KarimSyah gives an overview of the reporting requirements and enforceability of offshore commercial loans in Indonesia, and the issues facing those involved in the field.
Over the past three decades in Indonesia, offshore creditors granting commercial loans to Indonesia-based borrowers have had to contend with a peril far greater in extent and uncertainty than the normal risks of lending. Central Bank regulations require a borrower in Indonesia to disclose certain particulars of any foreign-sourced loans to the appropriate authorities. While the laws of all countries impose disclosure requirements of some kind, few jurisdictions, if any, would negate a loan entirely on the basis that the applicable reporting requirements have not been fully satisfied. The Indonesian experience, however, starkly demonstrates that the disclosure requirements go much further than the procedural need for administrative convenience; certain cases have held the borrower’s failure to report a loan to the relevant authorities to result in annulment of the loan, thereby depriving the creditor from exercising his hallowed right to repayment. These aberrant decisions seem all the more perplexing, seeing that it was the borrower that had the obligation to report and did not do so, where the cause of such omission conceivably ranging from innocent inadvertence (mildest), to negligence (the median), through to deliberate evasion with a view to annulling the loan later (the most extreme position). Yet the decisions outlined below will amply show that the mental culpability of the borrower in failing to disclose the loan has little, if any, relevance to the issue of whether the loan is valid and enforceable. The creditor in one case was able to enforce the loan despite the borrower’s negligence in failing to report. Yet in another, the borrower’s deliberate and willful failure defeated the creditor’s right to enforce the loan by rendering the loan null and void. This short article chronicles the series of conflicting cases spanning over three decades that have justifiably stirred grave concern amongst creditors.
The progenitor case which created the controversy started in 1979 and concluded in a Supreme Court Decision issued in 1985, in the matter of PT Agfa Color Laboratories Indonesia v European Asian Bank/Midland Bank (Supreme Court Decision No. 1650 K/Sip/1979 dated 27 February 1985). The creditor, European Asian Bank/Midland Bank, granted a loan to PT Agfa Color Laboratories Indonesia, the borrower. The director and the commissioner of the borrower brought the action. They argued that the loan agreement entered into between the creditor and borrower was null and void, as it was not reported in accordance with certain reporting regulations. The District Court of Central Jakarta, as the first tier court, found for the plaintiffs and held that since the loan was not reported as required, the loan agreement itself had violated the regulations for disclosure and therefore declared the loan null and void and thus could not be repaid, despite the fact that the funds had been disbursed to the borrower. The creditor appealed to the High Court, but failed when the court confirmed the District Court's finding for the plaintiffs. The case finally reached the cassation tier and the Supreme Court upheld the decisions of the first and second tier courts, again finding in favour of the plaintiffs. The Supreme Court further mistakenly held that the disclosure regulations required a draft of the offshore loan agreement to be scrutinised by Bank Indonesia prior to the conclusion of the loan agreement, although there was no such requirement set out in the regulations.
The decision in European Asian Bank/Midland Bank seems a curious one considering that the reporting requirements were never intended to jeopardise the rights of the banks providing offshore loans to Indonesian borrowers to recover the loan proceeds through the courts. The decision alarmed many foreign bankers and caused ripples of deep concern, both to existing and potential creditors. As would be natural, creditors had perceived the reporting requirements to be purely administrative procedures which had little, if any, legal effect on the validity and enforceability of their loans. As it is the borrower that is required to make the report, no one could have imagined that the lender should be prejudiced by the borrower's failure so to do.
Whilst the full impact and legal ramifications of the Agfa Color Laboratories v European Asian/Midland Bank were being realised, the decision in Lim Poh Hock v Chartered Bank, Singapore (Supreme Court Decision No. 2985 K/Pdt/1983 dated 9 April 1985) firmly sealed the nail in the coffin for creditors’ rights of repayment, and entrenched the decision in Agfa Color Laboratories v European Asian/Midland Bank. The Lim Poh Hock case is interesting because the borrowers deliberately flouted requirements to report their offshore loans to the authority. This was to enable the borrower later to rely on their own wrongdoing in failing to report the loan as justification to annul the loan agreements which they had concluded. In that case, the creditor, Chartered Bank, Singapore, extended an offshore loan facility to an Indonesian partnership, CV Sinar Surya. The plaintiff, Lim Poh Hock, guaranteed the loan. The loan was never reported to Bank Indonesia nor to the Department of Finance. The District Court of Central Jakarta held that, since the borrower had breached the reporting requirements, the loan facility was deemed in contravention of the requirements, and rendered it null and void. Since the guarantee depended on the validity of the loan, the guarantee provided by the plaintiff was accordingly cancelled. The decision was affirmed by the Supreme Court on appeal to the cassation tier.
These two decisions have led foreign creditors to fear that offshore facilities extended by their banks would vanish in the “jungle” of Indonesian courts. If the European Asian/Midland Bank case had created the fear, the Lim Poh Hock case certainly confirmed the creditors’ fears. Note that, as a civil law jurisdiction, a court judgment in one case does not have precedential binding effect on a later case. However, there is always a tendency of courts to at least consider, if not follow, a prior judgment if they wish. Lawyers were bewildered that the validity of the loan could be wiped out by the negligence of the borrower to report the loan. Even more bewildering was the effect the decision created, in that under this rule a wrongdoer who flouted the laws was able to justify its own breach under the umbrella of protection. The creditor was left with no means of resources, having lost all his money in the hands of the borrower who now stands unjustly enriched. Such decisions could easily have spelled the end of the availability of foreign credit for Indonesian borrowers.
It was not long before the Indonesian judiciary had the opportunity to question the wisdom of its earlier decisions, and correct the iniquity perpetrated by those decisions. That opportunity was presented in the case of PT Indokaya Nissan Motors v Marubeni Corporation (Supreme Court Decision No. 2826 K/Pdt/1984 dated 27 February 1986), another action instigated by a borrower to escape its repayment obligation by seeking to invalidate the loan through its failure to report to the proper authorities. The borrower, PT Indokaya Nissan Motors, sued the creditor, Marubeni Corporation, and petitioned the court to annul its loan agreement made on the grounds that the borrower itself had failed to report the loan to the proper authorities.
In its decision, the Supreme Court of Indonesia not only departed from the earlier cases, but established a new jurisprudence. The Supreme Court held that the regulations of the Minister of Finance and Bank Indonesia were purely administrative requirements, failure to comply with which could not operate to annul the loan agreement nor adversely prejudice the creditors.
Within a year of the Marubeni decision the Supreme Court of Indonesia was blessed with the opportunity to consider another case, PT Starlight Prime Thermoplast v Bank of America National Trust and Savings Associations (Supreme Court Decision No. 1313 K/Pdt/1965 dated 15 April 1987). The facts of the case were broadly similar to Marubeni in that the borrower, PT Starlight, sought to annul the loan on the grounds of its failure to report the loans to the proper authorities. The Supreme Court confirmed their earlier decision in Marubeni, and held that the loan was valid and enforceable, notwithstanding the non-observance of disclosure requirements. The court said that the borrower was obliged to report to the Monetary Authority the receipt and repayment particulars of the loan. The sanction for non-reporting of the loan can fall only on the borrower, the party that breached the regulation, imposing a penalty of 10,000 rupiahs (less than US$10 at that time). Most importantly, the Supreme Court held that the negligence of the borrower to report its offshore loans did not render the loan agreement null and void.
These two landmark decisions of the Supreme Court of Indonesia had, for a short time, alleviated the problems that have haunted foreign bankers granting loan facilities in Indonesia in the last two decades. The decisions have also served the significant purpose of restoring creditor confidence in their rights of enforceability under loan agreements. The courts had reinstated equity and restored pragmatism.
But not for long. In 1993, in Societe General, Singapore Branch v PT Sarang Tehnik and Bambang Sardjito (Supreme Court Decision No. 2810 K/Pdt/1989 dated 20 April 1993), the Supreme Court of Indonesia ignored the proper jurisprudence in Marubeni and Bank America cases and decided to follow the irrational decisions in the earlier cases, finding in favour of the defendant (borrower). In this case, Societe General as a creditor filed a suit against its borrower, PT Sarang Tehnik and the guarantor, Mr Bambang Sardjito, for failure to repay their loan. In its defence, the defendants relied on its own negligence in failing to report the offshore facility to argue that as a result of their non compliance, the loan agreement had no binding power in Indonesia. All three levels of the courts accepted this argument.
Just when creditors believed that the misfortune of European Asian/Midland Bank and Lim Poh Hock cases were behind them, the regrettable and irrational decision in the Societe General case changed all this and engendered deep doubts and uncertainty amongst foreign creditors.
And then in 1996, relief came again. In the case of PT Young Indonesia Textile v Indian Overseas Bank (Supreme Court Decision No. 2919 K/Pdt/1993, dated 30 January 1996), the Supreme Court overruled decisions of the lower courts, similar to those in the recent previous case, declaring that the negligence to report an offshore loan to the appropriate authorities should not be rewarded and can have no bearing on the validity of the loan and the obligation of the debtor to pay the loan.
It was again thus hoped that this decision of the Supreme Court of Indonesia would cause the lower courts to rectify their positions and that the judiciary would not only maintain but, more importantly, entrench the court’s earlier pronouncements in the Marubeni, Bank of America and Societe General cases. However, that hope was yet again shattered with the issuance of the now most recent Supreme Court Decision on the issue in 2011.
NV Indonesische Overzeese Bank (Indover) v PT Djakarta Lloyd (Supreme Court Decision No. 191 K/Pdt.Sus/2011) is a different breed of case from the others mentioned above. That case was not commenced as a lawsuit based on breach of a loan contract, but stemmed from a bankruptcy application.
In 2010, Indover (through its Receivers) filed a claim to the Commercial Court of Jakarta seeking to apply for a declaration of bankruptcy of PT Djakarta Lloyd, a state-owned company. As per the requirement of the Bankruptcy Law, Indover submitted evidence that Djakarta Lloyd had an outstanding loan due and payable to Indover, and that Djakarta Lloyd also had other creditors. Djakarta Lloyd submitted its defence arguing that under the Bankruptcy Law, a bankruptcy application against a state-owned company shall only be made by the Minister of Finance. The Commercial Court accepted Djakarta Lloyd’s argument and rejected the application.
In 2011, Indover filed cassation appeal to the Supreme Court arguing that Djakarta Lloyd was not within the scope of a state-owned company as intended under the provisions of the Bankruptcy Law. The Supreme Court decided to reject the appeal. Interestingly, the considerations for the rejection did not only deal with the interpretation of the scope of a state-owned company, but it also relied on the argument on the validity of the loan from Indover to Djakarta Lloyd. The Supreme Court, oddly, made a reference to the Societe General case in providing its consideration that any extension of credit facility by an overseas creditor to an Indonesian debtor must be registered with Bank Indonesia; and failure to comply with such obligation will render the credit agreement to have no binding power over the debtor in Indonesia. The Supreme Court boldly made the conclusion that as the loan from Indover to Djakarta Lloyd had not been registered, it could have no binding power over Djakarta Lloyd and therefore the requirement of the Bankruptcy Law for the existence of a due and payable loan had not been satisfied.
This case raised eyebrows of the practitioners as it was based on all the wrong reasons. From the face of the limited documents provided to us, it does not appear that the issue of the reporting requirement to Bank Indonesia was even argued by any of the parties in their submissions. Assuming that this is the case, we find it extremely irregular for the Supreme Court to make a finding on a factual matter (that the loan from Indover to Djakarta Lloyd was not reported to Bank Indonesia) that was never in issue. Under the applicable procedural law, the Supreme Court can only make a finding on the application of the law, and not on factual evidences. Hopefully Indover will pursue its final remedy and apply for Judicial Review by the Supreme Court, but we have no information whether this has been requested.
As one can see, this has been a roller coaster ride for the creditors. The Supreme Court has continually taken contradictory positions. The latest decision has reinstalled the creditors’ fears and reconfirmed their distrust in the Indonesian judiciary. It is hoped that the Supreme Court will be able to make a consistent rectification in their forthcoming decisions. Until then, foreign creditors might be tempted to cease lending to Indonesian entities and employ their funds elsewhere - perhaps to a more consistent and less hostile jurisdiction where their rights would not so easily be blown about by the capricious winds of change.