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Terry Halliday and Bruce Carruthers describe Indonesia’s ability to foil the bankruptcy reforms mandated by IFIs in response to the Asian economic crisis.

How did Indonesia resist efforts of powerful international financial institutions (IFIs) to pressure it into reforming its bankruptcy system?

Scholars Terry Halliday and Bruce Carruthers argue that in response to the Asian economic crisis, the world’s powerful international financial institutions mobilized in “unprecedented fashion” to address the financial and legal situation of affected states. Part of the effort of these powerful agents was focused on reforming bankruptcy law.

Bankruptcy law is integral to market operation since it regulates property rights and increases the predictability of risk in financial crises. So, part of the effort of IFIs and some Western States to address the Asian economic crisis was to attempt to transplant aspects of Western bankruptcy law into the Indonesian legal system.

Foiling Transplant in Indonesia

Despite the asymmetries of power between the IFIs and Indonesia (in short, Indonesia needed large amounts of cash and IFIs could make cash available—but on condition), Indonesia was able to “foil” the efforts of IFIs to transplant Western style bankruptcy law.

This raises two questions:

  1. Why would Indonesia want to resist transplanting law that could, arguably, aid its efforts to recover from the economic crisis?
  2. How did Indonesia foil the efforts of these powerful IFIs?

In order to answer these questions, Halliday and Carruthers examine three situations in which Indonesia successfully foiled outside efforts to transplant bankruptcy law:

  1. Formation of a Commercial Court,
  2. Establishing an out-of-court restructuring scheme,
  3. Creating an independent profession of bankruptcy receivers.


Efforts to transplant economic and legal structures always occur in a particular social setting. Indonesia’s legal system was widely seen as corrupt and moribund. Their bankruptcy law, based on Dutch law, was rarely used. Judicial independence was viewed as largely nonexistent and commercial litigants avoided the courts. Any commercial dispute of any importance was settled privately or through interventions by politicians and officials.

In addition, numerous conflicts plagued bankruptcy reform:

  • Creditor nations and IFIs did not agree on how to restructure corporate debt,
  • Nationalism gave rise to resistance against “foreign” reforms,
  • Debtors were largely recalcitrant,
  • Agents and special interests were deeply entrenched within the justice system,
  • Ethnic and regional tensions were potentially explosive.

Court Reform and the Commercial Court

The IMF (with the support of the U.S. Treasury) advocated a purge of all sitting Supreme Court judges, an overhaul of court administration (including hiring new staff) and the establishment of a new commercial court with ‘clean’, competent judges. The IMF argued that the Commercial Court would serve as an exemplar for the entire court system.

Why Did Was the Commercial Court Resisted?

There are several reasons:

  • Personal economic interest,
  • Nationalist sentiment,
  • Social consciousness,
  • Plain political expediency.

How Was Resistance Accomplished?

  • Selection of judges did not follow reforms. The Supreme Court maintained control of lawyers selected from general courts whose training and competence in bankruptcy law was minimal.
  • New Commercial Court judges were not paid well,
  • The Indonesian government refused to use ad hoc judges who were bankruptcy specialists but worked outside the existing court system.

Out-of-Court Restructuring Scheme

Another suggested reform was the creation of an out-of-court mechanism in which companies worth more than $10 million (U.S) could reach agreement with creditors with the help of expert mediators. The Jakarta Initiative Task Force (JITF) was to be this mechanism. Successful resolutions between debtors and creditors would be recorded in a Memorandum of Understanding.

In addition to providing a forum outside the discredited court system, the JITF was seen as a way to lessen pressure on the courts.

Why Was the JITF Resisted?

Many government ministers had financial interests in the largest debtors. Disclosing these interests to the JITF could be damaging.

How Was Resistance Accomplished?

  • The JITF was not given ability to levy sanctions to enforce Memoranda of Understanding. The authors call this, “mediation without teeth.”
  • Memoranda of Understanding (MOUs: the outcome of mediation negotiations) were merely statements of intent, not action,
  • Debtors used delaying tactics to avoid acting on MOUs,
  • Legislative amendments proposed by the IMF that would add positive and negative sanctions to MOUs were ignored by the government,
  • The Indonesian government only gave the appearance of conformity. Even though the government reported to the IMF that many companies were restructured, in effect this only meant that creditors took drastic loan reductions. In other words, “debt restructuring” meant financial restructuring, but not an effort to increase managerial effectiveness or efficiency.

Receivers’ Profession

IFIs recommended the creation of a specialized profession of highly trained bankruptcy receivers. This new profession (which existed in different forms in other countries) would not only increase the level of professional expertise in bankruptcy, but provide relief for the Indonesian legal profession.

However, training for this new profession would have to come from somewhere. Transplanting organizations (like IFIs and USAID) intended that experienced foreigners could enter the professional services market and train indigenous professionals.

Why Was the Receiver’s Profession Resisted?

At a time when foreign influence was felt to be particularly intrusive, importing judges from a former colonial overlord would inflame nationalist sentiment.

How Was Resistance Accomplished?

  • While the Indonesian government agreed that training and examinations were required for admission into the new profession, oral and written exams were required to be in the Indonesian language, Bahasa Indonesia (effectively excluding foreign professionals),
  • Receivers were required to be members of the Receivers Association. This provided the association with important gatekeeping powers over the profession.
  • The reforms mandated that creditors could nominate receivers for court confirmation. However, the Indonesian court did more than merely confirm nominations, and the independence of nominations quickly became suspect.

More Complexity: Chinese Interests

Another layer of complexity was added because of the presence of Chinese interests in the Indonesian economy.

The Chinese were threatened by the reforms because they had built up an impressive level of economic control during previous Indonesian regimes. Chinese business leaders were alleged to have removed enormous assets at the onset of the crisis and were reluctant to bring those assets back into the Indonesian economy.

Why Did Chinese Resist Indonesian Bankruptcy Reform?

Until the Chinese gained confidence in renewed economic opportunity, they had little incentive to support reforms in which they could only be the losers both as entrepreneurs and as a vulnerable ethnic minority.

How Did Chinese Resist Change in Indonesia?

  • The strategic response of Chinese entrepreneurs was to play for time,
  • They dragged out debt restructuring,
  • They fought to maintain control of their companies,
  • They kept most of their money out of the country,
  • They cooperated only enough to save face and to save their companies.

Bottom Line

The net effect of the combination of conditions, motivations and strategies of the Indonesian government and judicial system gave Indonesia an impressive ability to resist powerful IFI influences.

Data and Methods:

Data Source:

Based on interviews with actors involved in the development of international insolvency law.

Funding Sources:

American Bar Foundation.

Full Text Availability:
Available for purchase in

Halliday, Terence C., and Bruce G. Carruthers. 2007. "Foiling the Hegemons: Limits to the Globalisation of Corporate Insolvency Regimes in Indonesia, Korea and China." Pp. 255-301 in Law and Globalization in Asia Since the Crisis, edited by Christoph Antons and Volkmar Gessner. Oxford: Hart Publishing.

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