Lending and taking security in Indonesia: overview
A Q&A guide to lending and taking security in Indonesia.
The Q&A gives a high level overview of the lending market, forms of security over assets, special purpose vehicles in secured lending, quasi-security and guarantees. It covers creation and registration requirements for security interests; problem assets over which security is difficult to grant; risk areas for lenders; structuring the priority of debt; debt trading and transfer mechanisms; agent and trust concepts; enforcement of security interests and borrower insolvency; cross-border issues on loans; taxes; and proposals for reform.
To compare answers across multiple jurisdictions, visit the Lending and taking security country Q&A tool. This article is part of the global guide to finance. For a full list of contents visit www.practicallaw.com/finance-guide.
Overview of the lending market
The Central Bank of Indonesia recently issued some regulations providing certain amendments to the administrative requirements/procedures relating to:
The foreign exchange activities (including offshore loan reporting and corporate guarantees in favour of offshore entities) conducted by banking and non-banking institutions in Indonesia.
Withdrawal of offshore loan and export proceeds that must be made through or deposited into onshore bank accounts.
The requirement for hedging ratio, liquidity ratio and credit rating that non-bank borrowers must meet. From 1 January 2016, to obtain offshore loans, Indonesian non-bank borrowers must hedge at least 25% of the amount by which their foreign currency liabilities that will fall due in the following two consecutive three-month periods exceeds their foreign currency assets. In addition, non-bank borrowers must maintain a liquidity ratio (the ratio of foreign currency assets to foreign currency liabilities set to mature in the following three months) of 70%. The regulation also imposes an equivalent of "BB-" credit rating requirement on Indonesian non-bank borrowers who incurred foreign-currency external indebtedness starting from 1 January 2016.
Forms of security over assets
Real estate comprises:
Registered vessels with a gross weight of 20 cubic metres or more and aircraft are also considered to be immovable assets and can be mortgaged.
Common forms of security
The most common form of security over real estate is a mortgage (Hak Tanggungan). In a mortgage, the borrower grants the lender an interest in the borrower's real estate as security for the debt.
Mortgages are established through a two-stage procedure:
The signing of the mortgage deed before the Land Officer (Pejabat Pembuat Akte Tanah) (PPAT) with jurisdiction over the land to be mortgaged. This deed must be in Bahasa Indonesia (the official language of Indonesia) and in the prescribed PPAT form.
The registration of the mortgage deed at the relevant Land Registration Office (Badan Pertanahan Nasional) (BPN). A mortgage deed must include the following information:
the identity of the parties;
the domicile of the parties;
a clear reference to the secured obligations;
the secured amount; and
a description of the mortgaged property.
The mortgage is established at the moment it is entered in the land book located at the BPN. Therefore, certainty as to the moment of registration is very important to the lender. The PPAT must submit the execution mortgage deed to the BPN at the latest seven days after the execution date of the mortgage deed. The actual date of registration is deemed to be the seventh day after the BPN receives the complete mortgage application. If the seventh day falls on a day that is not a business day, the actual date of registration will be the next business day.
The total time, from the application for registration of the mortgage deed to the issuance of the mortgage certificate as evidence of registration can take between two weeks to six months, although it usually takes two to four weeks.
Tangible movable property
Tangible movable property
Tangible movable property comprises:
Common forms of security
The most common form of security over tangible movable property is a fiduciary transfer. A fiduciary transfer can also secure intangible assets (see Question 5) and certain immovable assets (including buildings that cannot be the subject of a mortgage under the Law No. 4/1996 concerning Hak Tanggungan (Mortgage) on Land and Objects Related to Land (Mortgage Law), such as buildings that were erected on land plots with rights that cannot be subject to a mortgage (see Question 2).
A fiduciary transfer takes the form of a notarial deed, under which the transferor (borrower) transfers to the transferee (lender) its legal title to the transferred assets for the period during which the debt remains outstanding. The deed must be in (Law No. 42/1999 Fiduciary Law):
The transferor retains possession of the tangible assets, and is normally entitled to use or dispose of them in the ordinary course of business. The fiduciary transfer deed must include the following information:
The identity of the fiduciary transferor and transferee.
The date of the underlying agreements secured by the fiduciary transfer.
A description of the assets that are the objects of the fiduciary transfer.
The amount secured.
The value of the assets that are the objects of the fiduciary transfer.
A fiduciary transfer also covers any insurance proceeds payable on the secured assets. In practice, however, a fiduciary assignment of insurance proceeds is still subject to a separate document since the insurance sometimes covers not only the assets that are the subject of the fiduciary transfer, but other assets as well.
The fiduciary transferee must register the fiduciary transfer agreement in the Fiducia Registration Book kept by the Fiducia Registration Office. Registration is necessary even if the transferred assets are located outside of Indonesia (Fiduciary Law). There is no specific time period for registration. The fiduciary transfer, however, comes into effect on the date of registration. If a party granting a fiduciary transfer fraudulently executes a fiduciary transfer over the same assets in favour of more than one party, only the first party to register its security interest will obtain a security interest enforceable against third parties. In that case, the transferee of the earlier fiduciary transfer will have a claim in contract against the transferor.
On acceptance of the registration application, the applicant will obtain a fiduciary security certificate. Registration can now be made online, resulting in a faster process in the issuance of the certificate (one to three days compared with previously, one week to one month). The date of the certificate will be the same as the date of the application for registration.
The most common types of financial instrument over which security is granted are shares.
Common forms of security
The most common form of security over shares is a pledge.
There is no formal legal requirement for a pledge agreement to be in writing. However, it is standard practice for pledges to be created by a deed of pledge (notarised or executed privately), setting out the pledge's particulars. In practice, it is often notarised, for evidencing purposes.
Different formalities apply depending on the type of security:
Registered shares. The pledge takes effect on notification of the pledge to the company in which the shares are held and recording of the pledge in the company's register of shareholders.
Shares listed on the Indonesia Stock Exchange. To create a pledge, it must be notified to the company in which the shares are held and to the Stock Administration Bureau appointed by the company. The pledge will then be recorded in the shareholders' register held by the Stock Administration Bureau.
Dematerialised shares kept in the custody of the Indonesian Central Securities Depository (PT Kustodian Sentral Efek Indonesia) (PT KSEI). PT KSEI must be notified and will issue a confirmation letter certifying that the shares are pledged.
Claims and receivables
Claims and receivables
The most common types of claims and receivables over which security is granted are debts.
Common forms of security
The most common form of security over receivables and claims is a fiduciary transfer (see Question 3, Common forms of security). It is doubtful that non-pecuniary rights under contracts can be assigned for security purposes.
For creation and perfection formalities for fiduciary transfers, see Question 3, Formalities.
The fiduciary transfer is validly created on the registration of the deed with the Fiducia Registration Office. The debtor or insurance company obliged to pay the receivables or claims (obligor) can, however, still pay them to the fiduciary transferor to discharge his debts or obligations until the fiduciary assignment has been:
Notified to the obligor. A court bailiff must officially serve the notification on the debtor.
Acknowledged by the obligor. This can be done in writing on the deed of transfer.
Once notified or acknowledged, the obligor can no longer validly settle with the fiduciary transferor and must make payments directly to the fiduciary transferee. Because of the nature of a fiduciary transfer, in the case of a transfer of trade receivables, notification or acknowledgment of the obligor only takes place when an event of default is anticipated. In other cases, however, such as a transfer of insurance proceeds, the transfer is usually notified to the insurance company at the time of, or soon after, creation.
Common forms of security
The most common form of security over cash deposits is a pledge over a bank account using the same formalities as a pledge over shares (see Question 4, Formalities).
However, the Fiducia Registration Office has expressed the view that a bank account cannot be the subject of an Indonesian security interest and the enforceability of a pledge over a bank account is yet to be tested in court. Although its enforceability is doubtful, it is common in practice to secure cash deposits with a pledge over a bank account.
The most common type of intellectual property over which security is granted is a trade mark.
Common forms of security
The most common form of security over registered intellectual property rights is a fiduciary transfer. It is not possible to take security over unregistered intellectual property rights. However, it is possible to provide an undertaking to grant security over the intellectual property rights when they are registered.
In relation to formalities for a fiduciary transfer, see Question 3, Formalities.
Most future assets can be taken as security, other than future real estate (see Question 2, Real estate).
In relation to future tangible assets, receivables and insurance proceeds which do not exist at the time of the original fiduciary transfer, it is necessary to transfer these assets each time they come into existence as the registration authorities require a clear description of the assets to register security (see below, Fungible assets). This is usually done by the original fiduciary transfer agreement containing a contractual obligation for the transferor to periodically submit lists of recently created assets to the transferee. The transferor must sign these lists, and they must contain a reference to the original fiduciary transfer deed. The updated lists must be registered with the Fiducia Registration Office.
It is doubtful whether future shares will be automatically pledged by the original pledge of shares agreement. It is advisable, therefore, to execute an additional pledge of shares each time the security provider acquires or subscribes to shares.
The law does not expressly prohibit granting security over fungible assets. However, it may not be feasible in practice as the relevant registration authority will require a clear description of the fiduciary assets.
There are no other assets over which security cannot be granted or is difficult to grant.
Release of security over assets
There is no prescribed form to release an Indonesian security interest. A security interest is of an accessory nature and is conditional on whether the underlying secured obligations over which it is taken is:
However, there is an administrative procedure to deregister the security interest from the public register (for example, the mortgage, fiduciary transfer or pledge over listed shares).
Special purpose vehicles (SPVs) in secured lending
Sale and leaseback
Quasi-security structures are not common in Indonesia. Lenders normally prefer to use the available forms of security (see Questions 2 to 6). Sale and leaseback is used in commercial transactions and is not recharacterised as a security interest.
Factoring is used in commercial transactions and is not recharacterised as a security interest.
Hire purchase is not common in practice. Where it is used, it would not be recharacterised as a security interest.
Retention of title
Retention of title is not common in practice. Where it is used, it would not be recharacterised as a security interest.
There are no other types of quasi-security structure that are common in Indonesia.
Risk areas for lenders
There is no general prohibition on a company providing financial assistance to acquire its shares, although under certain circumstances this may be ultra vires (see below, Corporate benefit).
When a company enters into a guarantee or security arrangement, its directors must take into account:
The company's articles of association.
Whether the company derives a commercial benefit from the transaction under which the guarantee and third party security is issued.
It is possible to challenge an act taken by a company which does not take these factors into account, under the ultra vires doctrine. However, this challenge can only be brought by the company itself, through:
The company's shareholders.
The company's board of directors.
The company's board of commissioners (a supervisory board that supervises the board of directors).
A receiver or trustee in bankruptcy.
To mitigate the risk of this happening, the written consent of the shareholders, board of directors and board of commissioners should be obtained.
Loans to directors
There is no general prohibition on a company from making a loan to its directors or directors of a related company. Whether this is permissible depends on whether the company derives a corporate benefit from the transaction (see above, Corporate benefit).
A Usury Law (Woekerordonantie) is in force. However, its provisions are generally not considered to affect commercial loan agreements and facilities.
There are no other relevant laws that affect the validity of a loan, security or guarantee.
Structuring the priority of debts
Contractual subordination is possible and common. It can be affected through an inter-creditor agreement between the lenders or an individual subordination deed (which is commonly used by a shareholder for its loan to the company).
Structural subordination is not common in Indonesia.
Inter-creditor agreements are common in Indonesia. The parties normally include lenders, the borrower and the obligor. An agreement is used to set out various lien positions and the rights and liabilities of each lender, and their impact on the other lenders.
Debt trading and transfer mechanisms
A transfer of debt is effected by an assignment instrument called a cessie. The debtor must acknowledge the assignment to bind the debtor to pay the debt to the assignee. Without this acknowledgment, the debtor is entitled to continue paying to the assignor, although the assignment itself is complete as between assignor and assignee.
Security interests such as mortgages, pledges and fiduciary transfers are accessory rights. This means they are tied to the debt that they secure. Therefore, any assignment of debt secured by a security interest automatically includes an assignment of the security interest. The assignee of the underlying debt will become the new mortgagee, pledgee or transferee, and can exercise all rights under the security agreement.
However, the relevant entries in the register should be amended to ensure that the rights over the security interest are preserved, particularly for security interests that must be registered in a public registry.
Agent and trust concepts
Enforcement of security interests and borrower insolvency
Methods of enforcement
On default, a security interest can be enforced through a public auction or private sale.
Public sale or auction
In theory, a public auction can be conducted without a court judgment or order if the owner of the assets is co-operative. In practice, however, a court order is required.
In the case of listed shares, however, the Indonesian Civil Code clearly specifies that an auction held by two brokers can be conducted in the market. In this case, no court order is required provided that a power of attorney to dispose of the shares has been given (usually at the time the pledge is created) (see Question 4).
A private sale is permitted if this means that a higher sale price can be achieved for the parties. Private sale requires consent from the owner of the assets, which is normally included in the relevant security documents.
For mortgages and fiduciary transfers, a private sale can only be conducted:
After the expiry of one month from written notification of the intended sale to interested parties and publication of this notice in at least two daily newspapers with circulation in the area where the asset is located.
Where no third party has voiced an objection against the private sale. The law is unclear as to who these third parties may be, although it is safe to assume that they at least include the borrower's other creditors.
Rescue, reorganisation and insolvency
Only one formal company rescue process is available: a suspension of payments (moratorium) under Chapter II of the Bankruptcy Law.
Start of procedure
The procedure is started by the debtor or its creditor petitioning the Commercial Court for a suspension of payments. The Commercial Court must then grant a provisional moratorium, and appoint a supervisory judge and an administrator or receiver to assist the debtor in managing its estate. The debtor will be entitled to manage and dispose of its assets jointly with the administrator. During this suspension, the debtor does not have to make payments to its unsecured creditors, and secured creditors cannot enforce their security without the court's consent. The purpose of a suspension of payments is to enable the debtor to propose a composition plan.
First creditors' meeting
The Commercial Court must call a meeting of the unsecured and secured creditors within 45 days of granting a provisional moratorium. At this meeting, unsecured creditors and secured creditors can either:
Approve a composition plan, if the debtor has submitted a plan to the court.
Agree to convert the provisional moratorium into a permanent moratorium of a maximum of 270 days from the start of the provisional moratorium. The permanent moratorium is extendable if the creditors and the court consent.
Any creditors' meeting to consider the plan must be held before the permanent moratorium expires.
Decisions require affirmative votes of both:
More than 50% in number representing at least 66.67% in value of the unsecured creditors present or represented at the meeting.
More than 50% in number representing at least 66.67% in value of the secured creditors present or represented at the meeting.
If no plan is submitted and the unsecured creditors fail to extend the moratorium, the court will declare the debtor bankrupt.
Composition plan ratification
If the creditors approve the plan, the supervisory judge must submit it as a report in writing to the Commercial Court and the Court will consider the report, including hearing the administrator and dissenting creditors. The Commercial Court must refuse to ratify the plan if:
The value of the debtor's assets considerably exceeds the amount agreed in the plan.
It is insufficiently certain that the plan will succeed.
The plan was concluded as a result of fraudulent transactions or undue preferences of one or more creditors, or other unfair means, regardless of whether the debtor or any other party co-operated with this.
The cost and expenses for the administrator and/or other professionals engaged have not been paid or the payments have not been adequately assured.
A plan can be submitted only once; if it is rejected by the creditors or not ratified by the court, a bankruptcy declaration will be made and the debtor's assets will be placed in the state of insolvency and liquidated under the settlement process.
Once ratified, the plan becomes final and binding on all creditors, except dissenting secured creditors. Dissenting secured creditors are entitled to compensation from the debtor at the lowest of either the:
Value of their security (which they can choose between the security value provided in the security documents or the security value designated by an appraiser appointed by the supervisory judge).
Amount of their outstanding secured claims.
The dissenting secured creditors rule is a recent change that was introduced in Law No. 37 of 2004, which was enacted on 18 October 2004, and there are no implementing regulations as to how it will work or precedents on its application.
Following ratification, the moratorium is ended and the administrator or receiver (as applicable) will be discharged. The business and assets of the debtor will be returned to the debtor's control, subject to any specific provisions contained in the plan.
Insolvency in the Indonesian context has a specific meaning. It is the state of being unable to pay, which is triggered after a composition plan is not offered in the creditors' meeting, the offered composition plan is rejected, or the ratification of the agreed composition plan is rejected by a final and binding court decision (Article 178, Bankruptcy Law) (see Question 21). For that reason, insolvency proceedings are usually referred to as bankruptcy proceedings in Indonesia.
An automatic stay is triggered from the date of a Commercial Court decision declaring that the debtor is bankrupt, or granting a provisional suspension of payments (see Question 21).
In the provisional suspension of payments procedure, the stay is at least 45 days, and is extendable up to a maximum of 270 days (Article 246, Law 37/2004) in line with the suspension of payments period granted (see Question 21, First creditors' meeting). During bankruptcy proceedings, the secured creditors' rights to enforce security are subject to the automatic stay for a maximum of 90 days (Article 56(1), Law 37/2004). It will be less than 90 days if the bankruptcy is terminated or a state of insolvency declared before the expiry of the 90-day period (see above).
Under the Bankruptcy Law, the receiver can apply to the court to nullify a preferential transfer transaction (such as a transaction involving a loan, guarantee or security interest) on the basis that this transaction is detrimental to the creditors (Articles 41 and 42, Bankruptcy Law). The receiver must prove the following:
The debtor entered into the transaction before it was declared bankrupt.
The debtor was not required by an existing contractual obligation or by law to perform the transaction.
The transaction prejudiced the creditors' interests.
The debtor and the third party to the transaction had or should have had knowledge that the preferential transaction would prejudice the creditors' interests. The debtor and the third party will be deemed to know this transaction was detrimental, unless they can prove otherwise, when:
it was entered into within one year before the company's bankruptcy;
the transaction was not mandatory; and
it was a transaction in which the consideration that the debtor received was substantially less than the estimated value of the consideration given, it was a payment or granting of security for debts that are not yet due or it was a transaction entered into by the debtor with a relative or related party. A relative or related party has a wide meaning, and applies to debtors that are individuals and debtors who are legal entities.
The Bankruptcy Law does not set a time limit within which an application must be brought.
The general rule on distributing the proceeds of a bankruptcy estate to unsecured creditors is one of equality, subject to the statutory priority rights of certain categories of creditors. The ranking order of creditors under the bankruptcy is as follows:
Specific expenses stipulated by the Tax Law, consisting of:
legal expenses arising solely from a court order to auction movable and/or immovable goods;
expenses incurred for securing the goods;
legal expenses arising solely from the auction and settlement of inheritance (in the context of a death of an individual).
Preferred debts ranking above secured debts under the Civil Code, for example:
court charges that specifically result from the disposal of a movable or immovable asset (these are paid from the proceeds of the sale of the assets over all other priority debts, including pledges or mortgages);
legal charges, exclusively caused by the sale and preservation of the estate (these have priority over pledges and mortgages).
Post-bankruptcy creditors, that is, claims against the bankruptcy estate for (Article 39(2), Bankruptcy Law):
the salary of the receiver;
the costs of liquidating the bankruptcy estate (for example, the appraiser's and accountant's fees);
the lease costs for the bankrupt's house or offices as of the date of the declaration of bankruptcy; and
the wages of the bankrupt's employees as of the date of the declaration of bankruptcy.
Secured creditors holding a mortgage, pledge, fiduciary transfer or a hypothec (a type of security interest granted over aircraft and ships with a size of more than 20 cubic metres) (see Questions 2 to 6).
Specific statutorily preferred creditors whose preference relates only to specific assets (for example, the costs incurred in the maintenance of the property).
General statutorily preferred creditors (for example, revenue authorities).
Other unsecured creditors, paid pro rata from any of the remaining proceeds.
Shareholders, who rank behind all creditors in the distribution of the proceeds of the estate.
The cost of the bankruptcy is shared pro rata among the statutorily preferred creditors and the unsecured creditors.
Cross-border issues on loans
There are no restrictions on payment of foreign currency to a foreign lender. However, the conversion of Indonesian rupiah to foreign currency, or foreign currency purchases, of more than US$100,000 per month (or its equivalent) per customer (including the purchase of foreign currencies for derivative transactions) must be based on documentation of an underlying transaction. The underlying transaction must set a maximum amount and include a statement that the foreign currency will only be used to settle the payment obligations under the underlying agreement.
Taxes and fees on loans, guarantees and security interests
Withholding income tax can apply to interest and fees (although not the principal of a loan) if the lender must pay income tax in Indonesia. Stamp duty of IDR6,000 is payable on any agreement signed by the parties.
Notary and registration fees for mortgages are normally based on the value of the secured amount under the mortgage (the lender has a choice whether to use the actual value of the assets or the principal amount of the loan), and can be costly. Fees concerning fiduciary transfers, pledges of shares and other forms of security interest vary and are at the notary's discretion.
See above, Registration fees.
For cross-border loans, the withholding tax rate can usually be reduced if the lender resides in a jurisdiction that has a tax treaty with Indonesia. To reduce mortgage registration fees, lenders should normally use the actual value of the assets rather than the secured amount under the mortgage (see Question 27).
There is no strategy to minimise the registration costs of other security interests, as they are generally considered to be reasonable.
Ali Budiardjo, Nugroho, Reksodiputro
Professional qualifications. The Netherlands, 1979
Areas of practice. Restructuring and insolvency; project finance; M&A; structured finance.
- Counsel to Kemira OYJ in the acquisition of AkzoNobel paper chemicals business, which include acquisitions of shares in PT AkzoNobel Pulp and Performance Chemicals.
- Counsel to Agence Francaise de Developpement in relation to a bilateral financing agreement with PT Sarana Multi Infrastruktur (Persero).
- Counsel to Goldman Sachs in relation to a hedging transaction with Trans Group.
Ali Budiardjo, Nugroho, Reksodiputro
Professional qualifications. Indonesia, 1989
Areas of practice. Corporate/M&A; banking and finance; capital markets; projects and natural resources.
- Counsel in the financing of Semangka Hydro Power Plant 2x28MW project in Sumatra, Indonesia.
- Counsel in the financing of exploration activities of PT Supreme Energy Rantau Dedap, an IPP Company developing a 240MW geothermal power plant in Rantau Dedap, Sumatera.
- Counsel to IFC in connection to a US$280 million loan to an independent power producer, PT Bajradaya Sentranusa, to refinance existing liabilities and support the long-term operation of Asahan 1, a 180 MW hydroelectric power plant in North Sumatra.
Ali Budiardjo, Nugroho, Reksodiputro
Professional qualifications. Indonesia, 1995
Areas of practice. Financing; corporate and investment projects.
- Counsel to IFC in connection to US$280 million loans to an independent power producer, PT Bajradaya Sentranusa, to refinance existing liabilities and support the long-term operation of Asahan 1, a 180MW hydroelectric power plant in North Sumatra.
- Counsel to IFC in relation to a US$40 million loan granted to Indorama Group.
- Counsel to IFC in the financing of the US$830 million Panca Amara Utama ammonia plant in Sulawesi, Indonesia.