The Indonesian Constitutional Court (the “Constitutional Court”) recently rendered a controversial binding decision, namely decision No. 18/PUU-XVII/2019 (the “Decision”), following the judicial review of several provisions under Law No. 42 of 1999 concerning Fiducia Security (the “Fiducia Law”) with respect to the statutory right to summary execution or self-executory righs vested in creditors (i.e. the fiducia security grantees) over fiducia security.

The specific provisions of the Fiducia Law subjected to review by the Constitutional Court are Article 15 (2) of the Fiducia Law, which grants an executory title to creditors through a fiduciary certificate (i.e., having the same degree of executory title as that of a final and binding court decision) and Article 15 (3) of the Fiducia Law, which allows creditors to directly sell the object of the fiducia security (the “Security Property”) under the executory title so granted without a previous judicial order in the event of the debtors’ default.

Under the Decision, the Constitutional Court has found in favour of the petitioner, and therefore the creditor’s right to summary execution against the Security Property will be significantly impaired.

Dwindling Meaning of Executory Title Granted under Fiducia Certificate

Essentially, the Fiducia Law grants a rightto summary execution (recht van parate executie) to a creditor, allowing the creditor to immediately sell the Security Property without obtaining a prior court order. This right is evidenced by the fiducia certificate issued in favour of the fiducia security grantee as provided for in Article 15 (2) of the Fiducia Law, which explicitly stipulates that the fiducia certificate bears an executory title equivalent to  a final and binding court decision.

In the Decision, the Constitutional Court finds that the right to summary execution vested in the fiducia security grantee under Article 15 (2) of the Fiducia Law is somewhat partial towards the creditor as the fiducia security grantee, whereby the debtor as the fiducia security grantor is deprived of either the ability or the opportunity to defend itself against the “one-way” determination of its default by the creditor. On this basis, to ensure ‘balanced’ protection for the debtor and the creditor, the Constitutional Court gave a bit far-stretched interpretation to Article 15 (2), holding that the executory title contemplated in the fiducia certificate is enforceable and valid only to the extent that : (i) there is a mutual agreement between the fiducia security grantor and fiducia security grantee on the occurrence of default; and (ii) the fiducia security grantor willingly surrenders the Security Property to the fiducia security grantee. Otherwise, the executory title granted under the fiducia certificate is not directly enforceable, and consequently the enforcement of the fiducia security should follow the ordinary security enforcement process (i.e. through the Indonesian civil court proceedings).

In line with the Constitutional Court’s limitative constitutional interpretation of the applicability of Article 15 (2) as elaborated above, the Constitutional Court also made a limitative constitutional interpretation of Article 15 (3), holding that either a mutual agreement between the creditor and the debtor or the commencement of legal proceedings (upaya hukum) is required to determine the occurrence of the debtor’s default.

Analysis

The Decision can be analyzed from two different perspectives: theoretical and practical.

From the theoretical point of view, if we take a closer look at Articles 33 and 34 (1) of the Fiducia Law, it can be reasonably inferred that the principle of impartiality or equality has been addressed by the Fiducia Law, which provides due protection for the fiducia security grantor by prohibiting the fiducia security grantee from repossessing and owning the Security Property and by requiring the fiducia security grantee to return any excess amount of the enforcement proceeds to the debtor following settlement of the secured obligation to the fiducia security grantee. Further, the Constitutional Court’s ruling that the executory title granted under the fiducia certificate is enforceable and valid only to the extent that the debtor willingly surrenders the Security Property seems to conflict with the general provision set by Article 30 of the Fiducia Law, which expressly requires the fiducia security grantor to surrender the Security Property for the purpose of enforcement of the Security Property. Given the above, it seems that Constitutional Court has failed to review or put its constitutional interpretation on the provisions of Article 30, Article 33 and Article 34 (1) of the Fiducia Law.

From the practical point of view, the constitutional interpretation by the Constitutional Court also raises some practical issues, including: (1)  it may not be practically sensible to expect a debtor to admit its default while knowing that it has the opportunity to postpone and prolong the enforcement process through court proceedings and (2) the Indonesian courts do not seem to have sufficient resources to handle numerous “enforcement disputes” in a fast and efficient manner so as to ensure “balanced” protection for the debtor’s and creditor’s interests; hence, the enforcement of the fiducia security by creditors may become even more difficult, if not almost impossible.

The Decision is therefore considered by many practitioners as a major setback to the protection of the creditor’s right to directly enforce the fiducia security, as originally intended by Articles 15 (2) and 15 (3) of the Fiducia Law. The Decision seems to have disregarded such objective. Consequently, many anticipate a possibility that in the future a bad faith debtor will invoke the Decision as the basis for frustrating and prolonging the enforcement of fiducia security or even any other form of security interests with the parate executie (e.g. land mortgage) recognized under the Indonesian law. Given that, it is very important for creditors to ensure that security documents are carefully drafted with due regard for the Constitutional Court’s interpretation under the Decision, but at the same time ensuring the inclusion of protective provisions to effectively protect their interests.

Although we can understand the Constitutional Court’s concern for preserving due impartiality in the fiducia security enforcement process (among others, to prevent deceitful creditors from misusing and abusing their right to summary execution against the debtors), we do believe that the Constitutional Court at the same time should have considered protecting the interests of the creditor, who in a typical financing transaction is generally exposed to greater risks than the debtor, especially following the creditor’s disbursement of the loan to the debtor while not having the factual control over the debtor’s use of the proceeds nor any certainty of the debtor’s willingness or ability to make due and punctual repayments to the creditor.

For further information on the above, please contact Hans Adiputra Kurniawan or Raditya Pratamandika