Material guarantee: understanding, type, and legal basis in civil law

In the world of financial and credit transactions, the term material guarantees often arise as a solution to provide a sense of security for the lender. However, what exactly is a material guarantee? Why is it important in civil law? This article will explore thoroughly about material guarantees, starting from the fundamental understanding, the legal basis that underlies it in Indonesia, various types, distinctive characteristics, functions and benefits, to the difference with personal guarantees.

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What is material guarantee?

Simply put, material guarantees are material rights given by the debtor to the creditor for an object as dependents on the debt. So, this material guarantee is a form of guarantee in the law that provides certainty to the creditor to obtain the right to repay receivables from the debtor’s objects. The purpose of this material guarantee is to protect the interests of creditor and minimize the risk of failure.

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Legal basis for material guarantees in Indonesia

The main legal basis governing material guarantees in Indonesian civil law is contained in the Civil Code (Civil Code), specifically Article 1131 of the Civil Code. Material guarantees are divided into two, namely guarantee of moving and immovable objects. One example of a guarantee of moving objects can be in the form of a pawn as stated in Article 1150 of the Civil Code. As for the guarantee of immovable objects is a mortgage as stated in Article 1162 of the Civil Code.

In addition to the public, there are also special laws and regulations governing certain types of material guarantees, such as:

1. Number 4 of 1996 concerning the right to land on land and objects related to land (“Law No. 4 of 1996”)
2. Law Number 42 of 1999 concerning Fiduciary Guarantee (“Law No. 42 of 1999”)
3. Law Number 9 of 2006 concerning Warehouse Receipt System (“Law No. 9 of 2006”)

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Type of material guarantee

In Indonesian civil law, there are several main types of material guarantees, including:

1. Pension

The pawn is a material right to moving objects submitted by the debtor or third party in the name of the debtor) to the creditor as a guarantee of the debt. Creditors hold physical mastery of pawn objects. The provisions of the pawn are regulated in Article 1150 up to Article 1160 of the Civil Code. Examples of objects that can be mortgaged are jewelry such as gold, diamonds and motorized vehicles.

2. Mortgage

Hypotek is a material right to immovable objects (especially land) to ensure debt repayment. The mortgage is regulated in Article 1162 to Article 1232 of the Civil Code and Law Number 17 of 2008 concerning Shipping.

The only object that can be used as a mortgage is a ship. This is because the land that was once guaranteed with a mortgage has been guaranteed with the Rights of Mortgage since the existence of Law No. 4 of 1996. The object of the mortgage is a ship with a weight of 7 tons up or contains 20 m3.

3. Mortgage right

Mortgage rights are a guarantee rights to land along with objects related to land, as regulated in Law No. 4 of 1996 and Law (Law) Number 5 of 1960 concerning Basic Agrarian Basic Regulations. Mortgage rights provide priority positions to creditors to repay their debt from the sale of collateral land.

4. Fiduciary Guarantee

Fiduciary is a guarantee right for moving objects, both tangible and intangible, and immovable objects, especially buildings that cannot be burdened with mortgage rights that remain in the control of the debtor or other appointed parties, based on Article 1 number 2 of Law No. 42 of 1999.

Fiduciary Guarantee can be given to one or more units of types of objects, including receivables, both those that already exist at the time of the guarantee are given or obtained later, according to Article 9 paragraph (1) of Law No. 42 of 1999. Except, if agreed, fiduciary guarantees also include the results of objects that are the object of fiduciary guarantees, and includes insurance claims in terms of fiduciary guarantees insured, based on Article 10 of Law No. 42 of 1999.

It should be noted that, fiduciary is the transfer of ownership rights of an object on the basis of trust with the provision that the ownership rights of the object remain on the control of the owner of the object as regulated in Article 1 of Law No. 42 of 1999. Examples of objects that can be guaranteed fiduciary are motorized vehicles.

5. Warehouse receipt

Warehouse receipts are proof of ownership documents on goods stored in warehouses issued by warehouse managers, according to article 1 number 2 of Law Number 9 of 2011 concerning Amendments to Law Number 9 of 2006 concerning Warehouse Receipt System. Each warehouse receipt issued can only be burdened with one debt guarantee, based on Article 12 paragraph (1) of Law No. 9 of 2006.

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Characteristics of material guarantees

Material guarantees have several characteristics that distinguish it from other types of guarantees:

1. Material is inherent, which is attached to the object, not to the person. That is, the rights of the creditor will continue to follow the guarantee object even though its ownership changes hands.
2. Preferred rights, namely creditors holding material guarantees have the right to prioritize their repayment compared to other creditor (concurrent creditors) from the sale of guaranteed objects.
3. The right to follow, namely the creditor holder of the material guarantee has the right to pursue a guarantee object in the hands of whoever the object is.
4. Speciality and publicity. Generally, the formation of material guarantees requires clear specifications regarding guaranteed guaranteed and debt objects, as well as the publisity mechanism (for example registration) to be known by a third party.

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Functions and benefits of material guarantees

Material guarantees have significant functions and benefits in financial transactions:

1. For creditors, which is to provide a sense of security and certainty that debt will be paid. If the debtor fails to pay, the creditor has the right to execute the guarantee object.
2. For the debtor, which allows the debtor to obtain a credit facility or a larger loan or with a more profitable requirement because of a guarantee.
3. Encouraging the economy, namely facilitating credit and investment activities, which ultimately contributes to economic growth.
4. Reducing credit risk, where for financial institutions, material guarantees help reduce the risk of bad credit.

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Differences in material guarantees and personal guarantees

It is important to distinguish between material guarantees and personal/individual guarantees, the following:

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Examples of cases of use of material guarantees

Here are some examples of general cases of use of material guarantees:

1. Home Ownership Credit (KPR). The bank provides credit to customers to buy a house, with a house purchased into a guarantee in the form of mortgage rights.
2. Motorized Vehicle Credit (KKB). The finance company provides credit for the purchase of a car or motorcycle, with the vehicle is a fiduciary guarantee.
3. Loans with pawn. Someone borrowed money from a madangian by handing over gold jewelry as a pawn guarantee.
4. Working capital credit. The company submits a loan to the bank by providing factory machinery as a guarantee of fiduciary or land and factory building as a guarantee of mortgage rights.

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(This article has been edited by the perqara editorial team)

Legal basis

1. Civil Code Book;
2. Law Number 4 of 1996 concerning Underwriting Rights and Objects Related to Land;
3. Law Number 42 of 1999 concerning Fiduciary Guarantee;
4. Law Number 17 of 2008 concerning Shipping;
5. Law Number 9 of 2006 concerning Warehouse Receipt System as amended by Law Number 9 of 2011 concerning Amendment to Law Number 9 of 2006 concerning Warehouse Receipt System.

Reference

1. Husni, F. (2018). Civil law (first edition). Maju Jaya Publisher.
2. Subekti. (2003 or the latest edition). Agreement law. PT INTERMASA.
3. Mariam Darus Badrulzaman. (2014 or the latest edition). Compilation of engagement law. Citra Aditya Bakti.
4. R. Wirjono Prodjodikoro. (2015 or the latest edition). Civil law regarding engagement. Bandung well.