Indonesian Constitutional Court redefines fiduciary security enforcement: Will a debtor agree that it is in default?
27 February 2020
On 6 January 2020, the Indonesian Constitutional Court issued a ruling on certain provisions under Law No.42 of 1999 on Fiduciary Security (“Fiduciary Security Law”) that may handicap creditors in their enforcement of fiduciary securities and at the same time embolden debtors to make enforcement more difficult for creditors.
A fiduciary security is a security right concerning movable objects (both tangible and intangible) and immovable objects that cannot be encumbered with a mortgage. The main characteristics of a fiduciary security have been considered to be the following:
- The fiduciary objects can remain under the custody and control of the fiduciary security provider (the debtor or a third party);
- The fiduciary security registration certificate (“Fiduciary Certificate”) was understood to give the fiduciary security recipient (usually a creditor) “executory power” (immediate enforceability) over the fiduciary object upon an agreed default event set out in an underlying agreement containing a debt payment obligation, commonly a loan agreement (such as failure to make a debt repayment); and
- The fiduciary security must have an underlying agreement containing a debt payment obligation and is only an “accessory” to the underlying debt payment obligation.
However, in Constitutional Court Decision No.18/PUU-XVII/2019, the Panel of Judges ruled on how the following Fiduciary Security Law articles must be interpreted (emphasis added):
Article 15(2) : “A Fiduciary Certificate has executory power equivalent to a final and binding court decision”; and
Article 15(3) : “If a debtor breaches a contract, the Fiduciary Recipient has the right to sell an object of Fiduciary Security on his own behalf”.
The Panel ruled that the phrases “executory power” and “equivalent to a final and binding court decision” under Article 15(2) and the phrase “breaches a contract” as set out under Article 15(3) must be narrowly interpreted in order not to conflict with the Indonesian Constitution.
The Panel ruled that in order for the above phrases under Article 15(2) to be constitutional they must be interpreted as follows (emphasis added):
“if the Parties to a fiduciary security do not both agree on the occurrence of a default, and the debtor objects to voluntarily handing over the fiduciary security object for enforcement, then the mechanism and the legal procedure under the Fiduciary Security Certificate must be conducted and applied in the same manner as the enforcement of a final and binding court decision.”
As for the phrase “breaches a contract” (usually an event of default in a fiduciary security) under Article 15(3), the Panel ruled that it should be interpreted as follows:
“a breach of contract should not be determined unilaterally by the creditor; instead, it should be based on an agreement between the creditor and the debtor or on the basis of a legal procedure to determine that a breach of contract [has occurred]”
A potential result of the Constitutional Court’s interpretation of the Fiduciary Security Law is that before enforcing a fiduciary security, a creditor now requires the debtor’s consent to enter into an agreement with the debtor which acknowledges that the debtor is in default (in either case, “Default Consent”).
If the debtor refuses to give such Default Consent and refuses to voluntarily release the fiduciary object, the only legal recourse for a creditor would be to file a petition with the relevant district court for enforcement (as if the fiduciary security were a final and binding court decision) which is likely to slow down the enforcement process.
This is an extract of an article by Soemadipradja & Taher, an Indonesian law firm with which Allen & Gledhill has a strategic alliance. To read the full article, please click here. To visit the website of Soemadipradja & Taher, please go to www.soemath.com.