The Covid-19 pandemic has dragged in consequences of global economic crisis and recession leading to lawsuits due to contract defaults. From January to June 2020, reportedly, petitions for Suspension of Debt Payment Obligation (“PKPU”) have rapidly increased. The Case Tracking Information System (“SIPP”) of 5 commercial courts in Jakarta, Medan, Semarang, Surabaya, and Makassar has recorded 249 PKPU cases, an increase of 52,76% compared to the previous year with only 163 cases. This fact indicates that the PKPU mechanism dispute settlement is effective and reliable, especially in today’s uncertain times for business activities.
Debt restructuring, widely used in the banking industry, is a company effort to avoid the risk of default due to a financial crisis. In other words, debt restructuring is the debtors’ last and final option to improve credit performance in fulfilling their obligations to creditors. Meanwhile, creditors believe PKPU can maintain the debtors’ business continuity, which leads to debt repayment performance. The main considerations of PKPU are business prospects and the capability to pay debts.
Furthermore, under POJK No 40 of 2019, the objectives of PKPU are as follows :
- Reduction of loan interest rates;
- Extension of debt period;
- Reduction of interest arrears on loans;
- Reduction of principal loan arrears;
- Adding credit facilities; and/or
- Conversion of debt into temporary equity.
PKPU and non-PKPU Agreements
By the end of July 2020, OJK had announced that Micro Small Medium Enterprises (“UMKM”) and corporate sectors had received debt restructuring with a total amount of IDR 776 trillion. In such cases, a debtor as a businessman has the freedom to decide whether to settle the dispute through the PKPU or litigation mechanism. The main consideration of the PKPU agreement is the debtors’ capability to fulfill the obligations and the creditors’ specific demands — payment of debts.
On the one hand, a debtor with a number of creditors is facing challenging difficulties in that it is obligated by law to negotiate the terms and conditions of the agreement with each creditor. If the debtor negotiates individually with a creditor through a conventional peace agreement, such the agreement will not bind other creditors. In other words, non-PKPU agreements are increasingly complex to keep in hand.
On the other hand, there are favorable differences compared to the PKPU mechanism. The debtor is directly accompanied by an administrator and a supervisory judge in meetings with the creditors. The creditors (separatist and concurrent) are invited for hearings and meetings by the commercial court to agree on a Permanent PKPU, Composition (peace proposals), etc. Debt restructuring through PKPU can avoid potential additional conflicts between debtors and creditors, and even between creditors and creditors. The PKPU agreement provides a simple option in imposing unilateral force majeure conditions and is more efficient in the negotiation phase where the debtor is not obligated to do it individually with each creditor.
Continue reading: Debt Restructuring Agreements through PKPU (2).
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This publication has been prepared by Pitman for general informational purposes only to provide clients with information on recent legal developments and is not intended as legal advice or opinion.