DISTRIBUTION SYSTEM OF THE “BANKRUPT DEBTOR” ASSETS WITHIN THE INDONESIAN BANKRUPTCY ACT PERSPECTIVE

DISTRIBUTION SYSTEM OF THE “BANKRUPT DEBTOR” ASSETS WITHIN THE INDONESIAN BANKRUPTCY ACT PERSPECTIVE

1. Introduction

Based on Article 1 number 4, Act Number 37 Year 2004 concerning Bankruptcy and Suspension of Payment (hereinafter referred to as Bankruptcy Act), the term “Bankrupt Debtor” is a Debtor which has been declared bankrupt by a Court Ruling. Following the bankruptcy ruling, there will be a legal effect on all of the assets owned by “Bankrupt Debtor”, in which they are going to be in a state of General Confiscation by law. “Bankrupt Debtor” will no longer be authorized to take ownership nor management actions on all their assets. “Precisely, bankruptcy is about the assets of the Debtor, not concerning the Debtor itself”. “Bankrupt Debtors” is seen as legally incapable of carrying out legal actions related to their assets, however when it is not related to their assets then “Bankrupt Debtors” remains legally capable to take any legal actions.

The aim of putting all of “Bankrupt Debtor” assets under the State of General Confiscation is to auction off the assets and then proportionally distributes the proceeds to the creditors rather than to equally distribute it. There are 3 (three) principles that exist in the realm of property law that needs to be undertood in order to fairly distribute the auction results of the Debtor’s assets. Those principles are: paritas creditorium principle, paripassu prorate parte, and structured creditors principles, which are the basis of the Debtor’s debt settlement to the Creditors.

The paritas creditorium principle means equality within the Creditors’ position. The purpose of this principle is that the Creditors all have an equal right to all of the Debtor’s bankruptcy estate. If the Debtor is unable to pay his debts, then all of the Debtor's assets becomes the objective of his Creditors. This principle is stated in Article 1131 of the Indonesian Civil Code, which determines: “all debtor’s material possessions in the form of movable, immovable, existing or future property will be a collateral for all their commitments.”

The paripassu prorate parte principle means that the Debtor’s wealth is a common collateral for all of the Creditors, and the proceeds of the sale of the goods must be distributed proportionally between them, unless if there is a statutory reason for preferential payments between the creditors. Therefore, this principle emphasizes the distribution of the Debtor’s assets to pay off his debts to the Creditors in a more equitable manner according to the proportions (pond-pond gewijs), rather than an even distribution.

The structured creditors principle, according to this principle, the creditors in a bankruptcy proceeding are classified based on the payment priorities into 3 (three) types of creditors, namely secured creditors, preferred creditors, and unsecured/concurrent creditors. This 3 (three) types of creditors is different from the grouping of creditors in the perspective of the civil law, which only recognizes preferred creditors and unsecured/concurrent creditors.

Preferred creditors in the perspective of civil law are creditors who have the right to get preferential payment over the payment of other creditors because they have collateral rights, and also creditors who are according to the law must receive their payments first, for example privilege rights holders, retention rights holders, and so forth. Creditors who have priority rights, as holders of collateral, in the perspective of bankruptcy law are called secured creditors.

The three legal principles in the realm of property law above mentioned are crucial as legal guidelines in the distribution of the “Bankrupt Debtors” assets to their Creditors. On the other hand, it is realized that the sale of the assets of the “Bankrupt Debtor” is definitely not sufficient to pay off all of its debts, therefore it is necessary to study the responsibility of the “Bankrupt Debtor” for the remaining outstanding debt, because the assets were insufficient.

Based on the background of the problems described above, it is fascinating to explore further regarding the “Asset Distribution of the “Bankrupt Debtor” within the Perspective of Indonesian Bankruptcy Law”. Furthermore, to get concrete benefits from the understanding, the core issue is formulated below.

2. Core Issue

The core issue in relation to the distribution of assets of the “Bankrupt Debtor” in the perspective of the Indonesian Bankruptcy Law is: how is the asset distribution system of the “Bankrupt Debtor” within the Indonesian Bankruptcy Law perspective? This is essential, because the Indonesian Bankruptcy Act does not clearly regulate this matter. If this is not resolved, then the result will be legal uncertainty that will results in distrust of Indonesian Bankruptcy Law.

3. Distribution System of the proceeds from “Bankrupt Debtor” Assets Auction

The effect of bankruptcy covers the entire wealth of the Debtor when the bankruptcy judgment is handed down, including everything else obtained during the bankruptcy. As soon as the bankruptcy judgment is handed down by the Commercial Court, the “Bankrupt Debtor” has lost the rights to manage and dispose its assets and since then the rights has been transferred to the Curator. Afterwards, the Curator will carry out his duties is which “The Curator’s main role is to manage the bankruptcy estate of the “Bankrupt Debtor”, and to distribute payments from the proceeds of the auction of all Debtor’s asset to Creditors”. The Curator, under the supervision of the Supervisory Judge shall conduct the settlement of the bankruptcy assets through public auction or private sale. Proceeds from the sale of these assets are then distributed prorated to the creditors. Among these creditors there are indeed creditors who have a higher position, such as preferred creditors and secured creditors, who shall have the right to take the payment first before other creditors whose position is lower. Therefore, those prioritized creditors in principle does not need to compete with other creditors. This is defined in the Indonesian Bankruptcy Act as being outside the bankruptcy, hence they are allowed to auction off the collateral goods themselves.

As for the Indonesian Bankruptcy Act does not explicitly regulate the distribution system of the auction proceeds against the assets of “Bankrupt Debtor”, thus to ensure the existence of legal certainty, the distribution system of the auction proceeds follows pre-existing rules in the Indonesian Civil Code, which essentially has set the order of the position of the Creditors in their debt payment.

The distribution system of the auction proceeds against the assets of “Bankrupt Debtor” is based on the types of bankruptcy creditor, i.e.: Preferred Creditors, Secured Creditors and Unsecured/Concurrent Creditors. The system will be described thoroughly and in succession below.

a.     Preferred Creditors

Preferred Creditors, are privileges holder creditors, with the right to prioritize payment on their debt settlement compared to other creditors (unsecured/concurrent creditors). The Preferred Creditors holds the first priority to receive payment for their debt from the auction results of the “Bankrupt Debtor” assets. This priority is based on Article 1134 of the Indonesian Civil Code which stated: “Privileges rights are rights given by law to people who are indebted, to increase their position above other indebted people, solely based on the nature of their debt”. According to that clause, the Preferred Creditor as the Privileged Creditor is given the first priority merely based on the nature of the debt.

Moreover, it needs to be more comprehensively understood, as this Privileged Right can be imposed on certain objects as referred to in Article 1139 of the Indonesian Civil Code, and Privileged Right on all debtor’s assets as specified in Article 1149 of the Indonesian Civil Code. In fact, which of these privileges should take precedence is also regulated, as referred in Article 1138 of the Indonesian Civil Code that basically determines the Privileges Right over certain objects should be prioritized over other debtor assets.

b.     Secured Creditors

Secured creditors are creditors who hold material security / collateral items. Secured creditors include liens holders and mortgages holders. Lien is regulated in Article 1150 until Article 1166 of the Indonesian Civil Code. Should a debtor be declared bankrupt then liens holder position is outside the bankruptcy proceedings, thereby they can sell the collateral goods as if bankruptcy did not occur. This type of creditor is in a safe position as there is a guarantee of payment of the debt from the auction results of the collaterals. Along with that, mortgage holders mean the creditor whose debt are guaranteed by collateral as referred in Act Number 4 of 1996 concerning Mortgage Rights on Land and Objects Relating to The Land, and Mortgage Rights on other immovable property, such as ship mortgages.

Of the two types of creditors abovementioned, it raises the question of which debt payments must take priority on between the creditor with privilege rights on the one hand and the creditor with the liens and the mortgages on the other? To answer this question, it must be understood that the provisions of Article 1134 of the Indonesian Civil Code stated: liens and mortgages are higher than special privileges, except in when the law stated otherwise. Based on this provision, it can be seen that “if it is not explicitly stated otherwise” in the law, then the creditors with liens and mortgage rights must be prioritized for payment of their debt before the creditor with the privilege rights.

Provisions that explicitly specify prioritization of creditor with the privilege rights are stated below.

1.     Article 1137 of the Indonesian Civil Code which determines: “the rights of the State Treasury, auction offices, and other legal entities established by the government to take precedence, to exercise of that right properly and the duration of said rights are regulated in various distinctive Acts regarding those things”.

2.     Article 21 of Act Number 6 Year 1983 which has been amended by Act Number 9 Year 1994 concerning General Provision on Taxation Procedures. Amendment of Act Number 6 Year 1983 concerning General Provisions for Taxation Procedures.

Article 21 of Act Number 9 Year 1994, among other things determines:

(1)  the State has prior rights to tax bill on goods belonging to the person in charge.

(2)  provisions regarding prior rights as referred to in paragraph (1), include the tax bill principal, interest, administrative penalties, increments and billing fees.

(3)  the prior right to tax bill exceeds all other prior rights, except for:

a.     court fees which are solely due to a penalty for auctioning a movable object (a provision that is almost the same as stated in Article 1139 number 1 of the Indonesian Civil Code.

b.     costs incurred to save an item (a provision which is almost the same as those stipulated in Article 1139 number 4 of the Indonesian Civil Code).

c.     court fees which are solely due to the auction and settlement of an inheritance (a provision that is almost the same as referred in Article 1149 number 1 of the Indonesian Civil Code.)

3.     read the full Article 1139 (1) of Indonesian Civil Code

4.     read Article 1149 (1) of the Indonesian Civil Code

c.     Unsecured/Concurrent Creditors

Unsecured/Concurrent creditors are creditors who do not hold any collaterals and also not privileged rights holders. Their debts are only guaranteed automatically through Article 1131 of the Indonesian Civil Code. To obtain payment for their debt, they must compete with other unsecured/concurrent creditors. This is where the curator's role comes in after auctioning the “Bankrupt Debtor” assets. The point is that after the preferred creditor and secured creditor received the repayment of the debts, the rest of the auctioned debtor’s assets and the auction proceeds are distributed proportionally to the unsecured/concurrent creditors by the curator. There is no lineup based on the occurrence of the debts. This type of distribution is called pro-rata parte.

The Articles in number 1 to number 4 aforementioned, constitute the rights of creditors to be prioritized over the lien holding creditors and mortgage holding creditors. Based on the ranking of creditors whose payment must be prioritized as described above, it is apparent that even though the Bankruptcy Act does not clearly regulate the creditors ranking, the Indonesian Civil Code has already unequivocally and thoroughly regulated it, thereby it can provide a strong legal ground for the curators to carry out their duties of distributing the proceeds of the sale of assets of “Bankrupt Debtor”.

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