Internalising Bankruptcy Externalities: A Judicial Framework for Proportional Insolvency Intervention in Indonesia

Abstract

Bankruptcy remedies can impose costs on employees, consumers, suppliers, and other stakeholders beyond the immediate debtor–creditor relationship. In Indonesia, scholarly debate has largely focused on bankruptcy eligibility, leaving the consequences of remedy design comparatively underexamined. This study aimed to develop a judicial framework for identifying and mitigating external costs attributable to insolvency remedies while preserving creditor protection. Prescriptive normative legal research was conducted using statutory, conceptual, case-based, and functional comparative approaches. The analysis examined the Telkomsel, Batavia Air, and Sritex cases, with Garuda Indonesia’s restructuring serving as a comparator, drawing on legislation, judicial decisions, issuer disclosures, institutional reports, and published sources. The findings indicated that remedy-attributable externalities varied according to the debtor’s financial condition and the manner in which the remedy was implemented. The Telkomsel case illustrated the potential costs of imposing bankruptcy on a solvent company; Batavia Air highlighted the disruption associated with an abrupt cessation of operations; and Sritex demonstrated the importance of distinguishing externalities arising from underlying business failure from potentially avoidable costs attributable to the implementation of insolvency remedies. Garuda Indonesia’s restructuring illustrated how restructuring mechanisms can preserve operational continuity. The study proposed the Bankruptcy Externality Internalisation Test, comprising stakeholder identification, counterfactual attribution, remedy design, and a reasoned externality statement. This framework provides a basis for transparent and proportionate judicial intervention in insolvency proceedings without altering bankruptcy eligibility requirements or granting affected stakeholders veto rights. However, whether the proposed framework can effectively reduce remedy-attributable external costs while preserving creditor recovery remains subject to empirical validation.