Home / Insights / Indonesia: M&A through Debt Restructuring Mechanism
Freddy Karyadi
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Indonesia: M&A through Debt Restructuring Mechanism
August 24, 2024Freddy Karyadi
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Following the monetary crisis
in 1998, Indonesia introduced debt restructuring regulation through the
issuance of Law No. 4 of 1998 on Bankruptcy, as amended by Law No. 37 of 2004
on Bankruptcy and Suspension of Payment (IBL). Similar to the US
Bankruptcy Law (USBL), two restructuring schemes are available, i.e., (i)
bankruptcy (Chapter 7 of USBL) and (ii) suspension of payment (Chapter 11 of
USBL - PKPU).
Different from the bankruptcy proceeding which will result in the sale of bankruptcy estates in favor of the creditors, the PKPU proceeding aims to provide temporal relief for the debtor against pressing creditors.
As briefly mentioned before, the repayment mechanism in the composition plan can also include debt-to-equity or debt-to-asset conversion. This way, the debtor will offer the debt to be settled by conversion into its equity or asset. Specifically, a debt-to-equity conversion can also be considered an M&A opportunity if the conversion will lead to a change of control in the debtor.
Once the composition plan is approved by the creditors and ratified by the court, the debtor would need to follow the standard debt-to-equity conversion procedures, including but not limited to the formality requirements such as newspaper announcement and notification to the Indonesian Competition Commission (once the filing requirements are fulfilled).
Recently, an Indonesian state-owned airline that went through a PKPU proceeding in 2022 also offered debt-to-equity conversion as its repayment plan.
Different from the bankruptcy proceeding which will result in the sale of bankruptcy estates in favor of the creditors, the PKPU proceeding aims to provide temporal relief for the debtor against pressing creditors.
M&A within PKPU Proceeding
As the purpose of the PKPU proceeding is to rescue the debtor (company), the debtor will be given a chance to prepare a composition plan. The composition plan should govern among other things the plan of the debtor to (i) rescue the company and (ii) repay the creditors through several mechanisms (set-off, haircut, debt buyback, debt-to-equity conversion, debt-to-asset conversion, or adjusted payment timings). This composition plan will be presented to the creditors for their approval. For the composition plan to be approved and the debtor can continue its going concern, it must be approved by:- >50% of the attending unsecured creditors that represent at least 2/3 of the verified unsecured claim;
- >50% of the attending secured creditors that represent at least 2/3 of the verified secured claim.
As briefly mentioned before, the repayment mechanism in the composition plan can also include debt-to-equity or debt-to-asset conversion. This way, the debtor will offer the debt to be settled by conversion into its equity or asset. Specifically, a debt-to-equity conversion can also be considered an M&A opportunity if the conversion will lead to a change of control in the debtor.
Once the composition plan is approved by the creditors and ratified by the court, the debtor would need to follow the standard debt-to-equity conversion procedures, including but not limited to the formality requirements such as newspaper announcement and notification to the Indonesian Competition Commission (once the filing requirements are fulfilled).
Recently, an Indonesian state-owned airline that went through a PKPU proceeding in 2022 also offered debt-to-equity conversion as its repayment plan.
Conclusion
M&A transactions can also
occur through a debt restructuring mechanism, specifically in a PKPU proceeding,
through a debt-to-equity proposal. The possibility of the creditors accepting
the proposal would depend on many factors, among others their confidence in the
debtor’s possibility to bounce back.
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This article was first published in the August 2024 edition of GGI FYI News – Litigation & Dispute Resolution, a publication by Geneva Group International (GGI) featuring insights from professionals across the globe.
Protemus Capital is pleased to contribute to this global platform, highlighting how Indonesia’s PKPU framework can serve as an alternative route for M&A transactions through debt-to-equity conversion. In complex restructuring situations, creative legal mechanisms like these can open new opportunities for strategic acquisitions and business recovery.
***
This article was first published in the August 2024 edition of GGI FYI News – Litigation & Dispute Resolution, a publication by Geneva Group International (GGI) featuring insights from professionals across the globe.
Protemus Capital is pleased to contribute to this global platform, highlighting how Indonesia’s PKPU framework can serve as an alternative route for M&A transactions through debt-to-equity conversion. In complex restructuring situations, creative legal mechanisms like these can open new opportunities for strategic acquisitions and business recovery.