Indonesia’s Constitutional Court interprets Fiducia Law

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Fiducia Law

Indonesia’s Constitutional Court recently issued a judgment interpreting article 15 paragraph (2), as well as article 15 paragraph (3) of Law No. 42 of 1999 on Fiducia Security (the Fiducia Law). The court did not invalidate these provisions, but provided a constitutional interpretation of these provisions, as follows:

(1) Article 15 paragraph (2) and its elucidation must be interpreted to mean that the creditor must apply for a civil court’s assistance to possess and sell the fiducia object if there is no agreement on default and the creditor refuses to surrender the fiducia object voluntarily to the creditor.

(2) Article 15 paragraph (3) must be interpreted to mean that the creditor cannot determine the debtor’s default unilaterally. Rather, it must be based on the parties’ agreement, or a certain legal process.

The Constitutional Court judgments are final, binding and not subject to appeal. The judgment was rendered following an application for constitutional review of the above-mentioned provisions by two individuals who had placed their car as fiducia security for their loan. The creditor possessed the car following the debtor’s default.

Article 15 paragraph (2)

This provision stipulates that: “The Fiducia Security Certificate as mentioned in paragraph (1) has the same executorial power as a court decision that has become final and binding.”

The court interprets this provision to mean that such an executorial power must be exercised through a judicial process if two conditions are fulfilled, namely: (1) there is no agreement on default; and (2) the debtor refuses to surrender the fiducia object voluntarily to the creditor.

If these conditions are fulfilled, the court has seemingly banned creditors’ unilateral actions in taking over the security object and selling it without a court decision. In these circumstances, creditors will need to apply to a civil court for assistance in enforcing their right to take possession of the fiducia security object from the debtor.

The rationale behind the judgment seems to rely on the argument that debtors must be afforded their constitutional right to defend themselves against accusations of default. In paragraph 3.14, the court states that, “In article 15 paragraph (2) of [the Fiducia Law], it can be simply understood that a fiducia certificate gives a very significant right to … the creditor … because … the creditor may, at any time, take over the fiducia object from the debtor and subsequently sell it to anyone … for the reason that the executorial power of the certificate is equal to a court decision that is final and binding.”

Therefore, the court continues, “On one hand, there is an exclusive right given to the creditor, and on the other hand, there is a disregard of the debtor’s right to legal protection, which is the right to defend themselves against the accusation of a breach of contract.”

Further, in paragraph 3.15, the court also affirms that the original concept of fiducia showed an “imbalance of bargaining positions between the debtor and creditor because the debtor is the party in need”, and that, “the action of the creditor in unilaterally executing the fiducia security … without a process of execution … could potentially result in an abuse and ‘inhumane’ acts, such as physical and psychological threats that are often made by creditors (or their representatives) against debtors.”

Although the civil court’s assistance in enforcing a creditor’s right is done through summary proceedings, the proceedings may give room for legal maneuvering to frustrate the enforcement proceedings, which could potentially delay the execution process against the fiducia object. While it is not expressly articulated by the Constitutional Court, it seems that it intended for the civil court to oversee the creditor’s right to enforce the fiducia object, if the two conditions, lack of agreement on default, and refusal to surrender the fiducia object voluntarily to the creditor, are fulfilled.

Does the court require the debtor’s admission of default? What the court refers to as “lack of agreement on default” is not entirely clear. Does it mean that the debtor must admit being in default, or does it mean that as long as there is an underlying agreement stipulating conditions of default, and the debtor has fulfilled any of those conditions, they may be deemed in default?

It seems that the latter should be the interpretation, because it serves better the court’s reasoning. The court repeatedly writes, in paragraphs 3.14 and 3.16, that the debtor’s right must be protected, i.e., the right to defend themselves against an accusation of default.

However, it is difficult to rationalize that the judgment still requires the debtor’s admission of default to enforce the fiducia security, when they have bargained for their rights by including the conditions of default in the agreement. If the judgment is interpreted as requiring the debtor’s admission of default, it can be potentially used by a delinquent debtor to frustrate the enforcement of the creditor’s rights. It is difficult to conceive that this is the Constitutional Court’s intention to qualify the meaning of the Fiducia Law.

Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker McKenzie by emailing Danian Zhang at danian.zhang@bakermckenzie.com.