The effects of reforming regulation in resolving insolvency towards EODB rank improvement: Evidence from Indonesia

• Published date: 01 May 2020
• Date: 01 May 2020
• DOI: http://doi.org/10.1002/iir.1372
• Author: M. Hadi Shubhan

RESEARCH ARTICLE

The effects of reforming regulation in resolving

insolvency towards EODB rank improvement:

Evidence from Indonesia

M. Hadi Shubhan

Indonesian Bankruptcy Law Study,

Faculty of Law, Airlangga University,

Surabaya, Indonesia

Correspondence

M. Hadi Shubhan, Indonesian

Bankruptcy Law, Faculty of Law,

Airlangga University, Surabaya,

Indonesia.

Email: hadi@fh.unair.ac.id

Abstract

This article examines the effectiveness of policy reform

and implementation in resolving insolvency in Indone-

sia. The Ease of Doing Business (EODB) in Indonesia

has significantly increased over the last 6 years, from

ranking 129th in 2012 to 73rd in 2019. Among the

10 EODB indicators, resolving insolvency was identi-

fied to be the highest contributing indicator. In 2019,

this indicator ranked 36th—far above the overall afore-

mentioned Indonesian EODB score, a 73rd worldwide

ranking. This article examines the factors leading to a

high bankruptcy settlement score as well as the indica-

tors that must be improved to raise Indonesia's EODB

ranking.

1|INTRODUCTION

Following the 1997 Asian Financial Crisis, the comparative stability of the New Order ended

upon President Suharto's forced resignation in May 1998 after 32 years in office.

1

This led to

political and state reform that drastically changed numerous aspects of the economic and legal

order. In the words of Nonet and Selznick regarding post-1998 policy reform,

2

many of the

changes led to a more responsive and autonomous legal system compared to the one during the

New Order

3

and Old Order

4

regimes, which consisted of repressive laws.

The Bankruptcy Law was a notable policy implemented by the Indonesian government to

promote much-needed economic reform. Furthermore, outdated government rules and regula-

tions (i.e., in the area of company law) were gradually being replaced with laws which were

more suitable for the country's rapidly globalising economy. This bankruptcy policy reform

Received: 4 June 2019 Revised: 30 January 2020 Accepted: 1 April 2020

DOI: 10.1002/iir.1372

© 2020 INSOL International and John Wiley & Sons Ltd

Int Insolv Rev. 2020;29:83–99. wileyonlinelibrary.com/journal/iir 83

fundamentally changed the principles of bankruptcy and bankruptcy settlement.

5

Indonesia

has implemented two bankruptcy policy reforms thus far; the first with the issuance of Law

No. 4 of 1998 and then with the issuance of Law No. 37 of 2004. Both laws have progressively

changed the basic concepts, philosophies, and principles of previously applied bankruptcy laws.

Despite this, the view of David Linnan is that Law No. 37/2004 still contains two basic insol-

vency approaches that reach back to the Dutch law origins of the Indonesian framework, nota-

bly liquidation in bankruptcy and a weak voluntary debt compromise procedure.

6

Such policy reform, nevertheless, is highly effective in bankruptcy settlement and bank-

ruptcy asset management. Before 1998, for a period of approximately 50 years since Indonesia's

independence, only a few bankruptcy cases were filed. According to a law firm, there were

nearly zero bankruptcy declarations pronounced by the courts in Jakarta over the past

20 years.

7

Darminto Hartono remarked that, prior to 1998, bankruptcy law simply did not exist

for all practical purposes; and debt settlements or reorganisations were treated as business mat-

ters and reconciled via negotiation and out-of-court settlements.

8

Research indicates that

approximately 130 cases have been filed domestically; in 2019 alone, a total of 549 bankruptcy

requests were made in commercial courts nationwide.

9

This equates to a national average of

one bankruptcy case a year.

Moreover, the spike in the handling of bankruptcy was especially apparent in two particular

bankruptcy courts (i.e., the commercial courts in Central Jakarta District Court and in Surabaya

District Court). The Commercial Court of Central Jakarta handled 100 cases in 1999 and this

skyrocketed to 230 cases in 2017. Meanwhile, the Commercial Court of Surabaya also handled

230 cases in the same year. The number of cases filed more than doubled after the implementa-

tion of the bankruptcy policy reform. The comparison between the average number of bank-

ruptcy cases filed domestically before and after the bankruptcy policy reform is shown in

Table 1.

Owing to this reform, the management of bankruptcy asset settlement after a debtor

declares bankruptcy has also become more efficient and effective. Prior to these reforms, settle-

ments made in bankruptcy asset management could drag on for decades. For instance, the

bankruptcy case of PT. Arafat has taken decades; in fact, the supervising judge has already been

changed four times and the case has not yet been settled to date. Following bankruptcy law

reforms, the average settlement made in bankrupt asset management takes an average of

3 years.

10

The new Bankruptcy Law provides for “a definite time frame for decision-making on

a declaration of bankruptcy”which is aimed at speeding up bankruptcy proceedings.

11

The more effective, efficient, and legally sound settlement of a bankruptcy proposal and

bankruptcy asset management is essential to the business world. Creditors hold an interest in

the certainty of the return of receivables from debtors, including the certainty of execution

against items of collateral. On the other hand, the debtors' primary concern is to immediately

resolve issues with the payment of debt obligations using their assets, so that they can return to

TABLE 1 The case comparison before and after Bankruptcy Law Reform

Period Average annual number of bankruptcy cases filed

Before 1998 1 case (throughout Indonesia)

1999 100 cases (only in one district court, Commercial Court in Central Jakarta District Court)

2019 336 cases (only in one district court, Commercial Court in Central Jakarta District Court)

Source: Commercial Court in Central Jakarta District Court.

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