What the Constitutional Court Says

In a recent decision (the “Decision”),[1] the Constitutional Court handed down a decision on the constitutionality of Articles 15(2) and 15(3) of the Fiduciary Security Law (“FSL”). The Constitutional Court in its Decision interprets the implementation of the following provisions of the FSL:

  • the executorial title under a fiduciary security certificate, meaning a fiduciary security certificate has the same legal effect as a court decision having legal binding effect, provided for in Article 15(2) of FSL, may not be enforceable in the absence of an agreement between the parties on the default mechanism, and if the debtor does not voluntarily surrender the secured asset. In that case, the fiduciary security holder must seek the assistance of the authorities (read: the court and police)[2];
  • the right conferred on the fiduciary security holder under Article 15(3) of the FSL to sell the fiduciary secured objects at its own behest (atas kekuasaannya sendiri) in the event of default is subject to the condition that a “default” is not being determined unilaterally by the creditor, but on the basis of an agreement between the creditor and the debtor or the exhaustion of other remedies that reveal the occurrence of a default.

An unfortunate characteristic of Indonesian judgments is that the underlying facts of disputes are rarely described in detail. This also applies to this case and as a result, there is a certain degree of uncertainty on the implementation of the Decision, especially in a case where the facts are different from the facts underlying the issuance of the Decision. The application to the Constitutional Court was submitted by certain debtors of a multi-finance company following persistent attempts by a multi-finance company to seize – by using the services of a debt-collection agent – a vehicle object sold to the customer in installments, and is subject to the fiduciary security granted in favor of the multi-finance company.

Although it is not entirely clear if the implementation of the Decision would impact fiduciary security enforcement in a highly negotiated transaction, there are reasons to be considered as demonstrated below that the Decision should not affect the current practice.

Fiduciary security: What is it? How to enforce it?

Fiduciary security – a security right over movable assets (tangible or intangible) and certain unregistered immovable assets that cannot be secured by a hak tanggungan (mortgage over land and immovable assets) – is created by way of an agreement incorporated in a notarial deed and registration with and issuance of a fiduciary certificate by the fiduciary security registration office. The enforcement of a fiduciary security is by way of selling the secured asset. In this sense, the FSL grants certain remedies to the fiduciary security holder in the form of: (i) the right to sell the fiduciary secured objects at its own behest (atas kekuasaannya sendiri) should the debtor be in default of its obligation; and (ii) the executorial title where the assistance of the court is not required to enforce a fiduciary security. A practical issue that may arise in the enforcement of executorial title is when the debtor is unwilling to hand over the secured asset to the fiduciary security holder.

ABNR Commentary

While the Decision may be subject to different interpretations, our interpretation of the decision is that the Constitutional Court does not invalidate the executorial title of the Fiduciary Security Certificate under Article 15 (2) and the right to sell the secured asset under Article 15 (3). Instead, the Constitutional Court establishes a new rule or norm governing how these provisions should be interpreted and implemented under certain circumstances. It seems that from the background case, the Constitutional Court recognises that the enforcement of Article 15 (2) and (3) of the FSL can become “arbitrary” and “inhumane” if deliberately misused, such as the employment of threats and intimidation or the sale of secured assets for below their market value, to the detriment of debtors.

Although, at first sight, the Decision may appear to undermine creditor rights, the Decision, we believe, could also be interpreted not to necessarily affect sophisticated transactions (e.g., international cross-border corporate or project financing).

It is worth noting that the Constitutional Court signifies the condition where there should be an agreement on the default mechanism between the creditor and debtor to provide protection to the debtor and avoid “arbitrary” and “inhumane” action (such as physical and psychological threats) by the creditor in enforcing its rights under Article 15 (2) and (3) of the FSL. The Decision further clarified that “the agreement between creditor and fiducia grantor regarding the existence of factual default” should be formalized, in addition to the voluntary delivery of the fiducia object by the fiducia grantor to the creditor, for the enforcement of the creditors’ right to sell the fiducia object at its own behest. In this regard, we believe that the Decision may be interpreted to imply that in a situation where creditor and debtor negotiate and agree in the underlying agreement on the default mechanism, including on what constitutes an event of default, notice of default and remedial actions, that agreement should fulfill the condition signified by the Constitutional Court. The negotiation provides an ample opportunity for the parties to raise any objection on the event of default terms and in the case of the debtor, to avoid one-sided provisions.

The Decision should not result in any great changes in practice, given that enforcement remedies remain available under FSL. In practice, a fiduciary security holder’s right to sell the fiduciary secured objects at its own behest is not as widely used as one might imagine (especially outside the multi-finance sector) as there are powerful factors that mitigate against its deployment, particularly (i) the potential for reputational damage to a lender that could arise from adverse publicity in the media, and (ii) the prospect of a tort claim against the lender under the Indonesian Civil Code (as happened in this case). It should be noted, however, that the Decision could also be interpreted differently so that it could be used to undermine the rights of the creditors to enforce their rights at their own behest under the fiduciary security.