Six days into 2020, Indonesia's Constitutional Court (“Constitutional Court”) began the New Year with a bang, issuing a decision that is not likely to be received well in loan markets.
The Constitutional Court has decided in favour of two petitioners (a married couple) and effectively changed the interpretation of Article 15(2) and (3) of the Fiducia Law (Law No. 42 of 1999), striking at the core principles of that law (“Constitutional Court Decision”).
The Constitutional Court Decision, which is final, binding, and not subject to appeal, states as follows:
- A default must be agreed by the debtor and creditor.
- If there is no agreement on the default, the default must be confirmed through a final and binding court decision.
- Upon agreement on the default (or a final and binding court decision confirming the default), fiducia security can only be enforced through the regular enforcement process of a court decision.
The Constitutional Court Decision, aside from changing the legal landscape of the Fiducia Law, also reinterprets the meaning of “default” in a way that goes counter to the Indonesian government’s efforts to encourage foreign investment into the country. It can also be seen as a major step towards creating a more borrower-friendly jurisdiction.
Many have argued that the current laws are too generous to creditors, particularly since discussions began on introducing a new bankruptcy law. The government needs to address this issue urgently if it wishes to sustain the lending market‘s appetite.
The case that started it all
A petition filed by the couple (“Petitioners”) with the Constitutional Court in February 2019 followed their successful civil claim at South Jakarta District Court (“SJDC”) in early 2018. The Petitioners initiated that first court case over a debt collector’s alleged unlawful collection of lease instalments for a luxury car. The debt collector, who had been hired by the financing company, was alleged to have made death threats before eventually repossessing the vehicle.
The SJDC found in favour of the Petitioners, who were awarded around USD15,000 against the financing company and debt collector for using unlawful debt collection methods (“SJDC Decision”). According to the SJDC’s website, the SJDC Decision has been upheld by Jakarta High Court and is now being reviewed by Indonesia’s Supreme Court.
Going one step further
Following their success at the SJDC, the Petitioners then took their fight to the Constitutional Court. In their petition, they made a plea in reference to Article 15 points (2) and (3) of the Fiducia Law for the interpretation of:
- executorial title so that enforcement of a fiducia security object should follow “all legal mechanisms and court procedures, similar to a final and binding court decision”;
- final and binding court decision so that enforcement of a fiducia security object should be put on hold until a final and binding court decision is obtained on the facility agreement and security agreements; and
- default so that determination of a default should be agreed by both creditor (as fiducia grantee) and debtor (as fiducia grantor); but if the default is disputed by the debtor, then the court must determine whether a default has occurred through a final and binding court decision.
The Petitioners‘ application was pegged on the inequality before the law between a creditor and debtor, on the grounds that a debtor has no equivalent legal mechanism to contest the alleged default.
In hearing the petition, the Constitutional Court also sought the views of the Government and House of Representatives, including experts presented by the various parties. The Petitioners relied heavily on the death threats made by the debt collector, and were supported by expert testimony from Yayasan Lembaga Konsumen Indonesia (the Indonesian Consumer Foundation) which highlighted the problems inherent in debt collection.
The Government and House of Representatives both gave their views. Supported by legal practitioner and academic experts, they explained the legal principles of fiducia security law, based on which they found it difficult to reconcile the argument made by the couple about the inequality between creditors and debtors before the law.
The Fiducia Law was enacted to address the issue of inequality and legal uncertainty for creditors, given that the debtor retains possession of the fiducia object. The House of Representatives pointed out that in the SJDC claim, the Petitioners had defaulted on their instalment payments since August 2017.
Don’t shoot the messenger
While we have reviewed the Constitutional Court Decision, which has been made public, we have not seen the SJDC Decision, since that has not been made public. We understand that the Supreme Court is still reviewing the appeal made by the financing company, and it is not known when it will issue its ruling, although it may be in the first half of 2020. But whatever the Supreme Court eventually decides, that will not affect the legality and enforceability of the Constitutional Court Decision.
We consider it unfortunate that the nine-judge panel of the Constitutional Court unanimously decided in favour of the Petitioners. The Constitutional Court Decision includes several lengthy legal considerations that are, while alarming, an interesting read:
- There had been negligence of the rights of debtors, who should receive equal legal protection – namely, the right to have an opportunity to defend themselves over an alleged breach of contract (default), and the right to obtain the proceeds from selling the fiduciary collateral at a reasonable price.
- In this case, the occurrence of a “breach of promise” was considered to have been unilaterally and exclusively determined by the creditor (fiduciary grantee) without giving the debtor (fiduciary grantor) an opportunity to make a rebuttal or defence.
- The principle of surrendering the property rights to the fiduciary objects clearly shows the inequality in the respective bargaining positions of fiducia grantor (debtor) and fiducia grantee (creditor) since the debtor as the party in need of financing is in an inferior position.
- In other words, the agreement between the parties occurred in circumstances that “lack freedom of will” on the part of the debtor (fiduciary grantor), whereas under Article 1320 of the Indonesian Civil Code, freedom of will is one of the fundamental conditions for an agreement to be legally valid.
We do agree with the Constitutional Court on the enforcement of fiducia security. The Constitutional Court Decision is consistent with what we recommend to our clients, which is that they should obtain a court stipulation or order (penetapan pengadilan) – not a court decision (putusan pengadilan) – before commencing enforcement of fiducia security so as to minimise potential challenges in the future. However, we found the rest of the Decision troubling.
The Constitutional Court failed to consider that the Fiducia Law was enacted to create equilibrium between the positions of debtor and creditor. A creditor disbursing a loan would not have possession of the security object (unlike a pledge, or gadai). On the other hand, a debtor can continue to enjoy and maintain physical possession of the security object after receiving the loan. The Fiducia Law equalised this position to ensure that while the debtor could retain physical possession and benefit from use of the object, the debtor could not unilaterally disparage the creditor’s rights by taking double security over the same object. Further, in the event of a default, as would have been agreed by both parties, the creditor can protect its rights by immediately taking physical possession of the object. In the same vein, the Fiducia Law also protects debtors by not granting creditors the right to appropriate the security object.
In our view, the Constitutional Court failed to acknowledge that a fiducia (being a transfer of ownership rights to an object that is made in good faith) allows the debtor to retain physical possession of the fiducia object while the creditor receives ownership title. However, the Constitutional Court Decision implies that if a debtor is in default, the creditor will be at the mercy of the debtor and the courts when trying to claim physical ownership of the fiducia object.
General Elucidation of the Fiducia Law
“Fiducia securities have been used in Indonesia since the Dutch colonial era as a form of guarantee born of jurisprudence. This type of security is widely used in lending and borrowing transactions because the perfection process is considered simple, easy and fast – but, it does not provide legal certainty.
Fiducia securities allow the debtor (fiducia grantor) to hold the object, to continue the business activities, financed from the loan that is guaranteed by the fiducia security. Initially, the objects of fiducia security were limited to moveable objects such as equipment. However, the objects of fiducia security have now developed to also include intangible and immovable objects.
The Fiducia Law is intended to accommodate the needs of the public to support their business activities and to provide legal certainty to relevant parties. As previously explained, fiducia security facilitates the party that uses it, in particular the debtor (fiducia grantor). However, on the contrary, because fiducia security was not registered, it does not provide legal certainty to the fiducia grantee (creditor) because of the risk of double security without the knowledge of the creditor (fiducia grantee)."
The Constitutional Court also appears to have muddled the legal considerations by linking the unequal footing between creditor and debtor to the unilateral actions taken by the debt collector in this case, which were “carried out in a less “humane” manner, both in the form of physical or psychological threats that creditors often carry out (or through their proxy) against debtors, often disregarding the rights of debtors.
Horror stories about debt collection by independent contractors are not new to Indonesia. In one notorious case in 2011, a multinational financial company was implicated in the death of a customer. The collection related to a credit card debt equivalent to US$3,000 (or US$7,000 at current exchange rates).
The Constitutional Court could certainly have factored into its legal considerations the suffering of the Petitioners during the debt collection process but should also have considered the regulations issued by Bank Indonesia, Indonesia’s central bank, concerning debt collection by independent contractors.
Debtors have other avenues available to contest the actions of debt collectors, whether through Indonesia’s Financial Services Authority (Otoritas Jasa Keuangan) or by lodging a criminal complaint with the police. That the fiducia object in this case was a luxury car should not be generalised to cover less valuable objects such as motorcycles or large-scale B2B lending.
The Constitutional Court Decision in essence requires a fresh agreement between the debtor and creditor upon an event of default in order to confirm that a default has indeed taken place. Fiducia or not, a fresh agreement admitting default is very unlikely to be obtained. There is also a risk that the Constitutional Court Decision could induce independent debt collectors to be more aggressive in obtaining such an agreement.
The Constitutional Court Decision could have an adverse impact not only on the Fiducia Law, but also on the broader lending and security landscape of Indonesia. That was perhaps not something the Court had considered. The Court may also not have considered the existing issues with debt enforcement in Indonesia, in terms of the length of time involved and the debt recovery rate.
Considering current Indonesian government efforts to bring in foreign investment for megaprojects, it will be interesting to see if this Constitutional Court Decision deters foreign investors.