When the business operations of startups and emerging companies in Indonesia come to a halt and ultimately lead to insolvency or bankruptcy, the distinction between an investor and a debt claimant can suddenly become blurred. Who should bear the risk of such losses? Many startup businesses face a similar dilemma. They require an injection of fresh capital and subsequently enter into arrangements with investors through documents labelled as an “Investment Agreement.” Why do disputes of this nature continue to arise before the Commercial Court?
Disputes often emerge when a business collapses and the investor is unwilling to bear the resulting losses. The investor may then unilaterally seek to alter its legal position and demand full repayment of the funds, effectively asserting the position of a creditor. Such practices frequently give rise to threats of filing an application for Suspension of Debt Payment Obligations (Penundaan Kewajiban Pembayaran Utang or “PKPU”) or bankruptcy proceedings, thereby placing significant legal pressure on startup founders and business operators.
Legal Framework and Regulations
Indonesian law provides a clear regulatory framework for distinguishing between an investment arrangement and a debtor-creditor relationship.
- Article 1338 of the Indonesian Civil Code (KUHPerdata) establishes the principle of freedom of contract and consensualism, under which a valid agreement is binding upon the parties as law. The parties are therefore bound by their original agreement, and its substance cannot be unilaterally altered merely because the business subsequently incurs losses.
- Article 2 paragraph (1) of Law No. 37 of 2004 on Bankruptcy and Suspension of Debt Payment Obligations (“Bankruptcy Law”) sets out the formal requirements for filing a bankruptcy petition, namely the existence of at least two creditors and one debt that has become due and payable. This provision may be invoked by investors seeking to characterize their investment funds as “debt” in order to initiate bankruptcy or PKPU proceedings.
- Article 3 paragraph (1) of Law No. 40 of 2007 on Limited Liability Companies (“Company Law”) and Law No. 25 of 2007 on Investment (“Investment Law”) reinforce the allocation of investment risk, whereby shareholders or investors bear the risk of loss in proportion to the capital they have contributed (equity risk), rather than being entitled to demand repayment of such capital as debt.
- Constitutional Court Decision No. 67/PUU-XI/2013 determines the hierarchy for the distribution of proceeds from the bankruptcy estate, namely:
- Outstanding principal wages owed to employees or workers;
- Claims of preferential creditors, including the State’s tax claims;
- Secured creditors (separatis creditors), namely holders of security interests such as mortgage rights (Hak Tanggungan), fiduciary security (fidusia), or pledges (gadai); and
- Concurrent creditors (concurrent creditors), namely creditors without specific security interests.
The court does not merely examine the title or nomenclature of a document. Rather, it examines the substantive legal relationship that actually exists between the parties. This principle was affirmed in Commercial Court Decision of the Central Jakarta District Court No. 78/Pdt.Sus-PKPU/2020/PN Niaga Jkt.Pst, demonstrating that the ambiguity between the legal status of an investor and that of a creditor is not limited to the startup sector, but may also arise in the highly regulated capital markets sector.
In that case, the panel of judges granted a PKPU petition directly filed by a mutual fund investor against an investment manager, concluding that investment funds that could not be redeemed had effectively become due and payable debt, notwithstanding the fact that the relevant investment contract and product expressly provided that the investment risk was to be borne by the investor.
If a court grants such a claim and characterizes investment funds as debt, the investor’s legal status may shift to that of a concurrent creditor. Such a shift can have significant consequences: the investor would effectively be insulated from the ordinary risks of business losses while acquiring a legal basis to pursue the company through bankruptcy or PKPU proceedings.
Conversely, the business operator may challenge such a unilateral debt claim before the court by demonstrating the agreed allocation of investment risk and the parties’ good faith. The business operator should demonstrate contractual provisions establishing a profit-and-loss-sharing mechanism, establish that there was no obligation to repay the principal through a fixed-return arrangement, and present transparent financial records demonstrating that the investment funds were actually utilized for business operations.
In addition, the business operator should submit records of correspondence and evidence of business-rescue or restructuring efforts demonstrating that the company’s deterioration resulted from genuine market and business dynamics rather than a default on a loan obligation. Where these evidentiary elements are established, the court may conclude that the alleged due and payable debt does not legally exist and that the resulting loss constitutes an equity risk arising from the investment, which must be borne in accordance with the parties’ agreed investment arrangement.
Conclusion
Losses arising from the failure of a startup business should, in principle, constitute an equity risk borne by the investor in proportion to the capital contributed. Rather than accepting the inherent risks of investment, however, investors may seek to exploit the formal requirements for bankruptcy, including the requirement of at least two creditors and one due and payable debt, by unilaterally characterizing their investment funds as debt in order to bring the business operator into PKPU proceedings.
Although courts may, in certain circumstances, grant debt claims where the substantive nature of the legal relationship between the parties is ambiguous, business operators may challenge such claims before the court. This may be achieved by demonstrating the existence of a profit-and-loss-sharing mechanism, the absence of any obligation to provide a fixed return or repay the principal, transparent financial records, and good faith demonstrated through correspondence and documented business-rescue efforts. Where the evidence supports the existence of a genuine investment relationship rather than a debtor-creditor relationship, the court may reject the unilateral characterization of the investment as debt and recognize the resulting loss as an investment risk.
As investment practices involving startups and emerging companies continue to develop, both business operators and investors must understand not only the opportunities involved but also the legal and regulatory implications arising from such arrangements. MNL Law Firm is ready to assist business operators in navigating these developments through tailored legal advice and solutions designed to address their respective business needs.
For further inquiries or legal assistance concerning investment law, bankruptcy, PKPU, business regulations, and other legal matters arising from the legal relationship between investors and business operators, MNL Law Firm is ready to provide legal assistance and solutions tailored to your business needs.
References
- Indonesian Civil Code (Kitab Undang-Undang Hukum Perdata or “KUHPerdata”), Article 1338.
- Law No. 25 of 2007 on Investment.
- Law No. 40 of 2007 on Limited Liability Companies.
- Law No. 37 of 2004 on Bankruptcy and Suspension of Debt Payment Obligations.
- Constitutional Court Decision No. 67/PUU-XI/2013.
- Commercial Court Decision of the Central Jakarta District Court No. 78/Pdt.Sus-PKPU/2020/PN Niaga Jkt.Pst.
Author: Petrick Rafael Samosir
Editor: Robby Simamora, S.H.,M.H.