Does an insurance company with 4,000 employees, 400,000 policy-holders, more than $350 million in assets under administration, 73 offices in 33 cities and a profit of $10 million in its most recent fiscal year seem bankrupt to you? An Indonesian bankruptcy court recently decided that, notwithstanding all of this, the company (which is Indonesia's fourth-largest insurer) should be consigned to the financial boneyard.

Either Indonesia has exceptionally strict requirements for solvency, or there may be a problem with Indonesia's insolvency system.

All signs point to a problem with the system. The involuntary bankruptcy proceedings (think chapter 7) were commenced by a former minority shareholder over an alleged unpaid $2.6 million dividend. One of the strange aspects of the case was that this minority shareholder had gone bankrupt itself and the shares on which it claimed the dividend had been sold in a government-supervised sale. The purchaser was the majority owner of the company, a Canadian insurer, which steadfastly denied that the company had ever declared a dividend. As the majority shareholder, it was probably in a position to know.

It didn't make much difference to the Indonesian bankruptcy court. The court declared the insurance company bankrupt and appointed a liquidator. Notwithstanding an immediate appeal and high-level discussions between the governments of Canada and Indonesia, the liquidator stayed in place and aggressively pursued shutting down the operations of the Indonesian unit. According to published reports from Jakarta, the liquidator took immediate measures to shut down the operations of the Indonesian unit, requested Indonesia's Central Bank to freeze its assets and threatened employees with arrest if they turned up for work.

The Canadian parent immediately went public with assertions that the court had been motivated by corrupt considerations although it was not able to offer any concrete evidence of bribery or fraud. However, the parent company produced a videotape of a clandestine meeting in which a local businessman is apparently seen to be offering to "solve" issues relating to the Indonesian unit for a particular and quite large sum of money.

The CEO of the Canadian parent used strong terms to describe the situtation: "What you have is a public mugging. People are stealing your property and there's nothing you can do."

Indonesia has been the recipient of billions of dollars of financial assistance over the years, but the current case is perhaps the most tangible evidence that all the money in the world won't necessarily produce a fair and efficient judicial system. All of us probably take too much for granted the existence of a fair, efficient and incorruptible court system, but the Indonesian experience shows that not all countries are so fortunate. Even if the current case turns out to be an aberration in the Indonesian judicial system, it will give serious pause to companies that invest or do business in Indonesia. For companies that are already in that situation, this case is a wake up call. For companies who are contemplating doing business or investing in Indonesia, it's a warning to be very careful in structuring business and investment arrangements in that country.

As this article was written, efforts to appeal the bankruptcy were continuing, and the Indonesian Supreme Court had launched an investigation into the corruption charges. High-level contacts between the governments of Canada and Indonesia are continuing. The three judges who delivered the bankruptcy ruling have been temporarily suspended from hearing further cases, and the liquidator, presumably under pressure from the Indonesian authorities, has permitted the Indonesian unit to open its doors again, but this story is far from over.

Author's Note: At press time, the Indonesian court decision had been reversed. Journal readers can follow the Indonesian accounts of this story in the online version of the Jakarta Post at www.thejakartapost.com and the Canadian parent's view of the matter at www.manulife.com (select "Indonesia Update").

Footnotes

¹ Eric Kupka, my partner at Cassels Brock & Blackwell LLP, contributed his valuable assistance into researching and verifying the facts in this article. Return to article