28 February, 2020
Overview
On 6 January 2020, the Constitutional Court of the Republic of Indonesia (the "CCI") issued a judicial review of Law No. 42 of 1999 on Fiducia Security ("Fiducia Law") through Decision No. 18/PUU-XVII/2019 ("Decision 18/2019"). The verdict in the Decision 18/2019 relates to a certain interpretation of Article 15 of the Fiducia Law in relation to the executory title of fiducia security that is deemed unconstitutional.
1. Background
The judicial review was filed by an individual debtor who obtained a consumer credit for the purchase of a vehicle ("Applicant"). The purchased vehicle was encumbered under fiducia security to secure the repayment of the consumer credit to the relevant financing company. Dispute arose when the Applicant failed to pay instalments, and subsequently the financing company arbitrarily declared that the Applicant had committed a breach of contract and sought to exercise its executorial rights over the fiducia object (i.e. the vehicle subject of the consumer credit) pursuant to Article 15 of the Fiducia Law by instructing a debt collector to seize the vehicle.
2. Judicial Review of Article 15 of the Fiducia Law
The Applicant deemed the vehicle seizure, which was conducted by the debt collector with force, contradicted basic human rights provided under Articles 27 paragraph (1), 28D paragraph (1), 28G paragraph
(1), and 28H paragraph (4) of the 1945 Constitution. The Applicant also suggested that the formulation of Article 15 of the Fiducia Law allows the beneficiary of fiducia security to arbitrarily determine the existence of a breach of contract when it deems fit, while also empowering it with strong executorial rights without the recourse to any proper legal mechanism. On that basis, the Applicant pleaded to the CCI that Article 15 paragraph (2) and paragraph (3) should be declared unconstitutional.
Relevant excerpts of Article 15 paragraph (2) and (3) of the Fiducia Law ("Articles") are set out below:
(2): Fiducia Security Deed as mentioned in paragraph (1) has the same executorial power as a court decision that is final and binding. [Elucidation: In this provision, "executorial power" has a meaning of directly executable without a court proceeding and is final in nature as well as being binding on both parties to execute that decision.] 15 (3): If a debtor is in breach of the contract, the Fiducia Recipient has the right to sell the Object that becomes the Fiducia Security object with its own power. [Elucidation: One of the characteristics of Fiducia Security is the ease in performing its execution in the event the Fiducia Grantor party breaches the contract. Therefore, in this Law it is believed necessary to specifically regulate the execution of Fiducia Security through a separate execution mechanism.]
3. Verdict in the Decision 18/2019
After hearing testimony, suggestions, and recommendations from the Applicant, the Government, the House of Representatives, and experts, the CCI issued the following verdict:
- declaring the phrase "executorial power" and "as a court decision that is final and binding" in Article 15 paragraph (2) and its elucidation to be applicable only if interpreted properly. In this respect, if (i) there is no agreement in relation to what constitutes a default under the underlying relationship between the parties and (ii) the debtor refuses to handover the fiducia security object, then the legal mechanism to execute the fiducia security deed must follow the steps required to execute a final and binding court decision; and
- declaring the phrase "in breach of the contract" in Article 15 paragraph (3) to be applicable only if interpreted properly. In this respect, , a breach of contract must not be determined single-handedly by the creditor but must be on the basis of mutual agreement by the debtor and creditor or as a result of legal action that determines the occurrence of a breach.
4. Commentary
The language used in the above verdict from the CCI is not clear cut. Suffice to say that the CCI did not amend nor change the formulation of the Articles. The CCI also did not hold that the Articles were expressly unconstitutional as contended by the Applicant – instead, the CCI clarified the correct interpretation of certain phrases in the Articles as a way to avoid misapplication of the Articles. We view that Decision 18/2019 does not change the power and effect of a fiducia security, which is equivalent to a final and binding court decision (subject to the requirements under the Fiducia Law being fully satisfied, including that the fiducia security needs to be made in a notarial deed, be written in Indonesian language, and registered with the authorized government institution, the fiducia office).
Nonetheless, in practice, it is always possible for a debtor not to voluntarily comply with the execution of a valid fiducia security. In such situation, a forced execution may be required by requesting an execution order (executorial beslag) from the relevant court. Thus, despite that Article 15 (2) of the Fiducia Law stipulates that a fiducia security deed is considered as a final and binding decision, this does not per se guarantee a smooth enforcement by the beneficiary and Decision 18/2019 does not change anything to that reality.
Considering the specific context and facts of the judicial review (which involved the micro financing/consumer credit sector), where the debtor appeared not to be aware of what constituted a default under the relevant consumer credit , the outcome of this case is possibly due to poorly drafted terms of the relevant credit agreement and the related fiducia security deed. This is therefore a stark reminder for finance and security documents in financing transactions should always be carefully drafted to ensure that this kind of dispute does not happen.
Parties to a fiducia security deed must pay attention to the interpretation of the Articles provided in Decision 18/2019. From the CCI's verdicts, we consider it is important to specifically agree in writing on:
- a detailed list of events of default which sets out clearly the circumstances that will constitute a breach of contract; and
- the mechanism for the implementation of fiducia security executorial rights by the lender (including the timing and procedures of how the lender may seize the fiducia security object).
For further information, please contact:
Frédéric Draps, Partner, Ashurst
frederic.draps@oentoengsuria.com
