Wednesday, September 06, 2017

Lesson Learned from the Bankruptcy of Nyonya Meneer

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Bobby R. Manalu[1]

News of the bankruptcy of PT Nyonya Meneer, a well-known Indonesian jamu company which was established way back in 1919, has been hitting the headlines recently. The company is on the verge of celebrating its centenary, a milestone that few companies achieve, and it therefore came as no surprise that a petition to save the firm is currently circulating on social media.  
Alas, the often-ruthless world of business can never guarantee the survival of a given company within the marketplace, a long and illustrious histories notwithstanding. Thus, the bankruptcy of a well-known brand cannot be considered an extraordinary event. Indeed such outcomes are all part and parcel of the risks involved in the world of business and should not necessarily be viewed as having resulted from any management failures.   
Usually however, a bankruptcy decision is never the end of the road for a business, as there is still legal recourse. Indeed, if the Supreme Court ultimately disagrees with a preceding decision, then a bankruptcy designation can be revoked. 
In this case, the bankruptcy of PT Nyonya Meener is the result of the company’s failure to meet the demands of a debt restructuring process with a number of its creditors during the course of the last two years. 
According to bankruptcy expert Ricardo Simanjuntak, this declaration of bankruptcy does not represent an attempt to liquidate the corporation but rather to find a solution to its unsettled financial commitments. Indeed, the parties involved have clearly learned from the past experience of the court as regards the appointment of a receiver solely for the purpose of liquidating a healthy and fully operative insurance company. Therefore, in a case such as this, where the company was still operating prior to the declaration of bankruptcy, the receiver should continue in its business (i.e., be an ongoing concern), unless the company has ceased to operate due to the failure of its business operations. 
Commonly, in the event of a company becoming bankrupt due to technical insolvency (i.e., a temporary state of inadequate funds), then prolonging the life of the company should prove beneficial. As it continues to operate, any such company may promote its well-known name and long history in a bid to retain investors who are willing to seek solutions to the company's debts and put an end to its technical insolvency. 
Theoretically, prolonging a company’s business activities in this way represents a superior strategy as regards maintaining the company’s assets. Furthermore, in the event that a company enters into a liquidation phase, then the relevant creditors may be able to receive a satisfactory level of payment. Being able to satisfy debt payments to creditors is important, not only for the creditors concerned but for Indonesia’s overall business climate.    
In the World Bank’s Doing Business 2017 survey, Indonesia’s rank declined from 74th to 76th in terms of its ability to resolve insolvency cases. One of the underlying reasons for this decline is the low creditor recovery rate for debt, which currently stands at a mere 29.9 cents in the dollar. In the context of the current global economic downturn and the government’s goal of achieving economic growth through infrastructure projects, elevating this rank is seen as imperative if the country’s business environment is going to attract foreign investment. 
If a company’s assets ultimately prove sufficient to repay all of its debts during the relevant liquidation process, then it may request to be rehabilitated. This means that the company will not have to be dissolved. Such outcomes are ultimately rare, however in the event that a debtor is able to convince its creditors to agree to a final settlement, then such rehabilitation is possible.  
On the other hand, debtor assets should be seen within the context of the current Draft Bankruptcy Bill. Indonesia's current bankruptcy law is largely advantageous to large-scale debtors who are in possession of huge amounts of economic assets and the fact that the law does not differentiate between types and sizes of debtors means that Indonesia has a low implementation of bankruptcy processes in comparison with other countries. This is an unfortunate situation, given that bankruptcy plays an important role within business cycles. 
Historically, this approach is understandable, as the current law was enacted within the context of IMF assistance to the country, for which a bankruptcy regulation that boosted non-performing banking loans and Indonesian foreign company debt was a prerequisite. Thus, Indonesia's bankruptcy law differs from those of other countries, as it is ultimately a debt-collection tool as opposed to offering commercial relief from financial difficulties. It is thus important than any future bankruptcy-settlement mechanism and regulations which address companies and individuals should be formulated in detail. 
The World Bank survey offers an indication that the current Bankruptcy Law is ineffective and ultimately unfit for purpose. In most bankruptcy cases, in the event of a company’s assets proving insufficient for the bankruptcy process, then the receiver can request that the relevant court terminate the bankruptcy, which shall be followed by the liquidation of the company by the management or the court through the chancery court as receiver. However, this practice is diametrically opposed to the stated goal, as the company concerned gains no benefits and is left in limbo. 
The country’s bankruptcy law and its focus upon large-scale debtors, as mentioned above, impacts upon the low rates of individual bankruptcy applications here. This is in stark contrast with the higher rates that persist in developed countries. This in turn can have dreadful consequences and stories of desperate individuals who take their own lives as a result of their debts are often to be found in the media. Strengthening the individual bankruptcy mechanism also represents a strategic approach to the economy, especially within the current context of high rates of consumer credit. The lack of guarantees of sufficient funding for bankruptcy settlements alas mean that individuals rarely choose this path. Thus, Indonesia may in the future have to make a budgetary allocation for the liquidation process.  
Moreover, in order to create a more appealing individual bankruptcy paradigm here, the implementation of a fresh-start concept will be necessary. In theory, Indonesia’s bankruptcy law recognizes the bankruptcy process as a way out of financial difficulties. As we've seen however, the adoption of this approach has proved extremely limited. Indonesia’s Bankruptcy Law does not offer any automatic debt nullification as regards uncollected debt. The debtor company must thus be dissolved in the event that its assets prove insufficient to pay its creditors. On the other hand, in terms of individual debtors, unsatisfied creditors may be able to enjoy civil legal recourse in the future. However, the wider perception among the public that bankruptcy represents an attempt to absolve oneself of responsibility as regards the payment of debt still persists. 
The fresh-start concept will offer debt forgiveness to debtors and the court may declare that a debtor is free from all of their debts and can start over, even though the debtor’s assets are only sufficient to pay off part of their debts. With this approach in mind, it is expected that there shall be no situation in which a party robs Peter in order to pay Paul in the future. Indeed, research undertaken by Paul Ali, Lucinda O’Brien and Ian Ramsay and published in the Melbourne University Law Review (Vol. 40:668) has revealed that debtors in Australia who file for bankruptcy enjoy a better quality of life and improved financial management. Moreover, in the longer term, a number of other studies have shown that an effective individual bankruptcy regime can indirectly boost consumer credit.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official position of 

[1] Litigation Partner at Siregar Setiawan Manalu Partnership.
Head of Department of Public Relation of Indonesian Receivers and Administrators Associations (Asosiasi Kurator dan Pengurus Indonesia/AKPI).
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