Indonesia’s growing economy offers a wealth of opportunities for foreign investors. Nonetheless, as in any jurisdiction, investors should obtain proper advice before entering commercial engagements with local counterparties.
Breaches of contract or financial distress – particularly in joint operations, distributorships, or cooperation arrangements – are risks in any jurisdiction and, when they occur, can significantly impact foreign interests. Fortunately, Indonesian law provides a structured legal framework for investors to enforce rights, recover claims, and navigate restructuring. We outline these below.
Contractual Enforcement Under Indonesian Law
The first line of defense for foreign investors facing non-performance is the enforcement of contractual obligations. Under the Indonesian Civil Code, a breach of contract grants the non-breaching party the right to pursue legal remedies, including compensation for losses. This entitlement generally arises after the breaching party has been formally placed in default but continues to neglect its obligations.
Indonesian law offers several remedies for breach of contract, including:
- Termination of the contract, restoring the parties to their original position prior to the agreement;
- Termination with damages, allowing the aggrieved party to claim losses arising from the breach;
- Specific performance, demanding that the breaching party fulfil its contractual obligations;
- Specific performance with damages, where performance is sought alongside compensation for losses; and
- Damages only, if the non-breaching party chooses not to seek performance but only financial redress.
Before commencing legal proceedings, investors should first examine the enforceability of the contract. In cross-border transactions, it is common for parties to stipulate that the agreement is governed by Indonesian law. Selecting Indonesian law should be the preferred choice if the agreement is likely to be enforced in Indonesia and potentially reviewed by Indonesian courts.
Separately, the choice of the dispute resolution mechanism is equally, if not more, important. While local parties may prefer Indonesian courts, it is important to note that foreign court judgments are not enforceable in Indonesia. To pursue enforcement, a party would need to relitigate the matter before an Indonesia court.
In contrast, arbitration offers a more effective path for cross-border transactions. Indonesia is a party to the 1958 New York Convention, which allows for the enforcement of international arbitral awards in Indonesia, making arbitration the preferred option for foreign investors.
Addressing Insolvency through Bankruptcy and PKPU
When non-performance stems from financial distress, investors may turn to Indonesia’s insolvency framework governed by Law No. 37 of 2004 on Bankruptcy and Suspension of Debt Payment Obligations.
The law recognizes two formal procedures: 1. Suspension of Debt Payment Obligations (Penundaan Kewajiban Pembayaran Utang or “PKPU”), which is a court-supervised debt moratorium to allow the debtor to propose a restructuring plan; and 2. Bankruptcy, which is designed for the liquidation of a debtor’s assets.
Once PKPU granted, all creditors – secured and unsecured – must register their claims with the court-appointed administrators and may vote on the proposed composition plan. If the composition plan is accepted by a statutory majority of creditors and homologated by the court, it becomes binding on all registered creditors. The plan may include various debt restructuring measures such as rescheduling, haircut, or debt-to-equity conversion. A PKPU serves as a rehabilitative mechanism aimed at preserving the debtor’s business and maximizing returns for all stakeholders.
By contrast, bankruptcy is a formal liquidation mechanism triggered when a viable restructuring under a PKPU is no longer feasible or when creditors seek a collective debt recovery through asset distribution. Upon issuance of a bankruptcy declaration (putusan pailit), the debtor is deemed insolvent and the court appoints a receiver to assume control over the debtor’s assets and legal affairs. The receiver is tasked with identifying, managing, and liquidating assets to satisfy creditor claims in accordance with statutory priorities.
Mitigating Risks and Preparing for Distressed Scenarios
While Indonesian law offers structured remedies for breach and insolvency, it is often more effective – and commercially prudent – for foreign investors to manage risks before disputes arise. A proactive approach can reduce legal exposure, strengthen the investor’s bargaining position, and preserve asset value. The following strategies can help foreign parties anticipate and respond to financial or contractual risks involving Indonesian counterparties.
- Clear Contracts and Legal Safeguards. Well-drafted contracts are the first layer of protection. Key clauses – such as governing law, dispute resolution, default triggers, and remedies – should be carefully tailored to Indonesian law. Prior to entering significant commercial arrangements, investors should also conduct due diligence on the counterparty’s legal standing, financial condition, and regulatory compliance. In addition, our experience suggests that investors should be prudent and consider the following approach in their contracts:
- the title of the agreement should include the word “debt” (utang) if it intends to capture the debtor’s repayment of its financial obligation;
- the agreement should contain a clear obligation that the debtor should repay the debt; and
- the agreement should be translated and executed in the Indonesian language and the client’s adviser should ensure that the Indonesian text is consistent with the English drafting and the parties’ intentions.
- Security Structure. Foreign investors should consider securing their exposure through legal instruments recognized under Indonesian law, including fiduciary transfers, mortgages, pledges, and guarantees. Proper registration of security interests may ensure enforceability and creditor priority in the event of default or insolvency.
- Early Monitoring and Intervention. Regular monitoring of a counterparty’s financial condition – such as missed payments, legal disputes, or operational red flags – can help detect early signs of trouble. Timely action, such as sending formal notices or invoking contractual protections, may prevent escalation.
Strategic Participation in PKPU or Bankruptcy. If insolvency proceedings occur, foreign creditors must promptly register their claims to preserve their rights. In a PKPU, active participation in creditor meetings and voting on the composition plan can influence outcomes. In a bankruptcy, secured creditors may enforce collateral after the statutory stay period, while unsecured creditors rely on asset distribution managed by the receiver. (1 July 2025)
