My Indo Airlines (2Y, Jakarta Halim) has sued Garuda Indonesia (GA, Jakarta Soekarno-Hatta) for allegedly failing to pay a debt to the cargo carrier, local media reported on July 19. The first appearance before a judge is set for July 27 at the Commercial Court of Central Jakarta.

The embattled flag carrier assured in a statement that the court summons had no immediate impact on its operations and that flights would continue as before.

Garuda’s chief executive, Irfan Setiaputra, said in the statement that the airline was studying a Debt Payment Obligation Postponement (Penundaan Kewajiban Pembayaran Utang - PKPU) proposal that My Indo Airlines had submitted together with a consultant.

PKPU is a court procedure in Indonesia that debtors or creditors can initiate to seek settlement and avoid bankruptcy. No details on the scale of the debt have been reported. A legal representative of My Indo Airlines confirmed the lawsuit in a statement but declined to provide further information.

Garuda Indonesia has been developing a strategy to resolve its debt problems, having posted a net loss of USD2 billion for 2020 and confirming USD3.4 billion worth of short-term liabilities. Last month, three state-owned banks approved the idea of debt restructuring for the carrier.

In a disclaimer accompanying the recent financial results, KAP Tanudiredja, Wibisana, Rintis & Rekan, part of the PricewaterhouseCoopers (PwC) network, warned that the adverse impact of the Covid-19 pandemic on Garuda Indonesia’s operations and liquidity “has directly affected the group’s ability to meet its financial obligations to its lenders” and vendors such as aircraft lessors.

“All of these conditions indicate the existence of material uncertainties which may cast significant doubt about the group’s ability to continue as a going concern,” it added.

The Indonesia Stock Exchange has suspended trading in Garuda’s shares since June 18 as a consequence of the airline’s decision to delay interest payments on its global sukuk. Fitch Ratings told ch-aviation that the default could provide clarity on sukuk restructuring and enforceability in the country as “legal precedent for effective enforcement in many jurisdictions where sukuk issuance is prevalent is lacking, including in Indonesia.”

Due to sharia requirements and the country’s hard-to-navigate bankruptcy regime, it remains uncertain whether certificate holders will be able to enforce their contractual rights in relevant courts, said Fitch, which does not rate Garuda or its sukuk but “is monitoring developments closely.”

My Indo Airlines and Garuda Indonesia did not immediately respond to ch-aviation’s request for comment.