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Is It Possible to File for Bankruptcy on Debt Under the Contract Which Contains Arbitration Clause?

“Existence of arbitration clause shall not make the competency of commercial court to examine and adjudicate the petition for declaration of bankruptcy cease to exist.”
The existence of choosing arbitration as a method of dispute resolution in a contract automatically makes the competency of district court in adjudicate the dispute arising in relation of aforesaid contract cease to exist, whether the dispute is in a form of breach of contract or unlawful act.

However, it does not apply in the commercial court, particularly in bankruptcy case.

The provision under Article 303 Law Number 34 of 1994 on Bankruptcy and Suspension of Obligation for Payment of Debts (hereinafter Bankruptcy Law) states:

The Court shall remain be competent to examine and adjudicate the petition for declaration of bankruptcy from contracting parties containing arbitration clause provided that the debt being basis of application for bankruptcy has fulfilled the requirements as referred to in Article 2 paragraph (1) hereof.”

Based on this provision, a party who perform a breach of contract which contains arbitration clause may still be declared bankrupt. The existence of arbitration clause does not remove the competency of the commercial court as a specialized court on bankruptcy matter.

The petition for declaration of bankruptcy shall be filed under the conditions stated in Article 2 of Bankruptcy Law. A debtor shall be declared bankrupt if a debtor is:

  1. Having two or more creditors; and
  2. Failing to pay at least one debt which has matured and became payable.

Thus, the commercial court is still competent to examine and adjudicate the petition for declaration of bankruptcy, without having to be resolved through arbitration. Besides, it must meet the requirement for filing a bankruptcy declaration petition, and shall be simply proven that the debt is exist.

Debt Arising out of an Arbitral Award
Besides the recognition of the debt arising out of a contract which contains arbitration clause, Bankruptcy Law also recognizes the debt arising out of an arbitral award as an object in bankruptcy matter, as mentioned in the explanation of Article 2 paragraph (1) line 3 of Bankruptcy Law:

‘Debt which has become due and payable’ shall mean the obligation to pay debt that has become due, either under the contract, accelerated or due to the sanctions imposed by the regulatory body or decision of the court, arbitrator or arbitral tribunal.

From these explanations, it could be concluded that debt is not only an obligation arising out of a contract.
If there is any party who fails to perform a payment obligated under the court judgment or arbitral award, the injured party may request for declaration of bankruptcy on the debt arising out of the aforesaid judgment/award.

BP Lawyers can assist you
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Fairus Harris, S.H., M.Kn.

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