The recent Coronavirus outbreak has rapidly developed into a global threat. With the declaration of the COVID-19 as a global pandemic by the WHO, the crippling effects of the outbreak on the economies are unfathomable. The effect of the large-scale social restrictions that limit both individuals’ activities and goods movement have resulted in the temporary closure of businesses and disruption in the operation and supply chains of businesses in Indonesia. As a result, many businesses are currently struggling to survive, dealing with cash-flow deficit and liability problems, while the COVID-19 outbreak remains very much active.

To mitigate the further impact of the pandemic, there are two restructuring options that can be taken by businesses that take the form of a Limited Liability Company (“LLC”), namely Debt Restructuring and Organizational Restructuring.

Option 1: Debt Restructuring

Out of Court Debt Restructuring

Generally, out-of-court debt restructuring may take the form of debt rescheduling, deduction of debt principal or interest (haircut), deduction of interest rate, asset settlement, debt to equity conversion, and cession, novation, and subrogation.

Debt rescheduling are efforts to extend the period of time in returning the debt or rescheduling of debtor’s debt to the creditor. Usually rescheduling is enacted by the creditor by giving additional time to the debtor in repaying the debt. Debt restructuring may also take the form of deduction of debt principal/interest (haircut), where a portion of the outstanding interest payments would be written off, or the suspension of payment of the outstanding principal.

Debt restructuring may also be conducted through asset settlement. In the event that the debt are unsecured debts, restructuring may take form of asset swap. Meanwhile, for secured debt, which means debt with collateral or a form of security, debt restructuring may call for the enforcement of security. The other way is to enact the debt-to-equity conversion scheme, where the creditor receives shares in the restructured debtor company in return for reducing or cancelling their debt claims.

Debt restructuring may also take the form of cession, subrogation, and novation. Cession is the act by which an entity transfers their right to claim their receivable on name (piutang atas nama), for example, in the form of registered bond, to another creditor. By signing a cession, a creditor transfers its right to claim the payment of its account receivable on name to another creditor, and thus the new creditor has the right to collect the payment of account receivable on name from the debtor. The debtor must be formally informed of the act of cession. Moreover, cession must be made under an authentic deed (Art. 613 para. (1) the Indonesian Civil Code (Kitab Undang-Undang Hukum Perdata)). In practice, there is usually a trustee (wali amanat) acting as the holder of collaterals and in registered bond, maintaining the bond holder register. The collaterals are not transferred to and registered in the name of the new creditor, but they stay registered under the trustee.

Subrogation of debt occurs when a third party obtains the rights to outstanding payment owed by a debtor as advanced payment received by the creditor from the third party. In subrogation of debt, the right to claim for the outstanding payment of the debt are transferred from the creditor to the third party as a result of the payment made by the third party to the creditor of the remaining outstanding debt. In return, the third party is granted the right to claim the remaining outstanding payment to the debtor and the right to enforce any form of security incorporated to the debt (Art. 1400 of Indonesian Civil Code).

Novation means the substitution of a new contract for an old one. This new agreement extinguishes the rights and obligations that were in effect under the old agreement. A novation is often used when the parties find that payment or performance cannot be made under the terms of the original agreement. Based on Article 1413 of the Indonesian Civil Code, there are three types of novation:

1. Objective Novation: The substitution of debt agreement between the debtor and the creditor to a new agreement that terminating their old agreement.
2. Subjective Novation (Passive): An agreement which substitutes a debtor with a new debtor, where the original debtor is relieved from the obligation to payback its debt.
3. Subjective Novation (Active): An agreement which substitutes a creditor with a new creditor, where the debtor is released from his obligation to repay the original creditor.

Debt Restructuring Within the Court

Debtors may also file for insolvency to the Commercial Court. Under the Law Number 37 of 2004 concerning Bankruptcy and Suspension of Payment (“Bankruptcy Law”), there are two types of proceedings that may be commenced for an insolvency claim:

1. Bankruptcy proceedings, under which the debtor loses its power to manage and dispose its assets; and
2. Suspension of payment proceedings, under which the debtor, upon request by the creditor or the debtor itself, is given temporary relief to restructure its debts and continue in business, and ultimately to satisfy its creditors.

1. Suspension of Payment Proceedings

The petition for suspension of payment may be filed by a creditor that foresees its debtor will not be able to continue to pay its debts when they become due and payable, or by the debtor that is unable, or predicts that it will be unable to pay its debts when they become due and payable. The aim of the suspension of payment is to provide the debtor with more time either to meet its obligations or to come to an agreement with its creditors to restructure the debts. One effect of a suspension of payment is that the debtor cannot be forced to pay its debts within the suspension of payment period. A debtor who obtains suspension of payment may still be able to manage or dispose of its asset and even obtain loans and secure its unsecured assets, provided that those acts have been authorized by the administrator and/or the supervisory judge.

2. Bankruptcy

As a last resort, bankruptcy proceeding may be taken to restructure a debt. To be declared bankrupt by the Commercial Court, a debtor who has more than one creditor and who has failed to pay in full one of its debts which is already due and payable can file for bankruptcy upon petition by either the debtor itself or by any of its creditor, whether domestic or foreign. The petition for bankruptcy may also be requested by the Indonesian Central Bank (Bank Indonesia) if the debtor is a bank, the Financial Service Authority (Otoriras Jasa Keuangan) if the debtor is a security company/stock exchange/clearing and guarantee agency/depository and settlement agency, the public prosecutor, if the bankruptcy petition involves the public interest, or by the Minister of Finance if the bankruptcy petition is against an insurance company, a reinsurance company, a pension fund, or a state-owned enterprises in the form of persero (equal to form of LLC).

After the court declares the debtor bankrupt, the debtor loses its capacity to manage and dispose of the bankruptcy estate. The power to undertake any legal action in respect of the bankruptcy estate passes to the curator (the equivalent of a receiver). For an LLC, the declaration of bankruptcy of the LLC does not extend to its shareholders because they are protected under the limited liability concept. The maximum the shareholders can be required to contribute is of the remaining unpaid amount of their capital contribution.

Debt Restructuring Regulation concerning COVID-19 Outbreak

To regenerate the economy, the Government of the Republic of Indonesia stipulates regulation concerning relaxation of debt repayment. This is regulated under the Regulation of Financial Services Authority (Peraturan Otoritas Jasa Keuangan/“POJK”) Number 11/POJK.03/2020 concerning National Incentive (“POJK 11”).

According to POJK 11, banks are allowed to implement stimulus policy to support economic growth for debtors who are affected by the COVID-19 outbreak. Debtors who are affected by the COVID-19 outbreak in this POJK is defined as debtors, including debtors from Small, Micro, Medium Enterprises, in various sectors such as tourism, transportation, hospitality, commerce, processing, agriculture, and mining that are directly or indirectly affected by the outbreak of COVID-19. The direct or indirect effect of the COVID-19 outbreak referred to in the criteria are described as follow:

1. Debtor affected as a result of the closure of transportation routes and tourism from and to the People’s Republic of China or other country affected by the COVID-19 disease as well as the issuance of travel warning from several countries;
2. Debtor significantly affected by the impact of the volume reduction of imported or exported goods due to the disruption in the supply and trading chain with the People’s Republic of China or other country affected by the COVID-19 disease;
3. Debtor affected by the obstruction of infrastructure project as a result of interruption in the supply of materials, labor force, and machinery from the People’s Republic of China or other countries affected by the COVID-19 disease.

With the stipulation of POJK 11/2020 for the requirement of loan disbursements, banks only need to assess the quality of a loan worth up to Rp 10 Billion based on a debtor’s timeliness in paying the loan’s principal and interest. Prior to the stipulation of POJK 11/2020, banks also need to assess the debtor’s business prospects and financial condition along with the requirement above. Banks are also allowed to declare a good loan despite declining quality due to the pandemic and not to categorize it as a non-performing loan.

POJK 11/2020 also enables banks to implement loan restructuring policy concerning the calculation of asset quality through interest rate reduction, extension of loan term, reduction of outstanding principal, reduction of outstanding interest, procurement of new credit facilities and/or conversion of credit to temporary equity capital.

This policy is also strengthened by the issuance of the Government Regulation in Lieu of Law (Peraturan Pemerintah Pengganti Undang-Undang or “PERPPU”) Number 1 of 2020 concerning State Financial Policy and Financial System Stability in Handling the COVID-19 Pandemic and/or in the Context of Facing Threats that Endanger the National Economy and/or Financial System Stability. This PERPPU gave Bank Indonesia the authority to conduct the necessary measure, such as providing short-term liquidity loans to Systemic Banks, or other necessary measure, in order to maintain the stability of National Economy or the National Financial System in times of threat, particularly in regards to the disruption caused by the COVID-19 outbreak.

Option 2: Organizational Restructuring

1. Merger

Merger, acquisition, and consolidation may be conducted as an option to restructure an LLC under the Law Number 40 of 2007 concerning Limited Liability Company (“LLC Law”). In merger, one or more companies merge themselves with another company which already exists with the effect that the assets and liabilities of the disappearing companies are transferred as a matter of law to the surviving company, and thereafter ending the status of the non-surviving company as a legal entity as a matter of law (Art. 1 para. (9) LLC Law). The effect of merger on the disappearing companies are as follows:

1. Assets and liabilities of the non-surviving companies are transferred as a matter of law to the surviving companies (Art. 122 para. (3) LLC Law; Art. 3(b) of Government Regulation Number 27 of 1998 concerning Mergers, Consolidations and Acquisitions of Limited Liabilities Company (“GR 27/1998”))
2. Shareholders of the non-surviving companies become the shareholders of the surviving company (Art. 122 para. (3) LLC Law; Art. 3(a) GR 27/1998)
3. The legal entity status of the non-surviving companies is terminated as a matter of law from the effective date of merger (Art. 122 para. (3) LLC Law)
4. Board of directors of the non-surviving companies cannot conduct any legal acts except as required in the framework of implementing merger. Members of the Board of Directors shall be held personally liable for violations of the foregoing (Art. 19 of GR 27/1998).

The board of directors of the non-surviving companies and the surviving companies must compose a merger plan consisting of the matters as stipulated in Art. 123 of LLC Law and Art. 7,8,9 of GR 27/1998 to request approval for merger to their respected shareholders through the General Meeting of Shareholders (the ”GMS”). Merger may only be undertaken with approval under a GMS. GMS to approve merger may be carried out if attended by at least ¾ unless specified otherwise in the Article of Association of the companies (the “AOA”) of total number of shares with voting rights. Resolution of GMS to conduct merger is valid if adopted on the basis of deliberation to reach consensus (musyawarah mufakat). Shareholders who do not approve of the merger may only utilize their rights to request the company to purchase their shares at reasonable price.

The legal act of merger must take into account the interest of the company taking part in the merger process, minority shareholders, and the employees of the company. Merger must also take into account the interest of other stakeholders and maintain a fair and healthy competition in conduct of business. Thus, the board of directors of companies which will undertake merger is required to announce the merger plan in at least one newspaper within a maximum period of 30 days prior to notice of GMS. This announcement is intended to provide opportunity to related parties in order to be informed of the existence of the merger plan and to submit objection if they feel that the merger would bring losses to their interest.

The merger plan must be approved by the GMS of each company which is then set forth in a deed of merger which is made in the presence of a public notary in Indonesian language. In the event that the merger includes amendments to the AOA of the surviving company which require approval of the minister of law and human rights (the “Minister”), the merger shall commence effectiveness from the date of approval of minister of the AOA. In the event that the merger includes amendment of AOA that does not require approval of the Minister, the merger shall take effect from the date of the deed of merger and deed of amendment of the AOA registered in the Company Registry. In the event that the merger does not include amendment of the AOA, the merger shall take effect from the date the deed of merger is signed.

2. Consolidation

Consolidation means a legal act which is conducted by two or more companies to amalgamate themselves by means of establishment of one new company. Consolidation results in the transfer of the assets and liabilities of the existing companies to the new company, and therefore the status of the existing companies as a legal entity ends as a matter of law. The aforementioned termination of status of company as legal entity occurs without undertaking prior liquidation. The existing companies are dissolved calculated from the date the deed of establishment of the consolidation is legalized by the Minister. The effects of consolidation on the disappearing company are as follows:

1. Assets and liabilities of the existing company are transferred as a matter of law to the new company resulting from the consolidation (Art. 122 para. (3) of LLC Law; Art. 3(b) and Art. 21 para (3) of GR 27/1998).
2. The shareholders of the existing companies as a matter of law are the founders of and become shareholders of the new company resulting from the consolidation (Art. 122 para. (3) of LLC Law; Art. 3(a), Art. 21 para. (1) and (2) of GR 27/1998).
3. The legal entity status of the existing companies is terminated as a matter of law from the effective date of consolidation (Art. 122 para. (3) of LLC Law).
4. Board of directors of the existing companies cannot conduct any legal acts except as required in the framework of implementing consolidation. Members of the Board of Directors shall be held personally liable for violations of the foregoing (Art. 24 of GR 27/1998).

Similar to the process of merger, the board of directors of the existing companies and the new company resulting from the consolidation must compose a consolidation plan to request approval to the shareholders through a GMS. The legal act of consolidation must take into account the interest of the company taking part in the consolidation process, minority shareholders, and the employee of the company. Consolidation must also take into account the interest of other stakeholder, the public, and maintain a fair and healthy competition in conduct of business. Thus, the board of directors of companies which will undertake consolidation is required to announce the consolidation plan in at least one newspaper within a maximum period of 30 days prior to notice of GMS. This announcement is intended to provide opportunity to related parties in order to be informed of the existence of the aforementioned plan and to submit objection if they feel that the consolidation would bring losses to their interest.

Plan of consolidation which has already been approved at a GMS must be set forth in a deed of consolidation made in the presence of a public notary in Indonesian language. This deed of consolidation constitutes the basis for the deed of establishment of the new company resulting from the consolidation. The board of directors of the existing company is required to submit written application for the legalization of deed of establishment of the new company along with the deed of consolidation to Minister within a maximum period of time of 14 days counting from the date of resolution of the GMS.

Before the new company obtain legal entity status, any legal act in the name of the new company may only be undertaken by all members of the board of directors jointly with all founders and all members of the board of commissioners of the new company and they will all be jointly and severally liable for the aforementioned legal act.

3. Takeover

In Indonesia, a takeover may be conducted by way of acquisition of existing shares issued and/or subscription of newly issued shares. For a takeover to be valid, the acquisition must be adopted into a resolution of GMS of the target company on the basis of deliberation to reach consensus (musyawarah mufakat). In the event acquisition is undertaken by another LLC, the board of directors must base its conduct of legal act of acquisition on resolution of GMS which fulfilled the attendance quorum of ¾ of total number of shares with voting rights (unless specified otherwise in the AOA).

In the event that acquisition is conducted through the subscription of new shares, the acquiring party must deliver a notice to the board of directors of the target company of its intention to conduct takeover. Following the notice, the board of director of the acquiring party and the target company with approval from the board of commissioner of each company must prepare a takeover plan. This plan of acquisition must be approved via GMS of each company.

Additionally, the legal act of takeover must take into account the interest of the target company taking part in the takeover process, minority shareholders, and the employee of the target company. Takeover must also take into account the stakeholders interest, and shall preserve fair and healthy competition in conduct of business. The board of directors of the acquirer company is required to announce the takeover plan in at least one newspaper within a maximum period of 30 days prior to notice of GMS. This announcement is intended to provide opportunity to related parties in order to be informed of the existence of the aforementioned plan and to submit objection if they take the view that the takeover would bring losses to their interest.

Takeover plan which has already been approved via GMS must be set forth in a takeover deed made in the presence of a public notary in Indonesian language. The copy of the takeover deed of the company must be attached to submission of application to obtain approval from the Minister in the event the takeover includes amendments to the AOA concerning name and domicile of the company, intention and purposes of the company, term of existence of the company, amount of authorized capital of the company, reduction of the subscribed capital, and changed status of the company.

In the event that the takeover is conducted through the acquisition of controlling shares directly from the shareholders, no notice of intention of board of director of the acquiring party to conduct acquisition to target company or  acquisition plan is required to be prepared. Acquisition of shares undertaken directly from shareholders must take into account provisions of the AOA of the target company concerning transfer of rights in shares. The effective date of such acquisition shall commence from the date of approval of Minister of the amendment of the AOA.

4. Separation

Separation involves the transfer of all or part of the assets and liabilities of a company (“transferor company”) into two or more companies (“transferee companies”). There are two ways a separation of an LCC may be undertaken, which are pure separation or partial separation. Separations require the approval of shareholders of the transferor company via GMS.

Pure separation results in all assets and liabilities of a transferor company transferring as a matter of law to two or more transferee companies, after which the existence of the transferor company will end as a matter of law. The transfer of assets and liabilities under pure separation is on the basis of general title (titel umum) that does not require a deed of transfer.

Partial separations are commonly referred to as spin-offs. Spin-offs result in part of the assets and liabilities of a transferor company transferring as a matter of law to one or more transferee companies with the transferor company continuing to exist. Legal acts of spin-off must take into account the interest of the transferor company, minority shareholders, and employee of the transferor company, and relevant third parties such as creditors and other business partners as well as the public and the condition of fair and healthy competition in conduct of business.

Resolution of GMS concerning separation is valid if adopted on the basis of deliberation to reach consensus (musyawarah mufakat). Separation may only be undertaken with the approval of the GMS of the transferor company. GMS to approve separation may be carried out if attended by at least ¾ (unless specified otherwise in the AOA) of the total number of shares with voting rights. Shareholders who do not approve of the separation may only utilize their rights to request the transferor companies to purchase their shares at a reasonable price. Plan of separation which has already been approved by the GMS must be set forth in a deed of separation made in the presence of a public notary.

5. Dissolution and Liquidation of LLC

In the event that dissolution of an LLC occurs from reasons other than merger, and/or consolidation, the dissolution of an LLC must be followed up by liquidation. Obligation to follow with liquidation must be undertaken by a liquidator or curator (in the event that the dissolution of the LLC are based on a declaration of bankruptcy). The company cannot conduct any legal acts except as required to settle all affairs of the company in framework of liquidation. Within a maximum period of time of 30 days from the date of dissolution of an LLC, liquidator is required to provide notice to all creditors concerning the dissolution of the LLC through announcement in newspaper and State Gazette of the Republic of Indonesia, and the minister concerning dissolution of the LLC for recordation in LLC Registry.

Obligations of a liquidator to conduct settlement of assets of the company in the process of liquidation include performance of:

1. Registering and collecting assets and liabilities of the company;
2. Announcing in newspaper and State Gazette of the Republic of Indonesia concerning plan to distribute assets resulting from liquidation;
3. Payment to all creditors;
4. Payment of residual wealth resulting from liquidation to shareholders; and
5. Other actions which are deemed necessary in conduct of implementation of settlement of estate/wealth.

This newsletter is for informational purposes only and solely intended to provide general information and should not be treated as legal advice, nor shall it be relied upon by any circumstance or create any relationship. All summaries of the laws, regulation and practice in the contents are subject to change. Specific legal advice should be sought by interested parties to address their particular circumstances.

If you have any question and/or wish to discuss further about the above or to discuss the impact of these legal and commercial developments in your particular case, please reach out to Cylvie at cylvie@sapartnerslaw.com and/or Sunu at sunu@sapartnerslaw.com .