Prepackaged bankruptcy is a bankruptcy scheme where the reorganization plan/settlement agreement has been agreed before the bankruptcy filled. The talk about Prepackaged bankruptcy under Indonesian law should be in the context of the Suspension of Debt Payment scheme (“SOP”), which generally similar to Chapter 11 in the US bankruptcy law.
While the prepackaged bankruptcy is relatively common in other jurisdictions, in Indonesia’s bankruptcy practice, this plan is less prevalent. Although there is no explicit prohibition under Indonesian law for the creditors and debtors to has a certain pre-agreed plan before an SOP proceeding, such a pre-agreed plan – under certain conditions – could pose some legal risk.
Why Prepackaged Bankruptcy Plan
There are other reasons why prepackaged bankruptcy could benefit parties under an SOP process. The most certain benefits are:
- Time/cost, the unplanned SOP procedure could be lengthy. Legally speaking it could take 270 days and require intensive human resources to attend and prepare for the creditors meetings.
- Certainty, a creditor that filed an SOP petition, cannot certainly predict the outcome of an SOP procedure. In many cases, it is challenging in Indonesia to know how much creditors that a debtor has and the value of the debtor’s assets.
- Goodwill, most of the SOP petition filed in Indonesia are contentious. This is due to common views in Indonesia that SOP is part of the bankruptcy process, while in fact that SOP is a different but connected process with bankruptcy. The prepackage Bankruptcy plan could ensure the ongoing business between the debtor and creditor is well protected, and the creditor still able to use the SOP process/protection.
- Flexibility, the time constraints for SOP under Indonesian law, could limit the parties’ freedom to agree on an effective settlement.
The prepackaged plan is a way for creditors the remove some uncertainty in the SOP procedure or make a restructuration agreement became legally binding (under commercial law perspective). The prepackaged plan also could be a guarantee for a potential investor of the debtor that the debt issue has been resolved before making an investment.
The Legal risk
In certain conditions, the prepackaged bankruptcy could jeopardize the SOP process. Article 156 paragraph (2) point c of Law No. 37 of 2004 on Bankruptcy and Suspension of Debt Repayment (“Indonesia Bankruptcy Law”) stated that:
“Court shall refuse the settlement agreement if:
c. the settlement agreement concluded based on fraud, conspiracy with one or more Creditor, or any means of dishonest manner and without consideration on whether the debtor or other party cooperate to achieve the settlement”
Although one could argue that Article 156 above means “unlawful” conspiracy/cooperation, still, this provision opens an opportunity for a creditor who not a party in the prepacked bankruptcy to annul the settlement agreement or demand for the Court to refuse the settlement agreement.
The obvious conclusion is for the prepackaged bankruptcy to be approved by all of the creditors. Unfortunately, in some cases, this option is not always possible. The parties might reduce the risk by carefully drafting the prepackaged agreement while keeping the process in line with the Indonesian Bankruptcy Law.