Jurisdiction - Indonesia
Reports and Analysis
Indonesia – International Debt Instruments In The Courts: Prepare For The Unexpected.

20 April, 2015



Enforcing and proving debts in the Indonesian courts can be difficult. This has been highlighted by recent cases in Indonesia. In this article, we describe the tactics commonly used by debtors to challenge the obligations set forth in international credit documents, and we suggest ways in which these might be overcome.

Keeping It Simple

Lawyers acting for debtors in the Indonesian courts usually try to “cut through” long and complex credit documents with straightforward or simple lines of argument. This has obvious attractions in a courtroom context – if you need many pages to present your argument, you are already on the back foot – and it can be especially effective in Indonesia given the nature of the judicial system.

The approach that we recommend is to ensure that credit documentation includes clear terms, which can be used to counter the most common arguments in an Indonesian court. Also, we cannot overemphasise the advantages of having documents in notarised form and in Bahasa Indonesia. This is the gold standard of evidence in an Indonesian court and is considered conclusive evidence of the subject matter.

I Didn’t Get The Money

As simple as it gets – and it is surprising how often this argument is used. In the cases of Indah Kiat and Lontar Papyrus, one of the key arguments was that the money remitted by the offshore special purpose issuer was not in fact received in full by the onshore entities, and the portion that had been received had been repaid.

It is surprising how often there is no clear evidence that the borrower actually received the money. It is not unusual for a significant portion of a loan to be deducted by the lender at source for payment of transaction expenses or other liabilities, or routed directly to a third party (e.g. in repayment of other debt or acquisition expenses). In some situations, also, funds are offset against loans to another group company, or applied in payment of a derivative (which could be challenged in Indonesia as speculative).

In such circumstances, debtors may argue the debt should be reduced to the amount actually received. In extreme cases, they can argue there was a complete lack of corporate benefit, or there was a usurious loan, which could be grounds for voiding the debt in its entirety. A clear record of the transfer of the principal amount to the borrower’s account should therefore be kept.

A reasonable deduction for transaction expenses and arrangers’ fees is probably acceptable, but it is in the creditor’s interest to have this clearly acknowledged in the financing documentation. For larger deductions, or in circumstances where the money is paid to third parties, we recommend a clear statement of the amount of the loan and the use of the proceeds, which is signed by the borrower. We are also strong believers in the value of obtaining a notarised Acknowledgement of Indebtedness in almost any borrowing context in Indonesia. This can prove invaluable.

It Was Not Authorised

Obligors commonly argue that a principal agreement – whether a loan agreement, guarantee or security document – was not properly authorised or executed. With a complex product such as a derivative, they may also argue that approval of the debt was outside the capacity of the directors/officers of the company.

The frequency of such arguments is surprising, as lenders are usually careful to obtain legal opinions confirming due authorisation and execution. But lenders must focus in particular on ensuring that all requirements of the articles of association of the obligor, as well as any company law requirements, are fulfilled. If the obligor is a listed company, the capital markets rules (particularly the material transactions and conflict of interest rules) must also be complied with. In the case of an individual obligor, spousal consent is generally required unless there is a registered prenuptial agreement.

The reason this is so commonly argued is that many of these requirements are as much a question of fact as a question of law. For example, the requirement to obtain a material transactions approval may turn on whether a transaction is in the ordinary course of business: this is a determination of fact, which may be capable of challenge. While a legal opinion may identify this risk, there will be factual assumptions which are difficult for external counsel to verify. A legal opinion is only as good as the underlying facts.

You must also take care when reviewing the details of any authorisation requirement, and ensuring it is fulfilled. One approach is to get a corporate certificate from the directors. However, it is preferable if the agreement is confirmed by a notary. In Berlian Laju Tanker‘s PKPU (Penundaan Kewajiban Pembayaran Utang) proceedings, one of the creditors argued that a claim on a guarantee should not be admitted because there was no shareholders’ approval. The administrator relied on a corporate certificate, however, to justify the claim. But in that case the debtor supported the claim: the result could be different in circumstances where the debtor challenges the claim. As a general rule, administrators in Indonesian PKPU proceedings have significant discretion, and it should not be assumed that a decision made in an uncontested case would automatically be followed by the courts in the event of challenge by the debtor. The evidentiary standard required in a contested case is significantly higher, and, in a case where corporate authorisation depends on matters of fact, we recommend notarising the relevant authorisation, as conclusive evidence of the underlying facts.

As in all jurisdictions, particular care should be taken in Indonesia in relation to third party guarantees and obligations of individuals. In a recent case, a spousal consent is being challenged on the basis that the spouse concerned had not appreciated the nature of the document being signed. Courts the world over are generally sympathetic to such claims by an individual when their personal assets are under threat as a result of their spouse’s business failures (see, for instance, the Barclays Bank -v- O’Brien case in England); and the Indonesian courts are no exception. The court’s sympathy for the “innocent” spouse may increase where the creditor is a major international financial institution. Once again, notarisation provides protection: it is the responsibility of the notary to ensure that all parties understand the document being signed and execution of the spousal consent in front of the notary would avoid this argument.

The Debt Was Illegal

This is probably the most commonly used argument in attempts to avoid debts in the Indonesian courts. There are different nuances to these arguments, but they broadly fall into three categories.

There Was A Regulatory Breach

Despite Indonesian academic comment that incidental illegality (i.e. illegality which does not go to the substance of the transaction) should not be held to void a transaction, the Indonesian courts have consistently held the opposite. Even a minor regulatory breach or procedural irregularity can suffice to prevent enforcement of a loan document. It is essential therefore to do a proper “box-checking” exercise, to ensure that everything is properly covered.

A notable recent example of a procedural irregularity defeating a creditor is the Nine Am case, where an Indonesian-law governed loan was held invalid for failure to comply with Law No. 24 of 2009 (regarding Flag, Language, State Emblem and National Anthem), because it was not in the Indonesian language. There are also two Indonesian Supreme Court decisions (namely Decision No. 2810 K/Pdt/1998 dated 20 April 1993 and Decision No. 191 K/Pdt.Sus/2011 dated 18 April 2011) holding loans invalid for failure to notify under the Bank Indonesia offshore loan requirements. By analogy, we expect similar arguments could be made under the new offshore hedging, liquidity and ratings requirements.

The Transaction Itself Was Illegal Or Mis-Sold

The most obvious examples of this argument are a number of cases holding various derivative transactions as illegal, such as the well-known Standard Chartered Bank and Citibank cases – either because they were unduly speculative (and therefore an illegal gambling transaction), or because they were mis-sold, or because the debtor did not fully understand the implications of the transaction.

There is a Usury Ordinance of 1939 which is still in force and has been used to strike down loans – particularly where they have excessively high interest rates, or features such as a high IRR make whole or redemption premium (devices commonly used to increase the return on a debt instrument, often while limiting withholding tax in the short term). Unfortunately, there is little guidance on what is deemed to be “excessively high” for this purpose.


In such cases, notarisation can be very helpful to prevent an argument that the creditor did not understand the transaction, or that the transaction was illegal on its face.

The Transaction Was For An Illegal Purpose

This is a more sophisticated argument, which can be used to taint more complex transactions. For example, the well-publicised Tri Polyta and Indah Kiat cases relied heavily on the argument that the structure (a common special purpose vehicle (SPV) issuer structure used in bond issuances) was put in place to evade tax, and was therefore illegal. Another potential risk factor is the use of redemption premium to avoid withholding tax. The more complex the transaction, the more susceptible it may be to this type of argument.
Complex transactions need to be carefully reviewed, to avoid this type of argument. For example, we have seen convertible bonds sold with a packaged equity derivative in order to hedge movements in the stock price. However, where the upfront derivative premium is close to 30 per cent of the principal amount borrowed, it is not difficult to imagine arguments that this was not a fair transaction for the borrower. Indonesia is a civil law system with a strong emphasis on good faith in commercial dealings. In a situation where one party (the lender) is considered to have a significant commercial advantage over another party (the borrower), there is a strong onus on fairness towards the weaker party – any situation where a borrower may argue that a transaction is unfair should be considered carefully.

While some lenders take comfort from the fact that Indonesia does not have financial assistance rules, it does have corporate benefit requirements and there should be a red flag if a transaction includes parties that do not obtain any obvious benefit from it. In practice, lenders should expect to have material difficulties in enforcing substantial sums against entities that did not obviously benefit from the transaction. Elaborate structures designed to work around tax or regulatory rules need very careful consideration from this perspective.

You Are Not The Creditor

This line of argument does not seek to deny the debt itself, just that the person claiming is not the person entitled to enforce the debt. It is often used where there is a trust structure. The Indonesian courts have held in many cases that a trustee is not a creditor, and therefore is not entitled to prove the debt. Transfers also need to be reviewed with caution: if a clear chain of title cannot be evidenced (again, preferably by notarised Indonesian transfer instruments), then a creditor claiming as a transferee may not be admitted to prove the debt. Attention should also be paid to the creditor of record in the debtor’s financial statements, since administrators are often reluctant to admit parties that are not clearly identified in the audited statements (at least without clear chain of title document).

SPV issuer structures can also cause problems. Indonesian courts have been very reluctant to allow a “double dip” for both an SPV claim and a guarantee claim. The two claims therefore compete, and there is a risk that the SPV claim may be admitted to vote (on its own or in competition with the guarantee claim – it should be noted that criticisms were levied in light of the admission of only the SPV to vote in the Bakrie Telecom PKPU, even though the final vote would have passed even if the SPV claim had been refused). Cleared bonds create special problems, as it is also very difficult to prove that a person actually holds the bonds. There are strategies which can be used to mitigate these risks, but this is a topic of its own and deserves full treatment in a separate paper.

There Is No Jurisdiction

This is not the most sophisticated argument, but one which is commonly used and requires careful consideration of jurisdiction clauses. Foreign court jurisdiction clauses can be problematic because they can be used to resist direct enforcement in Indonesia; but if you go to the foreign court specified in the clause, its judgment may not be recognised in Indonesia. In some circumstances, arbitration clauses may prove more effective, as the proceedings are at least recognised under Indonesian law and (in theory, at least) are capable of direct enforcement.

A more nuanced approach includes providing for key enforcement documents to be directly admissible in Indonesia. It is market practice to have a stand-alone Indonesian law and language form of guarantee executed by Indonesian parties. However, what is less common in recent times is to obtain a notarised Acknowledgment of Indebtedness to assist in enforcement of security and proving debts in PKPU proceedings, even if the underlying documents are subject to offshore arbitration.

The Transparency Issue

Probably the most frequent objection we hear from our international clients when discussing these issues is the view that the Indonesian courts are corrupt, and it does not matter what you do with the documents, because a corrupt debtor will always win. While we understand the frustration that is inherent in this position, we respectfully disagree.
The Corruption Eradication Commission (KPK) is active in Indonesia and has targeted judicial corruption, in high-profile cases. As was indicated by the Telekomunikasi Seluler (Telkomsel) bankruptcy case, a judge who gives a clearly unjustifiable judgment is nowadays at risk of summary dismissal (at least), and a lengthy jail term if there is evidence of actual corruption. Accordingly, there is very little appetite for judges to accept clearly unjustifiable arguments at any price – particularly in a high-profile case with an international creditor. As an aside, a solid PR strategy is a valuable precaution to guard again this risk: the risk of corruption is reduced significantly, the more a public spotlight is shone on the proceedings.


Our advice in relation to enforceability in Indonesia is to have clear and simple evidence. If your transaction is understandable and can be evidenced with simple documents, it stands a much better chance of enforcement. Every complicating factor introduces the possibility of arguments which can be used to challenge enforcement. This is not to say that complex transactions cannot be done in Indonesia, but such transactions require a detailed consideration of the risks from an enforceability and evidential perspective, to ensure that there is no obvious exposure to the common lines of argument that are used to avoid enforcement.

Our practical tips are:


  • to use a rigorous “box-checking” approach to ensure every “i” is dotted and “t” is crossed;
  • to ensure that all material transaction elements can be proved to the highest standards of evidence;
  • in the event of complicating factors, to conduct a detailed risk assessment; and
  • to obtain a notarised acknowledgement of all indebtedness which may be required to be proved in an Indonesian court.


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For further information, please contact:


Joel Hogarth, Partner, Ashurst
[email protected]


Bertie Mehigan, Partner, Ashurst
[email protected]

Carl Dunton, Partner, Ashurst
[email protected]

Kate Allchurch, Partner, Ashurst
[email protected]

Anna-Marie Slot, Partner, Ashurst
[email protected]

Banking & Finance Law Firms in Indonesia 


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