Corporate actions involving investments or cooperation between parties are typically facilitated through various agreements, including mergers and acquisitions (M&A), joint ventures (JV), indirect or direct investments, or any other mutually agreed-upon means.  

During the implementation of such agreements, these corporate transactions may entail risks that could result in default due to unresolved disputes. Even in a straightforward sale and purchase of shares transaction involving a joint venture (JV) company, a dispute could arise if the prospective purchaser seeks to acquire all existing shares, but the partner of the prospective seller declines to sell its shares. Occasionally, the parties may require creative solutions to address their concerns, even resorting to litigation proceedings as a means of resolution.

In loan transactions, defaulting debtors occasionally attempt to utilize legal means, such as litigation proceedings, to validate their non-payment obligations. Notably, in 2004, a prominent listed company attempted to evade its payment obligations by filing a case to invalidate the issuance of its bonds. This attempt was initially successful, as the district court ruled in favor of the debtor. However, this decision was subsequently overturned by the Supreme Court in 2008. On another occasion, an defaulting debtor attempted to justify their non-payment obligations by filing a case to invalidate the loan agreement due to the violation of the Indonesian Language Law.  

In addition to the examples provided above, this publication will present several examples illustrating how disputes in corporate transactions can be facilitated by utilizing specific litigation procedures.  

Using litigation means to solve the corporate transaction issue  

Facility Agreement to Facilitate Sale and Purchase Dispute

Approval from the General Meeting of Shareholders (GMS) is typically necessary for approving a sale and purchase of shares transaction in such a company. In a joint venture (JV) situation, particularly when there is no shareholders agreement governing the company’s governance and the shareholders’ rights and obligations, this requirement may pose a challenge for a shareholder seeking to exit their investment. There have been instances where certain shareholders have blocked the proposed sale and purchase transaction by not approving it in the GMS. If the selling shareholders do not hold more than 50% of the voting shares in the company, this may also be a barrier to their exit. The most common approach to resolving this situation is to engage in legal proceedings, either through court or arbitration, as may have been pre-agreed upon by the parties. However, this process can be protracted and cumbersome. As an alternative to this conventional approach, a more innovative strategy is to utilize a facility agreement as a means of bypassing the sale and purchase transaction.  

Assuming that the joint venture (JV) company is a non-listed entity, and its articles of association are standard, the challenges mentioned above can be addressed through a facility agreement. Instead of conventional sale and purchase transaction documents, the prospective seller can enter into a loan agreement (as a debtor with the purchase price as the loan amount) with the prospective purchaser (as a lender) with additional security, such as a pledge of shares agreement, power of attorney to vote, and power of attorney to sell. In this scenario, the seller/debtor would not be repaying the buyer/lender. The lender would simply declare the debtor as defaulting the agreement and exercising its rights under the pledge of shares agreement, including the option to sell the pledged shares.

Enforcement of a pledge of shares under Indonesian law can be accomplished through either a public auction conducted by the local State Property Service and Auction Office (KPKNL) or via alternative means after obtaining the court’s approval. This latter approach allows the lender to coordinate with its affiliates to act as the purchaser of the pledged shares.  

However, it is important to acknowledge that this arrangement carries certain risks, including:

1. The potential buyer may decline to accept this mechanism, potentially due to inconvenience or other considerations. 
2. Defaulting on the loan agreement could negatively impact the debtor’s credit rating, posing challenges in obtaining future loans for business or operational purposes. 
3. If the enforcement is conducted through a public auction, there may be a third party interested in purchasing the shares, resulting in competition between the lender and the third party. 
4. Other shareholders in the company may attempt to block the enforcement process.

Despite these risks, they can be mitigated, making this alternative a viable option when selling shareholders encounter obstacles.

Bankruptcy and Suspension of Payment Mechanism

Bankruptcy is a legal status that declares a debtor insolvent, placing them under the supervision of a receiver. The receiver manages the debtor’s assets and sells them to settle all outstanding debts. On the other hand, a debtor may be placed under the temporary management of an administrator under the terms of a Suspension of Payment (SOP). During this period, the debtor can propose a composition plan to its creditors, outlining a repayment plan for its debts. The prerequisites for a bankruptcy or SOP declaration to be approved are: (i) the debtor has at least two creditors; (ii) the debtor has defaulted on paying at least one of its debts that is due and payable; and (iii) the conditions above can be conclusively demonstrated (e.g., any dispute regarding the amount of debt being claimed does not negate the debt’s existence cannot be conclusively proven).

Provided that the requisite is fulfilled, there are several ways where bankruptcy or SOP can be used as tools to resolve corporate transaction issues, among others:

1. Bankruptcy or SOP as a Threat 
   The bankruptcy/SOP application serves as a strategic tool to exert pressure on the counterpart party, compelling it to fulfill its obligations under reciprocal corporate transactions. The potential loss of control and management over its estate by the counterpart may instill a sense of threat, prompting it to address outstanding obligations. Upon the debtor’s successful fulfillment of its obligations, the bankruptcy/SOP applicant may withdraw its applications to the commercial court. However, if the counterpart party subsequently defaults on its obligations, the bankruptcy/SOP application can be re-submitted to the commercial court for further proceedings.
   
   
2. Bankruptcy to Stop Legal Case 
   The Indonesian Bankruptcy Law stipulates that upon a debtor’s declaration of bankruptcy, all legal cases filed against them in court with the intention of enforcing their obligations from the bankruptcy estate will be rendered null and void. This provision can be utilized to terminate a legal case against a debtor in court, provided that the potential benefits of such a proceeding outweigh the advantages of continuing the legal dispute in court.
   
   It is noteworthy that once a company is declared bankrupt, all its affairs and operations will be managed by a receiver appointed with the intention of selling the company’s assets to repay debts. This process may result in the liquidation (winding up) of the company. Therefore, as previously mentioned, this option should be carefully selected only if it serves the greater good of the filing party (which could be the company or a third party with certain interests against the company, such as creditors) rather than prolonging the legal battle in court for an ongoing legal case.  
   
   
3. Bankruptcy or SOP to Acquire Assets
   If a debtor possesses certain assets that are encumbered, this presents an opportunity to acquire those assets via bankruptcy/SOP. Once a debtor is declared bankrupt or under the SOP, secured creditors (creditors with security rights over the debtor’s assets) have the right to enforce their security interest to secure repayment of the loan. The enforcement process typically involves a public auction.   
   
   Given these considerations, bankruptcy and SOP can be utilized as tools to acquire assets through enforcement, provided that the debtor meets the necessary criteria for filing for bankruptcy or under the SOP.
   
   
4. SOP to Restructure Payment Terms 
   It is widely recognized that SOP is utilized to restructure the loan of borrowers, either through extending repayment terms, reducing the principal amount, or implementing other mechanisms. Consequently, it is also common for financially distressed companies to initiate a voluntary SOP. In SOP procedures, the debtor is presented with an opportunity to present a composition plan, which is subsequently approved by creditors through voting (the voting power is determined by the verified claim amount). The composition plan typically governs the restructuring of the loan, including the debtor’s plan to repay creditors through various mechanisms such as set-off, haircut, debt buyback, debt-to-equity conversion, debt-to-asset conversion, or adjusted payment timings. The presentation of the composition plan poses a challenge, as the debtor risks bankruptcy if the quorum requirement for approving the plan is not met. Therefore, if the terms of the composition plan are unfavorable to the creditors, the debtor faces the potential for bankruptcy.  
   
   To address this issue, in practice, prior to claim verification, the debtor typically utilizes its affiliates to acquire certain claims from its creditors (usually offshore creditors, as they are reluctant to participate in SOP proceedings due to its substantial costs and lengthy duration). The objective is to ensure that its affiliates possess a majority voting power in the composition plan’s voting meeting. This allows the debtor to propose the most favorable repayment terms on its behalf while simultaneously ensuring the approval of the composition plan, as they hold the majority voting rights. However, it is crucial to maintain fairness considerations for the other creditors as well. Failure to do so may result in the composition plan being rejected by the court due to allegations of fraud or conspiracy.