The Constitutional Court decision on the enforcement of the fiducia security: is this a new interpretation?

The Case

On 6 January 2020, the Constitutional Court (the Court) issued a decision regarding the interpretation of paragraphs (2) and (3) of Article 15 under Law No. 42 of 1999 regarding Fiducia (the Fiducia Law). The Court interprets the two paragraphs as follows: (1) article 15(2), it is not possible for a creditor to sell the fiducia object without a court judgment especially when the debtor does not voluntarily surrender the fiducia object to the creditor; and (2) article 15(3), it is not possible for a creditor to unilaterally call an event of default if it is not agreed by the debtor.

The applicants in the present case were two individual customers of a multifinance company who placed their car as fiducia security for a loan. Following a default under the loan, the creditor repossessed the car using a debt-collection service agent. The customers alleged the service agent acted inappropriately (including making threats against the customers) while seeking to repossess the vehicle. The customers contested the repossession and submitted a lawsuit to the district court. The district court was of the view that the creditor’s actions in repossessing the car were "unlawful", though it is notable that the court in this instance did not assess the executorial power of the fiducia certificate.

A new interpretation or an affirmation of the market practice?

When the Fiducia Law was first introduced in 1999, the market took the view that it was not possible to enforce the fiducia security and sell the fiducia object without obtaining a court order unless the debtor gave its consent to the enforcement after a default had occurred. This practice was also supported by the unwillingness of the auction houses where the fiducia security ought to be enforced to proceed with the auction if there was no court order. Then the market practice changed and auction houses were willing to carry out enforcement of fiducia security without a court order although if the debtor challenges the enforcement by filing an objection to the court then the enforcement must be paused until the court has ruled on the case. The Court’s recent decision of Article 15 appears to reinforce the early interpretation of the Fiducia Law. In the present case the debtor challenged the creditor in court and the court took the view that the enforcement must be done with its order.

We do not believe this will change the current market practice on commercial lending transactions, particularly where the fiducia objects are machinery, heavy equipment or similar goods. In most cases, despite the language in the fiducia agreement where the debtor agrees and will let the creditor repossess the equipment, the creditor always take a cautious action by obtaining a court order before seizing the assets located at the debtor’s property.

The question is whether a creditor or a security agent will now have to seek a court order before enforcing or selling the fiducia object through an auction house even though there is no challenge from the debtor. As a note, it is not advisable for the creditor to sell the fiducia object through private sale because the creditor could be alleged to have sold the assets at below the market value.

The requirement for "an agreement of default"

The second part of the Court decision is for the debtor to agree on an event of default. This is probably the most important issue in this decision and seems to be a completely unreasonable requirement by the Court. It is not clear from the case however whether the loan agreement for the motor vehicle financing is clear in setting out the default provisions. In typical corporate lending transactions, the agreements would be very clear in setting out what event constitutes a default, how a default will be determined and how an enforcement notice will be issued. As a comparison, under the Indonesian Civil Code if a debtor fails to perform its obligations, Article 1238 of the Indonesia Civil Code requires the creditor to send a default notice (somasi) which will serve as an evidence of default in court later on when the creditor seeks a court order for enforcement.

The requirement for a "voluntary surrender of the fiducia object"

In its interpretation of Article 15(2), the Court considered that, if the debtor agrees that a default has occurred, then it should have "voluntarily surrendered" the fiducia object to the creditor. If the debtor does not voluntarily surrender the fiducia object, the creditor must seek a court order. This interpretation appears to contrast with Article 30 of the Fiducia Law, which obliges a debtor to hand over the fiducia object to the creditor in an enforcement scenario (though the Court did not consider the relevance of Article 30 in its analysis of Article 15).

As a matter of practice, in a commercial financing transaction a creditor is most likely to seek a court order to repossess fiducia objects regardless of the language in Article 30 of the Fiducia Law or the undertaking given by the debtor in the financing agreements. Again, this is not totally new in the context of enforcing a fiducia security.

Going forward

We believe the decision will have little impact on commercial financing transactions. If anything, loan documents should be made clearer how a default could be declared and that such declaration should be deemed as to have been agreed by the debtor. With regard to the issue on repossession of a fiducia object or selling it without a court order, we do not believe the Court decision will change the current market practice. One thing the market would be interested to see is on how the auction houses will carry out an auction in the future, whether they will ask for a court order even though there is no challenge from the debtor.