(Refiles to correct spelling of law firm's name in 17th
* 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 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
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.
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 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
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