Indonesia: M&A through debt restructuring mechanisms

Similar to the US Bankruptcy Law (USBL), two restructuring schemes are available, i.e. (i) bankruptcy (Chapter 7 of USBL), and (ii) suspension of payment (Chapter 11 of USBL – PKPU). 

Different from bankruptcy proceedings which will result in the sale of bankruptcy estates in favour of creditors, the PKPU proceeding aims to provide temporal relief for the debtor against pressing creditors. 

M&A within the PKPU proceeding

As the purpose of the PKPU proceeding is to rescue the debtor (company), the debtor is given a chance to prepare a composition plan. The composition plan should govern among other things the plan of the debtor to (i) rescue the company, and (ii) repay its creditors through several mechanisms (set-off, haircut, debt buyback, debt-to-equity conversion, debt-to-asset conversion, or adjusted payment timings). This composition plan will be presented to the creditors for their approval. 

For the composition plan to be approved and the debtor able to continue its going concern, it must be approved by (i) >50% of the attending unsecured creditors who represent at least 2/3 of the verified unsecured claim; and (ii) >50% of the attending secured creditors who represent at least 2/3 of the verified secured claim. The composition plan must also be ratified by the court before the debtor’s PKPU status can be lifted and it can continue its business as usual. If the creditors do not approve the composition plan, then the debtor will be declared bankrupt.

As briefly mentioned above, the repayment mechanism in the composition plan can also include debt-to-equity or debt-to-asset conversion. This way, the debtor can offer the debt to be settled by conversion into its equity or asset. Specifically, a debt-to-equity conversion can also be considered an M&A opportunity if the conversion will lead to a change of control in the debtor. 

Once the composition plan is approved by the creditors and ratified by the court, the debtor will need to follow standard debt-to-equity conversion procedures, including, but not limited to, the formality requirements such as newspaper announcements and notification to the Indonesian Competition Commission once the filing requirements are fulfilled. 

In 2022, an Indonesian state-owned airline that went through a PKPU proceeding also offered debt-to-equity conversion as its repayment plan. 

Conclusion

M&A transactions can also occur through a debt restructuring mechanism, specifically in a PKPU proceeding, via a debt-to-equity proposal. The possibility of the creditors accepting the proposal depends on many factors, including their confidence in the debtor’s ability to bounce back. 

Freddy Karyadi, a seasoned legal and tax professional with over 25 years of experience, currently serves as a Tax Partner at Protemus Capital. Specialising in project financing, capital markets, and M&A, his expertise spans diverse cross-border deals, particularly in the technology and fintech sectors.