EASE OF DOING BUSINESS IN INDONESIA FROM THE PERSPECTIVE OF THE LAWYER’S QUALIFIED

OPINION By : Melli Darsa

Melli Darsa

To see whether it is easy to do business in Indonesia, then all you need to do is read the

qualification section of the legal opinion you obtain upon closing of an Indonesian transaction.

In this session, I will share with you some of these “standard qualifications”. If Indonesia wants

to have a higher index for ease of business, it must improve and/or change its laws and

regulations as well as practices in relation to the these issues. In this paper we highlight some

standard qualifications.

Not all the identified relate to corrupt practices but they do affect the ease of doing business in

Indonesia.

To the extent, these matters must go to an Indonesian court, then there is a possibility someone

will be bribing the judge to get the decision he/she requires.

THE LAWYER’S PERSPECTIVE 1

Melli Darsa

IF YOU ARE A FOREIGNER, YOU MUST STILL ENTER INTO AN INDONESIAN LANGUAGE CONTRACT IN ORDER TO ENSURE YOUR RIGHTS UNDER CONTRACT ARE RECOGNIZED Since the issuance of Law No.24 of 2009 regarding Flag, Language, National Emblem, and National Anthem (“Law No.24/2009”) on 9 July 2009, no implementing regulations have been issued causing a host of legal uncertainty on agreements entered by Indonesian private institutions (lembaga swasta Indonesia) which have not been entered since their inception in both the Indonesian language and the foreign language, and whether the entry of an Indonesian language subsequently shall be considered to be equally authentic for the purpose of Law No.24/2009. Such legal uncertainty has recently been reemphasized by certain litigation filed by an Indonesian plaintiff at one of the Indonesian district courts to challenge the enforceability of a loan agreement together with its security agreement which it entered into which were never made in the Indonesian language, whereby the district court ruled in favor of the plaintiff and declared the loan agreement and its security agreement null and void as if they never existed in the first place;

LANGUAGE MATTERS

Pursuant to Law No. 2 of 2014 on Amendment to Law No. 30 of 2004 (“Notary Law”), a notarial deed made after 15 January 2014, must be drawn up in the Indonesian language. If the parties require, the notarial deed can be made in foreign language and in such event the notary must translate the deed into the Indonesian language but in the event of different interpretation as to the content of the deed, the Indonesian language deed shall prevail;

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Melli Darsa

AS AN INVESTOR, YOU GENERALLY CAN ONLY DO DUE DILIGENCE OR A COURT SEARCH WITH THE CONSENT OF THE OBJECT OR THE PERSON INVOLVED IN ADDITION PUBLIC AND COURT SEARCHES ARE UNRELIABLE While companies established in the Republic of Indonesia are required to be registered with the Company Register in the Ministry of Trade and the Ministry of Law and Human Rights, this registration system is not reliable for the purpose of obtaining up-to-date corporate information, such as the complete articles of association or names of shareholders, directors and commissioners, and does not include information relating to encumbrances and charges over corporate assets, nor is there any other means of being apprised of such encumbrances or charges over movable assets or of the filing of any banckruptcy petition or a bankruptcy declaration. Indonesian court judgments are not systematically published and the courts are often unfamiliar with sophisticated commercial or financial transactions, leading in practice to a lack of certainty in the interpretation and application of Indonesian legal principles.

DUE DILIGENCE MATTERS 3

Although a public registry for the assets subject to fiducia security does exist, not practical to conduct a search to determine whether the assets subject to a fiducia security document have been secured by a prior fiducia security due to administrative and clerical inefficiencies. One must therefore assume there is no simultaneously created or pre-existing security interests created over such property or rights.

Melli Darsa

EVEN IF YOUR SECURITY RIGHT AS CREDITOR IS PERFECTED, YOU STILL FACE RISKS Under Indonesian law, a security interest, is of an accessory nature. The validity and existence of a security interest is conditional upon the existence of the underlying secured obligation(s) and, if the underlying obligation is void, rescinded, performed or expired, the security interest created pursuant thereto shall also be null and void. Registration of fiducia security under Indonesian law may be subject to or limited by policies or ruling of the Ministry of Laws and Human Rights of the Republic of Indonesia, as applied or issued from time to time. These policies are not systematically published nor having reliable method for obtaining up-to date accurate and complete information. A ruling of the Ministry of Laws and Human Rights of the Republic of Indonesia, purports that rights over a bank account are not considered as a property right which can be secured by a fiducia security, resulting in the registration of fiducia security over such bank account to have been rejected.

RISKS ON PERFECTED SECURITY RIGHTS 4

Melli Darsa

The broad and vague concept of “unlawful act” (perbuatan melawan hukum) as meant under Article 1365

Indonesian Civil Code as well as the notion of fairness (keadilan) and customary practice (kebiasaan) as meant

under Article 1339 Indonesian Civil Code has on occasion successfully been used by legal practitioners as a

legal basis to challenge the enforceability of certain contracts, instruments or other arrangements entered

between consenting parties pursuant to the principles of freedom of contract, not otherwise specifically

regulated by the Indonesian Civil Code or other Indonesian law (including but not limited to SWAPs and other

derivative arrangements).

in several cases in Indonesian courts, Indonesian companies which had defaulted on notes and other debt

incurred through offshore financing entities using guaranteed bond structures have successfully sued creditors

and other transaction participants through the Indonesian court system obtaining, among other relief: (i) a

declaration that the entire debt obligation is null and void; (ii) disgorgement of prior payments made to

noteholders on the notes; (iii) damages from lenders and other transaction participants in amounts exceeding

the original proceeds of the debt issued; and (iv) injunctions prohibiting noteholders from enforcing their rights

under the transaction documents and trading in the notes.

NOTION OF “UNLAWFUL ACTS” AND “PUBLIC ORDER” MAY NULLIFY YOUR CONTRACTUAL RIGHTS

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Melli Darsa

One of the most notable cases involved PT Indah Kiat, where at the final appeal level in 2006, the Indonesian

Supreme Court affirmed a lower court judgment that invalidated the notes issued through an offshore offering

structure similar to the Securities, and declared the structure as an “unlawful act”. Although the decision was

subsequently annulled by the same Supreme Court through a judicial review process (peninjauan kembali) in

2008, which generally can only be done through the introduction of new material facts which have not been

presented in the lower court (novum) or due to mistakes committed by earlier judges in lower court in

rendering the judgment, the case demonstrates that among Indonesian judges and even among Supreme

Court judges, there are often very contrasting and disparate views pertaining to question of the legality and

enforceability of structures similar to those underlying the Notes.

The broad and vague concept of “public order” (ketertiban umum) as meant under Article 66 of Law No.

30/1999 has on occasion successfully been used by legal practitioners as a legal basis to challenge the

recognition and enforceability of certain (international) arbitration awards, not otherwise specifically

regulated by the Indonesian law

NOTION OF “UNLAWFUL ACTS” AND “PUBLIC ORDER” MAY NULLIFY YOUR CONTRACTUAL RIGHTS

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Melli Darsa

Indonesian labor law is not supportive for those who are doing or starting to do business in Indonesia because the Manpower Law as contained in Law No.13/2003 is overly protective of employees, making it burdensome on employers, which may not necessarily be in profit-making. Generally, the Manpower Law discourages any termination of employment from taking place, and every one by law must avoid it all cost. If it cannot be avoided, then usually absent bankruptcy or other financial difficulties, the company must negotiate with the employees until they agree to cease working with the relevant compensation packages. Even where the workers are not performing well, it is still difficult for the Employer to fire them without it having great financial implication against them.

LAST BUT NOT LEAST, COMMENTS ON INDONESIAN LABOR LAW

The formula stipulated under Article 156 Paragraph (2) and (3) are as follows:

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Melli Darsa

LAST BUT NOT LEAST, COMMENTS ON INDONESIAN LABOR LAW (Cont’)

In addition, under Article 156 Paragraph (3) of Manpower Law stipulates, the Employee is entitled to merit or long service pay, as follows:

Even if a company is bankrupt, in bad financial condition for two years or even due to force majeure (financial crisis), the employee may request for the above formula for severance and long service pay.

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Melli Darsa

Twice the statutory formula apply in these conditions: a change of status, merger, consolidation or change in ownership, and the Employee choose not to

continue his employee with the Employer;

after the employee being sick for one year (without making it clear the criteria of being sick) and the employer paying such absent employee for one year certain salaries, the sick employee may still request to be terminated based on twice the statutory formula;

upon the death of an employee, the heirs get twice the statutory formula regardless of whether there is any insurance;

Only where there is a major fault relating to fraud, burglary, embezzlement, falsified information, intoxication, immoral acts, gambling, violation of laws, destruction of property, causing danger to other employees, and crimes punishable with imprisonment of 5 years of more, where the employee was either caught in the act or based on at least two witnesses, can termination not occur with severance through still with separation pay. In the event, where there is Collective Labor Union, the condition for the employer may be harsher, including that the action must be based on a final and binding criminal court decision.

LAST BUT NOT LEAST, COMMENTS ON INDONESIAN LABOR LAW (Cont’)

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Melli Darsa

Courts and Judges as well as the police, prosecutors, and lawyers must be absolutely non-corrupt

Public registry information must be made formally available based on reasonable and low dues (company registry, court registry, land registry)

Security interest registration systems like the fiducia register must be improved

Law No.13/2003 must be amended to be fairer on employer and SME owners, especially

Law No.24/2009 should be amended to allow foreign language contracts to be entered into, without any doubt on enforceability (including in the case of dual language documents)

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