Taking security under Indonesian law: Key principles, legal requirements, and practical insights
A clear understanding of security under Indonesian law is essential for safeguarding investments and managing risk. For lenders and investors, the forms of security available, the procedures required to create and perfect them, and the mechanisms for enforcement can significantly affect the value and effectiveness of a security package.
This article outlines the key principles governing security interests in Indonesia, highlights the relevant legal requirements, and provides practical insights on structuring transactions to ensure adequate protection.
Overview
Indonesian law recognises only a limited number of statutorily prescribed security interests, each established by its own statute. These are fiduciary security, land mortgages (hak tanggungan), pledges, hypothecs, and warehouse‑receipt security.
Only arrangements created under these specific statutory frameworks qualify as valid security interests. Attempts to create security outside these frameworks are unenforceable as security and are generally treated only as contractual provisions.
Statutory security interests confer a secured status on the beneficiary, providing rights that are unavailable to unsecured creditors, including:
- priority in the proceeds of enforcement, including in insolvency or bankruptcy;
- continuity of the security interest even if ownership of the secured asset changes; and
- executorial force, enabling creditors to enforce without first obtaining a court judgment (subject to conditions depending on the type of security).
Foreign parties may be beneficiaries of Indonesian security interests, including pledges, fiduciary security, and land mortgages. Even though foreign ownership of land is restricted, foreign lenders may still hold mortgages, as enforcement yields sale proceeds rather than ownership of the land. One qualification is that fiduciary security may not be granted if the security provider itself is a foreign entity, although the rationale for this restriction is not publicly disclosed.
Key types of Indonesian security interests
The table below provides an overview of the main features of selected Indonesian security interests.
|
Security type and legal basis |
Key features and formalities |
|
Fiduciary Security (Fiducia) |
· Granted over movable assets (tangible or intangible) and immovable assets not eligible for a mortgage. · Non-possessory, with the security provider retaining control over the assets. · A fiduciary deed must be notarised and registered with the Fiduciary Registration Office. The resulting certificate functions as an executorial title, equivalent to a final and binding court decision. · Parate executie (self-help sale) is permitted only if the agreement specifies the default mechanism and the debtor voluntarily surrenders the asset. · If the above conditions are not met, the creditor must instead proceed through formal court enforcement. |
|
Land mortgage |
· Granted over land rights (ownership, build-use rights, strata units) and related immovable improvements. · Created by deed before a land deed officer (locally known as pejabat pembuat akta tanah or PPAT), in Indonesian, and perfected by registration with the National Land Office. · Mortgage certificate conveys executorial force, enabling enforcement by auction without court’s involvement. · Multiple mortgages may be registered, with priority determined by the date of registration. |
|
Pledge |
· Created over tangible or intangible movable assets by notarial deed or private agreement. · For tangible assets, possession must transfer to the pledgee. · For intangible assets (such as shares), the element of control must be removed from the security provider, and certain notification is required. · Pledges do not have government administered registration. |
|
Hypothec |
· Granted over vessels of seven gross tonnage or more. · Created by deed before the relevant registration official and perfected upon registration. · Only one hypothec may be registered per asset, with priority determined by registration order. |
Enforcement: Trigger & methods
Enforcement is triggered by an event of default, generally defined as the failure of the debtor to perform a specified contractual obligation. Under Indonesian law, parties are free to define in their agreement what constitutes a default and when enforcement rights may be exercised.
For example, parties may stipulate that enforcement can occur only if a particular default continues beyond a stated cure period. Loan market documentation often defines a “continuing event of default” as one that has not been remedied within a specific timeframe, aligning the enforcement trigger with international practice.
It is common for Indonesian security documents to incorporate by reference the definition of default contained in the facility agreement, including those governed by foreign law. This approach ensures that the security agreement remains consistent with the underlying financing terms while still complying with Indonesian statutory requirements.
Indonesian law recognises two principal methods of enforcement:
- Public auction is the default statutory method under the Land Mortgage Law (hak tanggungan), the Fiduciary Security Law, and the Civil Code. Auctions ensure transparency and safeguard the debtor’s interests. Any surplus must be returned to the security provider.
- Private sale is permitted only in limited circumstances and subject to statutory and judicial safeguards. For example, Article 29(2) of the Fiduciary Security Law allows for a private sale if both parties agree and the best price can be achieved. Courts have held that contemporaneous consent from the security provider is required, even where the security agreement contains pre-agreed consent.
A defining feature of Indonesian security is that beneficiaries cannot appropriate the secured asset outright; they may only receive proceeds from enforcement. An exception arises in relation to bank accounts, where set-off may be possible as the object is cash.
Bank accounts
Enforcement is typically by cash sweep, that is, applying balances directly to outstanding secured obligations, where the secured asset is a bank account. This is recognised in practice as a functional exception to the general enforcement methods.
Practical enforcement issues
In the event of enforcement, creditors are generally required to issue up to three warning letters (surat peringatan) before taking further action. While the law does not prescribe specific intervals, these are commonly sent about two weeks apart.
Each letter should clearly state the nature of the default and require the debtor to remedy it within a specified cure period.
If the debtor fails to comply, the creditor may proceed with enforcement through a public auction or, in limited cases, a private sale.
Corporate benefit as a pre‑enforcement hurdle
A common obstacle arises where corporate benefit resolutions were not properly obtained when the security was granted. Under Indonesian corporate law, specifically Law No. 40 of 2007 on Limited Liability Companies, a transaction may be invalidated if it lacks approval from the company’s corporate organs (i.e. the general meeting of shareholders, board of directors, or board of commissioners) or if it fails to meet the “corporate benefit” requirement.
To mitigate this risk, financing transactions typically include corporate approvals from all relevant bodies as a condition precedent. These resolutions should expressly authorise the granting of security and confirm that it is in the company’s best interests.
Change of lender / novation risk
Another issue arises when there is a change of lender or finance party. An assignment of rights does not terminate existing security; however, novation has a different effect under Indonesian law. Novation is treated as extinguishing the original obligation and creating a new one, even if the substantive terms remain the same.
Because Indonesian law follows the principle of accessoir (that security is ancillary to the underlying obligation), novation of the facility agreement may be construed as terminating the associated security. In such cases, the security would need to be released and re-granted - whether through re-execution of the security documents or re-pledging of assets - in order to secure the “new” obligation created by the novation.
Limited pool of qualified buyers
Another practical challenge is the limited buyer pool, particularly where enforcement involves pledged shares. Under Indonesia’s investment regime, now governed by the Positive Investment List (Presidential Regulation No. 10 of 2021), certain companies remain closed to foreign ownership. These restrictions reduce the pool of eligible buyers, which can in turn affect both liquidity and the sale price of pledged shares.
Executorial force of security interests
A key feature of Indonesian statutory security interests is their executorial force. Instruments such as mortgage and fiduciary security certificates carry the same legal weight as a final and binding court judgment (grosse acte). In practice, this means that once a default has occurred and the required warning letters have been issued, the creditor may proceed directly to the state auction office without first obtaining a court order.
That said, enforcement can still face hurdles. Debtors or related parties may resist by refusing to surrender the secured asset or by filing civil suits against the creditor or auctioneer. In response, some auction houses now require a court judgment before proceeding, despite the statutory executorial nature of the security.
To address this, the Government has issued protective regulations (currently limited to land mortgage enforcement) that shield auction officials from civil liability. Similar protections are expected to be extended to other forms of security, which would further reinforce the enforceability of creditors’ rights.
Language requirements
Indonesian language requirements also affect enforceability. The Indonesian Language Law requires that agreements involving an Indonesian party be prepared in Indonesian. Security deeds such as fiduciary deeds and land mortgage deeds must in any case be drafted in Indonesian for registration. To mitigate risk of challenge, facility and security documents are typically prepared in bilingual form, with both Indonesian and English versions executed.
