I
THE URGENCY OF INSOLVENCY TEST TO DECLARE BANKRUPT IN
INDONESIA (Applying the Theory of Balance Sheet Test under U.S
Bankruptcy Code)
A BACHELOR DEGREE THESIS
By:
DINA KHAIRUNISYAH
Student Number : 12.410.342
INTERNATIONAL PROGRAM
DEPARTEMENT OF BUSINESS LAW
FACULTY OF LAW
UNIVERSITAS ISLAM INDONESIA
2016
II
THE URGENCY OF INSOLVENCY TEST TO DECLARE BANKRUPT IN
INDONESIA (Applying the Theory of Balance Sheet Test under U.S
Bankruptcy Code)
A BACHELOR DEGREE THESIS
Presented as the Partial Fulfillment of the Requirements
To Obtain the Bachelor Degree at Faculty of Law
Universitas Islam Indonesia
Yogyakarta
By:
DINA KHAIRUNISYAH
Student Number : 12.410.342
INTERNATIONAL PROGRAM
DEPARTEMENT OF BUSINESS LAW
FACULTY OF LAW
UNIVERSITAS ISLAM INDONESIA
2016
III
IV
V
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VII
CURRICULUM VITAE
DINA KHAIRUNISYAH
Born on 19 October 1994 – Address: Pasir Putih, RT 007/RW002, Balai Jaya,
Rokan Hilir, Riau (28992) – 082328266665 – [email protected]
EDUCATION
High School : SMAN 1 Bagan Sinembah, Rokan Hilir, Riau (2009-2012)
University : Faculty of Law (International Programme), Universitas Islam
Indonesia 2012-2016)
ORGANIZATION EXPERIENCE
Student Exdecutive Organisation, Faculty of Law, Universitas Islam
Indonesia
(2012-2014)
Department of Politic, Advocacy, Social and Relations. Advocating students for
academic and non-academic issues before the Faculty‘s authorities. Organising
activities related with the departement‘s function. Having experienced to be the
Head of Orginising Committee in the event of State‘s Institutions Visit and
Treasurer of Steering Committe in the event of National Seminar.
Himpunan Mahasiswa Islam (Association of Islamic Students)
(2012-2014 Fungtionary periode, 2012-present membership periode)
Department of University, Relations and Social. Resposible in the supervision of
student organisation, organising routine training and database making for alumni
list.
Forum of Research and Legal Writing (FKPH) Faculty of Law, Universitas
Islam Indonesia
(2013-2014)
Department of Discussion. Responsible in organising routine discussion, involved
in research on current legal issues.
Juridical Council of International Program, Faculty of Law Universitas
Islam Indonesia
(2014-2015)
Department of Human Resources and Development. Responsible in the
recruitement of organisation‘s member helping members develop their personal
and organisation skill, knowledge and ability.
Student Legislative Organisation, Universitas Islam Indonesia
(2015-2016)
Head of Commission III. Managing finance of the organisation and supervising
event‘s implementation in financial aspect, and subordinated organisation‘s
expenditure.
VIII
ACADEMIC ACTIVITY
Undergraduate Thesis
The Urgency of Insolvency Test to Declare Bankrupt in Indonesia (Applying the
Theory of Balance Sheet Test under US Bankruptcy Act and Intorducing a two-
step procedure to conclude a debtor‘s insolvent condition to Indonesian
bankruptcy Act).
Other Academic Works
―Protction to Minority Shareholder in Limited Liability Company based on Good
Corporate Governance‖.
―The Necessity of Indonesian Government to Re-making Regulation and Policy
Towad ASEAN Free Trade Area (AFTA)‖.
―The Liability of Director for Negligence resulting to the Company‘s
Bankruptcy‖.
London International Model United Nations, London, 26-28 February 2015
Speaking before the committee of ECOFIN as the representative of Rwanda.
Researched and compiled position paper on ―Promotion for Sustained Economic
Growth and the Sustainable Development of Small Island developing States‖ and
―Alternatives to Structural Adjustment Programmes and Austerity in overcoming
Recession and Debt Crisis‖.
Training, Conference and Discussion
Often invited as moderator and speaker in student discussion, conference and
tarining for law-related topic particularly on bankruptcy, contracts, private
internasional law, partnership and non-law related issues.
LANGUAGE PROFICIENCY
Indonesian : Native Speaker
English : Professional Proficiency (Speech, Reading, Wriitng)
Yogyakarta, 27 October 2016
Sincerely,
Dina Khairunisyah
IX
MOTTO
Verily in the remembrance of Allah do hearts find peace
Q.S Ar-Ra‘d: 28
“Allah grant me the serenity to accept the things I cannot change, the courage to
change the things I can, and the wisdom to know the difference.”
- Reinhold Niebuhr
“There are three classes of intellects: one which comprehends by itself;
another which appreciates what others comprehend; and a third which
neither comprehends by itself nor by the showing of others; the first is the
most excellent, the second is good, and the third is useless.”
- Niccolo Machiavelli
“Even if you‟re on the right track, you‟ll get run over if you just sit there.”
- Will Rogers
X
DEDICATIONS
My humble effort I dedicated to:
The Almighty Allah SWT for the gracious mercy, tremendous blessing and
guidance to me. The Prophet Muhammad SAW
My beloved Father and mother, Parlindungan Simanjuntak and Warisih, the
greatest grace in my life and my amazing sisters and brothers.
XI
ACKNOWLEDGEMENT
Asalamu‟alaikum Wr. Wb
Asyhadu an Laa Ilaaha Illallah Wa Asyhadu Anna Muhammadan Rasuulullah.
Alhamdulillahirabbil „alamiin, First and above all, I praise God, the almighty, for
providing me this opportunity and granting me the capability to proceed
successfully and to prophet Mohammed SAW, (Peace be upon him) whose way of
life has been a continuous guidance for me.. This thesis appears in its current form
due to the assistance, support and guidance of several people. I would therefore
like to offer my sincere thanks to all of them.
1. Dr. Ir. Harsoyo, M Sc, as the Rector of Universitas Islam Indonesia
2. DR. Aunur Rahim Faqih, SH., M.Hum, as the Dean of Faculty of Law
Universitas Islam Indonesia.
3. Dr. Siti Anisah, SH, M.Hum as the Thesis Advisor, who always support,
advise and guide me, without her this paper would have never been
accomplished.
4. Dr. Aroma Elmina Martha, SH., MH, as the Academic Advisors, all lectures
and staff of International Program Faculty of Law especially to Mr.
Setiawan SH who have given support and motivation.
5. Most importantly, none of this could have happened without my family. My
parents father Parlindungan Simanjuntak, mother Warisih. I am forever
XII
indebted for your unconditional love and endless dua. My brothers Hendra
Surya Dharma, Rendi Warisman, Saut Ferdinand, and Santosa. My sisters
Siska Vinolia, Ana Pertiwi, and Tanti, who always supported me and
encouraged me with their best wishes. My nephew Al-Fatih Hentajunio
Fachreza and my new baby born niece Khaira Rumaisa.
6. My Language Advisor and prettiest best friend, Fasya Addina, SH who had
shown me the meaning of friendship.
7. My precious Teddy Irawan Saputra, who always by my side during difficult
situations. Thank you for always supporting and accompanying me all this
time.
8. My seniors, Muhammad Azhar SH, Igfa Satria Artadi SH, Dolly Setiawan
Silitonga SH, and my fellow Ardiansyah MM. I gained a lot from them,
through their personal and scholar interactions, their thoughtful suggestion
at various points of my study and life.
9. The everlasting brotherhood of IP 2012, Fasya Addina SH, Gemilang
Mahardika SH, Lintang Gadis Kecil Berkulit Hitam dari Aceh VSSH, Uni
Tsulasi Putri SH, Fikri Fadillah SH, Ebby CSH, Fitria Salsabila SH, Amelia
Karina Ja‘far SH, Reza Fattah Ghalib CSH, Dadang Sadika CSH, Dion
Kusuma SH, Meila Fajriah SH, Saadan Thandi CSH, Lukman SH, Windura
Pranahita SH, Hanif Nur Ahmad CSH, Mazii CSH, Dimas SH, Ryan CSH,
Gandar CSH.
10. My senior high school squad, Eka Rini Setiawati, Sri Susilawati, Indri
Eprillya, Raja Wulandari, Rezky Lestari, you were the best partners at my
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lowest point. Thank you for always criticising and supproting me to be who
I am now.
11. My second family in Yogyakarta, Himpunan Mahasiswa Islam. Mario
Evantio, Zakiul Fikri, Afif Fuady, Baihaqqi Sinaga, Juliyani Purnama, Lian,
Dyo Fariz, Dipo Septiawan SH, Amalia Maharani, Risang, Reynaldo J
Brusandi, Billy Elanda, Gustirio, Retno Widiastuti, Naya, Indira, Andika
Fadly, Mazhar, Jani, Dilla, Alfiah Hamzah, Ujig, Yoy. And many others I
cannot mention. Alhamdulillah I am blessed to have them in my life.
12. My fellows in Dewan Permusyawaratan Mahasiswa Universitas Islam
Indonesia 2015-2016, Aldhi Setyawan, Hakim, AD Zikri, Bela Nurditia,
Alfredho Perdana, Bulgam Akbar, Daeng Ganda, Aulia Ridha SH, Anasti
Limbong, Yoga Satria, Handsome Sobar, Wahyu Hidayat, Faisal Zakaria.
Wassalamu‟alaikum Wr. Wb
XIV
ABSTRACT
1977 monetary crisis was a nightmare for the economy of Indonesia.
Lending funds from the IMF was the last resort that should be taken by the
government at that time conditionally to acceptance of the requirements given
by the IMF one of which was to amending Law on Bankruptcy. The
amendments were taken place three times while the enforcement of the laws
still introduces many problems. One of them is many solvent debtors were
declared bankrupt by the Commercial Court. This research is a normative
legal research, thus the study was normative or mostly uses references from
written legal norm. This research made legislations, regulation, provision and
doctrine relevant to the present topic as sources. The data collecting method is
library research that leads to formation of answer adopting descriptive-
analytical explanation in line with the qualitative-descriptive method used by
the writer. The primary legal binding materials are the Law number 37 of
2004 on Bankruptcy and the Suspension of Debt Payment Obligations as the
main focus. Secondary legal materials, used to support the primary materials,
are US Bankruptcy Code, United Kingdom Insolvency Act, Germany
Insolvency Act, Delaware Insolvency Act, books, journals of law, papers,
judge verdicts, as well as research reports. This research concludes that
insolvency test using balance sheet test theory should be a prerequisite to be
urgently adopted in order for a bankruptcy petition could be granted by the
court in the future amendments of Law on Bankruptcy and Suspension of
Payment Obligation. The government of Indonesia should take thorough
consideration in applying balance sheet insolvency test. The government in
future shall specify an authorized institution to enforce such test, namely
commercial court. Commercial court shall determine parties conducting
assessment of debtor‘s asset and the time period of test must be done.
Keywords: Insolvency, Insolvency Test, Bankruptcy
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Table of Contents
THE URGENCY OF INSOLVENCY TEST TO DECLARE BANKRUPT IN
INDONESIA (Applying the Theory of Balance Sheet Test under U.S Bankruptcy
Code) ........................................................................................................................ I
THE URGENCY OF INSOLVENCY TEST TO DECLARE BANKRUPT IN
INDONESIA (Applying the Theory of Balance Sheet Test under U.S Bankruptcy
Code) ....................................................................................................................... II
................................................................................................................................ IV
PAGE OF FINAL THESIS APPROVAL ................. Error! Bookmark not defined.
SURAT PERNYATAAN.......................................... Error! Bookmark not defined.
CURRICULUM VITAE ....................................................................................... VII
MOTTO.................................................................................................................. IX
DEDICATIONS ...................................................................................................... X
ACKNOWLEDGEMENT ..................................................................................... XI
ABSTRACT ......................................................................................................... XIV
CHAPTER I ............................................................................................................ 1
INTRODUCTION................................................................................................... 1
A. Context of Study............................................................................................. 2
B. Problem Statement....................................................................................... 10
C. Research Objective .................................................................................... 10
D. Theoretical Review .................................................................................... 10
E. Method of Legal Research ......................................................................... 20
F. Structure of Writing ..................................................................................... 21
CHAPTER II ......................................................................................................... 24
GENERAL OVERVIEW ON BANKRUPTCY LAW ......................................... 24
A. Bankruptcy Law ..................................................................................... 24
A. 1. History of Bankruptcy Law in Indonesia ............................................. 24
A. 2. Principles in Bankruptcy Law ............................................................. 27
A. 3. The Condition of Bankruptcy Petition ................................................ 28
B. Theories in Insolvency Test......................................................................... 41
B. 1. Balance Sheet Test ............................................................................. 42
B. 2. Cash Flow Test ................................................................................... 46
B. 3. Insolvency Test under Islamic Perspective ..................................... 48
CHAPTER III........................................................................................................ 50
XVI
THE URGENCY OF INSOLVENCY TEST TO DECLARE BANKRUPT ....... 50
A. The Urgency of Insolvency Test to Declare Bankrupt ................................. 50
A. 1. Bankruptcy Law in Indonesia Does Not Require a Debtor under an
Insolvency Situation to Declare Bankrupt .................................................... 50
B. The Application of Insolvency Test (Balance Sheet Test) .......................... 58
B. 1. Under UK Insolvency Act ............................................................... 63
B. 2. Under US Bankruptcy Code ........................................................... 66
B. 3. Under Germany ............................................................................... 72
CHAPTER IV ....................................................................................................... 77
CONCLUSION AND RECOMMENDATION .................................................... 77
A. Conclusion ................................................................................................... 77
B. Recommendation ......................................................................................... 77
BIBLIOGRAPHY ................................................................................................. 79
1
CHAPTER I
INTRODUCTION
A. Context of Study
Bankruptcy law prescribes value of justice as one of its paradigms
reflecting its primary purpose to provide benefits, usefulness and legal
certainty. Satjipto Rahardjo states ―the law as the embodiment of the values‖
meaning that its presence is to protect and promote the values upheld by
society,1 not to mention what exists in law of Bankruptcy.
Bankruptcy law is one of the applicable laws in Indonesia which has
actually been introduced since the Dutch era. Unfortunately, in its
implementation bankruptcy law was poorly understood by the society due to
the education of this law that was not maximally done at that time.
Nevertheless, bankruptcy law later appeared as an answer to the needs of the
people following Indonesian monetary crisis in 19972.
Initially the monetary crisis began with the weakening of rupiah
against US dollar; which furthermore gave birth to countless debts of
Indonesian entrepreneurs on foreign currency especially from foreign
creditors. Consequently, these entrepreneurs could not pay their debts.
Besides that there were many Non-Performing Loans suffered by Indonesian
1 Satjipto Rahadjo, Sosiologi Hukum : Perkembangan Metode dan Pilihan Hukum, Universitas
Muhamadiyah, Surakarta, 2002, p 60 2 Siti Anisah, Perlindungan Kepentingan Kreditor dan Debitor dalam Hukum Kepailitan di
Indonesia, Total Media, Yogyakarta, 2008, p 12
2
banks which thereafter caused a decrease of rill sectors.3 Facing this situation,
group of creditors started to seek for means to claim their claims since the
existence Faillissementsverordening was very unreliable.4
Monetary crisis that occurred in Indonesia by mid-year of 1997 led
to the establishment of the Government Regulation in Lieu of law No. 1 of
1998 concerning Amendments to the Law on Bankruptcy. Approved by the
House of Representatives (DPR) without prior proposal for changes, and later
enacted into Law No. 4 of 1998 in September 1998. The existence of this
Government Regulation was a result of the insistence from the International
Monetary Fund that they determine as a prerequisite to get loan funds in order
to restore Indonesian economic condition. This requirement was specified in
the letter the letter of intent (LoI) signed on 1 October 1997.5
When IMF agreed to give assistance to Indonesia after the 1997 Asian
financial crisis, it required Indonesia to agree to revise its bankruptcy law
which led to the establishment of a Government Decree that amended
Indonesia‘s Bankruptcy Laws in 1998.6 The objective of such policy made by
the International Monetary Fund was solely to protect the interests of foreign
creditors. This can clearly be seen in the article 1, paragraph (1) of Law the
Number 4 of 1998 that disregards whether the debtor is in a state of insolvent
3 Sutan Remy Sjahdeini, Hukum Kepailitan: Memahami Undang-Undang No. 37 Tahun 2004
tentang Kepailitan, Grafiti, Jakarta, 2010, p 22. 4 Id
5 Siti Anisah, Perlindungan Kepentingan Kreditor dan Debitor.. Op, Cit., p 12
6M Reksodiputro, Bankruptcy Reform: Lessons from the First Nine Months, (pp 48-51) in Lindsey
(Ed), Indonesia: Bankruptcy, Law Reform & the Commercial Court, supra p 48.
3
to be declared bankrupt.7 It draws contradiction to the purpose of this Law
which among others is protecting the interests‘ of creditors and debtors in a
balance and equitable manner. Therefore, one of the key issues the Indonesian
bankruptcy law the perception that possibly serves the interests of foreign
creditors more than those of Indonesia.8
Throughout the application of the Law No. 4 of 1998, it does not
provide protection to solvent companies. This fact can be seen in the decision
of the declaration of bankruptcy imposed to the Asuransi Jiwa Manulife and
Prudential Life Insurance and filing of bankruptcy petition by small creditors
against large debtors. Law No. 4 of 1998 is more as a means than as economic
recovery efforts for Indonesia as a whole.9 In similar vein, the absence of
protection against solvent companies can be found again in Law No. 37 of
2004.
Law No. 37 2004 strongly suggests the adoption of the principle of
balance. In bankruptcy matters, there are many interests involved besides the
interests of its creditors there are also the interests of stakeholders of the
bankrupt debtor, moreover if the debtor is a limited liability company.10
Law
No. 40 of 2007 on Limited Liability Company acknowledges that associated
with the life of the company are:
1. The interests of company;
7 Id
8 D Linnan, Bankruptcy Policy and reform: Reconciling Efficiency and Economic Nationalism,
(pp 94-112) in T Lindsey (Ed), Indonesia: Bankruptcy, Law Reform & the Commercial Court,
Sydney, Desert Pea Press, 2000 pp 94 and 109 (cited hereinafter as Linnan, 2000). 9 Siti Anisah, Perlindungan Kepentingan… Op, Cit., p 12
10 Sutan Remy Sjahdeini, Hukum Kepailitan… Op, Cit., p 35
4
2. The interests of minority shareholder;
3. The interests of employees of the company;
4. The interests of society; and
5. The interests of fair business competition
The interests of society which must be considered by bankruptcy law are:11
1. State living off taxes paid by debtors;
2. People who need employment of debtors;
3. People who supply goods and services to the debtor; and
4. People who rely their life from the supply of goods and services of
the debtor, whether they as consumers or merchants
In case of debtor that declares as bankrupt is a bank bankruptcy law
also must consider the interests of people either they who save their money in
bank or they who gain loan from bank and forced to have trouble using the
loan when the bank went bankrupt.12
How we see the interests of the parties mentioned above? The state
has interest not to lose a source of tax comes mostly from corporations.
Therefore, the state has an interest to maintain the existence of companies.
For state own interest, state or government had even a duty to create a
conducive business climate and the growth of companies. Thus, state has an
interest for company which have debt would not be easily declared as
bankrupt.13
11
Id 12
Id 13 Id p 36
5
In this regard it has been discussed not only the state are concerned
about the existence and development of the company, but also the interests of
society at large. Companies provide employment opportunities to the
community. Bankruptcy, will definitely lead to termination of employment
(PHK) of the company. The bankruptcy of a company will also affect the
supply of goods and services produced by bankrupt companies to the public.14
Furthermore, the interest of creditors should also be given because creditor
also has stakeholder as debtor has. For instance, a debtor gains loan from
several banks in total amount of 2.4 trillion rupiah. Besides the banks, debtor
has other creditors as well. If there is one creditor has due and payable claim
in amount of 5 million rupiah only, however since creditor feels that the
debtor did not pay the debt, the creditor then filed for bankruptcy petition to
commercial court and it turns out it can simply be proved that the debtor's
debt to creditors was absolutely true, correct amount, correct the debt has due
and payable, and was not paid off by the debtor, but to the other creditors the
debtor continue to perform its payment obligations. Suppose the petition of
creditor is granted by the commercial court, it is definitely will harm the
creditors, especially banks that have given enormous loans, and the
bankruptcy decision will also detrimental to the shareholders, the state loses
revenue from taxes paid by debtor, the debtor's employees and even
counterparts of the debtor when running his business.15
14
Id 15 Id p 43
6
This condition might be caused by the indifference to philosophy of
the Bankruptcy Law by law enforcers, wherein for example, when judges are
about to decide, they merely rely on the existence of debts with one of which
has matured.16
Bankruptcy Law, no matter when or where devised and
enacted, has generally at least two general objectives: first, to secure and
achieve an equitable division of the insolvent debtor‘s property for all his
creditors, and, second, to prevent an insolvent debtor from conducting
detrimental acts to the interest of his creditors. In other words, Bankruptcy
Law seeks to prevent harmful acts conducted by the creditors to each other,
and to protect them from being harmed by the debtor. Besides, the Law also
serves to protect an honest debtor from his creditors by means of discharge,
through the systems of bankruptcy, but Law on bankruptcy in Indonesia does
not provide so.17
Unfortunately, unlike in other jurisdictions, this is not the case in
Indonesia. Bankruptcy is a simple declaration pursuant to the Article 2 that a
debtor can be declared bankrupt if there are two or more creditors in which at
least one debt is due and payable. It is a separate issue from insolvency.
Insolvency may follow. Formal insolvency does not occur until a composition
(plan of action) is either not presented or is rejected.18
16
Siti Anisah, Perlindungan Kepentingan… Loc, Cit., 17 Levinthal, The Main Purpose of Bankruptcy Law, 1999, p 17 as quoted by Sutan Remy
Sjahdeini at 28 18
Subianta Mandala, Indonesian Bankruptcy Law: An Update, written in the Fifth Forum for
Asian Insolvency Reform (FAIR) as Legal & Institutional Reforms of Asian Insolvency System
which was held on 27-28 April 2006 in Beijing, China, p 6
7
This bankruptcy law provides two basic means to dealing with
bankruptcy problems: first, it provides liquidation proceedings and; second, it
provides a moratorium on debt repayment through a system of court
supervision. Moratorium is a legal authorization to debtors to postpone
payment. Even though the new laws may provide better instruments for
creditors to resolve corporate distress, in general, the issue of weak judicial
systems is still a big problem in executing the law in Indonesia.19
Law had
arranged that to determine debtor‘s bankruptcy, the applicant must prove the
meeting of two conditions or commonly known as concursus creditorium,20
this provision shows that a solvent debtor has always big possibilities to be
declared bankrupt.
Generally in bankruptcy law, the debtor will be declared bankrupt if he
is in a state of insolvent (unable to pay), due to financial crisis that he
experienced previously. However in Indonesian Bankruptcy Law, the
requirement of a debtor being in a state of insolvent to be declared bankrupt
cannot be found in any of its provisions. It is noteworthy that insolvency law
reforms should be considered, especially consider that multilateral agencies
and other related entities can easily argue that the development of new
bankruptcy and secured transaction laws is crucial for enhancing investor‘s
confidence. Nevertheless, it should not be regarded as the primary reasons for
19
Wijantini, Indonesian Bankruptcy Law: Revisited, Integritas, Vol.I no.2, Agustus-November
2008,
p 178 20
See Bankruptcy Law No. 37 year 2004 article 2 paragraph (1)
8
such development of a modern insolvency regime in Asian countries such
asIndonesia.21
A crucial step in the process of bankruptcy is the insolvency phase.
This stage is important because it determines the assets of bankrupted debtor.
And whether the property of the debtor will be depleted to pay the debt or the
debtor can be relieved by the acceptance of reconciliation plan or debt
restructuring. If the debtor has been declared insolvent, then the debtor is
completely bankrupt, and his money will be soon divided, though this does not
mean that the business of the bankrupt company could not be continued.22
Therefore, for solvent companies, such provisions can give damages to them
as a debtor and other creditors. In this circumstance, the Law number 37 of
2004 on Bankruptcy and Suspension of Obligation for the payment of Debts
can potentially cause havoc in world of business and further to the economy of
the state.
Failure to apply the insolvency test has led to high number of insolvent
debtors declared bankrupt by law, which would likely not be the case if the
insolvency test is otherwise applied. The logic can be seen in the actual
monetary crisis that did not make the debtor in Indonesia in a state of
insolvent due to loss of market share or revenue in rupiah. Financial crisis
caused the debtor no longer able to pay the debt since different exchange rates
21
Some Challenge for Insolvency System Reform in Indonesia, p 5 in Forum for Asian Insolvency
Reform Insolvency Form In Asia: An assessment of the Recent Developments and the Role of
Judiciary, Prepared by Professor Romas Tomasir, (Bali-Indonesia, 7-8 February 2001) 22
Munir Fuady , Hukum Pailit dalam Teori dan Praktek, Citra Aditya Bakti, Bandung, 1999, p
135
9
that resulted in foreign currency debt will never be paid with revenues
denominated in rupiah.23
Supposedly, concept of insolvency test should be regulated in the Law
number 37 of 2004 on Bankruptcy and Suspension of Obligation for the
Payment of Debts, especially in the context of granting bankruptcy petition
and to determine whether or not the inability to pay the debtor because the
company is being insolvent or unwilling to pay their debts.24
Since the Bankruptcy Law in Indonesia does not accommodate yet the
condition of insolvency test; the government may refer to the US Code on
Bankruptcy or other countries‘ legislation that have practiced the insolvency
test. Because it is a necessary element of a preference or constructive fraud
claim under the Bankruptcy Code25
which also goes along with the legal needs
of Indonesia to complement the bankruptcy laws comprehensively.
Based on the description above, Indonesia needs to reconstruct the
law on Bankruptcy by formulating the insolvency test as a way to determine
whether the debtor is insolvent before declared bankrupt. The reasonable
reason is because the current regulation has resulted to some improper
decision of commercial court of the first instance. For example, the
bankruptcy decision for the insurance company Manulife, Prudential, and
23 Hikmanto Juwana, Hukum sebagai Instrumen Politik: Intervensi atas Kedaulatan dalam proses
Legislasi di Indonesia, delivered in Orasi Ilmiah Dies Natalies event in Law Faculty of North
Sumatera University, January 12 2004, p 12 as quoted by Habiba Hanum on Analisis Terhadap
Ketentuan Insolvensi dalam Hukum Kepailitan p 12 24
Adi Nugroho, Analisis Yuridis Terhadap Keadaan Insolvensi Dalam Kepailitan (Studi Normatif
Pasal 2 ayat 1 Undang-undang No 37 Tahun 2004 Tentang Kepailitan dan Penundaan
Kewajiban Pembayaran Utang), archival of Faculty of Law, University of Brawijaya, 2013, p 5 25
The Bankruptcy Code as amended is codified in Title 11 of the United States Code, 11 U.S.C.A.
§§ 101–1532 (West 2004 & Supp. 2006). Citations hereafter will be to the sections of the
Bankruptcy Code as codified in Title 11.
10
Telkomsel, which seems out of place because these companies are basically
not classified as insolvent, as proven assets far exceed his debts. A rational
approach to determine whether the debtor was solvent is to see whether the
debtor can repay the debt that is due and payable.
B. Problem Statement
Based on the context of study above, there are two majors problem of
discussion, namely:
How is the urgency of insolvency test to declare bankrupt in Indonesia?
How is the application of balance sheet insolvency test in other states?
C. Research Objective
Based on the context of study and problem statement above, therefore the
purpose of this research are:
To know how is the urgency of insolvency test to declare bankrupt in
Indonesia.
To know how is the application of balance sheet insolvency test in other states.
D. Theoretical Review
The definition of bankruptcy is found in the Article 1 paragraph (1) of
the Law Number 37 of 2004 on Bankruptcy amd Suspension of Obligation
for the Payment of Debts, stating that ―Bankruptcy shall mean general
confiscation of all assets of a Bankrupt Debtor that will be managed and
11
liquidated by a Curator under the supervision of Supervisory Judge as
provided for herein‖
Algra defines ―bankruptcy‖ as Faillissementis een gerechtelijk
beslag op het gehele vermogen van een schuldenaar ten behoeve van zijn
gezamenlijke schuldeiser26
(a general confiscation of all assets of the debtor
to pay off his debts to creditors). While Henry Campbell Black in the
Black‘s Law Dictionary defines that ―Bankrupt is the state or condition of
one who is unable to pay his debt as they are, or become, due‖.27
Jerry Hoff defines ―bankruptcy‖ comprehensively as a general
statutory attachment encompassing all the assets of the debtor. The
bankruptcy only covers the assets. The personal status of an individual will
not be affected by the bankruptcy; he is not placed under guardianship. A
company also continues to exist after the declaration of bankruptcy. During
the bankruptcy proceedings, act with regard to the bankruptcy estate can
only be performed by the receiver, but other acts remain part of the domain
of the debtor‘s corporate organs.28
Looking back at the Law Number 37 year of 2004 on Bankruptcy and
the Suspension of Obligation for Payment of Debts, Article 57 paragraph (1)
in the chapter VII defines Insolvency as the condition of unable to pay debts.
The US Bankruptcy Code defines ―insolvent‖ as a financial condition such
26 Algra, N. E., Inleiding tot Het Nederlands Privaatrecht, Tjeenk Willink, Groningen, 1974, p 425
as quoted by M Hadi Subhan, Hukum Kepailitan, Kencana, Jakarta, 2008, p 1 27
Id 28 Id
12
that the sum of an entity‘s debts is greater than all of such entity‘s property,
at a fair valuation, exclusive of property transferred and/or concealed. 29
In the complete phrase, insolvent is referred as: ―with reference to an
entity other than a partnership and a municipality, financial condition such
that the sum of such entity‘s debts is greater than all of such entity‘s property,
at a fair valuation, exclusive of:30
1. Property transferred, concealed or removed with intent to
hinder, delay, or defraud such entity‘s creditors; and
2. Property that may be exempted from property of the estate
under section 522 of this title;‖
Under the UFCA, a debtor is deemed to be insolvent when ―fair
saleable value‖ of its assets exceeds its ―probable liability on his existing
debts as they become absolute and matured.‖31
Therefore, a debtor might be
insolvent when the value of the debtor‘s assets exceeds the value of his
liabilities, but the assets are illiquid and the liabilities are short-term. In a
slightly different way, UFTA determines that a debtor who is not generally
paying its debts as they become due is presumed to be insolvent.32
Insolvency test is a test to know the condition of a person who is
insolvent, such as when there is an inability to pay one‘s debts; lack of means to
pay. Shortly put, it refers to the condition of a person who is unable to pay his
29
11 U.S.C.A. § 101(32)(A) (West 2004 & Supp. 2006). 30
Vide: US Bankruptcy Code Section 101 31
Vide: UFCA §2(1) 32
Vide: UFTA §2(b)
13
debts as they fall due.33 Relating to the definition of debtor, the writer refers it as
a person who has indebtedness for which payment can be claimed before the
court.34
Levinthal35
, as quoted by Sutan Remi Sjahdeini says that all
bankruptcy law, however, no matter when or where devised and enacted, has
at least two general objects in view. It aims, first, to secure and equitable
division of the insolvent debtor‘s property among all his creditors, and, in the
second place, to prevent on the part of insolvent debtor conducts detrimental
to the interest of his creditors. In other words, Bankruptcy Law seeks to
protect the creditors, first, from one and another and, secondly, from their
debtor and at third object, the protection of the honest debtor from his
creditors by means of the discharge is sought to be attained in some of the
systems of bankruptcy, but this is by no means a fundamental feature of the
law.
From the situation cited above can be seen the purposes of bankruptcy law
are:36
1) to guarantee the equal division of wealth among the
creditors of the debtor
2) to prevent the debtor from committing acts that may
detrimental to the interests of creditors
33
Black‘s Law Dictionary on Legal Dictionary 8th Ed.
34 See article 1 paragraph (3) Law No. 37 year of 2004 on Bankruptcy and the Suspension of
Obligation for Payment of Debts 35
Louis E. Levinthal, ―The Early History of Bankruptcy Law‖, in Jordan, et.al, Bankruptcy, (New
York: Foundation Press, 1999), p. 17 as quoted by Sutan Remi Sjahdeini on Hukum Kepailitan…,
p 28 36
Id
14
3) to provide protection to debtor have good faith of his
creditors, by obtaining debt relief
Meanwhile, Warrren in his book37
Bankruptcy Policy propounds as follow;
In Bankruptcy, with an inadequate pie to divide and the looming
discharge of unpaid debts, the disputes on who is entitled to shares of the
debtors assets and how these shares are to be divided. Distribution among
creditors is no incidental to other concerns; it is the center of the bankruptcy
scheme. In the explanation of Law No. 37 in 2004 on Bankruptcy and
Suspension of Obligation for the Payment of Debts explaining about several
factors of the need of regulation regarding Bankruptcy and Suspension of
Obligation for the Payment of Debts, which are as follows;38
First, to avoid the contested property of debtor if the debtor in the
same time has some creditors which collect receivables from debtor.
Second, to avoid creditors who hold security rights over collateral
material in which demands its rights by selling the property without regard
to the interests of either the debtor or other creditors
Third, to avoid any fraud committed by a creditor or the debtor
themselves. For example, the debtor seeks to provide benefits to one or
several specific creditors so that other creditors are impaired or any
fraudulent act of the debtor to get all of their wealth with the intention to
relinquish its responsibilities to the creditors.
37
Id 38
Id
15
Those are the aims of the enactment of Law Number 37 year of 2004
on Bankruptcy and Suspension of Obligation for the Payment of Debts which
considered accordance with the need and development of law community.
Accordingly it can be stated that the purposes of bankruptcy law
are;39
1. Protecting the unsecured creditors to obtain their rights in
connection with the enactment of the principle of
guarantee, that "All movable and immovable assets of the
debtor, either present or future, shall be regarded as
securities for the debtor's personal agreements", ie by
giving the facilities and procedures for creditors to meet
the bills to the debtor. Under Indonesian law, the principle
of the guarantee is guaranteed under article 1131 of the
Civil Code. Bankruptcy law avoids the occurrence of acts
vied with each other among creditors about the debtor's
property with respect to the principle of guarantee.
Without the bankruptcy law, there will be a more powerful
creditors would receive more than infirm creditors.
2. Ensuring that the distribution of wealth among the
creditors of the debtor in accordance with the principle of
pari passu (proportionally dividing the assets of the debtor
to the unsecured creditors based on the balance of each).
39 Id p 29-31
16
3. Preventing the debtor commits things that may be
detrimental to the creditors. By declared as bankrupt, the
debtor becomes no longer having the authority to manage
and transfer his wealth. The bankruptcy decision gives
legal status of the assets of the debtor under the general
confiscation (called the bankruptcy estate).
4. Under US bankruptcy law, debtors who have good faith to
his creditors receive legal protection by obtaining debt
relief. According to the United States bankruptcy law an
individual debtor would be released from his debts after the
completion measures settlement or liquidation of his assets.
Even though the rest of debtor‘s estate after liquidated or
sold by liquidator is not sufficient to pay off his debt to
creditors, the debtor is no longer be supposed to work off
the debt. The debtor is given the opportunity to acquire
financial fresh start. The debtor can re-start a business
without the burden of debts that pendulous in the past prior
to the bankruptcy decision. Under US Bankruptcy Code,
financial fresh start is only given to individuals insolvent
debtor and not be given to the legal entity debtor. The way
out can be reached by bankrupt companies is to dissolve the
insolvent company once the liquidation process is over.
Under Law No.37 of 2004, financial fresh start is not be
17
given to the debtor, both individual debtor and legal entity
debtor if after measures of settlement or liquidation of the
assets of the debtor completed by curators and it turns out
there are debts that have not been paid, the debtor must still
working off the debts (Article 204 Law No. 37 of 2004 on
Bankruptcy and Suspension of Obligation for the Payment
of Debts). The general explanation of the law states that
―bankruptcy does not discharge a person who is declared
bankrupt from his obligation to pay debts.‖ Once the
measures of settlement or liquidation done, debtor is given
back the authority to run business activity yet still bear the
obligation to pay off the debts which has not been paid.
5. Punishing the boards for causing the company suffered
financial distress situation thus the company is in a state of
insolvent and declared bankrupt by the court.
6. Providing the opportunity for the debtor and creditors to
negotiate and make agreements regarding the restructuring
of the debts of the debtor. Bankruptcy code in the United
States, it is stipulated in chapter 11 on the Reorganization.
In the bankruptcy law in Indonesia an opportunity for the
debtor to reach agreement on restructuring its debts with his
creditors set out in Chapter III of the Suspension of
Payment.
18
Besides the aims of Bankruptcy Law it can be argued that the legal
principles are crucial in the enactment of Bankruptcy Law for it has important
role as the foundations in every regulations. The use of legal principles as a
fundamental and ground for judges to rule on cases in bankruptcy can be seen
in Law Number 34 of 2004 on Bankruptcy and Suspension of Obligation for
the Payment of Debts which explicitly states that the source of unwritten law
including the principles of law in bankruptcy can be used as the basis for the
judge to decide. This is explained in the Article 8 paragraph 6 of Law
37/2004 on Bankruptcy and Suspension of Obligation for the Payment of
Debts that the Court decision shall contain a particular section of the
legislation in question and / or sources of unwritten law that formed the basis
for the judge to decide.40
One of the important principles in the bankruptcy law is the Principle
of Paritas Creditorum. This principle actually can be found in the Indonesian
Civil Code Article 1131 and 1132 known as the principle of securities which
determines that the creditors have the same rights to all of the debtor‘s
property. This principle provides assurance that although the assets of the
debtor are not immediately connected to the debt, yet by law the assets serve
as guarantee of his debts. Moreover, the Law is aimed also to ensure that the
distribution of debtor‘s wealth among the creditors in accordance with the
principle of pari passu prorata parte (proportional share of debtors assets to
the concurrent creditors or unsecured creditors based on consideration of the
40
Efraim Asa Nainggolan, A Comparative of Indonesian Bankruptcy Law and the Netherlands
Bankruptcy Law on the Conditions of Bankruptcy Petition from the Perspective of the Protection
of Debtor‟s Legal Interest, Tilburg University, 2013, p 12
19
claims respectively).41
The pari passu means that all creditors are jointly
together obtain a settlement without precedence. The pro rata which is also
known as proportional means that in the division of the debtor‘s assets,
creditors will get a proportional division based on the size of the individual
creditor‘s receivable compared to overall creditors‘ claims upon the whole
assets of the debtor. The Paritas Creditorum principle aims to provide
fairness and equality to all creditors but not treated the same, meanwhile the
principle of Pari Passu Prorata Parte provides the creditors legal certainty
with the proportional fairness.42
Furthermore, in His book, Harold F. Lusk
describes the aim of bankruptcy as follows:43
―The purpose of the bankruptcy act is (1) to protect creditors from one another, (2)
to protect creditors from their debtor, and (3) to protect the honest debtor from his
creditors. To accomplish these objectives, the debtor is required to make full
disclosure of all of his property and to surrender it to the trustee. Provisions are
made for examination of the debtor and for punishment of the debtor who refuses to
make an honest disclosure and surrender of his property. The trustee of the
bankrupt‘s estate administers, liquidates, and distributes the proceeds of the estate to
creditors. Provisions are made for determination of creditor‘s rights, the recovery of
preferential payments, and the disallowance of preferential liens and encumbrances.
If the bankrupt has been honest in his business transactions and in his bankruptcy
proceedings, he is granted a discharge.‖
While Peter J.M. Declercq emphasizes that bankruptcy law more is
addressed to the debtor who does not pay his debt to the creditors (a
bankruptcy petition has to state facts and circumstances that constitute prima
facie evidence that the debtor has ceased to pay its debt. this is considered to
be the case if there are at least two creditors, one of who, has a claim which is
41
Ibid 42
Ibid 43
Harold F. Lusk, Business Law: Principles and Cases, Richard D. Irwin Inc, Homewood Illinois,
1986, p 1076-1077 in M. Hadi Shubhan,
20
due and payable and which the debtor cannot pay, refuses to pay, or simply
does not pay).44
In addition to the aims and functions that have been described by
author, bankruptcy also actually needed to businesses to select businesses that
are not efficient. Douglas G. Baird illustrates it as follow:45
―This view of bankruptcy law is needed suffer from an obvious difficulty: It
may be impossible to discover what course best advances society‘s interest at large.
Even if one wants to save jobs, it does not follow that allowing a bad restaurant to
fold reduces the number of jobs in the economy. The hardware store that replaced
the restaurant, in fact, more hire more people. The person who bought the restaurant
equipment might open another restaurant in a different city, become very successful,
and need to hire more workers than the owner of the bad restaurant.‖
E. Method of Legal Research
This work is a normative legal research and as the consequences the
study would be normative or mostly using references to the written legal
norm. The focus of this work is to find out the urgency of insolvency test in
bankruptcy. This research will use legislations; therefore dealing with
regulation, provision and doctrine relevant to the present topic. Statute and
theory approach are chosen. This research will end with the result of
descriptive-analytical explanation in line with the qualitative-descriptive
method used by the writer.
As the primary legal materials which would bind the writer for this
research is the Law number 37 of 2004 Bankruptcy and Suspension of
Obligation for the Payment of Debts as the main focus. Secondary legal
44 Peter J.M. Declercq, Netherlands Insolvency Law, The Netherlands Bankruptcy Act and the
Most Important Legal Concept, T.M.C. Asser Press, The Haque, 2002, p 63 45
Douglas G. Baird, A World without Bankruptcy, In: Jagdeep S. Bhandari and Lawrence A.
Weiss (ed), Corporate Bankruptcy; Economic and Legal Perspective, Cambridge University Press,
New York, 1996, p 33 in M. Hadi Shubhan,
21
materials, used to support the primary materials, are US Bankruptcy Code,
UK Insolvency Act, books, journals of law, papers, judge verdicts, as well as
research reports.
The data collecting method is in library research method. The phases
in library studies are: (1) records all of the important data from related books,
articles, journals, official-related websites, and biographies; (2) reviews and
compiles the materials based on its priority and relevance; (3) reads and notes
all of the related-materials; and the last (4) writes down the materials into this
writings.
After gaining all related data and documents, the writer: (1) analyzes
one source to the other sources (i.e. the concept of determining insolvency in
Indonesia and other state; the theory of Insolvency test); (2) analyzes and
discuss the data; and (3) concludes the result of research.
F. Structure of Writing
The writer in this thesis divides the chapter into four chapters.
Chapter I describes the introduction; Chapter II consists of General Overview
of Bankruptcy Law; Chapter III deals with the Significance of Insolvency
Test to Declare Bankrupt in Indonesia; and Chapter IV is Conclusion and
Recommendation
In the Chapter I, the writer explains the context of study, problem
statement, and research objective, definition of terms, theoretical review, and
method of legal research and systematically of writing. This research consists
of one problem that is how is the significance of insolvency test to declare
22
bankrupt in Indonesia, with the objective to obtain the answer thereof. The
writer accordingly analyzes the implementation of the Law Number 37 of
2004 on Bankruptcy and Suspension of Obligation for the Payment of Debts
and the concept of Balance Sheet Test applied in the U.S according to the U.S
Bankruptcy Code Title 11, based on the theoretical review sourced from laws,
books, journals and articles related to the issue at hand.
Chapter II discusses general overview of Bankruptcy. This chapter
describes about the Indonesian Bankruptcy Law and consists of two parts
talking about the history of the Bankruptcy Law in Indonesia, steps of its
amendment, Condition of Bankrupt Petition, and theories of Insolvency Test
as practiced in some developed countries.
Furthermore, Chapter III talks about the urgency of insolvency test
to declare bankrupt in Indonesia where the writer tries to answer the main
research problem statement through two subs namely ―Bankruptcy Law in
Indonesia Does Not Require a Debtor under An Insolvency Situation‖ and
―The Application of Balance Sheet Insolvency test in other States‖. This
chapter is expected to illustrate the positive impact of such tests to the
bankruptcy system in Indonesia as well as for businesses actors. The writer
consequently was taking relevant Laws, books, articles and journals for
sources.
Lastly, Chapter IV elaborates the summary of the research and the
answer of the single problem statement delivered in this thesis previously.
The answer explains the urgency of insolvency test to declare bankrupt in
23
Indonesia. At the end of this chapter the writer also notes the recommendation
to the readers which might be possible to be implemented in the near future
for proper use.
24
CHAPTER II
GENERAL OVERVIEW ON BANKRUPTCY LAW
A. Bankruptcy Law
A. 1. History of Bankruptcy Law in Indonesia
During the 1990s, the Indonesian government introduced a number of
laws and regulations to protect creditors and investors. The Bankruptcy Law,
amended in 1998, is one of the most relevant laws governing the relationship
between debtors and creditors.46
The Indonesian bankruptcy law was based
on nineteenth century Dutch legislation and was promulgated in 1906.
Implicitly, the Indonesian legal system has elements of a civil law system,
based on the European civil law tradition. In 1998, the government of
Indonesia made some important amendments to bankruptcy law. First, the
law introduced new provisions, such as amending a chapter dealing with the
creation of a moratorium on debt repayment. Second, it established the new
Commercial Court (hereafter, the Court) having exclusive jurisdiction over
petitions for declarations of bankruptcy and moratoriums on debt
repayment.47
46
Wijantini, Indonesian Bankruptcy Law: Revisited, Op., Cit, p 178 47
Ibid p. 179
25
The important amendments are stipulated in the Government
Regulation No. 1 of 1998. As for which be taken into consideration of the
issuance of Government Regulation no. 1 year of 1998 are:48
1) the monetary turmoil that occurred in Indonesia since mid-1997
has given unfavorable influence on the national economic life, and
caused great hardship among business authors to continue their
activities, including obligations of creditors:
2) giving opportunity to the creditors and the company as a debtor in
seeking a fair settlement, is necessary legal means that can be used
quickly, openly and effectively;
3) one of the legal solution for settlement of debts are regulations on
the suspension of debt payments;
4) rules on bankruptcy which was still valid namely Faillissements
Verordening or laws on bankruptcy, as contained in Staatblad
number 348 of 1906, required improvements and changes as a
response to the circumstances and the need for the settlement of
debts;
5) to overcome the monetary turmoil and severe consequences on the
economy of that time;
6) in addition to meet the needs in the settlement of debts mentioned
above, the country needed to establish mechanisms to resolve
disputes fairly, quickly, openly and effectively through a special
48
Edward Malik, Cara Mudah Memahami Proses Kepailitan dan Penundaan Kewajiban
Pembayaran Utang, Mandar Maju, Bandung, 2012, p 11
26
court in the General Courts, formed and tasked to handle, examine
and decide disputes in the areas of bankruptcy and delays in
payment, indispensable in the life of business activities and the
economy in general;
7) due to the presence of pressing needs for resolving problems
above, it is necessary to immediately undertake improvements to
several provisions in the law on bankruptcy (staatsblad year of
1905 Number 217 juncto Staatsblad year of 1906 Number 348)
and put the government regulation in lieu of Law.
Law No. 4 of 1998 on Bankruptcy which was first made as an
anticipation of the economic crisis and the increasing amount of debt in
development of private sector is deemed to no longer adequate.
Correspondingly, the development of economy and trade as well as the
impact of globalization that swept the business world as well as the amount of
capital owned businesses which are on loan from various funding sources
such as banks, investment, issuing bonds or other means which as long as it is
allowed to do, have caused a lot of problems of settlement of debts in the
community.49
Therefore the Indonesian government at that time felt
significant need for alteration in the regulation of the bankruptcy law in
Indonesia. Therefore, the Government issued Law No. 37 of 2004 on
Bankruptcy and Suspension of Obligation for the Payment of Debts.
49 Ibid p 26
27
A. 2. Principles in Bankruptcy Law
The bankruptcy and suspension of obligation for payment of debts law
is based on some principles. These principles are:50
1. The Principle of Balance
The law contains provisions that are the manifestation of the
principle of balance, there are provisions that prevent the dishonest
debtor with bad faith from misusing bankruptcy institution, on one
the other hand, provisions that prevent the dishonest debtor and
creditors with bad faith from misusing bankruptcy institution, on
other hand.
2. The Principle of Going Concerns
In this law, there are provisions that enable a prospective company
of the debtor to survive.
3. The Principle of Justice
In bankruptcy the principle of justice means that the bankruptcy
provisions can satisfy interest parties‘ need for justice. The
principle of justice is aimed at preventing overreaction by the
creditors in their efforts to claim payments from the debtor that
neglect the interest of other creditors.
4. The Principle of Integration
50
Vide: Elucidation of bankruptcy and suspension of obligation for payment of debts Law
28
The principle of integration in this law means that the formal legal
system and material legal system constitute an integral part of civil
legal system and national civil law of procedure.
Professor Donald B. Korobkin places special emphasis on two main
principles: the inclusion of affected persons and rational planning. The first
principle would seek that every party affected by financial distress would be
eligible to press their demands.51
The second principle would seek to promote
the greatest part of the 'most important aims' and would involve formulating
the most rational, long-term plan as a means of realizing the 'good' for the
business enterprise. In complying with these objectives Professor Korobkin
draws upon Rawls' theory of the good41 and second principle of justice, the
so-called difference principle.52
A. 3. The Condition of Bankruptcy Petition
A. 3. 1. The Condition of Creditors (Concursus Creditorum)
Law number 37 of 2004 on Bankruptcy and Suspension of Obligation
for the Payment of Debts has set out clear conditions regarding petition of
bankruptcy against a debtor by specifying them in Article 2 paragraph (1)
which reads as, a debtor having two or more creditors and failing to pay at
least one debt which has matured and payable, shall be declared bankrupt
through a Court decision, either at his own petition or at the request of one or
more of his creditors. 51
Donald R. Korobkin, Contractarianism and the Normative Foundations of Bankruptcy Law, 71
Tex. L. Review 541, p 572-575 52 John Rawls, A Theory of Justice, *publisher omitted, 1971, p 395-452
29
According to the Article 1132 of the civil code53
which reads that the
assets shall serve as joint guarantees for his creditors; the proceeds thereof
shall be divided among the creditor in proportion to their loan, unless there
exist a legal order of priority among the creditors. Such provision constitutes
implementation‘s guidance.
Pursuant to Article 2 paragraph (1) Law No. 37 of 2004 on
Bankruptcy and Suspension of Obligation for the Payment of Debts, one of
conditions that shall be fulfilled is that the debtor must have at least two
creditors or more. Accordingly, a debtor may only be declared bankrupt by
this law once a debtor having at least two creditors concurcus creditorum.
This condition however was not required or emphasized in the Article 1
paragraph (1) of Faillissementsverordening.54
If a debtor has only one creditor, then the Bankruptcy Law lost its
raison d'etre. If a debtor who only has one creditor is allowed to file
bankruptcy petition for himself, therefore the estate of debtor which in
accordance with provision of article 1131 of Civil Code as guarantee of
debtor‘s debt is no longer necessary to be governed on the division of
proceeds from sales of asset. It is definite that the entire proceeds from the
sale of assets is a source of settlement for the only creditor mentioned above.
There will be no fear of the competition and the seizure of the assets of the
debtor since there is only one creditor.55
53
Kartini Muljadi & Gunawan Widjaja (Ed.), Pedoman Menangani Perkara Kepailitan, Persada
Pers, Jakarta, 2003, p 101 54
Sutan Remy Sjahdeini, HukumKepailitan..., Op., Cit, p 53 55
Id
30
Bankruptcy Law and the Suspension of Payment does not set firm
requirements to proving that a debtor has two or more creditors. Bankruptcy
law does not specify that the applicant in filing the bankruptcy petition must
prove that debtor has two or more creditors; however Bankruptcy Law in
article 299 has determined that ―unless stipulates otherwise herein, the
prevailing procedural law shall be Civil Procedural Law‖. Whereas applicable
civil procedural law, accordance with Article 163 HIR or article 1865 of
Indonesian Civil Code emphasized that burden of proof or bewijslast borne
by applicant or plaintiff to prove his postulate of petition, then applicant must
be able to prove that the debtor has two or more creditors as required in
Article 2 paragraph (1) Law No. 37 year of 2004 on Bankruptcy and
Suspension of Obligation for the Payment of Debts.56
A. 3. 2. The Condition of the Existence of Debt
Basically, debt shall mean as an obligation that must be carried out
to another party. This obligation born of the obligation made the subject of
law. There are two subjects in obligation, namely creditor who is entitled to
claim and debtors are obliged to meet claim.57
For that matter, the Civil Code
has been clearly elaborated on the notion of debt. But in reality there is an
erroneous interpretation of the debt in the examination of the bankruptcy
petition. And even in discussions and seminars were held to discuss and
56
Id 57
Victorianus M. H. Randa Puang, Penerapan Asas Pembuktian Sederhana dalam Penjatuhan
Putusan Pailit, Satu Nusa, Bandung, 2011, p 50
31
provide unified understanding of the various issues of bankruptcy, still
showed different view, which is still very narrowly defining the debt.58
A. 3. 2. 1. Definition of Debt according Law Number 37 of 2004
The Law number 37 of 2004 on Bankruptcy and Suspension of
Obligation for the Payment of Debts given a broad definition of debt as meant
by Article 2 paragraph (1) on the condition of bankruptcy petition. Under
Article 1 paragraph (6) definition of debt is set forth herein, which reads:
―Indebtedness shall mean an obligation that is expressed or may be expressed in
monetary unit under Indonesian or foreign currency that exist now or thereafter or is
contingent that is incurred from an agreement or pursuant to the prevailing law and
must be fulfilled by the Debtor, failing which the Creditor becomes entitled to
recover its loan from the assets of the Debtor‖
Classifying "the obligations that may be expressed in the amount of
money" as a fixed debt does not provide certainty about the notion of debt. In
line with the thinking that has been mentioned above, namely that the debt
within the scope of bankruptcy the amount must be definitely in addition to
existence is confirmed. The phrase "the obligations that may be expressed in
the amount of money" in Article 1 paragraph (4) refers to certain obligations
with uncertain value of money.59
If an "obligation that may be expressed in
the amount of money" has been categorized as a debt of the debtor, thus has
to be registered in the list of verification, then who can determine the value of
58
Suyudi et al, Kepailitan di Negeri Pailit, Pusat Studi Hukum dan Kebijakan Indonesia, Jakarta,
2004, p 125 59 Sutan Remy Sjahdeini, Hukum Kepailitan….Op.,Cit., p 91-92
32
the debt? If the curator is given the authority to judge either with or without
the approval of the supervisory judge, it will only cause problems.
Nor should then determine the value of the obligation is based on
an agreement between the creditor concerned with the debtor or curator. Such
way will only cause problems. Determination of ways as it would not be
perceived as a fair way. Such ways of determination can be suspected as a
result, not impossible or even likely occurrence of the "game" by the parties
concerned to detrimental to other creditor. Supposedly, the "obligation" is not
or has not been expressed in the amount of money must first have been
expressed in the amount of money before it is classified as debt. In other
words, if the amount may not yet be expressed as amount of money, then the
"obligation" must first be expressed in the amount of money. The competent
authority to declare an "obligation" as the amount of money should be only
the court.60
A. 3. 2. 2. Definition of Debt according to Court Verdict
The elaboration of the notion of debt on Law No. 37 of 2004 on
Bankruptcy and Suspension of Obligation for the Payment of Debts has
given significant alteration of the definition of debt from the previous Law on
Bankruptcy namely Law No. 4 of 1998.61
In practice, there are some judges
(Supreme Court) who adopted narrow interpretation of the debt. Case of PT.
Jawa Barat Indah (apartment caterer) against Sumeni Oemar Sandjaya and
60
Id 61 M. Hadi Subhan, Hukum Kepailitan…Op, Cit., p 88
33
Widyastuti (apartment buyer), the Supreme Court on judicial review verdict
No. 05PK/N/1999 argue that pursuant to Article 1 paragraph (6) stated that
the debt is main debt and its interest, accordingly what meant as a debt here is
dealing with contractual terms of loan or duty to pay certain amount of money
as one of sort of obligation (verbintenis).62
Whereas several groups argue that what is said in Article 1 of
Bankruptcy is claim shall be paid arise as consequent of the obligation
(verbintenis). The definition of debt here denotes as broad understanding of
debt. The term of debt refers to obligation law on Civil Code. All contracts
arise from an agreement, or by law.63
The contract is in purpose to provide something, to do or not to do
something.64
This idea is also prosessed by the majority of justices in the
insolvency proceeding. Case of PT. Suryatata Internusa against PT. Bank BNI
No. 08 PK/N/1999 it was decided that the cost / labor costs on a building
project arising from the agreement contract of employment which the project
has been completed properly by the contractor and it turns out the party
(debtor) has not paid the full fee to the contractor, accordingly the fee of
which has not paid is debt as stipulated in Article 1 of the Labor Law.65
Further court decision dealing with the understanding of debt is
Supreme Court decision No. 27K/N/1999. The case happened between parties
Ssangyong Engineering & Construction Co. Ltd against PT. Citra Jimbaran
62 Id p 89 63
See Article 1233 of Indonesian Civil Code 64
See Article 1234 of Indonesian Civil Code 65 M. Hadi Subhan, Hukum Kepailitan… Op, Cit., p 89
34
Indah Hotel on construction contract. Supreme Court disagreed with the idea
of Commercial Court stating that ―debt in the frame of bankruptcy shall be
meant as debt sourced from loan agreement and does not cover other sorts of
breach of law‖.66
Supreme Court found that ―that according to the general
understanding of debt or debt (debit) is an absolute promise to pay a certain
sum of money on a certain date or it also mean as an obligation of one person
to pay another‖.67
It could be seen that Supreme Court from the elucidation
above interprets debt narrowly.
In other case, through its decision No. 30K/N/1999 Supreme Court
defines debt in the narrow meaning. The case occurred between parties of PT.
Surya Citra Televisi against PT. Gebyar Cipta Kreasi. On its consideration,
Supreme Court adduces ―that the legal relationship between applicant and
defendant of bankrupt in the earlier was not debts yet agreement on serving
ads and once it served the defendant turns out breached the agreement by not
making payments; that thereby, act of the defendant is indeed breaching the
agreement yet it is not a contractual terms of debts therefore it not supposedly
filed through bankruptcy proceeding in Commercial Court but constitute
common civil case and ought to be filed through District Court.68
Commercial Court on Modernland case No.
18/Pailit/1998/PN.Niaga/Jkt.Pst consider that the term of debt set forth in
66
Sutan Remi Sjahdeini, Hukum Kepailitan… Op, Cit., p 84 67
Id 68
Id
35
Article 1 of Bankruptcy Law was not merely dealing with debt in loans
agreement but also an obligation arising from another agreements or from
transaction that required it to make payments.69
Supreme Court toward this
case (case No. 3/KN/1998) propound differently with the Commercial Court.
Under Supreme Court in the elucidation of Article 1 of Bankruptcy and
Suspension of Obligation for the Payment of Debts Law stated that debt
consists of main debt and interest. Thereby Supreme Court has stated that
bankruptcy law only covers bankruptcy based on loans agreement.70
A. 3. 2. 3. Definition of Debt according to Legal Experts
Some legal experts have opinions regarding the understanding of
debt in bankruptcy scope differently as the courts have provided an
understanding of the debt on the previous discussion. Understanding of the
experts also derived from the wording of the articles on the debt in
bankruptcy law and according to the Civil Code and the practice of empirical
conditions of the business world in Indonesia.
Started from Jerry Hoff, he emphasizes that obligation or debts can
arise either out of contract or out of law. There are obligations to give
something, or obligation to do or not to do something. The creditors in
entitled to the performance of the obligation by the debtor. The debtor is
obliged to perform. Some examples of obligations which arise out of contract
are:
69
Lontoh et al, Penyelesaian Utang-Piutang melalui Pailit atau Kewajiban Pemnbayaran Utang,
Penerbit Alumni, Bandung, 2001, p 79 70 Id
36
- The obligation of borrower to pay interest and to repay the principal of the
loan to the lender;
- The obligation of a seller to deliver a car to a purchaser pursuant to a sale
and purchase agreement;
- The obligation of a builder to construct a house and to deliver it to
purchaser;
- The obligation of a guarantor to guarantee to a lender the repayment of a
loan by a borrower.
Therefore from the debtor‘s perspective these obligations are his debts while
from the creditor‘s perspective these obligations are his claim.71
In line with the opinion of Jerry, Setiawan says that ―debt‖ is
supposedly been given the broad understanding; both in terms of pay certain
obligations arising from loan agreement or obligations to pay certain amount
of money and other contractual agreements that lead to the debtor must pay a
certain amount of money.72
In other words, what meant by debt is not only an
obligation to pay a certain amount of money due to the debtor has received a
certain amount of money from the credit agreement, but also the obligation to
pay by the debtor arising from other agreements.73
Meanwhile, according to Prof. Sutan Remy Sahdeini, the debts
referred to in the Act of bankruptcy is not any obligation bear by the debtor to
the creditor, but only on the ground that the obligation is expressed by a sum
of money, both those obligations arising from any agreements or as specified
71
Jerry Hoff, Indonesian Bankruptcy Law, Tata Nusa, Jakarta, 1999, p 15-16 72
Lontoh et al, Penyelesaian Utang-Piutang…Op, Cit., p 117 73
Id
37
by the Act (e.g the obligation to pay taxes determined by the Tax Act), or
because by judge decision which has legally binding.74
He further argued that ―Claim‖ under US Bankruptcy code requires
the ―right to payment‖.75
Accordingly, when the duty of the debtor does not
give birth to the right of payment consequently the duty of the debtor cannot
be classified as a ―claim‖. He adduced furthermore, that base on the
‗language‖ used by the Code and the legislative history, practical of the entire
court argue that the definition of ―claim‖ very is expansive. The question is
how far the concept of claim can be expanded? By designating one of the
legislative history of the Code, one of the Courts argue that ―that language
surely points us in a direction, but provides little indication of how far we
should travel‖.76
Ned Waxman said ―the concept of a claim is significant in
determining which debts are discharges and who share in distribution‖.77
Debt
as a primary ground to state bankruptcy subject becomes bankrupt is be very
important to be studied in further assessed of the underlying principles of that
norm. Robert L. Jordan defines ―claim‖ as follows:78
1) Right to payment, whether or not such right is reduced to
judgment, liquidated, unliquidated, fixed, contingent, matured,
74 Jamin Ginting, Pengertian Utang sebagai Dasar Permohonan Pailit dalam Yurisprudensi,
Fakultas Hukum Universitas Pelita Harapan, Vol. II, No. 1 Juli, 2002, p 49 in Sutan Remi
Sjahdeini, Hukum Kepailitan, p 110 75 M. Hadi Shubhan, Hukum Kepailitan, Op, Cit., p 34 76 Id p 35 77
Id, (as quoted from Ned Waxman, Bankruptcy, Gilbert Law Summaries, Harcourt Brace Legal
and Professional Publication Inc, Chicago, 1992, p 6) 78 Id
38
unmatured, disputed, undisputed, legal, equitable, secure or
unsecured; or
2) Right to an equitable remedy for breach of performance if such
breach gives rise toa right to payment, whether or not such right to
an equitable remedy is reduced to judgment, fixed, contingent,
matured, unmatured, disputed, undisputed, legal, equitable, secure
or unsecured.
The principle of debt is not only concerned with the limits of the
definition of the debt but also with regard to the limitation of the amount of
debt to be there. Things like this happen and can be seen from the rules
applicable Bankruptcy Law of Singapore namely in order to be entitled to
present a bankruptcy petition against a debtor, the creditor must satisfy the
following:
1) there must be a creditor-debtor relationship;
2) the debt owed to the petitioning creditor is not less than S$ 10.000,-
or such other sum prescribed by the minister;
3) the debt is liquidated and payable immediately;
4) if the debt was incurred outside Singapore, there is a judgment or
award which is enforceable by execution in Singapore, and
5) the debtor is unable to pay the debt.79
79 Dennis Campbell, International Corporate Insolvency Law, Butterworth & Co, London, 1992, p
492-493. Ricardo Simanjuntak, Esensi Pembuktian Sederhana dalam Kepailitan, 2005, in Emmy
Yuhasarie, Undang-Undang Kepailitan dan Perkembangannya, Pusat Pengkajian Hukum, Jakarta,
p 60
39
The arrangement of limitation of the amount of debt is similarly also
stipulated in Bankruptcy Act of Hong Kong namely the creditor can only
present a petition if the following conditions are classified:80
1) the debt owed by the debtor to the petitioning creditor or two or
more petitioning creditors in aggregate must be at least HK$
5,000,- and
2) the debt is liquidated sum payable immediately or at some certain
time in the future; and
3) the act of bankruptcy relied on must have occurred within three
months of presentation of the petition; and
4) the debtor has or had the requisite nexus with Hong Kong:
a. the debtor is domiciled in Hong Kong
b. within a year before the presentation of the petition either
ordinarily resided in Hong Kong, or has a dwelling-house
or place of business in Hong Kong, or carried on business
in Hongkong either personally or by an agent; or
c. within a year before the presentation of the petition was a
member of a firm or partnership which carried on business
in Hongkong.
80 Dennis Campbell, International Corporate Insolvency Law, Op,Cit., p 259
40
A. 4. 2. The Condition of Debt becomes Due and Payable
In an agreement almost certainly set on when a debt must be paid, and
in the sale and purchase agreement for instance is set on when the seller must
deliver the goods sold and when the buyer must make payment.
Article 2 paragraph (1) of Law No. 37 of 2004 on Bankruptcy and
Suspension of Obligation for the Payment of Debts determines that ―A debtor
having two or more creditors and failing to pay at least one debt which has
matured and became payable, shall be declared bankrupt through a Court
decision, either at his own petition or at the request of one or more of his
creditors‖. Afterward in chapter of elucidation of this law describes that
―Debt which has become due and payable‖ shall mean the obligation to pay
debt that has become due, either under the contract, accelerated or due to the
sanctions imposed by the regulatory body or decision of the court, arbitrator
or panel of arbitrators‖.81
From other sources can be found how the understanding of maturity
payable. Maturity (due and payable) is defined as the obligation to repay a
loan that is due in accordance with an agreement, or is due based on a
sanction or fine imposed by an authorized government agency, or based on a
decision of a court or arbitrator.82
Maturity means that a debtor, who has two
or more creditors and does not repay in full at least one debt which is due and
payable, can be declared bankrupt by the court. The requirement that the loan
be repaid in full was not in the old bankruptcy law. If the above conditions
81
Vide: Chapter of Elucidation of article 2 paragraph (1) of Law No. 37 of 2004 82 Subianta Mandala, Indonesian Bankruptcy Law, Op, Cit., p 1
41
are met, then a petition for bankruptcy may be filed with the relevant
commercial court.83
As to when a debt should be regarded as falling due, this also is a
factual question which must be determined in light of all the circumstances of
the case. The time at which a debt is considered to be "due" obviously has a
bearing on cash flow projections and therefore solvency. Usually, for the
purposes of the insolvent trading provisions, a debt falls due when it is legally
due for payment pursuant to the relevant contractual terms or any agreed
extension of time for payment arranged in advance with the creditor. In this
regard, it should be noted that forbearance by creditors will not necessarily be
sufficient to defer due dates for payment.84
B. Theories in Insolvency Test
Talking about insolvency test, there are two primary tests that are
generally used to determine whether any person or company is solvent; they
are the ―balance sheet‖ or ―absolute‖ insolvency test on the one hand and the
―cash flow‖ or ―equity‖ or ―commercial‖ insolvency test on the other.
Both tests have been used by financial analysts and international
courts since the nineteenth century. It is argued that only one financial
statement, and hence one financial test is necessary (albeit not always
83 Id 84
Michael Quinlan and David Courtness, The Latest Disturbing Developments in Insolvent
Trading, delivered in Corporate Insolvency & Restructuring Forum, 5 November 2008
subsequently updated by Steven Fleming, & Allens Arthur Robinson
42
sufficient) to determine an entity‘s solvency.85
Both tests also have been
employed by statutory provisions in Australia and other common law
countries, including England, New Zealand and the United States of America.
B. 1. Balance Sheet Test
The test for insolvency under English law is whether the debtor has an
―inability to pay debts‖. The tests for this are set out in the Insolvency Act
1986 (―IA‖). Under section 123(2) a company is deemed unable to pay its
debts if the value of the company‘s assets is less than the amount of its
liabilities, taking into account its contingent and prospective liabilities
(balance sheet test).86
Under the balance sheet test, a person or company is insolvent if the
total liabilities outweigh the value of the assets and therefore there are
insufficient assets to discharge the liabilities. A business might be
commercially insolvent and fall the cash flow test but be asset-sufficient and
therefore able to satisfy the balance sheet test; its creditors may however wait
some time for payment.87
―The idea underlying [the balance sheet insolvency
test]...is that it is not sufficient for the company to be able to meet its current
obligations if its total liabilities can ultimately be met only by the realization
of its assets and these are insufficient for the purpose.88
85 Julie E. Margret, Insolvency and Test of Insolvency: An Analysis of the “Balance Sheet” and
“Cash Flow” Tests, Australian Accounting Review, Vol. 12 No.2, 2002, p 29 86 http://www.jdsupra.com/documents/73508a29-90ec-4551-9946-7c1a28823037.pdf accessed on
August 11 2016 at 9 pm 87 http://legal.thomsonreuters.com.au/product/au/files/720502472/keay's_insolvency_pt_1.pdf
accessed on Thursday , August 11, 2016 at 9.42 pm 88
Holly Doyle & Simon Passfield , Recent Issues In Corporate And Personal Insolvency,
Guildhall Chambers, p 1
43
Applying the balance sheet test, the valuation analyst typically
performs a two-step procedure to conclude whether the debtor entity is
insolvent. In the first procedure, the valuation analyst concludes the
appropriate premise of value to use in the fair value valuation. In the second
procedure, the valuation analyst estimates (and compares) the values of the
debtor assets and the debtor liabilities.89
In the first procedure, the valuation analyst concludes the highest and
best use (HABU) of the subject debtor entity. Based on the conclusion of this
HABU analysis, the analyst concludes whether it is appropriate to value the
debtor assets on either a value in continued use, going-concern basis premise
of value or a value in exchange, orderly disposition basis premise of value.
This HABU conclusion determines the premise of value. In all cases, the
analyst will conclude the fair value standard (or definition) of value.90
In the second procedure, the valuation analyst concludes the fair value
of the debtor entity assets (both tangible assets and intangible assets), based
on the selected premise of value. Then, the valuation analyst concludes the
value of all of the debtor entity liabilities (both recorded liabilities and
contingent liabilities). This balance sheet valuation should specifically
consider: any asset reductions (e.g., cash payments to creditors, cash
dividends/distributions to stockholders, sales or other transfers of tangible
assets) related to the objectionable transaction; and any liability increases
89
Robert F. Reilly and Ashley L. Reilly, Valuation Procedures For The Insolvency Balance Sheet
Test, 2012, p 40 90 Id
44
(e.g., leases, loans, or other obligations) related to the objectionable
transaction. Next, the valuation analyst compares the fair value of all of the
debtor assets to the value of all of the debtor liabilities.91
Finally, if the fair value of the debtor total assets exceeds the value
of the debtor total liabilities, then the debtor ―passes‖ the balance sheet test —
and the debtor entity is solvent under the balance sheet test. Alternatively, if
the value of the debtor total liabilities exceeds the fair value of the debtor
total assets, then the debtor ―fails‖ the balance sheet test — and the debtor
entity is insolvent under the balance sheet test.92
While the inquiry is labeled
a "balance sheet" test, the court's insolvency analysis is not literally limited to
or constrained by the debtor's balance sheet. Instead, it is appropriate to adjust
items on the balance sheet that are shown at a higher or lower value than their
going concern value and to examine whether assets of a company that are not
found on its balance sheet should be included in its fair value.93
Whereas under U.K Insolvency Code, Balance sheet insolvency
(where a company‘s liabilities exceed its asses) is one of the ways of
establishing a company is ―unable to pay its debts‖ for the purposes of
Section 123 (2) of the Insolvency Act 1986 which reads ―A company is also
deemed unable to pay its debts if it is proved to the satisfaction of the court
that the value of the company‘s assets is less than the amount of its liabilities,
taking into account its contingent and prospective liabilities.‖ As such, not
91 Id p 41 92 Id 93
Peitz v. Hatten, 279 B.R. 710, 743, Bankr. D. Del. 2002, (citations omitted); see also Steam,
supra note 15, p 361, noting that the balance sheet is only a starting point and collecting
additional case.
45
only can balance sheet insolvency form the basis of a winding up petition
against a company, it also forms a necessary precondition for certain types of
officeholder actions. These include preferences (Section 239) and transactions
at an undervalued (Section 238), where the IP is required to show that a
company was ―unable to pay its debts‖ at the time of the relevant action.94
Furthermore, because it has developed from case law and not statute,
Delaware's balance sheet test has been stated differently. Over the years,
these varying definitions have evolved to the point of becoming borderline
inconsistent. For example, some cases describe the test in its "traditional"
sense liabilities exceeding assets: ―an entity is insolvent when it has liabilities
in excess of a reasonable market value of assets held.‖95
Other cases,
however, add a qualifier to the traditional test. These cases state that a
company is insolvent if it has a "deficiency of assets below liabilities‖ and
there is ―no reasonable prospect that the business can be successfully
continued in the face thereof‖96
On its face, the "no reasonable prospect" test
is a narrower one; not only must a company's liabilities exceed the fair market
94 https://www.burges-salmon.com/-/media/files/publications/open-
access/the_final_word_on_balance_sheet_insolvency_eurosail_in_the_supreme_court.pdf
accessed on Thursday, August 11, 2016 at 11 pm 95 Geyer v. Ingersoll Publ'ns Co., 621 A.2d 784, 789 (Del. Ch. 1992); see also Trenwick Am. Litig.
Trust v. Ernst & Young, L.L.P., 906 A.2d 168, 195 n.74 (Del. Ch. 2006) stating that "insolvency
in fact occurs at the moment when the entity 'has liabilities in excess of a reasonable market value
of assets held‖ (quoting Blackmore Partners, 2005 WL 2709639, p 6, reprinted in 31 DEL. J.
CORP. L p 681)); Blaclanore Partners, 2005 WL 2709639, p 6 ("Under long established precedent,
one of those circumstances is insolvency, defined not as statutory insolvency but as insolvency in
fact, which occurs at the moment when the entity 'has liabilities in excess of a reasonable market
value of assets held."' (quoting Geyer, 621 A.2d at 789)), reprinted in 31 DEL. J. CORP. L. p 681;
U.S. Bank Nat'l Ass'n v. U.S. Timberlands Klamath Falls, L.L.C., 864 A.2d 930, 947 (Del. Ch.
2004) (explaining that "a company may be insolvent if 'it has liabilities in excess of a reasonable
market value of assets held."' (quoting Geyer, 621 A.2d p 789)) in Robert J. Stearn, Jr. And Cory
D. Kandestin', Delaware's Solvency Test: What Is It And Does It Make Sense? A Comparison Of
Solvency Tests Under The Bankruptcy Code And Delaware Law, Vol. 36, p 179 96 Id
46
value of its assets, but the company also must have no realistic hope of
continuing to do business. Under this standard, fewer companies are
insolvent.97
B. 2. Cash Flow Test
Under the cash flow test a person (company) is generally regarded
as insolvent when there existed an inability to pay all the person‘s or
company‘s debts as and when they become due and payable. This means that
there are insufficient cash or other realizable resources available to pay all
creditors at the various times they can demand payment.
A business may be solvent from a cash flow point of view even
though its liabilities are greater that its assets; that may not be a problem if,
for example, the business generates significant cash flow from sales or
services provided.
―It is of no consequence, under (the cash flow) test, that assets exceed liabilities. The
important point is: can the company pay its way in carrying on its business? The
court, in examining whether a company is suffering cash flow insolvency, will
consider whether the company is actually paying its creditors‖98
It is not appropriate to base an assessment on the prospect that the
company might able to trade profitability in the future, thereby restoring its
financial position. The question is whether it, at the relevant time, is able to
pay its debts as they become due not whether it might be able to do so in the
97
Id 98
Keay, The Insolvency Factor in the avoidance of antecedent Transaction in Corporate
Liquidations, Monash University Law Review, 1995, p 305-307
47
future, if given time to trade profitability.99
The cash flow test nevertheless
can be more imprecise in its application, necessarily because the focus is on
the more indeterminate cash flow or access, or readily saleable assets and its
capacity at any one time to meet liabilities requiring payment, rather than on
assets and liabilities. Hence the decision about whether a company on a
particular day was insolvent is often a difficult and imprecise one. 100
Delaware law on the cash flow test, like the balance sheet test,
developed from common law jurisprudence. The test is not entirely clear: the
unanswered question is whether the test is present or forward-looking. In
other words, does a company become cash flow insolvent only at the point
when it actually defaults on a debt? Or is it insolvent at an earlier point, when
it becomes clear that the company will not be able to pay its debt in the
future?101
The case law does not answer this question definitively. Some cases
suggest that the test is forward-looking.102
In Blackmore Partners, the Court
of Chancery stated that ―the 'cash flow test'. . . examines whether a company
can reasonably meet its anticipated fixed (on-balance sheet and contingent)
99
Id 100 Id 101 See, e.g., Teleglobe USA, Inc. v. BCE Inc. (In re Teleglobe Commc'ns Corp.), 392 B.R. 561,
602-03 (Bankr. D. Del. 2008) (reflecting parties' dispute as to whether the cash flow test was
present or forward-looking under Delaware law). 102 See, e.g., Blackmore Partners, L.P. v. Link Energy L.L.C., 2005 WL 2709639, p 3 (Del. Ch.
Oct. 14, 2005) (―[T]he ―cash flow test‖ ... examines whether a company can 'reasonably meet its
anticipated fixed obligations as they become due‖), reprinted in 31 DEL. J. CORP. L. 672, 677
(2006); U.S. Bank, 864 A.2d at 947 ("First, a company is insolvent if it is 'unable to pay its debts
as they fall due in the usual course of business."'); see also J.B. Heaton, Solvency Tests, 62 Bus.
LAW 983, 984 (2007) (discussing Delaware law) ("[The cash flow test] is a forward-looking test.
It is not enough to be able to meet current obligations; the firm must be able to meet its future
obligations as well.") Robert J. Stearn, Jr, Loc, Cit.,
48
obligations as they become due.‖103
The word "anticipated" implies that the
test looks to future debts. The case is not definitive, though, because it is
unclear whether the court was stating its own view of the cash flow test or
merely was summarizing one of the parties' views.104
Other cases use ambiguous language hinting that the test is present
looking. In Production Resources, the Court of Chancery described the test in
the present tense: ―an inability to meet maturing obligations as they fall due in
the ordinary course of business‖105
. In Odyssey Partners, L.P. v. Fleming
Cos., ―the court found a company to be insolvent because it had failed to pay
debts that already had come due. ―Likewise, in Pereira v. Farace,‖ a Federal
Court of Appeals applying Delaware law rejected the forward-looking version
of the cash flow test and held that the test applied only to present debts.106
B. 3. Insolvency Test under Islamic Perspective
Islamic law recognises two concepts of insolvency test, namely al-
I‟sar and al-Iflas. Al-I‟sar means displacement of an easy situation to be
difficult. Al-I‟sar in narrow understanding means ―narrow‖ or ―deficiency‖.
Accoding to Islamic jurists, al-I‘sar is a condition when a debtor cannot pay
his debts (giving nafaqah).107
Other than that, Islamic law defines al-Iflas as
103 Blacknore Partners, 2005 WL 2709639, p 3, reprinted in 31 DEL. J. CORP. L p 677 (emphasis
added) (footnote omitted) (citation omitted). 104 Id 105 Prod. Res. Grp., L.L.C. v. NCT Grp., Inc., 863 A.2d 772, 782 (Del. Ch. 2004) (citing Siple v. S
& K Plumbing & Heating, Inc., 1982 WL 8789, p 2 (Del. Ch. Apr. 13, 1982), reprinted in 7 DEL.
J. CORP. L. 504,508(1982)). The court concluded that the plaintiff adequately pled cash flow
insolvency because the defendant had not paid debts owed to two significant creditors. Id p 784. 106
Robert J. Stearn, Jr, Op, Cit., p 183 107 Siti Anisah, Perlindungan Kepentingan Debitor dan Kreditor, Op, Cit., p 373-380
49
―the nominal amount of debtor‘s debt is bigger than debtor‘s asset, despite the
debtor was able to pay his debts and had sufficient asset‖. Under al-Iflas if
debtor‘s debt is greater than his asset and the creditor prohibits the debtor to
expend his asset (hajr), accordingly the judge is obliged to declare debto‘s
bankruptcy.108
Islamic law also regulates two cumulative conditions to determine the
debtor‘s insolvency. First, there is trade or commercial element (al-shifat al-
Tijariyah) and second, the inability of debtor to pay his debts. Under the
government of Prophet Mohammad SAW, the Prophet prohibit Mu‘adh to
manage his wealth due to his debts are much greater than his wealth,
furthermore Prophet Mohammed have Mu‘adh to sell his wealth for the
payment of his debts.109
108
Id 109 Id
50
CHAPTER III
THE URGENCY OF INSOLVENCY TEST TO DECLARE
BANKRUPT
A. The Urgency of Insolvency Test to Declare Bankrupt
A. 1. Bankruptcy Law in Indonesia Does Not Require a Debtor
under an Insolvency Situation to Declare Bankrupt
Before discussing the urgency of insolvency test, it is important to
review in advance the importance of bankruptcy declaration when a debtor is
already under an insolvency situation. Unlike in other jurisdictions, the
applicable bankruptcy law in Indonesia does not require a debtor to be
insolvent. Bankruptcy is a simple declaration pursuant to Article 2 paragraph
(1) it suffices that a debtor having two or more creditors and has not fully
paid one debt which is due and payable. It is certainly a separate issue from
insolvency.
Bankruptcy law should be a way out to the process of distributing the
assets of the debtor with good level of certainty and fairness. 110
Dimension of
justice of insolvency proceedings found in the protection of the interests of
parties, creditors and debtor. Basically, bankruptcy is not an instrument of
oppression for debtor to satisfy the interests of creditors‘ but there are many
110 M. Hadi Shubhan, Hukum Kepailitan.., Loc, Cit., p 59
51
legal aspects that also consider the interests of debtor in the end to minimize
losses on debtor‘s assets.111
Under macroeconomic view, bankruptcy will greatly affect the
economy of a state, which among other things will affect the productivity of
goods and services, the distribution of goods and services, tax revenues and
state level, increasing unemployment nationally up to affecting the rill sector
activities. Frank in his book adduces that ―corporate bankruptcy has two
functions; first, to deliver the penalty for failure by forcing a wrapping up
when a business cannot pay its debt; and second, to reduce the social cost
failure‖.112
As described previously, conditions of bankruptcy petition as set forth
in the Article 2 paragraph (1) on Bankruptcy and Suspension of Obligation
for Payment of Debts does not require the condition of a debtor under an
insolvent situation.113
Bankruptcy principle contained in Article 2 paragraph
(1) really adheres that bankruptcy is partially as debt collection institutions.
The conditions to be declared as bankrupt is by only two cumulative
conditions, namely a debtor having two or more creditors and failing to pay at
least one debt which has matured and became payable. Law does not provide
conditions other than those two things, including does not requiring the
minimum amount of certain debt or requiring debtor to be insolvent in which
111 Id 112 Frank H. Easter Brook, “Is The Corporate Bankruptcy Efficient?” 1996, in Jagdeep S.
Bhandari and Lawrence A. Weiss (ed), Corporate Bankruptcy: Economic and Legal Perspective,
Cambridge University Press, New York, p 405, Id 113
A debtor having two or more creditors and failing to pay at least one debt which has matured
and became payable, shall be declared bankrupt through a Court decision, either at his own
petition or at the request of one or more of his creditors
52
the debtor's wealth (assets) is much smaller than the debtor's debts (liabilities)
commonly measured by insolvency test. For this matter bankruptcy law leads
more to the easiness of filing the bankruptcy petition114
From the study of current bankruptcy law prevailing in Indonesia, it is
found that bankruptcy is used as an institution to be absolutely
straightforward making the legal subject becoming bankrupt without
considering the solvency of the company and the characteristics of the
company‘s financial distress.115
Juridical arguments on the proposition are
proved, first, provision requiring a debtor shall be "under to stop paying
situation" is replaced by "a debt that is not paid off". A provision of ―under
stop paying situation‖ has the meaning that the debtor is under situation does
not pay at all or stopped completely pay off debts. At the time when a debtor
still pays his debt to his creditor despite the payment of debt is only partially
of liabilities (installments) than it supposed to be, the debtor nevertheless
cannot be said to be under situation of stop paying.116
Whereas, provision ―do not pay off‖ has meaning debt / debt
installment is not fully paid and completed. If the debtor only pays a portion
of the obligation than it should be, then he is under category of "do not pay
off" accordingly it means that this situation has fulfilled one of the
requirements to file bankruptcy petition. This provision also means that the
law does not give the space at all for debtors who have problems with debt
114
M. Shubhan Hadi, Hukum Kepailitan, Op, Cit., p 82 115
Id 116 Id
53
payments to re-setting on debt repayment scheme.117
The only requirement of
the article is that the debtor merely has failed to repay one of its debts.
Theoretically, in this sense, a debtor can be declared bankrupt and,
subsequently, his assets can be liquidated in spite of the fact that the debtor
may in fact be technically solvent. This is irrespective of whether the debtor
owns assets with a much higher value than its liabilities. This logic deviates
considerably from the basic policy of most bankruptcy laws in which the
emphasis is normally placed on rehabilitating the debtor who is in distress
rather than on liquidating the assets for the sole purpose of the payment of
one single debt even in cases where the debtor is solvent.118
By drafting a bankruptcy law that disregarded issue of solvency, it
could reasonably be construed as having been drafted to make it easier for
creditors (including foreign creditor) to have Indonesian debtors facing a
financial distress declared bankrupt.119
Further, for many Indonesians,
including the Indonesian business community, the reform was not absolutely
necessary. To the contrary, the bankruptcy law reform had been perceived as
means for foreign creditors to conveniently take over Indonesian
businesses.120
Prior to the economic crisis, as the exchange rates were
relatively stable, there were only a few cases of inability to repay a debt.
117 Id 118 Hikmanto Juwana, Reform of Economic Laws and Its Effects on the Post-Crisis Indonesian
Economy, March 2015, p 80 119
Id 120
However many foreign companies had not aggressively taken over Indonesian companies due
to political uncertainty, unfavorable investment situations, and security concerns, Id
54
However, when the crisis hit Indonesia, exchange rates depreciated
considerably without the government being able to control them.121
In practice, many cases of bankruptcy petition are granted by the
Commercial Court for solvent companies. Certainly because it refers to the
article that determines the requirements for a bankruptcy petition shall be
granted.122 Simple declaration pursuant to Article 2 paragraph (1) has given a
disaster for many companies in Indonesia which is still solvent but should be
bankrupt because the law not due to the fact that the company has undergone
an inability to pay debts (assets less than liabilities).
PT Modernland Reality (Modernland) was the victim (solvent-yet-
bankrupt) due to its failure to deliver some apartment units to its customers.123
The author basically agree with the interpretation of the commercial court
judge broadly defines debt as the provisions referred to in Article 1234 of
civil code.124
Yet, being a critical issue for the author is the issue of
bankruptcy law does not specify bankruptcy may be imposed only when the
debtor is experiencing a crisis and so, the debtor does not have enough assets
to meet his obligations on his debt.
121 Before the occurrence of the economic crisis in July 1997, the exchange rate of U.S dollar to
the rupiah was around IDR 2.250 to IDR 2,600. However, when the economic crisis hit Indonesia,
the rupiah continued to depreciate trough June 1998, reaching IDR 15,250 and at one point
bottoming out IDR 20,000, Id 122 Article 2 paragraph (1) 123 Drs. Husein Sani et al, v PT MOdernland Reality Ltd., Commercial Court Decision No.
07/Pailit/
1998/PN.Niaga/Jkt.Pst. dated October 12, 1998. The Supreme Court, however, revoked the
commercial Court decision because the commercial court had defined the debt widely, namely as a
case where there was no monetary debt involved. The obligation to deliver units of apartment
could not be considered as debt, Id 124 Their purpose is to provide something, to do or not to do something
55
An Insurance joint venture company PT Asuransi Jiwa Manulife
Indonesia (AJMI), had to defend itself against several petitions of bankruptcy
brought by some unsatisfied policyholders who demanded payment of
disputed insurance claim. AJMI had faced a number of applications for
declaration of bankruptcy.125
When AJMI was declared bankrupt, the
shareholders were Manulife Financial (MF), a Canadian-based insurance
company which owned 51% of the shares, PT Dharmala Sakti Sejahtera
(DSS) which owned 40% of the shares, and the International Finance
Corporation (IFC) which owned 9% of the shares. It should be noted that the
DSS had been declared bankrupt prior for the filing of this petition.126
The case was particularly controversial and received a great deal of
attention domestically and internationally. The controversy surrounded the
fact that the respondent to the petition was a perfectly solvent company and
that the court declared AJMI bankrupt in spite of its solvency. At that time,
the risk-based capital ratio of AJMI was 167.26 percent, far above the
government requirement of 120 percent. Its assets were valued at IDR 1.8
trillion.127
Furthermore, the controversy highlighted how the bankruptcy
mechanism could be invoked in what essentially a feud between
shareholders.128
The application to declare AJMI bankrupt was submitted by
125 See the overview section of U.S Embassy (2000) in which it stated that “Indonesia‟s
Bankruptcy Law, which was amended in 1998 to establish a separate Commercial Court, has been
a disappointment to creditors” Hikmanto Juwana, Op, Cit., p 85 126
Id 127 Id 128
The Bankruptcy Act was used by DSS as a kind of weapon by the founder to attack Manulife.
See Corruption Lurks behind Bankruptcy Act in Indonesia, Age (Melbourne), June 27, 2002. The
Jakarta Post writes as follows, The bankruptcy petition launched against AJMI is seen by Manulife
56
the DSS‘s receiver on May 15, 2002. The case was examined by the Jakarta
Commercial Court, which is attached to the Central Jakarta District Court.
The reasons to declare AJMI bankrupt were that the applicant proved that
AJMI had two debts, one of which was due and payable.129
The first debt as
claimed by the DSS was a debt resulting from AJMI‘s failure to pay a
dividend to DSS for the year of 1999 (the amount claimed is IDR 22.4
billion)130
.
The dividend should have been paid as it was agreed in a certain joint
venture agreement conclude by the shareholders. One of the provisions
stipulated that AJMI had to pay a dividend if it registered a profit of more
than IDR 100 million (joint venture agreement between AJMI and DSS dated
June 10, 1998). In 1998 and 1999, AJMI had registered profits of around IDR
186 billon and IDR 306 million, respectively. On June 13, 2002 the judges by
vote of 2 to 1 concurred with the DSS arguments and declared AJMI
bankrupt.131
Another case also happened to PT Telkomsel Tbk against bankruptcy
petition file by PT Prima Jaya Informatika, a distributor of mobile phone SIM
cards and vouchers.132
A bankruptcy petition was filed against Telkomsel
using the agreement between Telkomsel and PT Prima Jaya Informatika
as part of its two-year legal battle with the Gondokusumo family, the owner of DSS, who has been
accused of trying to defraud Manulife.See Manulife says Receiver Irresponsible, Jakarta Post, June
18, 2002, Id 129 Law No. 4 of 1998 Article 1 paragraph (1) Id 130 Id 131
Commercial Court Decision No. 10/Pailit/2002/PN.Niaga/JKt.Pusat 132
http://www.thejakartapost.com/news/2012/11/24/telkomsel-bankruptcy-ruling-overturned.html
accessed on Tuesday, August 30 2016, at 8pm
57
(Prima Jaya) as the basis for the allegedly overdue debts of Telkomsel. The
agreement required Telkomsel to annually provide top-up vouchers worth 120
million rupiah from 2011 to 2013 to Prima Jaya for distribution; however,
despite receiving the purchase orders, Telkomsel cited breach of contract on
the complainant‘s part regarding the distribution of such vouchers, and
temporarily ceased their allocation.133
As a result, Prima Jaya filed a
bankruptcy petition against Telkomsel arguing that, due to Telkomsel‘s
refusal to provide the vouchers, Telkomsel owed money to Prima Jaya based
on the refused purchase orders. In order to fulfil the two-creditor requirement,
Prima Jaya alleged that Telkomsel also owed money to PT Extent Media
Indonesia.134
The commercial court granted the bankruptcy petition, which put
Telkomsel in bankruptcy. Telkomsel was taken to court by a prepay phone
voucher distributor, PT Prima Jaya, which alleged in a petition for a
bankruptcy declaration that PT Telkomsel still owed it 5.3 billion rupiah
($555,700). Jakarta Commercial Court accepted the petition and declared
Telkomsel bankrupt on 14 September despite the company posting a first-half
profit this year of $770 million.135
133
, p 186 134 Id 135
http://in.reuters.com/article/indonesia-bankruptcy-idINL4E8KJ4R720120921 on REFILE-
Indonesia telecom giant's bankruptcy stirs fears of legal abuse, accessed on Tuesday, August 30
2016 at 8.16 pm
58
B. The Application of Insolvency Test (Balance Sheet Test)
Generally speaking, bankruptcy should be harmonized with the
concept of the solvency of the company and the concept of financial distress,
accordingly bankruptcy would be the last resort (ultimum remedium).136
Bankruptcy is now no longer serving as one way out of the bankruptcy
of a company that is a reflection of the principle of commercial exit but is
often used as a legal institution in debt collection. Could conceivably there
are companies that bankrupted just because of the debts are less than one
percent of the assets of the company itself, accordingly, bankruptcy can
meaningfully be used for bankrupting a company and not vice versa as an
alternative solution to the company's bankruptcy settlement.137
This is the
biggest mistake of philosophy embedded within our Law on Bankruptcy and
Suspension for Payment of Debt.
Not requiring insolvency test in determining whether or not the debtor
is under an insolvency situation is not the case for bankruptcy arrangements
in several other countries. They have long been applying the test of
insolvency. As previously discussed in chapter II, countries always have the
option of determining which insolvency test that would apply or even not
choosing one but combining two or more insolvency test theory.
In many countries that adopt a Common Law (Anglo-Saxon), such as
the United Kingdom, USA, and so on, a provision that the Court judge
handling the bankruptcy case does not make it easier to declare the debtor
136
M. Shubhan Hadi, Hukum Kepailitan, Op, Cit., p 83 137 Id p 197
59
bankrupt. Before the bankruptcy case is processed, the judge first to test the
financial capability (insolvency test) for the debtor through public accountant,
whether the debtor company is really in a state of not being able, this is in line
with the philosophical value of the bankruptcy institute itself.138
It is often found that sometimes the company is facing financial
distress but is still solvent.139
The author still and all sees the balance sheet
test is the most appropriate insolvency test to be applied in bankruptcy in
Indonesia. The reason is certainly because of the concept of the balance sheet
in line with the philosophy of bankruptcy where the bankruptcy occurs only
when a debtor‘s assets are not sufficient to pay his obligations.
Accordingly, to set up a proper basis for discussion around valuation,
the writer begins with an overview of balance sheet test as a means to
determine whether the debtor is in a state of insolvent (insolvency test). This
is necessary because understanding of both insolvency and balance sheet test
are requiring a comparison of the debtor‘s assets to its liabilities.
The balance sheet test is best understood in its
application. Solvency disputes can implicate the definition of insolvency and,
specifically, requires interpretation of the phrases ―fair valuation‖ and ―fair
value.‖ This frequently arises when a trustee or a debtor in possession (DIP)
attempts to use its avoidance powers. In its simplest terms, the balance sheet
test requires the experts to engage in a three-step process.
138 Maswandi et al, Bankruptcy Practice in Indonesia Relating To Legal Protection for Solvent
Debtor, Volume 21, Issue 1, Ver. 5 (Jan. 2016) p 101 139
Jorge Martín Cerón, Going “Distress” on the WACC: Theoretical and Empirical Analysis, A
thesis, Universidad Autónoma de Madrid, p 15
60
First, an expert must determine whether, as of the date of the
challenged transaction, the debtor was operating as a going concern or
otherwise poised to liquidate, as the former typically would indicate higher
value and the latter lower value. Generally, in the context of a going concern,
the ―fair value‖ of a debtor‘s assets is the fair market price that could be
obtained if the assets were sold in a prudent manner in a reasonable period of
time. The reasonableness of the time period is determined in the context of
what is optimal for the debtor‘s creditors: not so short a time that value is
impaired by a forced sale, but not so long that the time value of money and
regular business needs would reduce a typical creditor‘s recovery.140
In other words, as long as the amount the debtor could realize from
converting its assets to cash in the ordinary course of business exceeds the
expenses of continuing to conduct business, an expert‘s determination that the
debtor‘s assets should be valued as a going concern may be deemed
reasonable by a reviewing court. Second, the expert values the debtor‘s assets
using a generally accepted valuation methodology that he or she deems
appropriate based on the facts and circumstances of the case. The three most
frequently encountered business valuation methodologies are discounted cash
flow, comparable company, and comparable transaction analysis, and these
methods have been accepted by many courts. After calculating the value of
the debtor‘s assets under the appropriate standard, the expert compares the
140
http://business-finance-restructuring.weil.com/valuation/the-statutory-definition-of-insolvent-
part-one/#hov2 accessed on May, 31st 2016, at 4.07 pm.
61
calculated asset values to the debtor‘s liabilities to arrive at a solvency
conclusion.141
To label it a ―balance sheet‖ test may be a misnomer. Financial
statements prepared in accordance with General Accepted Accounting
Principles (GAAP) do not record assets at fair market value. Instead, they are
recorded at the historical, original purchase cost and reduced each year by an
estimate of depreciation. Within the contemplation of § 101(32) ―property‖
may include assets not even listed on the balance sheet. Debts are recorded
only to the extent that they are known and quantifiable; many non recorded
liabilities usually surface in an insolvency analysis. The balance sheet is only
the starting point in the analysis142
A review of the balance sheet provides insight into the financial health
of the business. Comparison of balance sheets from a business through time
provides a general indication of performance of the business. The balance
sheet analysis should begin with a comparison of total assets and liabilities.
The difference is net worth. If total assets exceed total liabilities, the business
141
Id 142
See In re Trans World Airlines, Inc., 180 B.R. p 405 n.22. See also, e.g., Lids Corp. v.
Marathon Inv. Partners, L.P. (In re Lids Corp.), 281 B.R. 535, 540 (Bankr. D. Del. 2002) (―This
standard for solvency is typically called the ‗Balance Sheet Test.‘ ‖However, this may be a
misnomer because the Balance Sheet Test is based on a fair valuation and not based on [GAAP],
which are used to prepare a typical balance sheet.‖); Peltz v. Hatten, 279 B.R. 710, 743 (Bankr.
D. Del. 2002) (―While the inquiry is labeled a ‗balance sheet‘ test, the court‘s insolvency
analysis is not literally limited to or constrained by the debtor‘s balance sheet. Instead, it is
appropriate to adjust items on the balance sheet that are shown at a higher or lower value than
their going concern value and to examine whether assets of a company that are not found on its
balance sheet should be included in its fair value.‖), Civil No. 00-CV-00996, 2003 WL 1551287
(3d Cir. Mar. 25, 2003), on Robert J. Stearn. JR, ―Proving Solvency: Defending Preference and
Fraudulent Transfer Litigation‖ The Business Lawyer, February 2007, Vol. 62
62
is solvent and net worth is positive. When liabilities exceed assets, the
business is insolvent and net worth is negative.
A comparison of current assets and current liabilities from the balance
sheet indicates ability of the business to meet cash obligations as they come
due. A business that is able to meet its current cash obligations as they come
due possesses liquidity. The balance sheet of a business in a healthy financial
condition will reflect an excess of current assets over current liabilities.
Typically, that excess should be one-and-one-half to twice as much in current
assets as in current liabilities. The excess is needed for several reasons.143
A first reason is to serve as a financial cushion in case of rapid change
in price of property making up the current assets. A rapid drop in price will
destroy the liquidity of a business that has barely enough current assets to
cover current liabilities.144
A second reason that excess current assets indicate good financial
health is that this excess is the source of working capital for the business.
Working capital is the source of funds for the current operating expense -
items that must be purchased on a day-to-day schedule to keep the business
operating. If there is a deficiency of working capital, the business must
borrow additional funds or it must liquidate intermediate assets to secure
working capital. The procurement of additional credit often takes time. If
intermediate assets are liquidated, the assets that produce income for the
143 http://extension.psu.edu/courses/meat-goat/financial-information/farm-business-
analysis/balance-sheet-analysis on Balance Sheet Analysis The Balance Sheet Provides A Cross-
Section View Of The Financial Side Of A Business, accessed on Friday, September 2nd
2016 at
4pm 144 Id
63
business have been removed and future income flow will be reduced. Thus,
asset liquidation is not a viable long-term alternative.145
A number of ratios
have been developed to help in review of the balance sheet. These should be
considered as useful tools for initial evaluation of the document for
determining the insolvency.
B. 1. Under UK Insolvency Act
The mechanics and process of the balance sheet test in the context of
considering whether or not a company is insolvent was recently considered by
the UK Supreme Court in BNY Corporate Trustee Services Ltd v Eurosail-
UK-2007-3BL plc [2013] 1 WLR 1408.146
On the facts of the case, Eurosail-
UK-2007-3BL plc ("Eurosail") had issued loan notes, graded into classes of
varying priority, which provided that an "event of default" would occur if
Eurosail was deemed unable to pay its debts as and when they fall due (ie a
cash flow test) within the meaning of Sections 123(1) or (2) of the UK
Insolvency Act 1986. Subsequently, Eurosail suffered a deficiency in its asset
position and, even though it managed to continue to pay its debts, the lower
ranking note holders argued that there had been an event of default under the
notes.147
In examining whether or not the company could be considered to be
insolvent, Lord Walker observed that as time moves beyond the reasonably
145 Id 146
http://www.hk-lawyer.org/content/balance-sheet-test-and-its-significance-offshore-jurisdictions
accessed on Friday, September 2nd
2016 at 6.00 pm 147 Id
64
near future, a balance sheet test becomes "the only sensible test" because "any
attempt to apply a cash-flow test will become completely speculative". He yet
approved Toulson LJ's statement of the test in the Court of Appeal as
follows:148
"Essentially, section 123(2) requires the court to make a judgment whether it
has been established that, looking at the company's assets and making proper
allowance for its prospective and contingent liabilities, it cannot reasonably
be expected to be able to meet those liabilities."
The Court of Appeal was faced with two competing interpretations of
section 123:149
1. An objective test, where one takes the assets and liabilities at their
respective face values, which are those in the company‘s balance
sheet unless good reason is shown to the contrary.
2. A more restrictive test, where the court looks at whether the
company has ―reached the point of no return‖.
Lord Walker categorically rejected the "point of no return test" which
had been adopted by Lord Neuberger MR in the Court of Appeal, and
emphasized that this phrase "should not pass into common usage as a
paraphrase of the effect of section 123(2)".150
148 Id 149 http://www.kennedyslaw.com/article/insolvencybalancesheet/ accessed on Friday, September
2nd
2016 at 6.12 pm 150
http://www.hk-lawyer.org/content/balance-sheet-test-and-its-significance-offshore-jurisdictions
op, Cit.,
65
While The Supreme Court through its decision confirmed that:151
1. The cash-flow test is concerned with debts presently falling due as
well as those falling due in the reasonably near future. What
constitutes the "reasonably near future" will depend on all the
circumstances including, in particular, the nature of the company's
business.
2. Once the court has to consider more than the reasonably near
future, the cash-flow test becomes entirely speculative and the
balance-sheet test becomes the only sensible test for insolvency.
3. The balance sheet test is a legal test that requires the court to
determine what value to attribute to the prospective and contingent
liabilities of a company. The court must compare present assets
with present and future liabilities and, making allowance for
contingencies and deferred payments assess whether the company
can be reasonably expected to meet all of its liabilities.
4. The Supreme Court disagreed with the ―point of no return‖ concept
introduced by the Court of Appeal.152
It considered that the test
should be simply whether, on the balance of probabilities, a
company has sufficient assets to meet all its liabilities, including
prospective and contingent liabilities. However, in doing so the
151 http://www.lexology.com/library/detail.aspx?g=86db1422-4c16-47c1-b47e-fd31ec35d67f
When Is A Company Insolvent: "Cash-Flow" V "Balance-Sheet" Insolvency, accessed on Friday,
September 2nd
2016 at 6.22 pm 152 https://www.burges-salmon.com/-/media/files/publications/open-
access/the_final_word_on_balance_sheet_insolvency_eurosail_in_the_supreme_court.pdf on The
Final Word On Balance Sheet Insolvency: Eurosail In The Supreme Court accessed on Friday,
September 2nd
2016 at 6.26 pm
66
court had to take into account when those liabilities were likely to
fall due, and it is for the party asserting balance sheet insolvency to
prove it. In the case of Eurosail, it would not be possible to
establish that position until much closer to 2045 when the final
tranche of notes became due for payment.
Applying this to a case where Eurosail was cash-flow solvent and
might have up to 30-years to repay the notes, Lord Walker considered that ‗the
court should proceed with the greatest caution in deciding that the company is
in a state of balance-sheet insolvency‘.153
He concluded that ―Eurosail‘s ability
or inability to pay all its debts, present or future, may not be finally
determined until much closer to 2045…The movements of currencies and
interest rates in the meantime, if not entirely speculative, are incapable of
prediction with any confidence. The court cannot be satisfied that there will
eventually be a deficiency.‖154
B. 2. Under US Bankruptcy Code
Under section 547 of the Bankruptcy Code, an allegedly preferential
transfer may be avoided if, among other things, the transfer was ―made while the
debtor was insolvent.‖155
Similarly, under section 548 of the Bankruptcy Code,
an allegedly fraudulent transfer may be avoided if, among other things, the
153 http://blogs.lexisnexis.co.uk/randi/balance-sheet-insolvency-after-eurosail/ accessed on Friday,
September 2nd
2016 at 6.31 pm 154
Id 155 11 U.S.C.A. § 547(b)(3) (West 2004 & Supp. 2006).
67
debtor ―was insolvent on the date that such transfer was made or such obligation
was incurred, or became insolvent as a result of such transfer or obligation.156
For entities other than partnerships and municipalities, the Bankruptcy Code
defines ―insolvent‖ as a financial condition such that the sum of such entity‘s
debts is greater than all of such entity‘s property, at a fair valuation, exclusive of
(i) property transferred, concealed, or removed with intent to hinder, delay, or
defraud such entity‘s creditors; and (ii) property that may be exempted from
property of the estate under section 522 of [the Bankruptcy Code].157
The key term—―at a fair valuation‖—is not defined in the Bankruptcy
Code.158
The Bankruptcy Code definition of insolvency is referred to generally
as the ―balance sheet‖ test, perhaps to distinguish it from the ―equity‖ test (the
ability to pay debts as they come due).159
Additionally and whether they appear
on the balance sheet, ―contingent‖ assets (as well as contingent liabilities)
156 11 U.S.C.A. § 548(a)(1)(B)(ii)(I) (West 2004 & Supp. 2006). 157 11 U.S.C.A. § 101(32)(A) (West 2004 & Supp. 2006) 158 See, e.g., Liquidation Trust of Hechinger Inv. Co. of Del., Inc. v. Fleet Retail Fin. Group (In re
Hechinger Inv. Co. of Del.), 327 B.R. 537, 548 (Bankr. D. Del. 2005) (―The Bankruptcy Code
does not mandate what constitutes a ‗fair valuation.‘‖); Total Technical Servs., Inc. v. Whitworth
(In re Total Technical Servs., Inc. and TTS, Inc.), 150 B.R. 893, 900 (Bankr. D. Del. 1993) (―Fair
value is not defined by the Bankruptcy Code.‖). See also Travellers Int‘l AG v. Trans World
Airlines, Inc. (In re Trans World Airlines, Inc.), 203 B.R. 890, 893 (D. Del. 1996) (―The meaning
ascribed to the term ‗fair valuation‘ is crucial, in that it guides the interpretation of a debtor‘s
financial data, which then enables a court to determine if the debtor‘s liabilities exceed its assets,
that is, whether the debtor is insolvent.‖), rev‘d in part on other grounds, 134 F.3d 188 (3d Cir.),
cert. denied, 523 U.S. 1138 (1998). 159 See e.g., Home Place of America, Inc. v. Salton, Inc. (In re Waccamaw‘s HomePlace), 325
B.R. 524, 529 (Bankr. D. Del. 2005); Trans World Airlines, Inc. v. Travellers Int‘l AG (In re Trans
World Airlines, Inc.), 180 B.R. 389, 405 (Bankr. D. Del. 1994), rev‘d in part on other grounds,
203 B.R. 890 (D. Del. 1996), rev‘d in part on other grounds, 134 F.3d 188 (3d Cir.), cert. denied,
523 U.S. 1138 (1998). See also Shubert v. Lucent Techs. Inc. (In re Winstar Comm‘ns, Inc.), 348
B.R. 234, 274 (Bankr. D. Del. 2005) (―This test of insolvency, the so-called ‗balance sheet‘
insolvency, compares the ‗fair value‘ of all of the debtor‘s assets with the face or ‗stated‘ value of
its liabilities on the relevant date. It is different from equity tests that focus on a debtor‘s current
ability to pay debts as they become due.‖) aff‘d, C.A. No. 06-147-JJF, 2007 WL 1232185 (D. Del.
Apr. 26, 2007); 2 Lawrence P. King, et al., Collier on Bankruptcy ¶ 101.32[4], at 101-153 (15th
ed. 2005) (―The Code definition of insolvency is essentially a balance sheet test.‖ (footnote
omitted)), Id
68
require careful analysis.160
Although application of the balance sheet test can
lead to any number of disputes, in almost every case the primary debate will be
about the value of the debtor‘s assets. Indeed, solvency battles generally morph
into valuation fights. As in any valuation exercise, valuing the debtor‘s assets
can be a complicated endeavor:
―The application of an assets-and-liabilities test requires of necessity a valuation of
the property involved. This may be a difficult task, however, because value is not a
natural or fixed quality, but will vary according to the purposes and policies which
dictate the determinative judgments and the processes by which it is ascertained‖161
Accordingly, and although there may be cases where expert testimony
is unnecessary, in general a defendant that is serious about litigating solvency
should retain a skilled expert. A defendant who chooses to ―go at it alone‖
160 See, e.g., In re Advanced Telecomm. Network, Inc., 321 B.R. at 335 (―In making a
determination as to solvency, both contingent liabilities and contingent assets are appropriately
considered.‖); In re WRT Energy Corp., 282 B.R. p 370 (―contingent assets or liabilities should be
included as part of the balance sheet insolvency test‖). See also Mellon Bank, N.A. v. Official
Comm. Unsecured Creditors (In re R.M.L., Inc.), 92 F.3d 139, 156 (3d Cir. 1996) (―[I]f a debtor‘s
treatment of an item as an ‗asset‘ depends for its propriety on the occurrence of a contingent event,
a court must take into consideration the likelihood of that event occurring from an objective
standpoint....Far from ‗hindsight‘ or ‗post-hoc‘ analysis, a court looks at the circumstances as they
appeared to the debtor and determines whether the debtor‘s belief that the future event would
occur was reasonable. The less reasonable a debtor‘s belief, the more a court is justified in
reducing the assets (or raising liabilities) to reflect the debtor‘s true financial condition at the time
of the alleged transfers.‖); In re Trans World Airlines, Inc., 180 B.R. at 405 n.22 (―Within the
contemplation of § 101(32) ‗property‘ may include assets not even listed on the balance sheet.‖);
In re Xonics Photochemical, Inc., 841 F.2d 198, 200 (7th Cir. 1988) (―It makes no difference
whether the firm has a contingent asset or a contingent liability, the asset or liability must be
reduced to its present, or expected, value before a determination can be made whether the firm‘s
assets exceed its liabilities.‖); infra note 74 and accompanying text, Id p 363 161 2 Collier, supra note 7, ¶ 101.32[4], at 101-153 (footnote omitted). See also Robert F. Reilly &
Robert P. Schweihs, The Handbook of Advanced Business Valuation, at 340 (Irwin Library of Inv.
& Fin. 2000) [hereinafter ―Reilly & Schweihs‖] (―The balance sheet test determines whether, at
the time of the transaction, a company‘s asset value was greater than its liability value. As a first
step in conducting the balance sheet test, the assets of the company are valued as a going concern
as of the date of the transaction. Then the value of the company‘s liabilities is subtracted from the
asset value. The balance sheet test is passed if the sum of the value of the company‘s assets is
greater than the sum of the value of its liabilities. For purposes of this analysis, a valuation of the
company should be performed.‖); James H. Zukin, Financial Valuation: Businesses and Business
Interests, p 13-2 (1990) [hereinafter ―Zukin‖] (―One of the most important applications of
valuation analysis of late has been in the area of solvency or capital adequacy.‖), Id
69
may not fare well at trial.162 Initially, defense counsel should identify which
entities or entities‘ solvency requires evaluation. A debtor may focus on the
solvency of a single entity where consolidation with affiliated entities is
appropriate; alternatively, a debtor may focus on the solvency of affiliated
entities on a consolidated basis where only a single entity‘s solvency is
properly at issue. Although the correct answer will depend on the facts of the
162 See In re Waccamaw‘s Home Place, 325 B.R. p 530 (rejecting solvency testimony of
defendant‘s CFO as ―superficial at best and insufficient to overcome the presumption‖); Peltz v.
Worldnet Corp. (In re USN Comm‘ns, Inc.), 280 B.R. 573, 585 n.19 (Bankr. D. Del. 2002)
(―Defendant has presented no expert testimony to rebut the presumption of Debtor‘s
insolvency....[T]he issue here is whether Plaintiff should be forced to proceed with the burden of
proving Debtor‘s insolvency for the purposes of § 547(b) where the only evidence submitted by
Defendant to rebut the § 547(f) presumption of insolvency is the Form 8-K. I find that he should
not.‖ (emphasis in original)). See also, e.g., Brandt v. Samuel, Son & Co., Ltd. (In re Longview
Aluminum, L.L.C.), Case No. 03 B 12184, 2005 Bankr. LEXIS 1312, p 17 (Bankr. N.D. Ill. July
14, 2005) (―It is generally accepted that whenever possible, a determination of insolvency should
be based on seasonable appraisals or expert testimony.‖); Miller & Rhoads, Inc. Secured
Creditors‘ Trust v. Robert Abbey, Inc. (In re Miller & Rhoads, Inc.), 146 B.R. 950, 956 (Bankr.
E.D. Va. 1992) (―Numerous cases have held that the schedules are not dispositive or controlling
and that courts should rely upon more accurate evidence, such as current appraisals, opinion
testimony or actual sales of the assets in determining insolvency.‖ (citation omitted)). But see VFB
LLC v. Campbell Soup Co., No. 05-4879, 2007 WL 942360, p 4 (3d Cir. Mar. 30, 2007)
(―basically the district court regarded the hired expert valuations as a side-show to the disinterested
evidence of VFI‘s capitalization in ‗one of the most efficient capital markets in the world.‘‖); id. p
8 (―Absent some reason to distrust it, the market price is ‗a more reliable measure of the stock‘s
value than the subjective estimates of one or two expert witnesses.‘‖); In re Hechinger Inv. Co. of
Del., 327 B.R. at 548 (as to breach of fiduciary duty and fraudulent transfer claims; ―because
valuation is, to a great extent, a subjective exercise dependent upon the input of both facts and
assumptions, the court will give deference to ‗prevailing marketplace values,‘ rather than to values
created with the benefit of hindsight for the purpose of litigation‖ (citation omitted)); In re
Longview Aluminum, L.L.C., 2005 Bankr. LEXIS 1312 (although plaintiff presented expert and
defendants did not, defendants prevailed on solvency); In re WRT Energy Corp., 282 B.R. p 370
(―Insolvency and ‗fair valuation‘ may be esta blished to the court‘s satisfaction by expert
testimony, financial statements, public documents, appraisals, or a combination of these.‖
(citations omitted)); In re Golden Mane Acquisitions, Inc., 221 B.R. 963, 970 (Bankr. N.D. Ala.
1997) (where primary asset was office building and record contained evidence of offers and
eventual sale value, court gave little weight to expert testimony); Energy Coop., Inc. v. Cities Serv.
Co. (In re Energy Coop., Inc.), 109 B.R. 822, 828 (N.D. Ill. 1989) (―[A] sale is the best evidence
of the worth of a property. Short of that, a firm commitment to buy at a certain price would be
entitled to considerable probative value. Neither of those conditions are present here. As such the
[expert opinion testimony] is entitled to little weight on the question of value. Particularly is this so
in light of the other objective evidence in this case bearing more precisely on the issue of the
refinery value.‖), Id p 364
70
case, the point here is that a defendant need not accept the trustee‘s position
as to which debtor‘s solvency is relevant.163
Dealing with debtor asset, there are three generally accepted
approaches to value debtor assets are the cost, market and income
approaches.164 If sufficient data is available, the valuation analyst will apply
more than one approach in order to conclude mutually supported evidence of
value. The final value conclusion is based on a synthesis of the value
indications.
The cost approach values the assets by estimating a current cost
measure (typically replacement cost new, but other cost measures may also be
163 See, e.g., Askanase v. Fatjo, 130 F.3d 657, 670 (5th Cir. 1997) (court rejected trustee‘s
argument that insolvency of parent corporation applied to subsidiaries because parent and
subsidiaries supposedly were single business enterprise; ―the Trustee cites no legal or accounting
authority for his argument that [parent‘s] solvency necessarily determines the solvency of its
subsidiaries....[I]t could be that [parent‘s] subsidiaries were solvent but that [parent‘s] debts were
so great that [parent] on a consolidated basis is insolvent. Thus, [parent‘s] balance sheet solvency
does not necessarily determine the solvency of its subsidiaries....‖); Clay v. Dehner (In re Perry,
Adams and Lewis Secs., Inc.), 34 B.R. 155, 156–58 (Bankr. W.D. Mo. 1983) (―To demonstrate the
insolvency of the debtor as of the date of transfer, the plaintiff adduced in evidence a consolidated
balance sheet of all the debtors....It is clear from the facts...that, while the consolidated balance
sheet may show the debtors, all considered as one entity, were insolvent as of the date of the
transfer, Briarbrook Development Corporation was itself solvent. When the uncontradicted
testimony of the defendant is to the effect that he dealt only with Briarbrook Development
Corporation, it is the solvency or insolvency of that entity which is in issue.‖ (footnotes omitted));
U.S. v. Gleneagles Inv. Co., Inc., 565 F. Supp. 556, 577 (M.D. Pa. 1983) (―Because the business of
the Raymond Group was conducted as though the Raymond Group was a single entity and because
the Defendants urged the Court not to look at the solvency of individual Raymond Group
members,...we will deal only with the financial position of the Raymond Group as a whole and not
in terms of its individual parts.‖), aff‘d sub. nom., U.S. v. Tabor Court Realty Corp., 803 F.2d
1288 (3d Cir. 1986), cert. denied, 483 U.S. 1005 (1987); Cissell v. First Nat‘l Bank of Cincinnati,
476 F. Supp. 474, 478–82 (S.D. Ohio 1979) (rejecting defendant‘s argument that court should
consider solvency only of parent corporation and not of consolidated entity; evidence established
that all of defendant‘s officers treated parent and subsidiaries on consolidated basis during relevant
time period and that parent‘s method of operation was to treat subsidiaries as simply divisions of
larger consolidated operation and not as separate and distinct entities). See also American Classic
Voyages Co. v. JP Morgan Chase Bank (In re American Classic Voyages Co.), Adv. No. 03-
56998, 2007 WL 1237828, p 1 n.5 (Bankr. D. Del. Apr. 27, 2007) (―The Court would normally be
required to first identify who the transferor is, since it is that entity‘s solvency which is relevant to
the preference analysis.‖), Id p 364-365 164 Robert F. Reilly, Fraudulent Transfer…, Op, Cit.,
71
used) less allowances for depreciation and obsolescence. A common cost-
approach method is the ―replacement cost new less depreciation‖ (RCNLD)
method. Other cost approach methods may also be used. The fair value of the
asset is not the replacement cost new (RCN). The fair value of the asset is the
RCNLD.165
The market approach values the assets based on sales, licenses or
other transfers of sufficiently comparative assets (typically operating in the
same or similar industry). A common market approach method is the
comparable sales method. The first procedure is to identify and confirm the
sales (or other transfers) of comparable assets. The second (and perhaps more
important) procedure is to compare the debtor assets to the comparable assets.
This comparison allows the analyst to select debtor-specific valuation pricing
metrics from within (or sometimes without) the range of market derived
pricing metrics.166
The income approach typically values assets based on the projected
income from the ownership/operation of the assets. Two common income
approach methods are direct capitalization and yield capitalization.167 The
valuation analyst under balance sheet test are (1) selects the appropriate
premise of value based on HABU, (2) estimates the fair value of the tangible
assets and intangible assets, (3) estimates the value of the recorded liabilities
and contingent liabilities, and (4) subtracts the value of the total liabilities
165
Id 166
Id 167
Id
72
from the fair value of the total assets. In each analysis, the analyst considers
the impact of the objectionable transfer or liability on the debtor entity.
B. 3. Under Germany
All insolvency proceedings in Germany are governed by the
Insolvency Act (Insolvenzordung ―InsO‖).168 The German legislator after the
collapse of Lehman Brothers, like other governments, introduced financial
stabilization measures contained in the Financial Stabilization Act
(Finanzmarktstabilisierungsgesetz, FMStG). In the Act, the German legislator
in effect questioned the feasibility of the balance sheet test, as applied before,
since it amended Section 19 InsO in order to provide that a company is not
insolvent under German law even if its assets are not equal to its liabilities, if
a cash flow estimate (Fortführungsprognose) would permit the company to
survive in the future. Bearing in mind these changes, which were subject to a
limited time of application at first, the analysis of this scientific work focused
on whether IFRS could be applied in the course of the balance sheet test
under German bankruptcy law (Section 19 InsO).169
The insolvency court is obliged to appoint a preliminary creditors‘
committee (vorläufiger Gläubigerausschuss) following filing of the
insolvency petition if at least two of the following three criteria are met:170
168
https://www.dlapiper.com/~/media/Files/Insights/Publications/2012/05/Summary%20of%20the
%20German%20Insolvency%20Law%20Booklet/Files/2_Edition_German_Insolvency_Booklet_
May%202012/FileAttachment/2_Edition_German_Insolvency_Booklet_May%202012.PDF on
Summary of German Insolvency Law accessed on Saturday, September 3rd
2016 at 9am. 169
Nikita Litsoukov, A dissertation entitled IFRS, Bilanzrechtsmodernisierung und
Überschuldung, Institut für deutsches und europäisches Gesellschafts- und Wirtschaftsrecht, 170 on Summary of German, Op,Cit.,
73
a. a balance sheet total of at least EUR 4,840,000 after deduction
of deficits in the meaning of sec. 268 para 3 of the German
Commercial Code (Handelsgesetzbuch ―HGB‖);
b. At least EUR 9,680,000 in net revenues during the 12 months
prior to the balance sheet date;
c. At least 50 employees in the annual average.
Largely, the BilMoG improved the consistency of the balance sheet
test under Section 19 InsO and German GAAP due to the abolition of
optional accounting methods (Bilanzierungswahlrechte). The application of
optional methods within the test of Section 19 InsO would subject the balance
sheet test to even more judgment of the management. Therefore, the author
finds German GAAP as modified by the BilMoG to be more compatible with
the balance sheet test under Section 19 InsO than prior to the BilMoG.
The asset liability approach of the IFRS (including the fair value
model) theoretically suits the needs of the balance sheet test better than
German GAAP. However, IFRS do not only follow an asset liability
approach but also a deferral matching approach. This approach has the
purpose of allocating revenues and expenses to different time periods (i.e. to
this and the next financial year). This concept is inconsistent with the balance
sheet test. The balance sheet test of Section 19 InsO serves the sole purpose
of showing the debt servicing potential of a company at a given point in time.
74
It does not also serve the purpose of informing the creditors of the assets and
liabilities of the company in regular intervals (i.e. on an annual basis).171
Therefore, the IAS 11 rules on the percentage of completion method,
as they constitute outflows of the deferral matching approach, should be
applicable to the balance sheet test under Section 19 InsO only to a limited
extent. Due to a lack of reliability of the IAS 39 rules (several categories of
financial instruments which in the past could be used to re-categorize
financial instruments) and the IAS 36 rules (too much judgment in identifying
cash generating units) these rules were also determined to be inconsistent
with the balance sheet test under German insolvency law.172
From some descriptions of the balance sheet test applied in the
aforementioned states, the author believes that the concept of balance sheet
test under US Bankruptcy Code would be the most appropriate arrangement
to be applied in Indonesia compared to other states. It does at least contain a
number of reasons. First, balance sheet test prevailed under US Bankruptcy
Code is easier in application because this test has had many improvements-
changes from the past therefore the arrangements is better equipped than
other Acts. Second, this test is in accordance with the needs of Indonesia in
assessing company's financial condition with more reasonable calculation
mechanism. Third, under US Bankruptcy Code this balance sheet test focuses
on a fair valuation in accordance with the market situation, therefore under
US bankruptcy Code this test is less speculative.
171
Id 172 Id
75
In order to apply this test, the Bankruptcy Law shall at fist determine
some steps required to determine the insolvency of a company. The
authorized institution that determines the assessment of the debtor's assets is
the commercial court. Commercial court specifies the parties who will assess
the debtor‘s assets to determine whether or not the debtor is under insolvency
situation according to balance sheet test. In this matter, the parties must
consist of:
a. Supervisory judge appointed by the court
b. Independence public accountant which has the capacity and
license to act as an assessor in bankruptcy issues
c. Directors
In conducting such assessment, Bankruptcy law must also determine the time
limit when this test should be done. In order to ensure that the test can be
done effectively and does not cause a greater loss for the parties concerned.
When the company has declared bankrupt by the Court under balance
sheet insolvency test, further step that must be taken following Law No. 40 of
2007 on Limited Liability Company is the dissolution of the company.173
Pursuant to Article 142 paragraph (1) e of the Law the dissolution will occur
when the company has been declared under insolvency situation.
―Because the bankrupt estate of a Company which has been declared
bankrupt is in a state of insolvency as provided for in the Bankruptcy and
Suspension of Payments Act; or‖
173 M. Yahya Harahap, Hukum Perseroan Terbatas, Sinar Grafika, Jakarta, 2009, p 554
76
Dissolution out of bankruptcy calls for insolvency situation, governed in the
Article 187 of Law on Bankruptcy and the Suspension of Payment
Obligations which reads:
―After the bankruptcy estate has become insolvent, the Supervisory Judge
may convene a meeting with the Creditors at a specified date, time and place
to conduct a proper discussion on the manner to liquidate the bankruptcy
estate and if necessary, to conduct a verification of claims that are already
filed after the end of the period as stipulated under Article 113 paragraph (1)‖
Pursuant to Article 113 paragraph (1), within no more than 14
(fourteen) days from the date of decision on the declaration of bankruptcy, the
Supervisory Judge shall determine:
a. The deadline for filing the claims;
b. The deadline for tax verification to determine the amount of
tax obligation in accordance with prevailing taxation law and
regulations;
c. The day, date, time and venue of the Creditor‘s Meeting for
the verification of claims.
The commercial court should also specifically enforce the dissolution
provisions of partnership agreements, including relevant provisions implicitly
contained in every partnership agreement.
77
CHAPTER IV
CONCLUSION AND RECOMMENDATION
A. Conclusion
Law on Bankruptcy and Suspension of Debt Payment Obligation
No 37 of 2004 does not require a debtor to be under an insolvency situation
for being declared bankrupt by the Court. Consequently, there were many
cases where solvent debtors are declared bankrupt by the law instead of by
the situation where the debtor‘s assets are less than his obligations (under
balance sheet). Whereas, on bankruptcy matters, there are many interests
involved besides the interests of its creditors such as that of stakeholders of
the bankrupt debtor. Bankruptcy of company will definitely lead to
termination of employment (Pemutusan Hubungan Kerja or PHK), the State
will thereafter lose its revenue from tax paid by debtor, and it will also affect
the supply of goods and services produced by bankrupt companies to the
public as well. Therefore, Bankruptcy Law needs to determine the insolvency
situation through insolvency test under balance sheet theory which has been
recognized in many countries to ascertain whether the debtor is under an
insolvent or solvent situation.
B. Recommendation
The government of Indonesia should take thorough consideration in
applying balance sheet insolvency test. In the future, the government shall
specify in the Law of Bankruptcy that the commercial court as the institution
having authority to enforce the law and also to determine parties conducting
78
assessment of debtor‘s asset and the time period of the test that must be done.
Assessment using this test at least involves parties other than the trial itself
(through supervisory judge), namely an independent accountant who has
special license to perform assessments and directors from insolvent company.
It is necessary to maintain a balance and fair to the parties associated with the
assets of debtor.
79
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