The Constitutional Court of Indonesia recently issued a judgment that reinterprets the enforcement of fiducia object. The judgment was issued upon a judicial review filed by two individual debtors (also acting as fiducia grantors) who claimed that certain provisions of executorial power as set forth in Law number 42 of 1999 on Fiducia Security (“Fiducia Law“) are in violation of their constitutional rights. This case began when a multifinance company, that acts as their creditor and fiducia grantee, repossessed their car placed as fiducia security.
The aggrieved fiducia grantors asserted that Article 15 paragraphs (2) and (3) of the Fiducia Law are against their constitutional rights under the 1945 Constitution of the Republic of Indonesia (“Constitution“).
Enforcement of Fiducia Object in Indonesia Prior to the Judicial Review
Fiducia Law stipulates that executorial power of a fiducia security certificate equals that of a final and binding court decision. Such executorial power authorizes a fiducia grantee to summarily enforce a fiducia object in the event of default without a court order.
The Constitutional Court has taken the view that debtor (as fiducia grantor) and creditor (as fiducia grantee) are both entitled to equal legal protection. In light of the foregoing, the Constitutional Court sees that Article 15 paragraphs (2) and (3) of the Fiducia Law have shown inequality before the law between fiducia grantor and grantee, since the executorial power gives the grantee the right to summarily enforce fiducia objects while the law does not provide any equal mechanism for the grantor to defend its rights from abusive enforcement actions or a clear guidance whether a default has occurred.
Based on the above grounds, the Constitutional Court decided among others, as follows:
- The phrases “executorial power” and “equal to a final and binding court decision” in Article 15 paragraph (2) of the Fiducia Law violates the Constitution and no longer have legally binding power to the extent such phrases are not construed as follows: in the absence of parties’ agreement on the terms of default and the debtor is reluctant to voluntarily surrender the fiducia object, the execution of fiducia security certificates must be done through the same mechanism and procedure as the enforcement of a final and binding court decision.
- The phrase “breach of contract” in Article 15 paragraph (3) of the Fiducia Law violates the Constitution and no longer has legally binding power unless such phrase is construed as follows: the occurrence of a breach of contract is not determined unilaterally by creditor but must be based on an agreement between creditor and debtor or based on determination in legal proceedings that a breach of contract has occurred.
This Constitutional Court decision may considerably affect the timing and process of fiducia enforcement in the event of default.
Going forward, taking into account the high discretionary power given to Indonesian judges, creditors will have to observe the following potential risks when enforcing a fiducia object:
- If the debtor denies that a default has occurred and also refuses to voluntarily surrender the object, the creditor may have to file a request for an execution order to the relevant Indonesian court before executing the fiducia object; or
- If the execution of fiducia object is deterred due to objection of the debtor, the creditor may have to file for a breach of contract claim against the debtor and go through the usual civil legal proceedings in order to obtain a final and binding court decision before executing the fiducia object.
In light of the above possibilities, creditors will need to start implementing additional measures to ensure: (i) debtors could not challenge the fact that a default has occurred; and (ii) debtors could not refuse to surrender the fiducia object when due. These additional measures can be implemented, among others, by inserting certain clauses into the loan and security documents.
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