Introduction
The issue of a debtor’s inability to repay debts to creditors is a significant concern in the legal and business world. To resolve financial conflicts between debtors and creditors, the law provides bankruptcy as a last-resort mechanism. In Indonesia, the concept of bankruptcy is regulated under Law No. 37 of 2004 concerning Bankruptcy and Suspension of Debt Payment Obligations (UUK-KPU). Article 1(1) of this law defines bankruptcy as:
“A general seizure of all assets of a bankrupt debtor, the administration and settlement of which is carried out by a curator under the supervision of a supervisory judge as stipulated in this Law.”
The primary requirements for an individual or legal entity to be declared bankrupt are outlined in Article 2(1) of Law No. 37 of 2004, namely:
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A debtor who has two or more creditors.
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Failure to fully pay at least one debt that has fallen due and is collectible.
Before the enactment of Law No. 37 of 2004, Indonesia once applied the Insolvency Test as a prerequisite for determining whether an individual or legal entity was in a state of bankruptcy. This concept was based on a substantive and conceptual approach to assessing a debtor’s insolvency.
The Concept of Insolvency Test
The Insolvency Test is an assessment used to determine whether a debtor (individual or company) is unable to repay debts because their assets are worth less than their liabilities. The insolvency test plays a role in determining whether the failure to pay debts constitutes an ordinary breach of contract or has reached the level of insolvency that warrants resolution through bankruptcy.
Insolvency itself refers to a situation where a debtor, whether an individual or a company, is unable to fulfill payment obligations to creditors when they fall due. This test serves as an indicator of whether the debtor is legally insolvent, truly incapable of repaying debts to creditors.
In the book “Sejarah, Asas, dan Teori Hukum Kepailitan: Memahami Undang-Undang No. 37 Tahun 2004 tentang Kepailitan dan Penundaan Kewajiban Pembayaran Utang” by Prof. Dr. Sutan Remy Sjahdeini, S.H., two forms of Insolvency Test are recognized:
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Cash Flow Insolvency – When a debtor lacks sufficient liquid funds to pay debts that have fallen due.
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Balance Sheet Insolvency – When a debtor’s total liabilities exceed their total assets.
Under this approach, only debtors experiencing balance sheet insolvency are deemed appropriate for bankruptcy proceedings. If the issue is merely liquidity difficulties (cash flow insolvency), the matter is more appropriately resolved through a breach of contract lawsuit in the District Court.
Insolvency Test as a Bankruptcy Requirement
The use of the Insolvency Test as a bankruptcy requirement ensures that a debtor is truly insolvent before being declared bankrupt. In other words, the court will not declare a debtor bankrupt if they still have the ability to repay debts, even if they are experiencing financial difficulties.
However, applying the Insolvency Test as a formal requirement in Indonesian bankruptcy law is challenging due to several factors that complicate the determination of insolvency:
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Many companies, especially startups, have asset values significantly lower than their debts or investor commitments because they focus on expansion and future profitability.
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The method of calculating a debtor’s asset value can be debatable—whether based on market price, fair value, or liquidation value. As explained by Philip R. Wood in “Principles of International Insolvency” (2007), this leads to uncertainty in objectively assessing a debtor’s insolvency.
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The practice of dual bookkeeping in companies increases the risk of disputes in determining insolvency status through accounting.
A similar view is expressed by Dutch bankruptcy law experts Sijmen de Ranitz and Lucas Kortman in “The Law of International Insolvencies and Debt Restructurings” (2006). They explain that applying the insolvency test is not straightforward, as it requires complex financial examinations and analyses. Even if an evaluation shows that a company’s assets are less than its total liabilities (including debts not yet due), this does not necessarily reflect legal insolvency. In other words, an unhealthy balance sheet does not automatically prove that a company is truly unable to repay its debts.
The Practice of Insolvency Test in Other Countries
In contrast, bankruptcy laws in many other countries use the insolvency test as the primary foundation for determining whether an entity should be declared bankrupt.
In England, for example, the Insolvency Act 1986 explicitly regulates two forms of insolvency tests cash flow insolvency and balance sheet insolvency, as stipulated in Section 123 of the Insolvency Act 1986. If a debtor cannot pay due debts or their total liabilities exceed their total assets, they are deemed legally insolvent.
Section 123 of the Insolvency Act 1986 states:
“Definition of inability to pay debts.
(1) A company is deemed unable to pay its debts
(a) if a creditor (by assignment or otherwise) to whom the company owes a sum exceeding £750 has served a written demand (in the prescribed form) requiring payment and the company has failed to pay, secure, or compound the debt to the creditor’s reasonable satisfaction within three weeks; or
(b) if execution or other process issued on a judgment, decree, or court order in favor of a creditor is returned unsatisfied in whole or in part.
(2) A company is also deemed unable to pay its debts if it is proved to the court’s satisfaction that the company’s assets are less than its liabilities, taking into account contingent and prospective liabilities.”
Similarly, in the United States, under the Bankruptcy Reform Act of 1978 (Bankruptcy Code), the insolvency test is divided into three categories:
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Cash Flow Test – Determines whether a debtor can pay debts as they fall due.
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Balance Sheet Test – Assesses whether a debtor’s liabilities exceed their assets at fair valuation.
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Capital Test – Applies when a company engages in transactions that unreasonably deplete its capital, exposing it to insolvency risks (rarely used).
These examples show that a substantive approach based on financial analysis is prioritized to ensure that bankruptcy is not merely an administrative formality but a last resort for insolvent debtors.
Conclusion
Although the insolvency test provides a substantive approach to determining bankruptcy, its application as a formal requirement in Indonesian law faces practical and technical challenges. Difficulties in accessing a debtor’s internal financial data and methodological challenges in asset valuation make the insolvency test unsuitable as the sole criterion for bankruptcy declaration. Therefore, Indonesia’s legal system maintains a formal approach as stipulated in Article 2 of the UUK-KPU.
Legal Basis
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Law No. 37 of 2004 on Bankruptcy and Suspension of Debt Payment Obligations (UUK-KPU);
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Insolvency Act 1986 (UK);
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Bankruptcy Reform Act of 1978 (US).
Writer: Gracia, S.H. & Evy Mutiara
Editor: Muhammad Arief Ramadhan, S.H.