Telkomsel’s Bankruptcy Stirs Fears of Legal Abuses in Indonesia

By webadmin on 11:21 am Sep 21, 2012
Category Archive

Rachel Armstrong

A court ruling that Indonesia’s biggest
mobile phone operator is bankrupt, after not paying a disputed debt
of just half a million dollars, has revived concerns over flawed laws
that invite abuse and can trip up even highly profitable companies in
Southeast Asia’s largest economy.

Analysts and shareholders have
brushed the decision aside as one of the quirks of the country’s
legal system, saying it is almost inevitable that it will be
overturned when Telkomsel appeals to the country’s Supreme Court.

The case has fuelled concerns
among lawyers, however, that the bankruptcy law is open to abuses —
such as forcing settlements to disputes that should be dealt with
elsewhere in the legal system — and poses unnecessary risks for

“It’s not a prudent and fair
judgment. Every company has a loan or debt that will sometimes be
disputed,” said Harjon Sinaga, a partner at Lubis Ganie Surowidjojo
law firm in Jakarta.

Telkomsel, a subsidiary of PT
Telekomunikasi Indonesia (Telkom), was taken to court by a prepay
phone voucher distributor, PT Prima Jaya, which alleged in a petition
for a bankruptcy declaration that the telecom giant still owed it Rp
5.3 billion ($555,700).

Jakarta Commercial Court accepted
the petition and declared Telkomsel bankrupt on Sept. 14
, despite the
company posting a first-half profit this year of $770 million.

Under Indonesian law, a company can
be declared bankrupt if it can be shown to have at least two
creditors and the debt owed to one of them is due and payable. The
strength of the balance sheet is irrelevant.

Many investors were sanguine about
the ruling, viewing a brief dip in parent company Telkom’s share
price after the declaration as a good chance to buy into the stock.

“Legal noise is an opportunity,”
wrote Citigroup analysts Arthur Pineda and Hussaini Saifee in a
research note. “We believe this matter will be resolved in the
upper courts with a less drastic outcome.”

They maintained their buy rating for
Telkom shares, which are among the star performers of the Indonesian
stock market so far this year with a surge of 33 percent, versus a 10
percent rise in the main index.

This is not the first time
Indonesia’s bankruptcy rules have been used against financially
healthy companies.

In May 2004, the Indonesian unit of
British insurer Prudential Plc was forced to suspend operations after
being declared bankrupt following a dispute with an agent.

Two years earlier, Manulife
Financial Corp’s local subsidiary suffered a similar fate following a
claim from a former joint-venture partner that it had failed to pay
shareholders a dividend.

Both of those decisions were
subsequently overturned by the Supreme Court of Indonesia. The
Prudential case led to a change in the bankruptcy laws which made it
tougher to press claims against financial companies.

However, the new law did not set a
minimum size for unpaid claims that can trigger a bankruptcy
petition, or assuage concerns that it could be used to hold companies
to ransom.

“Naturally, there are concerns
that this kind of law can be open to abuse,” said Theodoor Bakker,
a foreign legal counsel at Ali Budijardjo Nugroho Reksodiputro in

“If a court does not pay
particular attention to the legitimacy of a claim, then parties with
a claim that is disputed or invalid can try and push a company
through the bankruptcy court,” he added, without commenting on the
specifics of the Telkomsel case.

Telkomsel, which is 35 percent
owned by Singapore Telecommunications Ltd and serves more than 100
million subscribers, is now in the process of appealing against the

“The company is in a very healthy
business and financial condition and as the parent company Telkom
believes Telkomsel can overcome the problem,” said Slamet Riyadi, a
Telkom spokesman.

Lawyers say an appeal will take up to
two months, however, meaning the uncertainty surrounding the company
is set to linger a while longer.