Who's bankrupt? Foreign firm or Jakarta
court? By Bill Guerin
JAKARTA - A sense of deja vu surrounded
the astonishing news that an Indonesian court has once
more declared a major foreign enterprise bankrupt,
despite its healthy financial state. The case, involving
largely British-owned PT Prudential Life Insurance
(Prudential), is yet another major public relations
disaster for Jakarta and could thwart government
efforts to woo foreign investment and boost growth.
The operations of PT Prudential Life Insurance
(Prudential) were brought to a halt last Friday after
the Central Jakarta commercial court declared it
bankrupt on the strength of a petition filed by
Malaysian Lee Boon Siong on April 7. Siong had cited the
failure of the company to pay him out after his
agent-recruiting and agent-training contract was
terminated in January for undisclosed reasons. In the
petition, he claimed he was owed Rp366.8 billion
(US$42.5 million) in unpaid bonuses and travel
allowances and for the loss of future earnings.
The surprising verdict drew waves of censure
from various groups and sparked a strong protest from
the British Embassy in Jakarta. The embassy said on
Monday that it was in "urgent discussions" with the
company about action with the Indonesian authorities.
"We are deeply concerned about the case, which has
strong similarities with the Manulife case," the
statement said.
This was a reference to a
similar ruling delivered by the same court in 2002 when
it handed down a bankruptcy verdict against PT Asuransi
Jiwa Manulife Indonesia, a subsidiary of Canadian
insurance giant Manulife, in a legal battle against its
former local shareholder. Like Prudential, Manulife
Indonesia was solvent, but the judges ruled Manulife
Indonesia bankrupt for not paying a 1999 dividend. The
company shut down operations for six days. The Supreme
Court eventually overturned the ruling, but not until it
was faced with strong intervention from the Canadian
government.
Manulife alleged that the decision
was influenced by bribery. Judges in the case denied the
accusations, but after several months the minister of
justice suspended the three judges involved on suspicion
of bribe taking.
Prudential President Charlie E
Oropeza, though he did not allege bribery, said the
company also would appeal to the Supreme Court over the
commercial court's decision. "We are surprised by the
court's decision...The petition, which is from a
disgruntled former consultant, is wholly without merit,"
said Oropeza.
Many others agree, as hundreds of
company staff and self-employed insurance agents staged
a peaceful protest on Monday outside Prudential's main
office in a show of support for the company. The
protesters signed a petition demanding that the
government look into the matter. The ironic twist is
that these were Indonesian workers protesting on behalf
of a foreign company: Prudential is 94.5 percent owned
by UK-based Prudential Plc, with the few remaining
shares held by a local company, PT Sasana Dwi Paramitra.
Not in line with the law Both the
Manulife and Prudential verdicts, against bona fide,
large, healthy enterprises, are not in any way in line
with the intent of Bankruptcy Law No 4/1998, which is
directed at business debtors that have no intention of
paying their debts. The law came into force in 1998
after pressure from the International Monetary Fund
(IMF) to set up a legal way of forcing local debtors to
repay their debts to foreign creditors.
A
commercial court was formed, and the judges of the new
court were supposed to have undergone rigorous selection
and training in order to make them immune to corruption
and also to give them expertise in bankruptcy matters,
which were to be the exclusive focus of the commercial
court.
The logic of the law is questionable, to
say the least, given that a company that does not repay
even a single debt can be declared bankrupt by the
commercial court regardless of whether it is solvent or
not.
As Siong's lawyers put it when arguing that
the case was a contractual dispute and that the move to
force the unit's bankruptcy was perfectly legal under
Indonesian law: "Even if you are rich, even if you are
profitable, if you don't pay your debts, you can be
declared bankrupt."
One of the many oddities
about this particular case is that the current
bankruptcy law requires more than one creditor for an
action to be successful. However, there has been no
information released on any creditor other than the
Malaysian consultant.
Though Prudential has
denied that its operations will be affected by the
verdict, there is some concern about security. A company
representative, Nini Sumohandoyo, told the press on
Monday that the firm had shut down "to avoid unwanted
things from happening to us".
Twenty-four hours
later, Yuhelson, the receiver appointed by the court,
suspended Sumohandoyo and three others and warned that
if the directors did not hand over the liquid assets of
the company within two days, they would be deemed in
breach of the court's instructions. The matter would
then be reported to the police.
Prudential's
lawyers hit back with demands that the court replace
Yuhelson, claiming that he used to work as a lawyer at
Lucas SH & Partners, which is representing Siong.
The lawyers said that prior to any verdict issued by the
Supreme Court, a receiver will run Prudential and the
company's assets will be temporarily frozen. If the
Supreme Court were to uphold the bankruptcy ruling,
"Prudential will be liquidated and its assets
distributed to Prudential's creditors, who include
policyholders".
Healthy as healthy can
be Last year, Prudential Life's premium income
more than doubled to reach Rp1 trillion ($117 million)
from Rp477 billion in 2002. Its risk-based capital (RBC)
rate, at 255 percent, was way above the minimum
requirement of 100 percent. Another parameter used by
the Ministry of Finance to determine the financial
standing of insurance companies is their liquidity
rates. Prudential Life's was a healthy 110 percent in
2003.
Since last Friday, on top of recent
developments regarding the bankruptcy law, the director
general of financial institutions at the Ministry of
Finance, Darmin Nasution, was the first to engage in
damage limitations.
His office oversees the
insurance industry, and Nasution promised on Monday to
lobby the House of Representatives to amend the "flawed"
law immediately. He pointed out that the ministry had
proposed an amendment to the law last May under which
the ministry would have the final say before dissolving
an insurance company.
Nasution said the case had
created uncertainty in the country's business climate,
and told reporters it "should serve as a wake-up call to
speed up the revision of the bankruptcy law".
"This case will indeed affect the investment
climate," echoed Coordinating Minister for Economic
Affairs Dorodjatun Kuntoro-Jakti on Tuesday.
There are some 80,000 life-insurance agents
nationwide, and by coincidence, the Indonesian Life
Insurance Association (AAJI) chose this week to confirm
that a policy aimed at standardizing the quality of all
life-insurance agents in the country had been approved
by the government. All life-insurance agents across the
country will henceforth have to register with the
association for training and certification. The
Singapore College of Insurance helped with designing a
certification program.
Siong was one of several
Malaysian and Singaporean entrepreneurs who have seized
the initiative to build sales forces for Prudential in
Indonesia, where the company has no direct sales staff.
There are fortunes to be made. Business written in
Indonesia and the rest of Asia for Prudential is said to
be twice as profitable as that written in the United
Kingdom and six times as profitable as that previously
written through the now-disbanded UK direct sales force.
Indonesia also has the lowest ratio of
policyholders to population, less than 6 percent, and
thus the greatest potential, among the countries in the
region. The ratio is above 12 percent in Singapore,
Thailand and Malaysia.
Insurance comes to
Indonesia Prudential's expansion in Indonesia was
motivated by a 2001 government regulation that exempted
investors in the sector from the minimum capital
requirement of Rp100 billion ($10 million at the time).
This incentive was meant to facilitate the take-over of
struggling insurance companies, part of efforts to stem
the rapid decline of the sector. Although new investors
were allowed to invest less than Rp100 billion, they
were expected to improve the performance of the ailing
companies.
Then, in June 2001, Prudential
acquired the US-based Allstate Corp's majority holdings
in Pt Asuransi Jiwa Allstate in Indonesia and Allstate
Life Insurance Co in the Philippines for $7.5 million, a
deal that gave the group more than 14,000 new
policyholders, 4,400 agents and 230 staff in both
countries.
Prudential Asia Corp (PAC) currently
employs more than 6,000 staff and serves some 5 million
customers, making it the leading European life insurer
in Asia, with operations in 12 countries or territories
- China, Hong Kong, India, Japan, South Korea, Malaysia,
the Philippines, Singapore, Taiwan, Vietnam, Thailand
and Indonesia.
Mark Norbom, the director of
Prudential's Asian businesses, was appointed this
January and awarded a salary package worth up to $5
million. He replaced Mark Tucker, who had earned even
more than Prudential chief executive Jonathan Bloomer
when he was running the Asian side.
"All the
ingredients were there: an increasing population,
emerging middle class and a shift in pension provision
away from the state," Tucker said when taking over.
In addition, analysts expect PAC to account for
50 percent of new business premiums by 2005, compared
with 11 percent in 1999.
The Indonesian arm of
PAC, first established in 1995, now has upwards of 8,000
self-employed sales personnel and 230 permanent staff.
It has six main sales offices, 61 agency offices and 14
financial advice centers nationwide.
Thus, wags
might argue that it is Indonesia's notoriously inept,
delay-ridden and corrupt court process itself that is
bankrupt, not Prudential. As Nasution pointed out, with
exquisite understatement: "The verdict was obviously
decided using legalistic technicalities and terms that
don't equate with reality. Prudential is financially
fit, and by logic it does not deserve to be dissolved."
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