There is insufficient information publicly available as to Indonesia's compliance with the Principles and Guidelines for Effective Insolvency and Creditor Rights Systems developed by the World Bank. Prior to August 20, 1998, Indonesian corporate and personal bankruptcies were governed by a 1905 Bankruptcy Ordinance enacted during the Dutch colonial period. The Bankruptcy Law of 1998 aimed to modernize the bankruptcy system and promote the fair and expeditious resolution of commercial disputes. Santoso et al. note in 2004 that although considered a step in the right direction, the 1998 Law was perceived by many as too creditor-friendly because it allowed the creditor to initiate a bankruptcy regardless of the amount of debt versus the amount of debtor's assets. This was seen as making it too easy to force solvent companies into bankruptcy. In 2004, a new Law on Bankruptcy and Suspension of Payment was adopted which established the criteria for who can file bankruptcy petitions. Although Santoso et al. observe that there are still problems with the amended law, the issue of effective implementation presents a much more substantial problem. In his 2006 publication, S. Mandala of the Ministry of Law and Human Rights notes that on August 2, 2005 a Judicial Commission was created to address the weaknesses in the judicial system.

General Overview

Insolvency proceedings in Indonesia are governed by the Bankruptcy Ordinance enacted by the Dutch in 1905. The Ordinance was first amended in 1998 following the 1997 financial crisis, which revealed the inadequacy of the insolvency regime in Indonesia. As noted in the Australian Department of Foreign Affairs and Trade's 2000 report, the 1998 amendments were introduced through the enactment of the Bankruptcy Law of 1998 and included claw-back provisions, the creation of a panel for receivers and administrators, the definition of time frames for passing a legal judgment, and the establishment of a Commercial Court. However, the report added that some weaknesses remained, such as lack of criteria to define debt and its maturity and the absence of a formal concept of insolvency as a prerequisite for bankruptcy.

S. Mandala of the Ministry of Law and Human Rights reports in 2006 that the Law on Bankruptcy as amended in 1998 was replaced by a new Law on Bankruptcy and Suspension of Payment, adopted on October 18, 2004. According to Mandala, the law was amended to provide clear definitions of the underlying fundamental principles, to identify time frames and procedures, and to establish requirements on who can file bankruptcy petitions. Specifically, a bankruptcy or a suspension of payments petition can now be filed either by a debtor himself, or by one or more creditors. Separate rules apply to certain types of companies. If banks are concerned, only the Bank of Indonesia has the power to file the petition. In the case of a security company, the stock exchange, a guarantee clearing institution, or a central securities depository, the responsibility falls under the Capital Markets Supervisory Agency (Badan Pengawas Pasar Modal). The Ministry of Finance files petitions for insurance or re-insurance companies, pension funds, and state-owned enterprises that operate in the public interest.

Mandala points out, however, that "the new law has yet to obtain legitimacy due to inadequacies in the amendments made in 1998 and some fundamental problems in the judiciary itself" (p. 1). The author mentions that on August 2, 2005, a Judicial Commission was created to address the weaknesses in the judicial system. In fact, the deficiencies of judiciary capacity in Indonesia have been observed by a number of authors writing on the topic. For example, a 2006 Asian Development Bank report titled "Indonesia 2006-2009" states that "the legal framework for insolvency is inadequate and the judiciary's capacity to manage financial sector cases is weak, which hampers resolution of nonperforming assets.... Underfunding of the courts, insufficient capacity and knowledge of financial sector issues, and a lack of transparency of court cases and verdicts have been identified as the main problems" (p. 116).

The World Bank's Doing Business snapshot of 178 countries offers a three-pronged evaluation of the procedure for closing a business, in which it looks at the time required, the cost (as a percentage of the debtor estate) and the recovery rate for creditors (expressed in terms of cents on the dollar). In Indonesia, it takes an average of 5.5 years to close a business compared to the regional average of 2.7 years and the average for member states of the Organization for Economic Cooperation and Development (OECD), which averages 1.3 years. The cost of proceedings averages 18%, whereas the regional average is 23.2%, and the OECD average is 7.5%. Recovery rates are low, averaging 12.6 cents on the dollar in Indonesia. Regionally, the average is 28.1, and in the OECD states the return averages 74.1 cents.