How-to understand security and loan recovery in Indonesia

The activity of borrowing money has been carried out for a long time in people’s lives who have known money as a means of payment. Most of the lending and borrowing activities related to the requirements for the submission of loan guarantees are carried out by individuals and various business entities. Business entities generally expressly require the borrower to submit an item (object) as an object of guarantee for the debt of the borrower. In receiving credit guarantees, the provisions of other laws and regulations that are included in the scope of the guarantee law regulate, among other things, the legal principles of guarantees, the nature and form of debt guarantees.

Governing law and regulation 

• Indonesian Civil Code (KUHPer)
• Law No. 4/1996 concerning Security Over Lands and Buildings
• Law No. 42/1999 concerning Fiduciary Security
• Law No. 17/2008 concerning Shipping as amended by Law No. 11/2020 on Job Creation
• Law No. 1/2009 concerning Aviation
• Minister of Transportation Regulation (Permenhub) No. 52/2018 concerning Civil Aviation Safety Regulations

Types of security

In general, in the KUHPer there are general security [Articles 1131 and 1132 of the KUHPer] and specific security [Article 1132 (b) and Article 1133 of the KUHPer]. What distinguishes the two is whether or not the guaranteed assets can be executed if the debtor is unable to repay the debt. Specific security are divided into two, namely Real Security Right (in rem) consisting of mortgage, lien, fiduciary, and mortgage rights and Personal Security Right (in personam) consisting of corporate and personal security. Banks prefer to get Real Security Right because in the event that the debtor is declared bankrupt, the assets are not included in the bankruptcy but can be executed by the creditor who is guaranteed in rem.

Security Rights Over Lands and Buildings (Hak Tanggungan) 

Security Rights Over Lands and Buildings is regulated in Law No. 4/1996. There are some required document for Security Rights Over Lands and Buildings:

• Deed of Granting of Security Rights
• Certificate of Security Rights, which shall be issued by the National Land Agency (BPN)

The ranking system based on the registration date in the BPN: 

• Rights over the land 
• Including or not including buildings or other immovable properties attached to the land 

Procedures for perfection of security rights over lands and buildings are as follows: 

1. The owner of the rights over land and buildings, or its designated proxy by virtue of Power of Attorney to Grant Security Rights (Surat Kuasa Membebankan Hak Tanggungan – “SKMHT”) (if any) and the Hak Tanggungan grantee shall execute the Deed of Granting of Security Rights (Akta Pembebanan Hak Tanggungan -“APHT”) before the Land Deed Official (Pejabat Pembuat Akta Tanah – “PPAT”) where the land located; 
2. No later than 7 (seven) days as of the execution of APHT, the PPAT shall process APHT to the Land Office where such land is located, who will register it at the Land Registration Book (Buku Tanah), maintained and administered by the relevant Land Office; 
3. Registration of Hak Tanggungan the Land Registration Book (Buku Tanah) will be evidenced by the issuance of a Certificate of Hak Tanggugan (Sertipikat Hak Tanggungan/SHT) by the relevant Land Office. 

The enforcement of security rights over lands and buildings can be in the form of:

1. Parate Executie – instant/direct execution by public auction without court order. 
2. Fiat Executie – execution with court order. 
3. Private Sale – the sale of secured objects by the security grantee acting as attorney of security grantor under an irrevocable power of attorney (POA).

Fiduciary Security

Based on Law No. 42/1999 fiduciary security can be in the form of movable goods (tangible or intangible) and immovable goods (other than Security Rights Over Lands and Buildings object). In a fiduciary security, there is a transfer of ownership of the goods and the ownership of the goods remains with the owner. There are some required document for fiduciary security which are:

• Deed of Granting of Fiduciary Security (Akta Pemberian Jaminan Fidusia) 
• Certificate of Fiduciary Security (Sertifikat Jaminan Fidusia) which shall be issued by the Fiduciary Registration Office

Procedures for perfection of fiduciary security: 

1. A fiduciary security is created by virtue of a written agreement between the parties in the form of notarial deed. The deed must be written in Indonesian language and stipulating at least the identity of the fiduciary transferor and fiduciary transferee, the principal/main agreement being secured, description of goods being object of the fiduciary security, value of the loans being guaranteed and the value of the goods itself. 
2. Law No. 42/1999 expressly states that fiduciary security will only be created on the date of its registration in the Fiduciary Registry. 
3. The evidence for the creditor which is the fiduciary transferee shall be the Fiduciary Security Certificate, issued on the same date as of receipt of the fiduciary security application. Thus, the constitutive legal act in creating fiduciary security is the registration in the Fiduciary Registry maintained at Fiduciary Security Office, not the execution of Deed of Fiduciary Security before a notary public. 
4. Pursuant to Article 23 paragraph 2 of Law No. 42/1999, a fiduciary security grantor is prohibited to transfer, pledge, or lease the fiduciary security object to other party unless the object is in form of inventory, or if prior written consent from fiduciary grantee for such transfer, pledge or lease have been obtained. Please also see Article 20 of Law No. 42/1999. 
5. Re-fiduciary is also prohibited (Article 17 of Law No. 42/1999), however fiduciary security may be given to more than one fiduciary grantee or their proxy or representative (Article 8 of Law No. 42/1999).

The enforcement of Fiduciary Security can be in the form of:

1. Parate Executie – instant/direct execution by public auction without court order. 
2. Fiat Executie – execution with court order. 
3. Private Sale – the sale of secured objects by the security grantee acting as attorney of security grantor under an irrevocable power of attorney (POA). 

The issuance of Constitutional Court (MK) of the Republic of Indonesia Decision No. 18/PUU-XVII/2019 on January 6, 2020 (“Court Decision”) impacting the ability of creditor to conduct ‘parate executie’ over the secured object, as it can only be performed in the event of: a. There is a consensus on the occurrence of default; and b. The fiduciary grantor is willing to voluntarily surrender the possession of the fiducia object (for execution). In conclusion, before the issuance of a Court Decision, the Creditor shall obtain court order to enforce secured object in the event the Debtor disagrees with the “occurrence of default” and unwilling to “voluntarily deliver” the secured object. This is due to the fact that the auction houses will not re-commencing enforcement process of such secured objects if the claim has not been settled yet. The difference is that, before the issuance of Court Decision, it is more of a customary for auction houses to not re-commencing the enforcement process (typically based on their standard operational procedure). While in post-Court Decision circumstances, the action to halt enforcement process is based on the Court Decision.

Pledge

Based on Article 1150 of KUHPer pledge is a right obtained by a creditor in movable assets, which has been provided to him by the debtor or his representative, to secure a debt, and which entitles the creditor priority over the other creditors with regard to the settlement of debt; with the exception of the costs incurred in the sale of assets and the cost incurred after the pledge, for the maintenance of asset, which shall be preceded. Pledge of intangible movable goods (including shares and rights over deposits) will be perfected by: 

1. Notification of the pledge of such properties to the party (other than the pledgor) against whom the rights under the pledge will be enforced (Relevant Party); 
2. As to the pledge of shares, the pledge shall be registered in the shareholders register of the company issuing the pledged shares as required by Indonesian Company Law.

The enforcement of Pledge can be in the form of:

1. Parate Executie – instant/direct execution by public auction without court order.
2. Fiat Executie – execution with court order.
3. Private Sale – the sale of secured objects by the security grantee acting as attorney of security grantor under an irrevocable power of attorney (POA).

Hypothec

It is regulated in Article 1162-1232 of KUHPer. The objects of Hypothec are Vessel more than 20m³ as regulated in Law No. 17/2008 and Airplane as regulated in Law No. 1/2009 and Permenhub No. 52/2018 Part 47 regarding Aircraft Registration. The ranking system of hypothec is based on the registration date in the List of Indonesian Vessel Registry. For Vessel Hypothec someone just need to make a deed of Hypothec (Akta Hipotik) and registration to the Indonesian Vessel Register (Buku Daftar Kapal), both are conducted by Registrar and Registrar of Transfer of Ship Names or Pejabat Pendaftar dan Pencatat Balik Nama Kapal (Syah Bandar) in the place where such vessel is registered. For Airplane Hypothec someone has to make a deed of Hypothec (Akta Hipotik) and registration to Directorate General of Air Transportation.

The enforcement of Hypothec can be in the form of:

1. Parate Executie – instant/direct execution by public auction without court order.
2. Fiat Executie – execution with court order.
3. Private Sale – the sale of secured objects by the security grantee acting as attorney of security grantor under an irrevocable power of attorney (POA).

Guarantee

Based on Article 1820 of KUHPer Guarantee is an agreement, by which a third party, for the benefit of the creditor, binds himself to fulfill the obligation of the debtor in case the debtor does not fulfill its own obligation. The guarantor cannot bind itself or be bound by obligations exceeding the debtor’s obligation. Moreover, the law restricts/limits the rights of a creditor against a guarantor by providing specific rights or privileges to protect a guarantor, among others: 

• The right to demand. The creditor should first collect the due and payable debt from the debtor, so the guarantor will only have to pay the shortfall (Article 1831 of KUHPer). 
• The right to request from court. If there are more than one guarantor, the creditor must first divide his claim against the guarantors pro rata amongst them, so the guarantors are not severally liable for the debtor’s debt as a whole (Article 1837 of KUHPer).

A guarantee is a security right in personam, which confers the creditor an unspecified security right to all of the guarantor’s assets. It has no preferences against those assets unless supported by another security right (security right in rem, e.g., land security right, pledge) creating preference with respect to particular property of the guarantor. Enforcement of guarantee is identical with enforcement of a valid contract between the parties thereto. Under Indonesian Procedural Code, the claim/suit must be filed with the court having jurisdiction over the guarantor or, if the parties have chosen a particular court in the relevant agreement, that court. In order to conserve the guarantor’s assets for subsequent fulfillment of its obligations, the creditor could request the court to seize all/part of the guarantor’s assets. This type of seizure is called “conservatoir beslag” (seizure to conserve/preserve the defendant’s assets for later execution). After the final court judgment has been obtained, the creditor should then summon the defendant (through court) to enforce the judgment. The court would give the defendant eight days to comply with the judgment. Failure of such would entitle the court to order seizure against the defendant’s assets for the purpose of execution (called “executie beslag“). The execution will be done by public auction by the State Auction Office. Then it continued by submitting a bankruptcy petition towards the guarantor. However, the bankruptcy requirements shall be applied.