LAW

MONOPOLY AND FAIR BUSINESS COMPETITION IN INDONESIA AND THE THE APPLICATION OF LAW NO. 5 YEAR 1999: AN EVALUATION

2009-09-25T02:24:00.000-07:00

1. Introduction

In Indonesia, there have been various attempts to develop international competition law. Socialization is involves in order to develop people awareness on the importance of competition market. An effective competition law was relevant for Indonesia because of the bad governance practices in both the public and the private sectors under the New Order Regime. Indonesia enacted a competition law in 1999 and set up the Business Competition Supervisory Commission (KPPU) in 2000. Competition authority like KPPU has been dealing with hundreds of cases of competition law and policy. The role of KPPU are actions taking and assessments on behavior against competition as regulated under the Law Number 5 Year 1999, also offering recommendation and deliberation on government policies related to monopolistic practices and unfair business competition.
However, the problem for Indonesia as a big developing country with a population around 330.000.000, anti monopoly law is a very new system and it is hard to follow. The purpose of the law is very well stated and systematically written for all the business person in Indonesia, from big businesses to small businesses. Until now, the application of the Law No. 5 Year 1999, has not fully guide the businesses in Indonesia to create a fair competition market, only some part of businesses that can follow due to the presure given by the International Organization.
Currently in Indonesia there are still some business companies and some of the state owned enterprises still doing the monopoly action. For example the Electricity National Company (PLN) and also the Transport Insurance Company (PT. Jasa Raharja). Both PLN and PT. Jasa Raharja is a monopoly company and owned by the government. The problem with this monopolistic action is that both company did not give a good services for the people and the facilities are not maintained and also the mothly payment that people pays is high. Some of politicians ask the government to let other similar company establish in indonesia, but government said that is is too dangerous for other company especially foreign company to work in this two area.
The establishment of Law Number 5 Year 1999 are in some cases very effective but in other cases invisible. This problem cannot be separated from the history of the Law and the Indonesian Government. The fact that this Law was forced by the International Organization is one of the big issue why this Law has not been working effectively.

1.1 Methodology
A good research requires precise methodology and hypothesis. Method used in this research is a procedure to find a complete understanding about one object as end of science and knowledge. While a good reseach is an effort conducted only to catch a phenomena based on science methodology in order to find out new principles behind the phenomenon.
The methodological approach in this research conducted using normative juridical method. This method contain the research through finding laws and regulation which are considered living law. The ends of this method is to find law substance, but conducted by examining how the process of case settlement done which is by the cause root of the cases, then studying history of the cases and how the cases be settled and finally what was the impact of settlement of the case to the community in general.
Data that is needed for this reseach are primary and secondary data. primary data will be obtained by studying the primary law sources, among others, are law and regulations, non codified law sources (i.e. customary law), court decisions, convention, etc. secondary data will be obtained by studying the bills, opinion of legal scholars, research, journal, etc. to intensify the study, this research will also used comparative method of research that is to compare data obtained with other similar data from foreign countries.

2. Historical Aspect of the competition law in Indonesia

The competition on economic practice in Indonesia was existed a long time ago in a Constitution 1945 which envisaged a democratic economic system. In Article 33 declared the economic shall be organized by universal efforts based upon the principles of the family system and the state controlled the sector of production which are significant for a country and affect the life of the people. but at this time, the economic practice in Indonesia has been different to the strength of the Constitution 1945.
The interest in developing a comprehensive competition law in Indonesia was noticed around the year 1990. At that tima, the need of competition law was being discussed by legal scholars, aslo member of various political parties, non governmental organizations, certain governmental institutions and number of different group, in fact the Indonesian Democratic Party and the Indonesian Ministry Trade in cooperation with the Faculty of Law University of Indonesia created draft of competition laws. Yet, authority people were not given serious attention to the porosed draft law because at that time, most of the unfair business competition and monopolistic practices was set usually by Indonesian largest industries and businesses because of the result of direct and active government support. However, the introduction of competition law did not automatically result in an improvement in condition for cunsumers.
Since 1997, Indonesia has been in a middle of an economic crisis which getting worse along with the world economic decline reacing its lowest point in 1998. One of the reason that influenced the economic crisis is because Indonesia did not present a clear competition law, competition law has not been a major aim of public or private sector concern in Indonesia.
Before the enactment of the Law Number 5 Year 1999, the Government did not give much attention to the development of the competition law regime in Indonesia. Therefore in 1980’s, internal deliberations on competition and comsumer protection were performed quite few times among officials within the Departement of Industry that includes a bill of legislation and regulation on competition and consumer protection. And there was no comptehensive legal regime implemented at that time, in fact the government’s policies in carrying out its normal interaction particularly in the process of running country’s economy have gave many major effects into the aspect of business competition in Indonesia.
Indonesia adopted the Law Number 5 year 1999 which concern about the Prohibition of Antimonopoly and Unfair Business Competitin and the creation of the Supervision Commission for Business Competition (KPPU), as the Indonesian Antimonopoly Authority have noticed serious efforts of Indonesian Government to perform structural modification towards competition regime in Indonesia. Until now, the Government which is the Commission still performs continuous consolidation to set up competition stategies and has initiated effoerts to pbserve public compliants. This is a good start for the future Indonesian competition law and policy regime.
The historical aspect takes an important part of the fair competition activities that is currenty happening in Indonesia, and the result has not been satisfactory to the Indonesian Government and the development of the competition law it self need to be analyze in order to find a solution for the fair competition problems.

2.1 The Development of Competition Law In Indonesia
The term competition has been interpreted as workable because competition is a base of a proficiently working market system and it is basically control the market from every sector which also has numerous advantages over a planned economy. According to Adam Smith, competition is a requirement which protects freedom of decision and action of self interested individuals from directing lawlessness of anarchy but slightly too economically optimal, socially fair and desirable market result. For competition procedure run easily and have desirable results, there has to be several requirements are gathered such as freedom of trade and contract, free market entry and exit, an efficient monetary system, protection from festrictive business practices, the existence of positive and negative sanctions and transparency of the market.
Transparency of the market is the most important part of the system of fair competition, not only for the company it self but for others to evaluate the company and for the government to control in order to increase the market system and compete in the global market.
A fair competition law in develop country is an effect of successful interaction between government’s rule, business professionals and the law that control the whole procedure. This circumstance is essential element to advance people’s welfare, also to offer an opportunity for free trading and promote the economic growth. Developed countries use fair business competition as an inseperable aspect of their economic democracy in order to build welfare among their people. Indonesia is expected to success with the establishment of the Law that regulates Prohibition on Monopolistic Practices and Unfair Business Competition. Both the Law and KPPU as an association are endeavored to support healthy business competition.
Currently, the adoption of competition law and policy is very important and a must if the country wants to survive from economic problems and the global competition. For the Competition Law to be effective and efficient in all areas is not an easy task to emplemented by the government. That is why it is essential that competition law imposed by authority to avoid misconduct committed by public and private sectors.in Indonesia, competition is a new topic, and the result will take years to achieve.

2.2 The Establishment of the Law Number 5 Year 1999 about anti monopoly and fair business competition.
Law Number 5 Year 1999 is the first Indonesian comprehensive law which prohibit monopolistic practices and unfair business competition. The establishment of this law begin to make sure there is an effective business competition in Indonesia. Before the establishment of the Law Number 5 Year 1999, several legal provisions dealing with competition law were rather limited in scope and can only be found in some of the laws that spread thoughout several regulation including both Indonesian Cminimal and Civil codes.
Indonesia Civil Code article 1365 was the only provision that had a foundation for protection against unfair competition conducted by business person. However, there is no clear definition of unlawful action in Indonesia because its application is very broad and only depends on the judge decision when cases arise. So, it becomes a problem for business person to plan their activities in the future because the aspect of competition law has become very wide. Furthermore, Indonesian Criminal Code in article 382 stated that the provision can only provide protection for business person only if unfair competition is in the shape of a fraudulent act, but the unfair behavior like market cestrictions and collusion are not automatically conducted through fraud. From this point of view the important of a fair competition act for Indonesia seen very clearly.
The establishment of the Law regulating of Monopolistic and Unfair Business Competition offers a same protection for every business player and legal centainty for motivating more rapid economic expansion in an attempt to improve social welfare, also with an accomplishment of the will and intention as developed in the Indonesian constitution. Moreover, the law is partially to satisfy condition of Letter of Intent entered between Indonesian government and the International Monetary Fund in July 1998. The law was supported by the politicians, the government, public, and the press which means it will address increasing concerns about monopolistic practices and unfair business practices and it will control the corruption, collusion and nepotism that had been taking place in Indonesia between government and favoured business.
It can be seen that the Law Number 5 passed by the House of Representative (DPR) on February 18, 1999 and it was signed into law by the President of Indonesia on March 5 1999 with an effective date on March 5 2000. The one year date of the competition law was purposely set in turn to provide time for socialization of the new law. And for businesses, there is additional six month time until September 5 2000 under the law to come within fulfillment of the law. The six month time of the law certainly to give businesses, the public, and others a clear signal that rules of doing businesses in Indonesia were about to change significantly.

2.2.1 Era Monopolistic Regime
The monopolistic regime exist in Indonesia is because of non conductive political economy climate, generally by economic rent looking for direction performed collusively between business and government officials. In fact, government created anti competition policy for themselves, although it is contrary to a legal provision such as law. There is not much of legal provision deal with anti monopoly and unfair practices besides spread in several statuses of criminal code and civil codes and there is no specific procedural and operation regulation to implement the law. Moreover, there is no establishment of the authorizes body to execute, control, the anti monopoly practices.

2.2.2 Era Anti Monopoly and fair Competition
In the period of anti monopoly and fair business competition, a competition policy in Indonesia’s point of view is an outline through which business or investor persues their aims and interest. It includes written law and provision, institutionalization, legal profession, enforcement of institution and its legal decision and outcome. In this era, the important of competition law in Indonesia is a fair competition or anti monopoly practices that increases capacities, economic welfare, innovation, and quality guarantee. Make sure that there is a legal certainty for investor and business entities and keeping entreppreneurs’ creation.

2.2.3 The role of Government in Business Competition
In the past, ther role of government in business competitions was very important, but it is not always in a positive way. The government in poser at this time is different with government that brought up independence in Indonesia. Long time ago, President Soeharto was the first leader that brought Indonesia political stability and economic progress but his government has been criticized because of an arbitrary arrest, a shackled press and military dominated politics. The law has a purpose of protecting public interests, thus the government has a significant position in transforming idea of fair competition aming business players. The government plays a part in forming a right tool to advance successfully promote competition rules and the government’s job in regulating fair competition can be recognized in its power as an institution to create legislation to regulate competition.
There are two forces of influence in politics of economic reform within the New Order government: the technocrats who supported market transformations and limited role of government in the economic and the economic nationalist who claimed that trade protection and direct government investment and rule were necessary to restrain foreign influence whilst mobilizing sufficient resources to renew the economy.
In the Law Number 5 Year 1999, there is a harmonization between KPPU and government dealing with Monopolistic Practices and Unfair Business Competition. Based on its duties by the Law, KPPU has to give advices to government regarding competition issues. The relationship between the competition authority and government is considered and described as growing, constant, simultaneous process of harmonization and cooperation. In the early period, it is very important to have responsibility in a process of communicating and understanding between government and competition authority in a current position. An understanding between government and competition authority on a viewpoint of welfare and efficiency and stated that responsibilities would reduce a prospect of conflict or dispute. Through the Supervision Commission fo Business Competition (KPPU), the government is estimated to plan high credibility and integrity with a promise that every case related to business competition or activities resulting in market alteration will be properly processed in an interest of consumers.
Government rules are also a matter to Commission Supervisory because it is similar with the fact that monopolistic practices can also happen under the government’s consent and it seems that government plays an important role in creating monopolistic condition and in not promoting fair competition.

3. Business Competition Law Problems In Indonesia

There are three types of anti competitive actions that happen most in Indonesia. The first is the anti competitive actions carried out by business person as a tactic to destroy its competitors, for instance vertical intergration, resale price maintanance and market allocation. The second is anti competitive actions performed by business person with a permission of a government which include cartel like conducts through association and monopoly right granted to individual persons. The third anti competitive actions are those conducted in providing of government’s needs and state own enterprises (BUMN) supplied through collusion.
Another problem is decentralization; in Indonesia, decision makers at a regional level do not understand rules behind the competition law. Also, there is a lack of understanding of competition law on a part of government officials and judges.
As a developing country, Indonesia is still eager in creating incentive for economic growth bt presenting series of policies. Competitiveness also limited a performance of competition law in Indonesia. Developing country like Indonesia has lower competitiveness and thus they are likely to be more practical towards this competition law, but this is a wrong perception. Indonesia is also obliged to implement competition law to improve its domestic competitiveness.
The beginning of Indonesia anti monopoly law was pushed by external factor mainly force from the IMF and the result is that there is a lacks of support of the law in a political field. Therefore, the implementation of the Law Number 5 Year 1999 have not achieve their purpose. The are still some area of business where the anti monopoly law is still not yet implemented.

3.1. Prohibited agreement by law No. 5 Year 1999
The Law Number 5 Year 1999 concerning the Monopolistic Practices Prohibition and Unfair Competition consist of several chapters, one of the chapters is about prohibited agreements in articles 4 to 16 which banned Oligopoly, Price Setting, Area Division, Boycotting, Cartels, Trust, Oligopsony, Vertical Integration, Close Agreement and Agreement with Foreign Parties, prohibited activities in articles 17 to 24 and misuse of dominant position in article 25 to 29. There are many interesting issues regarding agreements that prohibited under the law especially about definition of an agreement which are very broad, includes written and unwritten agreement.
According to Articlel 1 point 7, agreement does not have to have an objective and occurs as a result of an action. Parties in an agreement are entrepreneur and agreement may or may not be in writing. There definition of an agreement does not affirm any purpose which means it is not state the reason of why each party enter into an agreement. Moreover, the parties in an agreement gave to be business person that may be an individual or business entities whether in form of legal entities or else. One of the prohibited agreements is oligopoly or to practice joint monopoly which stated in Article 4 paragraph 1 of the law. In Article 4 paragraph 2 shows the statement that a market share of 75% own by 2 or 3 business players could be alleged to have control over a production and marketing.
Price fixing is stated in Article 5 paragraph 1 which prohibits business person from entering into agreement with their competitors in order to set a price on certain goods or service for consumers or costumers. Price fixing is illegal no matter on what level a price is being set or even there is a negatice effect on negligible competition. Boycotts in Article 10 of the Law are horizontal agreements between competitors to refrain business transactions with other competitors, suppliers or certain consumers. This is a kind of effort by competitors to eliminate other competitors by direclty or indirectly force customers to end doing business with other competitors who prevent entrance to participate which are needed by other competitors.
Article 11 of the Law related to Cartel stated that “Business actors are prohibited from creating any contract with other business competitors with a purpose to manipulate the price by influential production and/of marketing of goods and/or services that can cause monopolistic practices and/or unfair business competition. That is why this provision can be viewed as a rule of reason violation.

3.2. Prohibited activities by law No. 5 Year 1999
The Law No. 5 Year 1999 set many types of prohibited activities, and in article 28 paragraph 1 regarding Mergers in Indonesia are only allowing if it is not significantly decrease competition. It described that business actors are prohibited from performing mergers or join up of enterprises which may result in monopolistic practices and unfair business competition. In paragraph 2 stated that acuisition of shares of other companies is also not allowed if that activities can cause monopoly or fair business competition.
Another prohibited activity is monopoly which defined as control over a production or marketing of certain goods or service by one business person or one group of business actors. While monopolistic practice is described as centralization of economic power by one or more business actors which result in a production control of a certain goods or services that can cause unfair business competition and may prove harmful to public interest. There are some qualifications for monopolistic practice such as control over a product, control over the marketing of a product, such control may cause monopolistic practice and that kind of control also may cause unfair business competition.

3.3. Exemption agreement in the Law No. 5 Year 1999
There are several exemption given by the Law No. 5 Year 1999 related to the agreements and activities with respect of intellectual property, explicity patents, trademarks, copyrights, industrial product design, integrated electronic assembly, trade secrets, and franchise agreements. In franchise, exempted agreements have been accepted in international legal practive. It seems that competition law in here has been unnoticed and it can be easily seen as adopting typing contracts or reciprocal dealing.
There is also an improvement of exampted provisions which can create problems, that related provisions are article 5(2)a about an agreement entered into the context of a joint venture, article 5(2)b is about an agreement entered into based on an exixting law. Additionally, article 50h related to business actors of the small scale group/enterprises or activities of supportive intended specifically at serving their members in article 50i. The justification for an exemption of provisions in the law is to give the small scale group/enterprises some protection against voracious actions of large firms, in addition to uphold various allocations different sizes firm with different skill requirements. The exemption of the small scale enterprises will not improve their competitive benefit relation to larger scale enterprises. But, on the other hand it could let small scale enterprises and cooperatives to engage in anti competitive behaviour.
Considering the large number or small scale group/enterprises, this is the most important exemption of the Law No. 5 Year 1999. The big enterprises in Indonesia got a very big support from the small scale group and in this way thay can keep working side by side without destroying the small businesses, at least this is the purpose of this examption and not necessarily the same as the actual situation.

4. Challenges for Indonesian Competition Law and the Necessary Condition to Implement Competition Law.

There is a need to assess Indonesia’s competition law by creating the law or legislation in a clear decision, expected unbiased manner, and approaching for public. Make shure the law is directed and enforced in a way which is transparent, unbiased, reasonable and ensuring a competent and independent professionals. There has to be a beginnig of combining per ception of free and fair competition, this concept is very practical to have an understanding and enforcement of competition law on a right goal while keeping coordination and integrity.
Furthermore, reasons of enacting the Law Number 5 Year 1999 are to prevent monopolistic practives and unfair business competition that may be performed by business actors thus to support free and fair competition. Aslo, to create conduvice business environment just to make sure there is a certainty of equal opportunities for large, middle and small scale business players in Indonesia. There is a need to have effective and well-organized business activities to maintain the interests of a public and to advance national economy competence as one of the efforts to develop the people’s welfare.
The chalange is also coming from clarification of a defenition of monopolistic practices in Indonesia Competition Law. Since a concept of monopolistic practices plays an important part in the Law No. 5 Year 1999, it works as misconduct determination standard of 13 types of prohibited conduct in total. But, in the real situation, it tis very complicated and difficult to understand what is prohibited.
One of the big example of the fair competition practices that happens due to the establishment of the Law No. 5 Year 1999 is the PT. Telekomunikasi Indonesia (PT. Telkom). PT. Telkom used to be a monopoly telecommunication company in Indonesia, but since the establishment of the Law and this is one of the reason of the presure from International Organization, that is to open a fair competition in the Telecommunication area of business. And now PT. Telkom has a lot of competitor in this area, eather from domestic company or the foreign company. The positive effect of this competition is that PT.Telkom give a very good services to the consumers and always maintain their facilities and now they are the biggest company in Indonesia. Other positive effect is that the development of technology in the telecommunication area is increasing rapidly and now Indonesia is the number one country in the list for the phone company to launch their product.
But oother that a positive effect, there are alot of negative effect due to the establishment of the Law No. 5 Year 1999. Even if this regulation is protecting the small company, but the business person in the big company sometimes or most of the time are not as protective as the Law. There are hundreds of small company that goes bankrupt because of the competition with the big company. Indonesian Government knows that this is happening in Indonesia, but some of them just doesn’t want to be bothered by this unfair competition by business persons.

5. Conclusion and Recommendation

5.1 Conclusion
Indonesia has adopted competition law in 1999, the Law Number 5 Year 1999 prohibiting monopolistic practices and unfair business competition. It sets out legal and institutional basis for establishing and to make sure that there is a fair competition for all enterprises activity that work in Indonesia. In particular, the enactment of the Law Number 5 Year 1999 prove there is a recognition by Indonesian Government on the necessity for comprehensive economy strength, pro competition economy strategies and human resources development to put national development in more convenience, efficient, self motivated and competitive systems.
The establishment of the Law Number 5 year 1999 has purposes to protect the public interest and to advance national economic competence sequentially to increase the pople’s welfare, to make sure that there is a cernainty of equal business opportunities for large, medium and small scale enterprises, in addition to avoid the existing of monopolistic practices and unfair business competition.
Generally, competition law and policy in Indonesia has played a significant pari in advancing competitiveness and economy efficiency. With an enacment of the Law Number 5 Year 1999, Indonesia has made extensive development in raising competitiveness. Eventhough, much of a regulation has been done to strenghten competition and create controlling market, but some of the rule like enforcement of competition has to be done. But there is some not always a positive effect on the establishment of this Law. The monopoly practice in Indonesia is still appear in some of the big business company and they are a state own enterprises. This means that the Indonesian government know exactly what is happening with this monopoly practice by the company and they know this is not what the Law No. 5 Year 1999 allowed.
Some expert says that this is happend because the history of the establishment of the Law and the development of the law is very important to the effect that will be given by the Law. The history of the Indonesian government is also relevant to the negative effect shows by the application of the law to the business person, especially the small businesses.

5.2 Recommendation
a. Indonesian Government and KPPU have to apply the Law No. 5 Year 1999 to all the business company, not just some and have to give a full control to the business persons.
b. The Indonesian Government have to give a lof seminar about this new Law to the people that works in the government so they can really understand about this Law and what is really the purpose of this Law.
c. Indonesian Government have to make more Government Regulation or policy about this Anti Monopoly Law, so it can control the business company and business person and it also can control the market in the more effective way.

Bibliography

Journals/Books/Articles
Clarke, Phillip and Corones, Stephen, “Competition Law and Policy Cases and Materials” 1999, Oxford University Press

Cooper, John C, et.al “An Overview of Laws Governing Horizontal Conduct by Competitors for Various Pacific Rim Countries and Regions” n.d, Foley and Lardner the International Corrugated Case Association, p.3

Dowling, John Malcolm, “Competition Policy in Indonesia” 2006, Singapore Management University Economic and Statistics Working Paper Series No. 08, p.5

Harsono, Darianto, “The Need of Capacity Building in Competition Policy: Indonesia’s Experience” 2002, APEC Training Program

Iwantono, Sutrisno, “Economic Crisis and Cartel Development in Indonesia” 2003, Vth International Cartels Workshop Brussels, Belgium, Commission for the Supervision of Business Competition

Janow, Merit, E, “Considering Competition Law in Indonesia: Challenge and Approaches” n.d, School of International and Public Affairs

Lachmann, W, “The Development Dimension of Competition Law and Policy” 1999, United Nation Conference on Trade and Development, Geneva

Louglin, Colleen, et.al, “Report on Competition Policy in Indonesia” 1999, USAID Government of Indonesia

Maarif, Syamsul, “Competition Law and Policy in Indonesia” 2001, Indonesian Supervisory Commission for Business Competition (KPPU), Asian Competition Law Project

McClanaghan, Lillian and Drake, Earl, “Government and Business Relation in Indonesia” 1991, David See-Chai Lam Centre for International Communication, Simon Fraser University, Harbour

Muhammad Iqbal, “Recent Development of Competition Law & Policy in East Asia Countries” 2006, The 3rd East Asia Conference on Competition Law and Policy, Thailand, p.2

Masanao, Nakagawa, “Challenges of Indonesian Competition Law and Some Suggestion for Improvement, From Japanese Experience” 2005-2006, the University of Oxford Centre for Competition Law and Policy, Working Paper (L)

Organization for Economic Cooperation and Development, “Promoting Compliance & Educating Businesses about Competition Law: Indonesia’s Experience Session II” 2001, OECD Global Forum on Competition.

Sirait, Ningrum Natasha, “Indonesia’s Experience with Its Competition Law and Challenges Ahead” 2004, University of North Sumatra, Indonesia

Sirait, Ningrum Natasha, “Overview of the Indonesia Competition Law Number 5 of 1999 Concerning the Prohibition of Monopolistic Practices and Unfair Business Competition” n.d, University of North Sumatra

Susanti, Riesa “Policies Harmonization (Internalizing Business Competition Values into Government Policies-Support for Competition Regime” 2004, Commission for the Supervision of Business Competition (KPPU)

Syamsul, Maarif, “Competition Policy and the Exercise of Intellectual Property Rights” 2007, Intergovernmental Group of Experts on Competition Law and Policy, Commissioner, Competition Authority, Indonesia

Sweeney, Brendan, “Globalisation of Competition Law and Policy: Some Aspects of the Interface between Trade and Competition”, 2004, Melbourne Journal of International Law, vol.15

The Jakarta Post, “Competition Law Needs Competent Judges” 2007, Business and Investment, the Jakarta Post, Bali

Tineo, Luis and Coppola, Maria, “Competition Policy and Economic Growth in Indonesia: A Report on Issue and Options” 2000, the World Bank, International Conference.

Witjaksono, Djatmiko B “The Role and Challenges of Competition Policy for Strengthening the Domestic Legal Environment (Case of Indonesia)” 2003, Ministry of Industry and Trade

2. Legislation
- Law of the Republic of Indonesia No5 of 1999 Concerning the Ban on Monopolistic Practices and Unfair Business Competition

3. Other Sources
Asian Development Bank, “Competition Law and Policy Roundtable” 2006, Law and Policy Reform at the Asian Development Bank

Commission of the Supervision of Business Competition Indonesia, “Recent Development of Competition Law and Policy in Indonesia” 2007, the 4th East Asia Conference

DIRECTORS RESPONSIBILITY IN CORPORATE FAILURE TO REACH COMPANY'S GOAL IN INDONESIA

2009-09-24T22:07:00.000-07:00

I. INTRODUCTION

1. Indonesian Legal System

a. Civil Law System
There are two different system of law adopted by countries in Europe, that is the Civil Law system that developed in Europe mainland territories, France and German and the Common Law system that developed in England. The differences that mostly shown by this two legal system is the fact that Civil Law System used the principle of codification of law while the common law system did not adopt the codification principle. The Civil Law System are greatly infuenced by the Roman Law, different with the Common Law System. However, even though they have some differences, these two system are the product of the Western Europe culture .
In the time of colonialization, the colonial government in Indonesia applied a legal system that works differently of every groups of people in Indonesia. The law system that applies for the Netherland and Europe community are different from the law that applies for the Chinese and the foreign east people, and different law also applies for the native. But after Indonesia declare their Independence and transfer of sovereignty by the Netherland, Indonesia use the system inherited by the Netherland and it was Civil Law that comes from Europe.
After tens of years of independence, system of law in Indonesia keep growing to the positive and modern direction. however, in this development, the system of law can’t be seperated from influences from other law system especially the Common Law System brought by legal expert who take legal education in the country which hold the common law system such as England and the United States of America.
The Common Law System influance brought from the U.S and England gives a positive impact for the development of law in the practical matter in Indonesia, especially in the field of Business Law. The system also have some negative impact for Indonesian legal system that is system confusion that occurred in the education and application of the law in practice.

b. Company’s Law
The most important and powerful business association in the economy is the registered company by the law. The basic idea of using the registered company as a tool or medium for trade and commerce is straightforward. A company is formed or ‘incorporated’ by a promoter. Shares are issued by the company to shareholders, who then enjoy control over the company by voting in the meeting, in proportion to the number of shares they hold.
Company’s law in Indonesia is not regulated only in one Act. There are some of the Act and Regulation governing the company to run the business, such as KUHD (Commerce Act), Anti Monopoly Act, Consumer Protection Act, and other Regulation that control the business sector in the country.
There has been some major changes in the Acts regarding Indonesian company which is the Limited Liability Company Act No. 1 year 1995 has been changed to the Limited Liability Company Act No. 40 year 2007 or the Corporate Act 40/ 2007.
The relevant case about the directors duty in corporate failure in Indonesia are the Century Bank Cace. This is one of the latest case in this area of law, and this issue appears even with all the new regulation and new system that are applied. In This case, three organ of the company are involve that is the shareholder, directors and the commissioners. Shareholders which intervere with running the company’s management, directors that release an empty bond and a commissioners who gives permission to the directors and even give a wrong advice to the to the directors in the day to day management. In this case, the Indonesian government are suffer a loss about US $ 669 Million (Rp. 6.76 Trillion), and at this time the government take over the company. The problem is that this issue does not include the minor shareholder, and now the company are 100% owned by the Indonesian Government, and this can be a problem for the other shareholder.
This paper will explained about the two board system, the directors and commissioners duty, also discuss their responsibility in the corporate failure.

c. Corporate Act Number 40 year 2007
The Indonesian Corporate Act Number 40 year 2007 is the latest corporate act after the government decided to change the old corporate act which was the Act No.1 year 1995 about the limited liability corporation. There are some changes made by the new corporate Act including the directors duty and the commissioners duty. This changes was made to prevent any division that deliberately try to avoid the law.
The Indonesian Corporate Act Number 40 year 2007 is an Act which specifically regulate and control a company in a form of limited liability corporation. This Act regulate all the term and condition for a limited liability corporation from establishing procedures to the director’s duties and company’s management.

2. Corporate Management System in Indonesia

a. Double Board System
In countries that applied the common law system, a corporation apply the single board system. A company in a form or limitid liability corporation only have one set of body known as the Board of Director (BoD). BoD doesn’t run daily company management, but they delegate that duty to their officer that is the CEO (Chief Executive Officer), COO (Chief Operation Officer), CFO (Chief Financial Officer) and other officer if needed. While in Indonesia, the limited liability corporation applied the Double Boards System, which there are two sets of bodies, including: Board of Commiccioners (BoC) and Board of Directors (BoD).

b. Seperation of Power and Duties of Directors and Commissioners
As a follower of the double board system, the Corporate Act Number 40 year 2007 seperate the authorities and responsibilities of the two organs. This seperation is a good system for the Indonesian corporate system, because there will be less room for error that will be made by the Board of Directors due to the supervision given by the Board of Commissioners in day to day management run by the directors and the managers of the company.

3. Corporate Bodies in Indonesian Legal System

As a follower of the two board system, Indonesian Company has three main organ with different authorities and different duties, they are the Meeting of Shareholders, the Board of Commissioners and the Board of Directors. With this three main organ, a company has a social and environmental responsibility to be achieve.

a. Meeting of Shareholders
The meeting of share holder is an organ of a company that has the authority that was not given to the directors and Commissioners, within limits that is given by the Coorporate Law No. 40 Year 2007. The Meeting of shareholders may deliver to the Board of Directors the authority to approve the implementation of the Meeting of Shareholders resolution for the period more than one year.

b. Board of Commissioners
The Board of Commissioners is one organ of a company in of of general surveillance in accordance with the statutes and to give advice to the directors.

c. Board of Director
Directors are one organ of a company that has the authority and full responsibillity of the company’s management for the company’s own interest suitable to the target and goal of the company. Directors also represent a company both within and outside the court of justice suitable with the Articles of Incorporation of the company.

4. Duties and Liabilities of Directors and Commissioners

a. Director to run day to day management
Directors has the duties and responsibility on the management of one company that are stated in the Corporate Act No 40. Year 2007 article 100. In this article, directors must make a list of the share holder, the special list, notes of the meeting of shareholders, and the notes of the board of directors meeting. The director also need to make an annual reports as mentioned in article 66 and the company’s financial document as mentioned in the Regulation about Corporate Documents. The directors must maintain all the list, notes and financial document and run it as part of the day to day management.

b. Commissioners to control and advice
The board of commissioners duty is to perform a supervision on the policy, and management in general, both of the corporation and the company’s business, and the commissioners duty is also to give an advice to the directors. The supervision and the advise mentioned above is all for the benefit and interest of the corporation and has to be in accordance to the company’s objectives.

II. Setting Company’s Goal

1. Meeting of Shareholders
It is common that the goal and the target to be achieved by a company is decided at the Meeting of Shareholders. Hence, the objectives and targets became one official purposes which approve by the owner of the company and have to be fully implemented by the Board of Directors and the Board of Commissioners, because the resolution that is given on the Meetign of Shareholders is te highest at the company.

2. Management Contracts
Sometimes after the objectives and target are decided by the meeting of shareholders, the Corporate Management make a form of new contract management between the Board of Director and the managers to expressed willingness and promise of the managers to achieve the company’s goal and target which decided by the meeting of shareholders. The problem is whether the management contract is binding or not, because it is not possible to have a contract that has a power of law and binding for the parties, if there are no seperate parties inside one body.
3. Appointment of Corporate Management
Before a company is run and before the objectives and targets are decided by the company, a corporate management is needed. It is the management which will run the daily management of the company.
In the single board system, the directors was chosen by the meeting of shareholders and then director will elect a officer to run the company.
In the double board system, the meeting of shareholders elect both of the two board (BoD and BoC), after that the directors will elect a managers for each field of the business.
In this case, the responsibility of the director who elect a manager is a big problem if the manager failed to achieve the objectives and company’s targets. The problem is whether the directors will also be responsible or only the manager will be responsible if he failed to achieve the goals and targets.

4. Setting the Company’s goal
In determining a goal and target of a company on the meeting of shareholders, bargaining betweer the BoD and the meeting of shareholders centainly occur. For example if the target that is decided by the shareholders are too high, then the BoD can bargain to lower the target. And if its already decided by the shareholder and still the target are too high, the qustion is whether the Board of Directors can escape from responsibility with an excuse of unnatural and too high targets or not.

III. Derectors and commissioners duties in company business

1. Duties of Directors
Directors duties are very important for all part of related bodies to understand, such as the Company, the Shareholders, Indonesian Government, third party or agent that related to the company and the Board of Directors. There are alot of cases in Indonesia that are related to this matter where the other bodies does not understand how the duties of directors works, and this can be the main cause of the corporate failure in Indonesia. Board of Directors as an organ to run the management in a company has to work based on its duty that is stated in the Limited Liability Corporation Act, otherwise, the Company can not develop in the right track and can also cause a major failure as happened in the Century Bank Case in Indonesia.
The board of directors duties are stated in article 92 to 107 of the Act Number 40 Year 2007 about the Limited Liability Corporation. There are duties of directors that is related to the achievement of a company. The Board of Directors shall undertake its duty to manage the Company for the interest of the company in the pursuuit of its purposes and objectives. This is the main task of being in the Board of Directors. Furthermore, the Board of Directors shall have the authority to manage the company in accordance with the policy which is considered accurate, and shall be in accordance with the provision as regulated under the Limited Liability Corporation Act.
As state in the Act, article 94, members of the Board of Directors are appointed by the General Meeting of Shareholders. This means that the members of the Board of Directors are people that are highly known by the majority of the shareholders and are qualified to do the duties that are stated by the Limited Liability Act and also can delivered a very good performance for the company to reach their targets and goals.
To do their duties, the Board of Directors also has some limits that can eliminate their authority to act. Member of the Board of Directors shall have no authority to represent the company if there is a proceeding in the court beetween the Company and the relevant member of the Board of Directors or the relevant member of the Board of Directors has interest detrimental to the Company. In this case, other member of the Board of Directors who has no intereset detrimental to tha company can represent the Company.

2. Duties of Commissioners
As the follower of the two board system, the Limited Liability Corporation Act 2007 also regulate the duties for the Commissioners. The Board of Commissioner shall conduct supervision over the management policy, the implementation of the management in general, either regarding the Company or its business, and provides advice to the Board of Directors. These supervision and advice shall be conducted for the interest of the Company, and shall be in accordance with the purpose and objective of the Company.
This is one of the advantage of using the two board system, where the directors day to day management in the company are always monitored by other organ that has the same hierarchy with the Board of Directors. If a company have a business activities based on the syariah principle, other than having a Board of Commissioners, shall also be obliged to have Syariah Supervisory Board. However, using the two board system with the Board of Commissioners to give supervision, means that there are more and more room for error.
In article 116 of the Limited Liability Corporation Act 2007 stated that the Board of Commissioners shall be obliged to prepare a minute meeting of the Board of Commissioners and keep the copy thereof, report to the Company regarding its relative’s shares ownership in the Company and other Companies and submit a report to General Meeting of Shareholders regarding the supervisory duty which has been performed within the previous accounting year.
In the Century Bank Case, the Board of Commissioners doesn’t follow their duty as told in the Act, Instead, they are interfering with the directors duties and therefore it’s been a question about how they are going to be responsible for the failure of the Company.

3. Liabilities of shareholder in fiercing corporate veil
Usually, shareholders are not taking part in running the company management. Their, authorities are just inside the General Meeting of Shareholders which is to set a company’s target and goal that will be manage by the directors. So, shareholders are not personally liable for agreements made on behalf of the Company, and are not liable for the Company’s losses in execess of their prospective shareholding.
But, in come cases there are some shareholders that can be liable for the company’s losses if the relevant shareholders, eather directly or indirectly, with bad faith, explits the Company for their personal interest, the relevant shareholders are involved in illegal actions commited by the company, and the relevant shareholders, illegally utilizes the assets of the Company, which result in the Company’s asset become insufficient to settle the Company’s debt.
In the Case of Bank Century in Indonesia, the major shareholders that own more than 50% or the company’s share, are responsible personally because in this case they also take control of the company along with the directors and the commissioners.

4. Day to day management
The directors have the authority to run the day to day management of the company. The day to day management of a company is the way to achive the goal that have been discussed in the previous General Meeting of Shareholders. In the day to day management, the directors as the leader of a company’s management are responsible for everything that are related to the company’s target, whether successful or not.
In order to know the performance of the company, the Board of Directors shall submit an annual report to the General Meeting of Shareholders after it has been reviewed by the Board of Commissioners, and it will shows the result of the company in achieving the target for that year. To make and maintain the list of the shareholder in one compay and to keep the note of the meeting are part of the day to day management. The directors have to register the company as stated in the Act No 3 year 1982 about registering company. The Board of directors are responsible for any losses suffered by the shareholders from mistake made by directors before they register the company.
To write down the transfer of rights over shares and to notify in writing the dicision of General Meeting of Shareholders and inform it to the State Gazzete and two daily newspapers if there has been a capital reduction in the company is one of the important duty in the day to day management. Day to day management has to be run by the directors with honesty and reasonable diligence. In managing the company there are three way that have to be used by the directors:
- Fiduciary duties = trust and confidence
- Duties of skill, care and diligence
- Statutory duties
If the day to day management run by the directors with this three important manner, than it is very sure that the company will achive it’s target and goal.

5. Control and advise
Control and Advise is needed by a company on their way to achieve their objective. There are a lot of different corporation start to run their company using the transparant system, systematically and responsible. This system is also called Good Corporate Govenance (GCG). To run a company with a Good Corporate Governance, a role of independent commissioners are needed. This independent commissioners function is to control and give advice to the directors that runs the company’s management.
In the Board of Commissioners there are two type of commissioners, first is the ordinary company commissioners and the second one is the independent commissioners. The role of the Board of Commissioners including the independent commissioners including:
- To give supervision to the company’s directors in their management to achieve company business target plan and to give advice to the directors about the business management irregularities that are not match the intended direction of the company.
- To monitor the implementation and effectiveness of the Good Corporate Governance practice.
In order to give a good supervision, control and advice to run a Good Corporate Governance practice in a company, the Board of Commissioners have to fully understand and run their duty with reference to the GCG principles, including:
a. Transparancy
b. Disclosure
c. Accountable
d. Independence
e. Fairness

IV. Directors and commissioners responsibility in corporate failure

In Indonesia, there are a lot of cases that related to the corporate failure and even the regulation are quite clear in this area, but there are still a lot of shortcoming with the people that work in this important role in the company such as directors and commissioners. But, the responsibility of a directors and commissioners in corporate failure are stated in the Limited Liability Corporation Act 2007.

1. Failure in managing the company
In article 97 (3), Act No. 40 year 2007 stated that,

‘Each member of the Board of Directors shall be fully and personally liable over the loss of the Company if it resulted from its faults or negligent in performing its duties, in accordance with the provision...’

This article stated very clearly how far are the responsibility of a directors in a corporate failure. But, a member of the Board of Directors are not liable for the loss of a company if it is proven that such loss is not resulted from its fault or negligence, the Board of Directors has performend the management of the Company with good faith and prudent for the interest of the Company in the persuit of its purposes and objectives, there is no conplict of interest either directly or indirectly over the management that result to the loss, and the Board of Directors has taken a precaution measure to avoid the loss.

2. Failure in reaching corporate goal
The most important duty for the Board of Directors is that reach their target and achieve their goal. But, to achive a goal in a limited liability corporation is not an easy task for the Board of Directors to do. The goal of a company which are set in the meeting of shareholder is to gain profits for the company. However, if a company fail to reach a target, and the targets are too high given by the shareholders in the meeting, then the directors are not fully responsible for it.

3. Failure due to excessive control of commissioner
Article 114 (1) Act No 40 year 2007 stated that,

‘The Board of Commissioners shall be responsible to supervice the Company’

Article 114 (2) Act No 40 year 2007,

‘Each member of the Board of Commissioners shall be obliged with good faith prudent and full of responsibility to perform his supervisory duty and provide advices to the Board of Directors for the interest of the Company and shall be in accordance with the purpose and obectives of the Company’

In this case the Board of Commissioners are personally liable fo the loss suffer by the Company if it resulted from its fault or negligent in performing its duty which is to give supervision and advice to the directors. However, if the Board of Commissioners have performed their duty as stated in the Act, then any member of the Board of Commissioner are not liable for the loss of the company.

V. Conclusion

As a developing country, Indonesia are still the their way to reach the perfect corporation system and regulations. However, in this corporation law issue, the trial and error technique are not the best system to be applied. In the Common Law Country which uses the one Board system like US and Australia, there are still room for errors and even all the big economic crisis came from the country than uses this system. But these country are developed country which can recovered quickly through major crisis.
Indonesia on the other hand is not ready for a major crisis, so they preffer to prevent this kind of economic losses with using the more save system. Nonetheles, this two board system still have some shortcomings and still be improved time to time.