Security interests and guarantees

Collateral and guarantee support

Which entities in the organisational structure typically provide collateral and guarantee support for bank loan financings? Are there limitations on which entities in the organisational structure are permitted to provide such support?

There are no specific restrictions for affiliated entities generally to provide collateral and guarantees for loan financings. However, for publicly listed companies, providing corporate guarantees may require disclosures or prior approval from shareholders. In determining a suitable collateral provider, banks are bound by general prudential requirements in conducting a credit assessment.

Banks normally prefer obtaining collateral or a guarantee from an affiliate that actively carries out the bank’s business operations and is a source of assets, instead of non-active affiliates with assets but no active operations. For corporate guarantees, it is also important to check whether guarantees have also been given for other creditors. This is because upon receiving corporate guarantees, banks’ position will remain as a concurrent creditors. Therefore, enforcement of a corporate guarantee needs to take into account other creditors’ interest as well.

In addition, any collateral or guarantee provided by an affiliate must take into account corporate benefit principle. Refer to question 28.

What types of obligations typically share with the bank loan obligations in the collateral and guarantee support? If so, are all such obligations equally and ratably covered by the collateral and guarantee support?

A hedging obligation is commonly shared with bank loan obligations. However, the collateral and guarantee provided to secure the bank loan obligations should state that they cover such additional hedging obligations.

Security sharing agreements or intercreditor agreements are commonly used to stipulate pari passu ranking of the collateral and guarantee so that they equally and rateably secure both the bank loan obligations and additional obligations. In these cases, cross-default provisions are stipulated in the underlying agreements, so that the proceeds of enforcement can be distributed contractually thereunder.

Due to ranking system in mortgage and hypothec, higher ranking securities receive priority.

Commonly pledged assets

Which categories of assets are commonly pledged to secure bank loan financings? Describe any limitations on the pledge of assets.

Land, buildings and fixtures are encumbered by a mortgage, which provides prioritised position for the mortgagee against other creditors. After-acquired land cannot be encumbered by a mortgage.

Movable assets (tangible or intangible) such as accounts receivable, vehicles, inventory, insurance claims, bank account receivables and shares may be encumbered by a pledge or fiduciary security depending on the type of asset. In a pledge, the security interest is perfected by possession of the pledged collateral by the creditor, whereas, in a fiduciary security, the debtor may maintain possession of and utilise its assets. A pledge cannot cover future bearer securities.

Vessels with a gross volume of more than 20 cubic metres, usufruct rights on vessels, and shares in vessels are secured by way of hypothec. As with mortgages and pledges, a hypothec cannot be created over future-acquired vessels.

To date, Indonesian law does not provide any specific procedure for creating security interests in aircraft to secure bank loan financings. In practice, creditors commonly rely on non-Indonesian law security documents and register the same along with irrevocable de-registration and export request authorisations (IDERA) with aircraft registration authorities in order to authorise creditors to procure de-registration, export and physical transfer of the aircraft in case of default.

Banks also favour cash collaterals through pledge of bank accounts or back-to-back financing arrangement.

Creating a security interest

Describe the method of creating or attaching a security interest on the main categories of assets.

Mortgage

The mortgagee generally requests an irrevocable power of attorney from the mortgagor authorising the mortgagee to carry out all necessary procedures to prepare and register the mortgage on behalf of the mortgagor. The parties then execute a Deed of Mortgage before a Land Deed Official (PPAT), who registers the Deed of Mortgage at the Land Office where the land is located. The Land Office will issue a certificate of mortgage, which serves as evidence that the mortgage has been lawfully registered as of the date of the certificate.

Fiduciary security

A fiduciary security is created by entering into a fiduciary deed before a notary with respect to the object that will be secured as collateral. Perfection is achieved through registration with the Fiduciary Registration Office. Following registration, the Fiduciary Security Registration Office will issue a fiduciary certificate, which serves as an evidence that the fiduciary security has been lawfully perfected on the date of issuance.

Pledge of shares

A pledge of shares in a limited liability company is created by entering into a pledge of shares agreement. It is customary that the pledgee requests irrevocable powers of attorney from the pledgor authorising the pledgee to carry out a private sale of the pledged shares if a default arises and attend and vote in the general meeting of shareholders. Following that, the pledgor delivers the original pledged share certificates to the pledgee. Separately, the pledgor needs to notify the company to record the pledged shares in its shareholder register book.

A pledge of registered securities is also created by entering into a pledge of shares agreement and preparing a consent to transfer the pledgor’s shares to the pledgee or any appointed third party if a default arises and a power of attorney to attend and to vote in the general meeting of shareholders. Afterwards, the pledgor (through its custodian) needs to notify the Indonesian Central Securities Depository (KSEI) to block the pledged shares from trading. The pledge also needs to be registered in the securities administration bureau (BAE).

Pledge of bank account

Bank account deposits are secured by entering into a bank account pledge agreement, with the pledgor’s bank providing an acknowledgment of the establishment of the pledge.

Pledge of tangible and movable assets

A pledge of tangible and movable assets is created and perfected way of the pledgor handing over the secured assets to the possession of the pledgee or an agreed third party during the pledge period. If the pledgee loses possession of the secured assets, the pledge will be deemed to have ceased to exist (except due to an act of theft).

Hypothec of a vessel

A hypothec of a vessel is created by entering into a hypothec agreement. For perfection, the hypothec needs to be registered with the Registrar of Shipping, which will issue a grosse deed as evidence of the hypothec. Similar to the mortgage process, the hypothec grantor may provide a power of attorney to the hypothec grantee to carry out the necessary procedures on behalf of the hypothec grantor.

Perfecting a security interest

What steps are necessary to perfect a security interest on the main categories of assets? What are the consequences of failing to perfect a security interest?

See question 20 for the procedures to perfect security interests in Indonesia.

Under Indonesian law, perfection of security is crucial in establishing a security interest. If there is a failure to perfect a security interest, creditors are faced with the risk of not being able to enforce their security and recoup value from the secured assets.

In order to ensure perfection, creditors commonly request a power of attorney from the borrower allowing the creditor to prepare the necessary documentation and register the security interests, as required.

Future-acquired assets

Can security interests extend to future-acquired assets? Can security interests secure future-incurred obligations?

Possibility for collateral agreements to cover future-acquired assets depend on the type of security interest. Land mortgages, pledges, and hypothec cannot cover future-acquired assets because of the specific nature of the security interest.

For future-incurred obligations, if the secured amount under the collateral agreement is covered under the facility agreement, future-incurred obligations should also be covered under the collateral agreement. This is because collateral agreements are an accessory to the main facility agreement.

Also refer to our response in question 19.

Maintenance

Describe any maintenance requirements to avoid the automatic termination or expiration of security interests.

Under Indonesian law, security interests are accessories to underlying loan agreements. Therefore, so long as the rights and obligations under the underlying agreements still exist, there will be no automatic termination or expiration of the relevant security interests, absent of the full repayment of the loan and fulfilment of all outstanding obligations of the borrower.

It is also important to ensure information of secured assets are updated. See question 22.

Release

Are security interests on an asset automatically released following its sale by the debtor? If so, are the releases mandated by law or contract?

Generally, the sale of an asset that is secured by a certain security interest (ie, mortgage, hypothec or fiduciary security, but not pledge) neither releases the security interest nor precludes the creditor’s right to enforce the security interest.

Under Indonesian law, a security interest follows the secured asset until it is properly released. However, unwarranted sale of a secured asset by a borrower to a third party may cause problems for a creditor enforcing the security, especially if the asset is sold to a bona fide purchaser. To minimise this risk, creditors may set out requirements such as keeping the original land certificate (for land mortgage) or affixing marks that secured assets are being secured (for fiduciary security and hypothec) to be conducted by the borrower.

Creditors would also require that the borrower obtain the creditor’s consent prior to selling a secured asset to a third party.

For pledges, note that this type of security interest can only be perfected by physical possession and that when creditor has lost physical possession over the pledged objects (through a sale of the secured asset), the pledge will be considered as ceasing to exist.

Non-fulfilment of guarantee obligations

What defences does a guarantor have against claims for non-fulfilment of guarantee obligations? Can such defences be waived?

The Indonesian Civil Code provides the following possible defences special rights of guarantors on enforcement of a guarantee:

  • the guarantor can deny request of guarantee enforcement on the basis that all possible actions against the borrower’s assets (ie, seizure and sale of assets) need to be exhausted before requesting the guarantor to perform its guarantee obligations;
  • if there is more than one guarantor, the claims are to be split between the guarantors; and
  • guarantor is indemnified by the borrower through contractual arrangement among them, allowing guarantor to repudiate any claim by creditors.

Such defences above can be contractually waived as long as it is agreed between the relevant parties. If waived, the creditor can directly enforce the guarantee and claim against the guarantor without first pursuing all possible actions against the borrower’s assets.

Parallel debt requirements

Describe any parallel debt or similar requirements applicable in a secured bank loan financing where an agent acts for multiple investors.

See question 6.

Enforcement

What are the most common methods of enforcing security interests? What are the limitations on enforcement?

In principle, a security grantee is prohibited from owning secured assets sold through public auction.

Given the executorial nature of common security interests in Indonesia (see question 21), in the event of default by the debtor, the secured party has the right to sell the collateral without having to wait for a court decision. The secured party has a priority right over other creditors in terms of seeking repayment of its receivables based on the execution of the secured collateral. Such a right will not disappear due to bankruptcy or liquidation of the debtor.

In case of default, the debtor is obliged to hand over the collateral. However, the secured party may execute its security interest through the sale of the collateral at public auction or a private sale based on the agreement of the debtor and the secured party, if it results in the highest price beneficial for both parties. Stakeholders must be provided with one month’s prior notice of a private sale.

In some cases, to limit the period of recouping collateral proceeds through public auction, banks may temporarily take over assets to compensate the outstanding loan. However, this must be conducted through private arrangement with the borrower.

To enforce a corporate or personal guarantee, the secured party may issue a demand letter to the guarantor requesting payment of the guaranteed amount within the agreed time period. If the guarantor fails to pay, the secured party may proceed with enforcement through ordinary civil claim proceedings.

Fraudulent conveyance and similar doctrines

Describe the impact of fraudulent conveyance, financial assistance, thin capitalisation, corporate benefit and similar doctrines on the structure of bank loan financings.

Clawback principles

During bankruptcy, the bankruptcy estate may not be transferred or disposed, and any transfer or disposal up to one year before the bankruptcy would be subject to clawback principles if it:

  • causes loss to the creditor or creditors;
  • was not a mandatory legal or contractual obligation of the debtor; or
  • was not conducted through a bona fide transaction (having lesser value compared to sales in bankruptcy auction).

Any transfer or disposal within a one-year period before the bankruptcy that cause losses to the creditors may be deemed null and void and may be required to be unwound.

Thin capitalisation

Thin capitalisation in Indonesia is measured based on the borrower’s debt to equity ratio (DER). In conducting a credit assessment through 5C (capital, capacity, condition, collateral and character) analysis, creditors would need to determine whether thin capitalisation is suitable for the specific business of the borrower, which may vary from one borrower to another. From tax perspective, in general, any borrowing costs in excess of liability exceeding a 4:1 ratio will be disallowed as a deductible interest expense from a tax perspective. If the interest expense exceeds the 4:1 DER, it will be deemed as a dividend payment and the applicable tax rate will be different.

Corporate benefit

Under the fiduciary duties concept, the directors are obliged to ensure all actions by their company are conducted in the company’s best interest and provide corporate benefit to the company. If a bank loan is structured with a security provider that only grants security and does not receive direct loan proceeds, the directors of the security provider must be able to justify and ensure that such granting of security offers directly or indirectly creates a corporate benefit in order to comply with their fiduciary duties. Nevertheless, such actions requires certain corporate approvals.