Discover insight through our challenging cases.

Differences between Bankruptcy and Insolvency

“A debtor can be declared bankrupt without actually being insolvent; on the other hand, the insolvent debtor might not be able to be declared bankrupt if he/she only has less than two creditors.”

Bankruptcy and insolvency are whole things that are often confused together. Both bankruptcy and insolvency, in general, are often used to refer to a situation when a legal entity (the debtor) cannot afford to pay all of their liabilities, or in other words, their assets can’t cover all of their debts.

Definitions

First of all, as to avoid translation confusion, the term bankruptcy here shall refer to bankruptcy as stipulated by article 1 of Law No. 37 of 2004 on Bankruptcy and Suspension of Debt Payment, which is a general confiscation over all of the debtor’s assets due to the debtors having two or more creditors and the debtor doesn’t fully pay at least one due to liability. Thus, a bankrupt is a legal condition of bankruptcy declared by the court to a legal entity which fulfils the conditions mentioned above.

On the other hand, the definition of insolvency can be found further in article 57 of Law No. 37 of 2004, which is a condition of not being able to pay off debts. In other words, insolvency is a general condition when a debtor can’t pay off their debts due to having smaller assets compared to the debts, without even having to be declared so by the court. Going by the definitions alone, it could be seen that bankruptcy emphasizes on the condition of a debtor with at least two creditors not paying its due debt despite the actual asset’s status of the debtor, while insolvency emphasizes on the actual incapability of making the payment. It means a debtor can be declared bankrupt without actually being insolvent; on the other hand, the insolvent debtor might not be able to be declared bankrupt if he/she only has less than two creditors.

Procedures and Legal Consequences

Bankruptcy is not an automatic condition. Referring to article 2 of Law No. 37 of 2004, a petition for bankruptcy could be filled to the commercial court if the following conditions are met:

  1. There is a debtor with two or more creditors (whether it’s concurrent, separated, or preferred creditors); and
  2. There is debt that is already due and not paid, no matter the amount.

In other words, even when a debtor fulfilled the criteria for bankruptcy, a petition for bankruptcy must be filled to the court to acquire a formal decision of bankruptcy. It requires a thorough process which involves many parties, including the debtors and creditors, curator, and supervisory judge. Insolvency, on the other hand, is something that could happen later during the process. On the other hand, insolvency is an automatic condition which could appear anytime, including during the bankruptcy process as shall be further explained below.

Bankruptcy process starts from a party filing a bankruptcy petition to the commercial court. The one filing for bankruptcy could be the debtor itself, any of the creditors, or other relevant 3rd parties including Attorney General, Bank of Indonesia, the Financial Service Authority (OJK), and the Minister of Finance. The process at the court itself is considered fast as a decision must be passed in 60 days. The decision could also be appealed to the Supreme Court, in which the Supreme Court must pass their decision in also no longer than 60 days. The legal effect of the bankruptcy decision is that the debtor would lose its right over the bankruptcy asset as it would be handled by the curator to settle any relevant liabilities. However, the condition is by no means puts the debtor in insolvency state automatically. 

After the court has issued the decision of bankruptcy, a curator and supervisory judge shall be appointed to handle the settlement process. The very first step is to hold a verification process, which is a meeting by all parties concerned, including the debtor, creditors, curator, supervisory judge, and clerk of the court to verify the assets and debts concerned. From this point onwards, the debtor shall have two option, which is to settle the bankruptcy assets or to suggest a peaceful settlement. As firstly mentioned, a bankruptcy emphasizes the existence of unpaid liability, not the incapability of settling the liability itself. In other words, in the event the debtor’s asset is actually bigger than the liability, the settlement process shall proceed with no problem. After all of the liabilities have been paid off, the debtor could also file for the rehabilitation of its good name to the court. On the other hand, if the debtor’s asset is smaller than the liability, it would put the debtor’s in insolvency state. The debtor could still suggest for a peaceful settlement; however, in the event, the suggestion is rejected, the bankruptcy asset shall be liquidated and distributed accordingly.             

Author: Benedictus Giovanni

Gaffar & Co., Indonesian Boutique Law Firm which specializing and focus on commercial law areas include capital market and financial services.

For further queries and information, please contact us:

+62- 21 50806536  | +62 – 811 877 216 |  info@gaffarcolaw.com | www.gaffarcolaw.com

Share on linkedin
LinkedIn