REFILE-Indonesia telecom giant's bankruptcy stirs fears of legal abuses

Fri Sep 21, 2012 8:09am IST

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(Refiles to correct spelling of law firm's name in 17th paragraph)

* Bankruptcy declared over disputed $550,000 debt

* Ruling triggered by fight with former business partner

* Telkomsel expected to succeed in appeal against ruling

* Bankruptcy law changed in 2004 but flaws remain

By Rachel Armstrong

Sept 21 (Reuters) - A court ruling that Indonesia's biggest mobile phone operator is bankrupt, after not paying a disputed debt of just half a million dollars, has revived concerns over flawed laws that invite abuse and can trip up even highly profitable companies in Southeast Asia's largest economy.

Analysts and shareholders have brushed the decision aside as one of the quirks of the country's legal system, saying it is almost inevitable that it will be overturned when Telkomsel appeals to the country's supreme court.

The case has fuelled concerns among lawyers, however, that the bankruptcy law is open to abuses -- such as forcing settlements to disputes that should be dealt with elsewhere in the legal system -- and poses unnecessary risks for enterprises.

"It's not a prudent and fair judgment. Every company has a loan or debt that will sometimes be disputed," said Harjon Sinaga, a partner at Lubis Ganie Surowidjojo law firm in Jakarta.

Telkomsel, a subsidiary of PT Telekomunikasi Indonesia (Telkom), was taken to court by a prepay phone voucher distributor, PT Prima Jaya, which alleged in a petition for a bankruptcy declaration that the telecom giant still owed it 5.3 billion rupiah ($555,700).

Jakarta Commercial Court accepted the petition and declared Telkomsel bankrupt on Sept. 14, despite the company posting a first-half profit this year of $770 million.

Under Indonesian law, a company can be declared bankrupt if it can be shown to have at least two creditors and the debt owed to one of them is due and payable. The strength of the balance sheet is irrelevant.

Many investors were sanguine about the ruling, viewing a brief dip in parent company Telkom's share price after the declaration as a good chance to buy into the stock.

"Legal noise is an opportunity," wrote Citigroup analysts Arthur Pineda and Hussaini Saifee in a research note.

"We believe this matter will be resolved in the upper courts with a less drastic outcome."

They maintained their buy rating for Telkom shares, which are among the star performers of the Indonesian stock market so far this year with a surge of 33 percent, versus a 10 percent rise in the main index.

CASE HISTORY

This is not the first time Indonesia's bankruptcy rules have been used against financially healthy companies.

In May 2004, the Indonesian unit of British insurer Prudential Plc was forced to suspend operations after being declared bankrupt following a dispute with an agent.

Two years earlier, Manulife Financial Corp's local subsidiary suffered a similar fate following a claim from a former joint-venture partner that it had failed to pay shareholders a dividend.

Both of those decisions were subsequently overturned by the Supreme Court of Indonesia. The Prudential case led to a change in the bankruptcy laws which made it tougher to press claims against financial companies.

However, the new law did not set a minimum size for unpaid claims that can trigger a bankruptcy petition, or assuage concerns that it could be used to hold companies to ransom.

"Naturally, there are concerns that this kind of law can be open to abuse," said Theodoor Bakker, a foreign legal counsel at Ali Budiardjo Nugroho Reksodiputro in Jakarta.

"If a court does not pay particular attention to the legitimacy of a claim, then parties with a claim that is disputed or invalid can try and push a company through the bankruptcy court," he added, without commenting on the specifics of the Telkomsel case.

Telkomsel, which is 35 percent owned by Singapore Telecommunications Ltd and serves more than 100 million subscribers, is now in the process of appealing against the decision.

"The company is in a very healthy business and financial condition and as the parent company Telkom believes Telkomsel can overcome the problem," said Slamet Riyadi, a Telkom spokesman.

Lawyers say an appeal will take up to two months, however, meaning the uncertainty surrounding the company is set to linger a while longer. ($1 = 9537.5000 Indonesian rupiahs) (Reporting by Rachel Armstrong in SINGAPORE; Additional reporting by Janeman Latul in JAKARTA; Editing by Edmund Klamann)

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