Indonesia's down and dirty coal
fight By Bill Guerin
JAKARTA - In a closely watched, highly
contentious court case, a German bank is in the
dock in an ongoing legal battle against a
Singapore-registered company over ownership of
Indonesian assets that are now partly owned by the
Singaporean government. In a controversial and
secretive deal, Deutsche Bank in 1998 sold off
shares in Indonesia's largest coal mine after
Singapore-based Beckkett Pte Ltd defaulted on a
US$100 million bridging loan at the height of the
1997 Asian financial crisis.
The assets
were bundled and sold off at a bargain basement
price to PT Dianlia Setyamukti (DSM), a company
controlled by Edwin
Soeryadjaya, son
of the ethnic-Chinese tycoon William Soeryadjaya,
the founder of Indonesia's biggest car group,
Astra International. Another well-known tycoon, Benny
Soebianto, was also privy to the deal.
The
storyline is convoluted and features cameos by
some of Indonesia's wealthiest tycoons. Beckkett
previously owned 40% of the shares in Indonesia's
second biggest coal miner, PT Adaro Indonesia
(Adaro) and PT Indonesia Bulk Terminal (IBT), and
is itself owned by three separate entities through
the ASMEC group. The three
principals are Indonesian pulp-and-paper tycoon Sukanto Tanoto,
Hashim Djojohadikusumo and his sister-in-law,
Titiek Prabowo, former president Suharto's second
daughter, with their Tirtamas group, and Graeme
Robertson, an Australian native who took up
Indonesian citizenship.
Put simply,
Beckkett accuses Deutsche Bank of colluding with
Jakarta-based company Dianlia and the management
group to buy the shares in the mine for a mere
$44.2 million in a private deal in February 2002.
With the recent upswing in global commodity
prices, that stake is now estimated to be worth
more than $400 million.
Beckkett is seeking the full restoration of its 40%
stake. The company has also said in court that in
the event neither Deutsche Bank nor Dianlia is
able to procure the restoration of equity
to their original respective percentages, Beckkett
will seek a claim for damages to be assessed
by reference to the present market value of
the shares in their original percentages - or
roughly $400 million.
In
Tuesday's session in Singapore's High Court, Beckkett,
as the plaintiff, said the sale of the pledged
shares by Deutsche Bank to DSM, as the first
and second defendants, was part of a "conspiracy"
between the two companies. Among the team
of lawyers representing Beckkett is one known by the
single name Lucas, who gained notoriety for the
successful bankruptcy application against
Manulife's Indonesian unit.
In
a bizarre 2002
ruling, a Jakarta commercial court declared insurance
firm Manulife Indonesia, a unit of the Canadian
firm Manulife, bankrupt for not paying a 1999
dividend to its former Indonesian partner, which
it bought out after the partner got into trouble
during the economic collapse of 1997 and 1998.
By most internationally recognized
standards, the company was solvent. The same court
in 2004 controversially declared Prudential, one
of Indonesia's top 10 insurance companies,
bankrupt.
So, just as Indonesia struggles
to regain favor among foreign and local investors,
the battle for ownership of a stake in the
country's second biggest coal mine puts the
country's notoriously corrupt legal system back in
the international spotlight. A string of
questionable rulings against foreign investors has
eroded confidence in the ability of Indonesian
courts to enforce contracts or to protect firms'
legal rights, and the lack of legal recourse is
widely viewed as the top obstacle to doing
business in Indonesia.
Although the legal
action will ultimately determine the true
ownership of the shares, the broader significance
of the case is that, for once, the Indonesian
legal system is not in the dock at all. The
problems with Indonesia's judicial system are not
only due to corruption, but also attributable to
flawed laws and inexperienced judges. These issues
are arguably being dealt with for the first time
ever.
The Beckkett/Deutsche Bank case is
not the average tale of pitched legal battles
between indebted Indonesian companies and their
foreign creditors over debt restructuring
agreements and asset disposals. Rather, it is a
rare, probably unique, example of a foreign bank
successfully seizing assets in Indonesia. In a
startling contrast to the many tales after
the 1997 Asian financial crisis of slippery
Indonesian businessmen and corrupt courts fleecing
foreign investors, Deutsche Bank takes the stand
accused of committing fraudulent price-fixing during
an asset-disposal deal.
Depending on the final
verdict, the case could demonstrate that it is
not only local businesses but also foreign ones
that sometimes exploit the many loopholes and
blind spots in Indonesia's underdeveloped,
flightily monitored regulatory regime to win
ill-gotten gains. If found guilty, Deutsche Bank's
reputation in the region would be in tatters, say
observers monitoring the case.
Of course,
the foreign bankers beg to differ. Deutsche Bank
representatives have described Tanoto and
Djojohadikusumo as "cynical Indonesian businessmen
who believed that they would be able to refuse to
repay their loans and yet prevent security from
being enforced". The lack of a credible legal
infrastructure makes seizing assets in Indonesia
almost impossible, foreign investors often carp.
The case, watched closely by a bewildering
array of international creditors, private equity
investors and hedge fund managers, has been dogged
by endless legal battles over document disclosure,
marred by threats of intimidation and harassment,
and complicated by the complex web of the
company's operations and share holding structure.
The roller-coaster saga stretches back as
far as 1991, when PT Asminco Bara Utama (Asminco)
took over management of the Adaro concession. The
corporate structure was complex, with Australia's
Soul Patterson holding 69.3% of New Hope, which
held 40.83% in Adaro. Naturalized Indonesian
Robertson has been closely associated with
developing Indonesia's infrastructure and coal
mining industries, and at the time was a
non-executive director and head of Australia's
Soul Pattinson's coal operations, New Hope Ltd,
which then owned 50% of Adaro.
Asminco,
which owned a 15% stake in Adaro, borrowed $100
million from Deutsche Bank in October 1997, mainly
to buy out the 25% stake in Adaro and 15% in the
related bulk terminal held by Tirtamas. The
guarantor of the loan was Beckkett, which owned
Asminco and pledged all 40% of its shares as
collateral.
In August 1998, at the height
of the regional financial crisis, Asminco, which
had management control of Adaro, was unable to
repay the loan because of all-time-low global coal
prices and a sharply depreciated rupiah. Attempts
to restructure the loan over the next three years
failed, and in February 2002, Deutsche Bank
foreclosed on the loan and sold the pledged shares
to Dianlia. Beckkett claims it was left in the
dark about the deal and says it only found out
about the sale three days after it took place.
The
ownership structure has since changed
dramatically, as has the Adaro concession's
fortunes. In 2003 a consortium of Indonesian
buyers led by Soeryadjaya bought New Hope's 41%
stake in Adaro for $378 million and then the
remaining 11% of Indonesian interests, giving it
majority ownership and control.
Last
June, a consortium of international banks and
strategic investors bought Adaro from Dianlia for
about $950 million, leaving Soeryadjaya and his
cousin TP Rachmat each with about one-third of the
company. The new foreign investors include the
Government of Singapore Investment Corp,
the Kerry Group and the private-equity arms of
Goldman Sachs Group Inc and Citigroup Inc.
Lawyers for Deutsche Bank say they tried
unsuccessfully for two years to restructure the
loan before foreclosing on the shares in Adaro,
but Wolfgang Topp, Deutsche Bank's Asia-Pacific
managing director, talks of the bank "literally
being held to ransom", according to court
documents. He claims in documents submitted to the
court that he was interrogated by Indonesian
police over allegations he was party to "deception
and fraud" over the sale of the Adaro stake.
The police investigation was dropped in
September 2002 because "no criminal acts were
committed", Topp says. And Deutsche Bank insists
that the disposal of the shares in a private sale
was in full accord with the loan contract. But, as
Beckkett's Jakarta lawyer OC Kaligis notes, "If
this were true, why did [Deutsche Bank] get court
decrees prior to the sale?"
This
would seem a telling point on its face. The
South Jakarta District Court, through no fewer than 16
separate decrees issued at the request of the bank
between December 2001 and February 2002, gave a
green light to the sale, court records show. If
the sale transaction was legal as per the loan
contract, then Deutsche Bank never would have
needed court endorsement.
Beckkett, however, successfully appealed to the Jakarta
High Court, which declared the South Jakarta
District Court decrees invalid. Dianlia later asked
the Supreme Court to rule against the High
Court decision, saying the decrees issued by the
District Court could not be appealed, as they were
not case-based verdicts. The Supreme Court has yet
to make a pronouncement.
Deutsche Bank has
strongly contested the case and says it plans to
launch a counterclaim against Beckkett for more
than $110 million in outstanding loan and interest
payments. Certainly Beckkett will have to pay up
if it loses the action, but the company could be
forgiven for taking a stance that all bets were
off once it had launched its case against Deutsche
within weeks of the foreclosure.
It hardly
needs the sophistry of a Singapore counsel to spot
what is so ludicrous about the idea of such a
counterclaim, particularly in view of what Steven
Chong, Beckkett's senior counsel, claims was the
real game. "The plan was to sell at under value
and use the balance amount owing by Asminco to
wind up Beckkett, the guarantor," he said.
Beckkett believes there was a conspiracy
between Adaro's management team and Deutsche Bank
and Dianlia to sell the shares at a fraction of
their real worth to a consortium that included
members of the management team. Chong told the
court that documents provided by Deutsche Bank
clearly showed that the bank and Dianlia acted
together against Beckkett's interests.
In
apparent anticipation of legal wrangles over the
deal, the sale agreement reportedly shows that
Dianlia agreed to fund all legal costs incurred by
Deutsche in enforcing the action against Beckkett
and also agreed to put $1.5 million into the kitty
for the enforcement proceedings. This adds weight
to Beckkett's claim that the whole deal was a fix
between the bank and the buyer of the undervalued
assets.
Looking the other way when it
comes to sloppy disclosure may have worked in the
Jakarta jurisdiction, but stalling tactics are
unlikely to impress the Honorable Judge Kan Ting
Chiu, court observers say. State-owned Bank
Mandiri, Indonesia's biggest bank, is said to have
given Dianlia an interest-free loan of $40
million. The Singapore Court of Appeal turned down
a Deutsche Bank request to prevent one telling
document from being disclosed - which revealed
that the $40 million loan from Adaro to Dianlia
was a "non-commercial" arrangement.
Court observers say Deutsche Bank presumably
wanted the document suppressed because it pointed to
the obvious consideration that Adaro, then in
the hands of the management team, had handed
over enough cash to Dianlia to buy the
shares. According to the court transcript, counsel
for Beckkett pointed out to the Court of Appeal
that the documents revealed that most of the
funding for DSM's (PT Dianlia) $46 million purchase of
the shares from Deutsche Bank appeared to have
come from a $40 million loan obtained by Adaro
from Bank Mandiri and was later on-lent to DSM as
an interest-free loan.
For its part, Bank
Madiri is riddled with bad loans from politically
powerful debtors on its hands, and there are a
number of ongoing investigations which threaten to
erode the bank's already suspect reputation.
The Indonesian media have intensively
investigated Tanoto coincident with the action in
Singapore, where he currently lives. At least
three investigative pieces have focused on the
tycoon's ownership of Unibank, whose operations
were suspended by the central bank (Bank
Indonesia) in October 2001.
The
bank's assets of Rp4.4 trillion ($475 million) were
frozen after it failed to pay trillions of rupiah
in obligations to Bank Indonesia. Yet months
before the bank was closed down, Tanoto and his
companies held less than 5% of the shares in
Unibank. Sources close to the case say the media
coverage of the issue in Indonesia is no
coincidence.
Neither is it a coincidence
that several Indonesian reporters are on the case,
as it were, in Singapore, with expenses paid by at
least one public relations group linked to the
plaintiff. Deutsche Bank has also brought up the
allegedly poor credit history of his companies in
an affidavit to the court. The trial is expected
to run for three weeks and a verdict is not
expected until June.
Regardless of the
final verdict, would-be investors will once again
note the risk of becoming embroiled in litigation
over Indonesian assets and just what can go wrong
with investing in the country.
If Beckkett
loses the action, the company is expected to move
the legal battlefield back to Jakarta, where it
could initiate action against Deutsche Bank for
breaches of Indonesian law. Deutsche Bank, says
Beckkett, breached the Indonesian Civil Code, when
it executed its rights in Indonesia and sold them
to Dianlia.
If the court rules against it,
the German bank will be seen as the architect of
its own demise. Beckkett is asking for the full
restoration of its 40% stake, but if it proves
impossible to unwind the complicated transactions
that followed the foreclosure, it will seek
damages equivalent to the present market value of
the shares in their original percentages.
Shareholders will likely be up in arms should the
sale be canceled and the shares returned, or if
damages of about $400 million are awarded to the
original shareholders.
More important,
perhaps, a guilty verdict would be a major blow to
Deutsche Bank's reputation and credibility in the
region. International banks will get the message
that although they lent vast sums of money to
companies in a country where the legal system has
consistently been found wanting, they will find it
is not so easy to seize assets without the full
backing of the law, even in Indonesia.
Bill Guerin, a Jakarta
correspondent for Asia Times Online since 2000,
has worked in Indonesia for 20 years as a
journalist. He has been published by the BBC on
East Timor and specializes in business/economic
and political analysis in Indonesia.
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