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Constitutional Court ruling affects credit risk
The World Bank has indicated and inquired about fiducia in its 2020 annual survey of the ease of doing business in Indonesia.
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Lenders normally employ fiducia security to put encumbrance over assets so that when default occurs, the encumbered assets can be sold to satisfy the borrowers’ obligations. (Shutterstock/File)
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he World Bank has indicated and inquired about fiducia in its 2020 annual survey of the ease of doing business in Indonesia. Because of its nature, which facilitates the nonpossessory security interest and out-of-court enforcement, the existence of fiducia has been instrumental in measuring and elevating the strength of the legal right index. But the narrative may no longer be the same because of what the Constitutional Court said with its recent decision dated Jan. 6 on fiducia law. The decision raised questions among some people.
Lenders normally employ fiducia security to put encumbrance over assets so that when default occurs, the encumbered assets can be sold to satisfy the borrowers’ obligations. One of the chief attractions of fiducia is that lenders can enforce it, namely by selling the encumbered assets at auction or by private sale without involving court processes.
The relatively easier route of enforcement is made possible because fiducia is equipped with executorial title (meaning the power of a final and binding court’s judgment) and parate executie (meaning lenders can sell the encumbered assets on their own accord).
But the whole story changes starting from the date of the court decision, as the court puts several conditions on it. The conditions are agreement on default and voluntary surrender of the fiducia object. So, in nutshell, if a lender cannot prove that there is an agreement on default with the borrower and that the fiducia object is voluntarily surrendered for enforcement purposes, it may only be able to enforce fiducia through a court process. The court process in Indonesia can unfortunately be a long and winding road.
Imposing the conditions arguably defeats the whole purpose of having fiducia in the first place because lenders may only enjoy the privileges of fiducia if the conditions are satisfied, while the satisfaction of the conditions might rely on the borrowers’ side. Not only that, the approach taken by the court in arriving at this conclusion might not sound soothing for the main reasons discussed below.
The court argues that the fiducia law does not specify when default occurs, which may lead to an interpretation for lenders to decide it unilaterally. Consequently, the court requires an agreement between lender and borrower on when default occurs.
It is true that the fiducia law does not determine when default occurs, but it is for a simple reason. It is because the Civil Code has already provided an answer to it. The Civil Code is effectively the main source of civil and private laws in Indonesia. Default according to the code is essentially an event in which a debtor fails to perform its obligation for the sake of a creditor. As for when default occurs, it is generally determined by virtue of a default declaration: that is, a formal letter addressed to a debtor demanding the obligations that are due to be performed within a certain period.
