Wages disbursement in corporate insolvency proceedings in Indonesia

In the event of wages disbursement, Article 95 Paragraph 4 of the Indonesia Manpower Law states: “In the event that a company is declared bankrupt or liquidated based on applicable laws and regulations, wages and other rights of workers/labourers are debts whose payment takes priority”.

In practice, under these provisions, when a company is declared bankrupt, payment of wages to workers does not take priority. Companies tend to prioritise state debt and curator fees, and secured creditors holding collateral, fiduciaries and/or mortgages. However, in fact Article 95 Paragraph 4 of the Indonesia Manpower Law is contrary to Article 21 Paragraph 3 of Law number 28 of 2007 concerning general provisions and tax procedures which states:

“In the event that a taxpayer is declared bankrupt, dissolved or liquidated, the curator, liquidator, or person or entity assigned to carry out the settlement is prohibited from distributing the assets of the taxpayer in bankruptcy, dissolution or liquidation to shareholders or other creditors before using the assets to pay debts the taxpayer's taxes.”

In the end, a judicial review was submitted to the Constitutional Court for a firm interpretation of Article 95 Paragraph 4 of the Indonesia Manpower Law regarding the phrase “payment takes precedence”, because in practice when a company goes bankrupt, workers’ wages are still paid after responsibilities towards the state because of legal uncertainty. 

The Constitutional Court decided that it is clear if bankruptcy occurs, the right to advance tax debts does not apply if it meets workers’ wages and the rights of workers/other workers. In relation to workers’ rights, for a worker with an employment agreement for an indefinite period of time and whose employment relationship is terminated due to the company going bankrupt, the worker is entitled to severance pay, gratuity pay, and compensation for their rights. As for workers with fixed-term work agreements, they are entitled to compensation equal to their wages until the end of the term of the work agreement.

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Dea Shakila is a part of the Corporate Legal team at Protemus Capital, where she contributes her expertise in legal matters to support the company's operations and compliance efforts.