The law on bankruptcy and postponement of debt payment obligation (PKPU) of 2004 (Bankruptcy Law) is applicable for all bankruptcy and PKPU claims through the commercial court in Indonesia. The Bankruptcy Law does not negate the guarantee agreement set forth under Indonesian Civil Code (ICC) which creates a guarantor. The complexities of this legislation could complicate disputes, so it is important to be clear on these rules during litigation.
Legal relationships
There are three different relationships that can be had between three parties. The first is between a project owner and a contractor doing the construction work, under a construction service agreement. This agreement requires the contractor to issue a bank guarantee by a reputable bank to guarantee the performance of a contractor.
The second relationship is an agreement or application for a bank guarantee between the contractor (as required under the construction service agreement) and the bank.
The bank then issues a bank guarantee for the project owner. This is the third relationship; the bank as the issuer of bank guarantee and the project owner as the receiver of bank guarantee. The bank guarantee is issued to guarantee performance of the contractor when the contractor defaults under the construction service agreement.
A conflict between the project owner and contractor can occur which could compel the project owner to liquidate the bank guarantee. While instructing the liquidation of bank guarantee to the bank, the contractor goes into a PKPU stage. The administrator of a PKPU then formally demands the bank and the project owner not to liquidate the bank guarantee. The question is whether the bank guarantee can be stayed due to a PKPU status.
Construction service agreement
Under the construction service agreement, the project owner is a creditor to receive contractor’s service, but also a debtor to pay the contractor’s fees. Additionally, the contractor is a creditor for the payment of construction fees and a debtor to perform its obligation under the contract.
What about the relationship with the bank? The project owner, as holder of bank guarantee, is a creditor for the bank, which is a debtor for the project owner since the bank is guaranteeing the performance of contractor when contractor defaults. The contractor will become the debtor for the bank when the bank has already liquidated the money for the bank guarantee, since the bank will become the creditor over the contractor (who will become a debtor to the bank).
This is regulated under article 1840 of ICC which stipulates that the guarantor who already paid, by law, replaces the rights of the creditor against the debtor. The key phrase is “who already paid”. The replacement does not take place when the bank has not paid the liquidation money secured under the bank guarantee.
Liquidating bank guarantee
Can the PKPU status of the contractor stay the right of the project owner as creditor for the bank in liquidating the bank guarantee? Article 242 paragraph (1) of Bankruptcy Law states that the debtor of a PKPU cannot be forced to pay its debt and all executionary actions that had been commenced must be postponed. The contractor is the debtor under this provision. The bank, as the issuer of the bank guarantee, is not bound by this provision simply because the bank is not the debtor of PKPU. The bank is a debtor to the project owner, but not a debtor to PKPU. Accordingly, ordering the liquidation of bank guarantee does not mean that the project owner violates article 242 paragraph (1) of Bankruptcy Law.
However, the bank cannot liquidate the bank guarantee if it holds the secured assets of the contractor, or it will violate article 242 paragraph (1). This incorrectly implies that the secured assets will be those liquidated by the bank when it agrees to liquidate the bank guarantee called by the project owner.
The bank’s assets are those that should be paid when the bank liquidates the bank guarantee, particularly when the guarantee was given under article 1832 of ICC, which waives the right to claim for the contractor’s assets to be seized and sold for the repayment of debt (contractor’s debt).
When the bank liquidates its money to fulfill its promises under the bank guarantee, the bank is then entitled to enforce the secured assets of the debtor. Nevertheless, if the contractor is still under PKPU status, as set forth in article 242 paragraph (1) of Bankruptcy Law, the bank should postpone its right to execute during the PKPU status, since the bank has become the creditor of the contractor. The objection above will be relevant after the bank pays the bank guarantee money to the project owner, not before.
Thus, when the contractor has PKPU status, and the contractor defaults its obligation under the construction service agreement, the bank should not be able to decline the liquidation instruction by the project owner. Understanding the interplay between the debtor, creditor and guarantor, as well as their relevance when PKPU occurs, is crucial.
For further information on this topic please contact Eddy Leks at Leks&Co by email (eddy.leks@lekslawyer.com). The Leks & Co website can be accessed at www.lekslawyer.com.
