Buying distressed assets in Indonesia

Indonesia has no specific definition or regulations on distressed assets. However, it is practically common to refer distressed assets as assets being sold due to certain issues, such as pre-insolvency or suspension of debt payment obligation – Penundaan Kewajiban Pembayaran Utang (PKPU) or insolvency process, loan security exercise, bad debt/loans, or other legal issues. They may include tangible or intangible assets (i.e. land, real estate, shares, or other financial instruments). As certain issues including legal ones, are involved, distressed assets practically have significantly decreased values compared to similarly worth acquiring assets with no such issues.

In Indonesia, a company is considered likely to be or to be in insolvency, when the company has two or more creditors, one debt of which is due and payable based on Law No. 37 of 2024 on Insolvency and Suspension of Payment (“Insolvency Law”). 

However, the decision to declare a company under PKPU or insolvency must be made by the Commecial Court upon the petition submitted by (i) the borrower; or (ii) at least, one respective creditor, based on Insolvency Law (Article 1 (4) of Insolvency Law). In practice, the petition of insolvency is submitted by the creditor when the company/borrower frequently fails to repay the loan and the existing security is not enough to cover the outstanding loan amount. The company also has no significant source of revenue or cash for the loan repayment. In addition, the borrower is under pressure to settle the outstanding loan in a certain restructuring timeframe due to the court decision.

Before a company is regarded under insolvency, the borrower has the opportunity to present in court to the creditors, a settlement or composition plan for the loan restructuring, before the court decides the company’s insolvency.

if the judges consider the PKPU or insolvency conditions have been met, they will render a decision to declare that the borrower is under PKPU or insolvency, and appoint the supervisory judges with the administrator (for PKPU), or receiver (for insolvency) to supervise the PKPU or insolvency process (Article 15 jo. Article 225 of Insolvency Law).

Insolvency Law recognizes the concept of Actio Paulina, whereby the creditor or receiver in the insolvency process may request a cancellation of any borrower’s legal actions involving its assets that may prejudice the creditor’s rights, before the insolvency decision is rendered (Articles 41 and 42 of Insolvency Law).  

In regard of the above, the seller that proposes the sale of assets may face a legal risk that the sale become subject to cancellation by the relevant creditors or receivers.

To reduce the legal risks associated with distressed assets, including a clawback action from the creditor of the seller, it is important to conduct legal due diligence on the seller and the assets, encompassing the following facts:

• Any pending litigation towards the assets and the seller;
• Encumbrances of the assets;
• Outstanding obligation (i.e. taxes) of the assets; and
• Any legal documents related to the ownership (i.e. land title for a property) of the assets, and the seller’s corporate documents (if the seller is a legal entity) or identification number (if it is an individual).

In Indonesia, the only way to obtain a confirmation on the litigation or insolvency status is by submitting an application to the relevant court because such information is not available online. Upon making an application to the court, the applicant will obtain the court’s statement letter confirming whether the seller is under insolvency status or having any pending litigation.   

It is advisable to conduct a site visit to the respective location of the distressed asset to physically confirm that the property is not illegally occupied and/or claimed by any third party because in Indonesia, it is common to see a vacant land/property being illegally occupied and/or claimed by a third party.

It is understood that the risk of buying distressed assets under pre-insolvency or insolvency procedure is relatively low. As such, buying distressed assets from a seller under PKPU or insolvency status is practically preferable considering the significantly reduced values of the assets.

• Under Pre-Insolvency/ PKPU Procedure:

However, Insolvency Law is silent on specific actions to be taken by the borrower to repay their debts, unless they are specifically stated in the settlement plan. In other words, to the extent these actions do not prejudice the creditors and they are in accordance with the settlement plan, the borrowerand receiver may perform various actions deemed necessary to manage the borrower’s assets and repay the debts, including selling the remaining assets. It is common that the borrowerand receiver are permitted to sell their assets under the PKPU process to repay their debts.

Under Insolvency Law, PKPU allows both parties to restructure their debts, which may include partial or full repayment of the debts under the approved settlement/ composition plan (Article 222 (2) and (3) of Insolvency Law). PKPU can be applied by the seller or respective creditors. During the PKPU process, a borrower will present the settlement/composition plan before the court to be approved by the creditors.

• Under Insolvency Procedure

Article 16 (1) of Insolvency Law stipulates that once the insolvency status has been issued by the commercial court, all borrower’s assets are subject to the administration and/or settlement by the appointed receiver. The sales process of the borrower’s assets are conducted through a public tender.

Generally, the buyer has no liability if the assets are acquired during the insolvency or pre-insolvency process. However, once the transfer of assets is effective, the buyer is deemed to assume all liability associated with the assets such as, tax payment obligation or any outstanding obligations attached to the assets. Additionally, if the sale is conducted in bad faith where the transaction is made to defraud creditors of the seller, the buyer could be held liable.

PKPU or Pre-Insolvency 

No, PKPU or Pre-Insolvency does not always require a public auction. In pre-insolvency situations, the debtor still has some control over its assets and may pursue private sales without necessarily going through a public auction.

Insolvency

Although a private sale is permitted, any debtor’s assets due to insolvency must be sold through a public sale or auction (Article 185 (1) of Insolvency Law). Moreover, Ministry of Finance Regulation No. 122 of 2023 on Guideline on Implementation of Auction (“MoFR 122/2023”) stipulates that the public sales where the insolvent debtor’s assets are sold is recognized as Executory Auction (Article 3 of MoFR 122/2023). In this regard, a public auction is mandatory for selling the debtor’s assets during insolvency process.

If the sales through public auction are not achieved, Article 185 (2) of Insolvency Law permits the receiver to carry out private sale with the permission of the supervisory judge.

Although buying distressed assets could be profitable, it involves various legal considerations, especially when the seller is under insolvency or pre-insolvency/PKPU proceeding. For instance, if the seller is under insolvency, as mention in point (3), the buyer may encounter the risk of claw-back action (Actio Paulina) initiated by the creditors to nullify or cancel the sale of assets.

To mitigate such risk, it is important to conduct thorough legal due diligence on the assets and seller, including checking for any ongoing litigations (including the ones, which are subject to PKPU or insolvency) and any encumbrances. Additionally, obtaining a formal statement from the court regarding the seller's insolvency or PKPU status can provide further legal certainty. Conducting site visits can also be considered if the acquired assets are lands or properties.  

If the acquired distressed asset is under pre-insolvency/PKPU or insolvency procedure, the buyer should make sure that the sale is permitted under the settlement plan and it is approved by the relevant receiver. In general, Insolvency Law permits the sale of debtor’s assets under both processes, with public auctions being mandatory for sales during the insolvency process, and private sales during the pre-insolvency/PKPU process. The buyer generally has no further liability on acquiring the assets under insolvency or pre-insolvency/PKPU, but when the sale of assets is effective, the buyer is deemed to assume all liabilities associated with the assets, including if the sale is made in bad faith.