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Constitutional Court Decision concerning the Enforcement of Fiducia Security

By : Agung Santoso

2020-03-10

The Constitutional Court of the Republic of Indonesia has issued Decision No. 18/PUU-XVII/2019 on 6 January 2020 (the “Court Decision”) as a final verdict towards judicial review over certain provisions in Law No. 42 Year 1999 concerning Fiducia Security(the “Fiducia Law”). In brief, the verdicts in this Court Decision are as follows:

  • Article 15 paragraph (2) of the Fiducia Law is unconstitutionalif the terms “executional power” and “as if a final and bindingcourt decision” thereunder are not interpreted the followingway:“for fiducia object whereby there is no consensus regardingthe occurrence of default and that the debtor (fiduciagrantor) is reluctant to voluntarily surrender the possessionof the fiducia object, THEN all the legal mechanism andprocedure to implement the execution under the fiduciacertificate must be made and have the same enforceabilitywith the implementation of execution of a final and bindingcourt decision”;
  • Article 15 paragraph (3) of the Fiducia Law is unconstitutionalif the term “default” thereunder is not interpreted thefollowing way:

“the occurrence of default shall not be determined unilaterally by the creditor, but based on consensus between the creditor and debtor OR based on final and binding legal proceeding determining the occurrence of default”

 

The above provisions are the underlying for what we commonly known as ‘parate executie’ OR the right to execute the secured object by the creditor’s own power (without the assistance of thecourt).

Pursuant to Article 29 of Fiducia Law, a creditor’s remedies in anevent of default with respect to fiduciary assigned assets are limited to i.e.:

  • Having the assets sold at a public auction (fiat executie),
  • Selling the fiduciary assigned assets at apublic auction by its own power (parate executie) or
  • A private sale, provided that the grantor of the security hasconsented to such private sale one month after the announcement of such proposed sale in two daily newspapers.

I. Consideration behind the Court Decision

While we are not trying to make exhaustive academical discussion on the reasoning in this controversial Court Decision, we would like to note the gist of the court’s reasoning lies in the argument that the implementation of ‘parate executie’ will only (one-sidedly) protect the interest of the creditor while FAILS to also protect the interest of the debtor, and therefore denies the debtor’s constitutional right for legal certainty.

II. Impact to the Enforcement of Fiducia Security

In a nutshell, the Court Decision will impact the ability of the creditor to conduct parate executie over the secured object,whereby the foregoing can only be performed IF (regardless how ill-considered it may sound, especially for legal practitioners at large):

  • There is a consensus on the occurrence of default; and
  • The fiducia grantor is willing to voluntarily surrender the possession of the fiducia object (for execution).

Nevertheless, we choose to – still – use the word ‘impact’ insteadof ‘adversely impact’ based on this matrix of comparisons:

Requriements Before The Decision After The Decision
Consensus on default
  • At any time during the parate executie process, the debtor can submit a claim(typically against the creditor & the relevant auction house facilitating the enforcement) to challenge the execution process,and one of the most common arguments used in such challenge (among many others) is the dispute on the‘occurrence of default’;
  • Usually, the auction house will then wait until the claim is settled (final) before re-commencing the auction process.
  • If there is no consensus on the‘occurrence of default’, then the creditor must first go to the court to determine whether or not a default has occurred;
  • Only after the obtainment of the above court’s decision/stipulation, then the creditor can execute its rights;

Note:

the Court Decision does not specify (explicitly/clearly) whether this consent must be obtained after or before the dispute.  We can always put an upfront‘consensus on default’language in the Deed of Fiducia. This, however, still subject to test in actual court proceeding.

Voluntary gesture from the fiducia grantor against the execution
  • Fiducia security by nature is a security byway of trust (where by the possession of the secured object remains with the fiducia grantor), so logically in order to enforce (and to sell in auction) – the creditor will have to gain possession over the fiducia object, either voluntarily OR by force;
  • The downside in parate executie (read again, the right to execute the secured object by the creditor’s own power -without the assistance of the court) is exactly that we do no task for court’s assistance in foreclosing the foreclosed object by force (using court’s bailiff, police, etc.);
  • The corollary impact is that, if the fiducia grantor is reluctant to voluntarily surrender the possession of the fiducia object, then the creditor must go to the court first (e.g.fiat executie).
  • If the fiducia grantor is reluctant to voluntarily surrender the possession of the fiducia object, then the creditor must go to the court first(e.g. fiat executie);
  • Only after the obtainment of the above court’s decision/stipulation, then the creditor can execute its rights.
Practical requirement
  • In most cases (if no tall), when the creditor would like to enforce its parate executie right, the auction houses always reluctant to facilitate the auction without prior court’s stipulation (fiat executie) based on their internal policy or SOP to avoid future claim or challenge by the fiducia grantor (where there is a high probability that they will be involved as a plaintiff or at least co-plaintiff);
  • The above is also the fact, not only for fiducia security, but on the enforcement of hypothec and land mortgage.
  • If there is no consensus and voluntary gesture from the fiducia grantor, then the creditor must go to the court first (e.g.fiat executie);
  • Only after the obtainment of the above court’s decision/stipulation, then the creditor can execute its rights.
Article 30 of fiducia Law which obliges a debtor to handover the fiducia object to the creditor in an enforcement scenario
  • In reality, unilateral repossession in enforcement only happens if the debtor/fiducia grant or agrees to surrender the secured object voluntarily. Otherwise a forced repossession by the creditor itself (without a court’s order, e.g. fiat executie) is unlawful.
  • the Court Decision did not consider the relevance of Article 30 in its verdict.

 

Using the foregoing matrix, we simply try to draw the creditors’attention on the fact that before OR after the Court Decision, the latent hurdles and challenges that the creditors may find in enforcing a fiducia security ARE ALREADY THERE. The only different is now the auction houses can refuse to facilitate parate executie process based on the law (after the Court Decision)rather than reluctantly referring to its internal policy or SOP(before the Court Decision).

 

III. Conclusion

While the conclusion may not be as fearful as one may suggest after reading the Court Decision, and that we are in the view that the Court Decision shall not (at least in practical level) ‘adversely impact’ the creditors’ rights in enforcing fiducia security;

Academically, we still need to highlight that the court’s reasoning to embrace an equilibrium balance in protecting the interest of both the debtor and the creditor is not entirely correct (if not overkill) because:

  • The position of the creditors (after draw down) is always weaker. After draw down, the creditor becomes the beggar(with nothing to force the debtor to repay the loan, other than their rights to enforce the security – which in many cases is not that simple nor efficient because the encumbered goods are still in the possession of the debtor/fiducia grantor), and it is the exact philosophy why the law grants preference right(as well as simple and efficient enforcement method) to the creditor in terms of security enforcement;
  • Instead of being an epitome for legal certainty, the Court Decision is an antithesis to the current Jokowi regime’s vision (and attempt) to make ease in doing business and to boostrapped development in business sectors at large (by increasing the cost of financing for the financiers – due to the higher risks and additional steps in enforcement).

 

This summary only highlights certain issues under the Court Decision and may not be complete and comprehensive.Please visit our website at www.aymp.law for more information about our firm. For more specific inquiry about this matter or other emerging legal issues in Indonesia, please contact the following lawyers:

- M. Arie Armand (arie@aymp.law)

- Agung Santoso (agung@aymp.law)

- Ketty Chandra (ketty@aymp.law)

 

www.aymp.law


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