- Payment terms in Indonesia are around 30 days on average. However, in recent years, the payment behaviour of Indonesian companies has deteriorated. Domestic law regulates the issue of late payment.
- Legal action in Indonesia is usually lengthy and costly while the appeal process provides debtors with an opportunity to further delay the proceedings. As a result, conducting orchestrated debt-collection efforts is the best option.
- The insolvency framework has improved over the last few years so that the amount of inconsistent decisions that used to be rendered has been reduced. But in practice the insolvency system is still to be tested.
Collecting in Indonesia
Availability of financial information
There are very few reliable financial information regarding Indonesian companies because partnerships and sole traders (which comprise 69% of registered entities in Indonesia) are not required to file audited annual financial statements whilst private limited companies (29% of registered entities) are only required to file annual financial statements with the Ministry of Trade within six months after each financial year end, provided that certain criteria are met (listed companies or public companies, companies which engage in activities that collect funds from public, companies which issue bonds, companies having assets that exceed IDR 25 billion / EUR 1,5 million, companies that are required by banks to file audited annual financial statements, foreign companies which carry out their business activities in Indonesia in accordance with the prevailing laws and are authorized to enter into agreements, state-owned companies). Public companies or listed companies have other stricter obligations but only account for 2% of registered entities.
In practice, adherence to these requirements is low and relying on specialized providers is advisable (private channels may also help obtaining reputation-based information). Allianz Trade cross analyses financial data obtained from banks, buyers, suppliers and official records to allocate each company a grade reflecting its financial health and how it conducts business. Grades represent a core of Allianz Trade’ knowledge and analyses, and help clients identify and avoid risk. Data is continuously monitored to offer the most up-to-date information to support management decisions.
Main corporate structures
Liability for business debts is determined by legal structures, which may be described as follows:
- Sole Proprietorship (Perusahaan Dagang, PD) is available for small businesses managed by an individual and for which no commercial structure is necessary. In this case, the owner is held liable for all business debts. Two or more individuals may also decide to share ownership and responsibilities through Commercial Partnerships (Firma), in which case the partners may be jointly and individually liable for the actions of the other partners. Limited Liability Partnerships (CV) may alternatively offer limited liability to the partners (under the Limited Liability Partnership Act of 2008).
- Limited Liability Companies (Perseroan Terbatas, PT, governed by Law 40/2007) are the most favoured legal entities because they require reasonable minimum capital funds (Rp 50 million, about EUR 3,000) whilst the shareholders‘ liability is limited to their contribution. A limited liability company is required to have at least two shareholders.
- BUMN companies (Badan Usaha Milik Negara) are State Owned Enterprises (SOE), owned by government agencies.
- Subject to certain restrictions under the prevailing laws, foreigners may carry out businesses in Indonesia under Foreign Direct Investment scheme by establishing a foreign investment limited liability company or a joint venture limited liability company. Any company established for the purpose of foreign investment is locally referred to as a PMA company (Perusahaan Penanaman Modal Asing). PMA company is essentially a limited liability company with more stringent obligations compared to the domestic limited liability company and must comply with the requirements under the foreign investment laws (Law 25/2007 and its implementing regulations). The minimum capital required to establish a foreign investment company is Rp. 10 billion (approximately EU 600,000). Foreign businesses may also set up representative offices in Indonesia in order to conduct liaison functions or for marketing purposes. However, representative offices of foreign companies are prohibited from pursuing core business activities, entering into transactions or generating income.
Indonesia has a mixed legal system in which Civil Law works together with religious principles and local customs. The Law No. 48 of 2009 concerning Judicial Power grants specific attributions to various District Courts acting in first instance: Religious Courts would usually deal with family matters; Administrative Courts would deal with claims brought against official decisions and acts. Finally, General Courts (peradilan umum) would generally deal with criminal and civil cases whilst Commercial Courts (located in the five largest District Courts) decide on disputes that relate to the bank‘s liquidation process (Law No. 24 of 2004), intellectual property and insolvency claims (Law No. 37 of 2004). The Supreme Court supervises the work of both District Courts and High Courts (acting as appeal Courts) and it has the authority to adjudicate a petition of judicial review (i.e. examination of a statute or lower rank law against the Law / Undang-Undang).
It should be added that it is a requirement to draft contracts in Bahasa Indonesia when an Indonesian party is involved, but the parties may also enter into bilingual contracts in Bahasa Indonesia and another language of their choice. In 2013, the District Court of West Jakarta has declared a contract void as it was not drafted in Bahasa Indonesia and, although Indonesia does not recognize
binding precedents and judgment from one Indonesian court does not bind other Indonesian courts, a party intending to enter into contracts with Indonesian individuals or companies is advised to comply with this rule.
According to the Law on Judicial Power, the courts must be independent but in practice they keep facing a high dose of corruption and the overall system suffers a lack of reliability. Having said this, although transparency has always been an issue, some improvements have been made by the Supreme Court to ease access to information.
Days Sales Outstanding (DSO)
Payments terms in Indonesia is usually around 30 days on average (2015 figures); however, payment behaviours of Indonesian companies in recent years has deteriorated and delays may reach up to 20 days on average.
Most Foreign Investment Companies (PMA) are good payers provided that they have sufficient cash-flow liquidity and solid revenue streams and as long as all contractual conditions are met. Middle to large Private National Companies similarly tend to preserve their reputations and would thus avoid being black-listed or credit defaulted due to overdue payments. Most delays can therefore be found with SMEs - which can encounter payment difficulties if they have short term liquidity issues or are under-capitalized - and State-Owned Enterprises (SOEs) which have rather questionable payment behaviours and are known to be late in meeting their payment obligations.
Late payment interest
Indonesian law prescribes no standard payment terms, but the Civil Code regulates late payment interest, which has to be paid by the defaulting party upon request of the non-defaulting party before a court.
Two sorts of interest would apply. On the one hand, a conventional interest rate (bunga konvensional) may be agreed by the parties through a contract and apply in case of late payment event or if a breach of other obligations occurred. On the other hand, if no contractual agreement exists, a 6% per annum legal interest rate (bunga moratoir) is set by law. The legal late payment interest is calculated from the date it is requested to the court, whilst the conventional interest rate is calculated as provided in the contract. In both cases, commencing legal proceedings is necessary to obtain payment.
Debt collection costs
Retention of Title (RoT) rights allowing the preservation of goods until the related invoice is paid in full is provided under the Civil Code. Ownership rights under Indonesian law are transferred to the buyer as soon as the goods have been delivered, whether or not the goods have been fully paid. RoT therefore only grant the seller a “reclaim right”, provided that (i) the goods are still with the buyer and that (ii) reclamations occur within 30 days after the goods’ delivery to the buyer.
The Civil Code however does not recognize the concept of “extended” RoT, hence, when the buyer has transformed and/or sold the goods, reclaim would not be possible and the seller would have no option but to request payment of the unpaid goods from the court. In addition, RoT agreements would have a role to play when the debtor becomes insolvent because RoT holders are considered as preferred creditors during insolvency proceedings in Indonesia (see below).
Bank guarantees may usually be obtained provided that a cash deposit equivalent to the requested guarantee is given, but it is advisable to negotiate down payments (35 to 40% of transactions are paid in advance).
Legal dunning ought to start with a registered Demand Letter recalling the debtor’s obligation to pay the principal together with late payment interest.
Ordinary legal action may only commence when amicable collection has failed and the parties have first attempted to reach a compromise. The creditor may then file a claim with the District Court, which is given responsibility for serving the debtor with summons. If the debtor fails to appear on the hearing to lodge a statement of defence, the court has discretion to organize a second hearing or to release a default judgment (verstek / verstekvonnis).
Prior to considering the debtor’s defence, as previously mentioned, the court must first verify whether the parties have tried to reach an agreement or amicable settlement through mediation, as mandated by the Supreme Court Regulation No. 1 of 2008 concerning Procedures of Mediation at Court. If the parties have undergone the mediation process, the panel of judges will then continue the hearings and the parties’ evidence will be examined. The court would then render a decision and may award remedies in the form of compensatory or punitive damages.
- A duly executed Special Power of Attorney / Surat Kuasa Khusus;
- Statement of Claim;
- Rejoinder (duplik) or reply to the Defendant‘s response;
- List of (documentary) evidences
Lodging an appeal
Dissatisfied parties may lodge an appeal against decisions rendered in the first instance, before the High Court, within 14 days following the notification of the decision. The appellate court would then review the decision, taking issues of fact and law into consideration. Decisions rendered in second instance may also be appealed against (cassation) before the Supreme Court, which awards are final and binding on the parties. The Supreme Court however only has authority to consider questions of law.
It should be emphasis that appeal proceedings have a suspense effect; therefore, as long as the proceedings have not been terminated a judgment cannot be enforced against the debtor. Appeal proceedings may be extended to the Supreme Court, which in practice gives debtors major means to delay the decision and increase procedural costs.
Enforcing court decisions
How long could legal action take?
The timescale to obtain a court order varies and depends on the procedure, on the tribunals’ expertise and availability as well as on the context of the file. District Courts would usually take six months to one year before rendering a decision in the first instance, but it is not unusual to wait for years in order to obtain a final and enforceable decision since appeals would often delay the process extensively.
The proceedings may take a longer time when a case involves foreign parties as the (court) summons will need to be served to the foreign parties via diplomatic channel.
How much could this cost?
The Civil Procedure Code does not leave room for procedural costs and the courts hardly award costs in civil litigation proceedings. Each party must thus expect to bear its own legal fees.
Contingent fees whereby the legal professionals are entitled to receive a percentage of the final award are allowed though uncommon. Practitioners would rather tend to charge a flat fee or on hourly basis and, sometimes, an additional success fee.
Alternatives to legal action
Alternative Dispute Resolution methods (ADR)
Mediation and arbitration (under Law No.30/1999) is increasingly common in Indonesia, especially when the dispute relates to large international contracts. In fact, the Indonesian National Mediation Centre (Pusat Mediasi Nasional) was set up in 2003 to this purpose. Mediation involves nomination of a mediator who is given responsibility for helping the parties to reach a compromise. In other words, the mediator has no authority to decide on the behalf of the parties and they cannot bind the parties with a decision. An agreement is only binding if a settlement agreement is entered into between the parties at the end of the mediation. The mediator really acts as a facilitator to settlement.
Arbitration involves the parties agreeing to rely on an independent and impartial third-party arbitrator, who is given authority to settle their dispute on their behalf. The arbitrators’ decision will be binding on the parties.
As an out-of-court settlement method, ADR can be cost-effective, generally reduces delays, allows preservation of confidentiality and offers a binding decision which may then be enforced before the courts if necessary. When international transactions are involved international arbitration may also be considered.
Other matters shall be subject to the provisions of laws on arbitration, under the Law of the Republic of Indonesia Nr. 30 dated August 12, 1999 regarding Arbitration and Alternative Dispute Resolution.
Enforcing foreign awards
Enforcing foreign judgments may prove impossible. Indeed, Indonesia is not party to any treaty concerning reciprocal enforcement of judgments. This means that it would also be difficult to enforce, abroad, the decisions of Indonesian courts.
International arbitration awards would however be enforceable insofar as Indonesia is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958).
The Bankruptcy Law adopts the principle of territoriality. A bankruptcy procedure initiated in another jurisdiction has, in principle, no effect in Indonesia. Assets located in Indonesia belonging to a company which has been declared bankrupt outside Indonesia are not considered part of the bankruptcy estate.
Insolvency in Indonesia is not a matter of cash flow or a matter of balance sheet. A debtor having two or more creditors and failing to pay at least one debt that has matured and become payable may be declared insolvent by the decision of Indonesian Commercial Court, either at his own petition or at the request of one or more of his creditors. The term “failing to pay” is interpreted broadly and does not necessarily mean that the debtor does not have sufficient cash flow to pay his debts. Sometimes, a debtor would be declared insolvent by the Indonesian Commercial Court when, following a Suspension of Payment procedure, no composition plan has been approved by the creditors and the court alike.
The Insolvency Law No 4/1998 (‘Law 4/1998’) has been replaced in 2004 by the Law on Insolvency and Suspension of Payment No 37/2004 (the ‘Insolvency Law’), which governs insolvency and suspension of payment procedures in Indonesia. This framework has reduced the amount of inconsistent decisions which used to be rendered, but in practice the insolvency system is still to be tested.
Restructuring the debt
Informal debt restructuring in Indonesia is in principle a renegotiation of a contract between the parties and advantages are varied, especially compared to the procedural and practical difficulties in enforcing any security that the creditor may have obtained. A range of options are available in this process, including but not limited to interest rate reductions, debtor rescheduling and the granting of additional securities.
Suspension of Payments’ proceedings may be initiated by the debtor or its creditors (under Article 2 of the Insolvency Law) when the debtor company is facing temporary liquidity problems which are likely to be solved, as long as the court has not declared the debtor insolvent.
The debtor retains the ability to manage the company (under the supervision of a court-appointed Administrator and a Supervisory Judge) and is given an opportunity to submit a composition plan to the creditors. If the latter approves the composition plan (secured creditors representing more than 50 per cent of the secured creditors represented at the meeting and holding at least 66.67 per cent in value of the total claims of all the secured creditors; and unsecured creditors representing more than 50 per cent of the unsecured creditors represented at the meeting and holding at least 66.67 per cent in value of the total claims of all the unsecured creditors), and the Commercial Court ratifies it after receiving a written report of the Supervisory Judge, the composition plan becomes binding on all the parties to the exception of the dissenting secured creditors. These dissenting secured creditors may try to reach an alternative agreement with the debtor which will need to be coordinated with the administrator and other creditors to ensure that such dissenting secured creditors do not benefit unfairly. In practice, such creditors often opt to receive prompt payment of their debts but with a substantial discount.
If the creditors and the Commercial Court reject the composition plan, the insolvency proceedings would commence. In order to support the company during the composition phase, the court would generally order a temporary 45 days moratorium, followed by an extendable 270 days maximum permanent moratorium suspending all enforcement claims against it.
Under Indonesian Insolvency Law, a company’s insolvency would be pronounced by the court if the debtor has at least two creditors and that it is unable to pay one of the two debts due and payable. ‘Insolvency’ would occur upon demand of the debtor or its creditors. Once the Commercial Court accepts the insolvency petition and declares the debtor insolvent, a 90-day moratorium shields the company from enforcement proceedings. A Receiver is appointed to manage the estate and to distribute the proceeds of the sale under the authority of a Supervisory Judge.
It should be noted that the debtor is allowed to propose a composition plan at all times. If approved by the creditors and ratified by the court, such plan would halt the liquidation process.
Priority rules normally apply whilst distributing the proceeds to the creditors. Tax debt (not exceeding five years) would be repaid first. Post-insolvency creditors (Procedural costs, post-insolvency financing) would then be given priority over other creditors and would be entitled to receive their debt in full. The claims of preferred creditors, secured creditors (including RoT holders) and employees would be considered next. Unsecured creditors would come last.
Holders of retention rights shall be differentiated from holders of security rights which hold security interests pursuant to specific security agreements with the debtors.