Banks and Non-Bank Financial Institutions (“NBFIs”) amidst COVID-19 outbreak,the GoI has issued new regulations that are related to restructuring in financial services sectors, namely:
a. OJK Regulation No. 11/POJK.03/2020 concerning the National Economic Stimulus as Countercyclical Policy on the Impact of the Spreading of COVID-19, which took effect on 16 March 2020 ("OJK Regulation No. 11/2020").
OJK Regulation No. 11/2020 allows banks (conventional banks, sharia banks, sharia business units, rural banks and sharia rural banks) to set out and implement their internal policies that will support the economic growth stimulus for debtors that are affected by the COVID-19 outbreak, including debtors that have micro, small and middle businesses. The said internal policies should cover (i) asset quality determination policy; and (ii) credit or financing restructuring policy. In implementing the internal policies, banks should always take into account the applicable risk management regulations. In addition, banks should have guidelines to determine (i) the criteria of the affected debtors; and (ii) the affected sectors.
Under OJK Regulation No. 11/2020, banks are allowed to provide new credit or financing and/or other types of funding to the affected debtors with the determination of such new credit or financing and/or other funding collectability will be separated from the previous credit or financing and/or other funding that was granted to the said debtors before they were affected by the COVID-19 outbreak.
b. OJK Regulation No. 14/POJK.05/2020 concerning Countercyclical Policy on the Impact of the Spreading of COVID-19 for Non-Bank Financial Services Institutions, which took effect on 17 April 2020 (“OJK Regulation No. 14/2020).
OJK Regulation No. 14/2020 allows NBFIs to restructure financing for the debtors that are affected by the COVID-19 outbreak. In implementing this, NBFIs shall consider, at least (i) the process and policy of financing restructuring for the debtors from the fund owner which are signed by the authorized official, in the event that the financing distribution was conducted through joint financing and channelling; (ii) a request of financing restructuring from the debtor that is affected by the COVID-19 outbreak; and/or (iii) a restructuring feasibility assessment from the NBFIs.
Under OJK Regulation No. 14/2020, NBFIs are allowed to provide new financing to the affected debtors on the basis of adequate financing analysis so as to give confidence regarding the debtor’s good faith, ability and undertaking to pay off the financing in accordance with the agreement.
With the above-mentioned regulations coming into effect, based on the OJK press release dated 8 May 2020, the realization numbers of restructuring of COVID-19 affected debtors are as follows:
a. Banks
(i) 74 conventional/sharia banks have restructured.
(ii) 1,020,000 debtors are undergoing restructuring with a value of IDR207,200,000,000,000. Among them are 819,923 micro, small and middle businesses with a restructuring value of IDR 99,360,000,000,000.
b. NBFIs
(i) 183 financing companies have received requests for restructuring.
(ii) 735,111 financing contracts were approved for restructuring with a value of IDR28,130,000,000,000.
(iii) 508,080 financing contracts are in the process of restructuring.
Therefore, any LLC that needs to restructure its debts with creditors that are banks and NBFIS, may opt to request a debt restructuring provided that it meets the criteria set out by the banks and NBFIs in accordance with the applicable laws and regulations in Indonesia.
If the options mentioned above are unsuccessful, there is a possibility for any of the LLC’s creditors, especially the creditors who do not hold secured collateral(s), to file a bankruptcy petition under Law No. 37 of 2004 concerning Bankruptcy and Suspension on the Payment of Debt Obligation (“Law No. 37/2004”), in which the said bankruptcy petition can only be filed against a debtor who has 2 or more creditors and has failed to pay in full at least one of its due and payable debts. If the debtor is declared bankrupt, the debtor will lose its right to control and manage its assets due to the assets becoming a bankruptcy estate. The bankruptcy estate will be controlled and managed by a receiver appointed by the court under supervision of a supervisory judge. Subsequently, the said receiver will settle the debtor’s obligation with its creditors.
However, during the bankruptcy proceeding, the debtor still has the right to offer a composition plan to all of its creditors on how the debtor will settle or repay the debts. If the said composition plan is approved by the creditors and ratified by the court, then the debtor’s bankruptcy status will be revoked. Therefore, the debtor may continue its business activities which enable it to generate the expected revenues in order to repay the debts in accordance with the terms as stipulated in the said approved and ratified composition plan. If the composition plan is rejected, then the bankruptcy proceeding will be continued.
Besides the bankruptcy proceeding, the Law No. 37/2004 also offers a suspension on the payment of debt obligation proceedings that may be filed by the debtor in the event that the debtor who has more than 1 creditor and is unable to, or predicts that it would not be able to continue to pay its due and payable debts. There are 2 stages of the said suspension, as follows:
- Temporary suspension, which will last for 45 days from the court decision on temporary suspension being read out. The court will appoint a supervisory judge and 1 or more administrator(s) who will manage the debtor’s assets together with the debtor.
- Permanent suspension, which will last for 270 days from the court decision on temporary suspension being read out. During that period of time, the court will decide, based on the approval of the creditors, whether or not to grant the debtor the permanent suspension (including its extension).
During this process, the debtor still has the right to offer a composition plan (as described previously in the bankruptcy proceeding) to all its creditors on how the debtor will settle or repay the debts. However, if the composition plan offered is rejected by the creditors and the suspension period has expired, thus the court will declare the debtor bankrupt and the bankruptcy proceeding will commence.
In light of the COVID-19 outbreak, the bankruptcy or suspension on the payment of debt obligation proceedings can be carried out through (i) an e-court application system for court administration (including submission of a lawsuit or a petition); and (ii) an e-litigation application system for the implementation of a virtual trial/hearing, in accordance with Circular Letter of the Supreme Court No. 1 of 2020 concerning Guidelines on the Implementation of Duties During the Period of Preventing the Spread of COVID-19 within the Supreme Court and Subordinate Courts, as last amended Circular Letter No. 4 of 2020, dated 12 May 2020 juncto Supreme Court Regulation No. 1 of 2019 concerning Electronic Administration of Court Cases, which took effect in 19 August 2019 and Decree of Chief Justice of the Supreme Court No. 109/KMA/SK/IV/2020 concerning the Application of the Guidelines on the Settlement of Bankruptcy and Suspension on the Payment of Debt Obligation Cases, which took effect on 29 April 2020. Nevertheless, certain physical hearings at the court are still allowed to take place with several restrictions applied.
How We Can Assist You
Our lawyers have extensive expertise and experience in advising our clients on various types of restructuring options and insolvency proceedings in Indonesia. We aim to guide our clients throughout the restructuring and insolvency process as effectively as possible. Our collaborative approach with other relevant professionals, such as notaries, financial advisers, public accountants and appraisers has made it possible for us to respond to our clients’ needs and provide them with comprehensive, innovative, and cost-efficient legal solutions.
Disclaimer:
This article is provided for informational purposes only and should not be construed as legal advice. The information contained in this article is accurate as of 28 May 2020, unless stated otherwise. azp legal consultants cannot be held liable for any information provided in this article. With the rapid developments on issues related to COVID-19, readers are advised to check regularly for any updates with their local authorities.
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Endang Setyowati (Senior Partner)
Email: endang_s@azp.co.id
Sri N. Ibrahim (Partner)
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