Piercing corporate veil under Indonesian law

LEGAL
Piercing corporate
veil under
Indonesian law
Piercing the corporate veil is the
judicial act of imposing personal
liability on otherwise immune corporate
officers, directors, and shareholders for the
corporation’s wrongful act. 1
Piercing corporate veil shows that the Limited
Liability Company (“Company”) often cannot
be separated from the parties’ interest such as the
Shareholders of that Company. In this context, the
Shareholders’ interest is the Company’s interest.
Piercing corporate veil Concept stipulates that when
“the separation condition” of Company with the
Shareholders does not exist then the limited liability
responsibility of the Shareholders should be absent.
Therefore the Shareholders must be liable personally
upon the loss of the Company.
Piercing corporate veil also applies to the corporate
officers such as director and/or commissioner
if it shows that loss of company because of the
corporate officers’ wrongful act. Therefore director/
commissioner of company must be liable to Company
upon the loss of the company. In case of insolvency,
they must be liable to the Creditors. This article
will only discuss the piercing corporate veil by the
Shareholders.
Piercing corporate veil by the
shareholders
The purpose of establishment of Company is to
conduct the business activities that the respective
founders (Shareholders) are not liable personally
besides the assets that they put in the Company. In
order to have a limited liability status, the Company
must fulfill the formal requirements based on the
prevailing laws and regulations. The founders must
fulfill the requirements from pre-establishment to
post-establishment of company. If the founders do not
conduct their duty related to the fulfillment of legal
1 Blacklaw dictionary
status of the Company, the founders clearly do not
want to have limited liability from the Company.
With regard to the limited liability of Company, the
Company owns at least the minimum required capital
so that the Company can operate. As a legal entity, the
Company must be rendered the sufficient capital to
conduct its activities. Moreover, the respective capital
must be used based on the purpose of the Company
and the Company’s interest. The misuse of the
Company assets is not allowed by law.
The purpose of the Company’s assets that were
separated by the Shareholders, is to ensure only the
respective separated assets will be liable, not all the
assets of the Shareholders. The intermingling of assets
of the Company and of the shareholders shows that it is
difficult to separate the liability from the existing assets.
As a consequence, the characteristic of limited liability
of Company is absent because of law.
In general the Company is established in order to
have profits. That profit will be distributed among the
Shareholders unless otherwise stipulated. The dividen
given to the Shareholders every year is mandatory.
If dividen is not given to the Shareholders every
year, it shows that there is misuse of company for
the Shareholders’ interest particularly the majority
Shareholders. In this scenario, the piercing corporate
veil can be applied.
If the Shareholders transfer the assets of the Company
to each Shareholder improperly, then the piercing
corporate veil can be conducted in this case.
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LEGAL
Theory of piercing corporate veil
With regard to the piercing corporate veil, there are five
(5) theories e.g. agency, fraud, sham or façade, group
enterprise and unfairness/justice.
In the Agent theory, the Company is agent of the
Shareholders. It shows that as an agent, the Company
is not liable upon the acts that were conducted by
itself based on the purpose of the Shareholders.
Therefore there is no limited liability that applies to the
Shareholders.
In the Fraud theory, the particular action is conducted
by the Company in order to avoid the personal liability.
For example: the Shareholders treats the assets of the
Company as their own personal assets, the respective
Shareholders use the Company’s assets for his personal
interest, and the Shareholders’ act emerges the transfer
of Company’s assets to each Shareholders improperly.
Furthermore, a ‘sham’ or façade will be applied as
piercing the corporate veil if the corporate form was
incorporated or used as a mask to hide the real purpose
of the corporate controller. While a façade will be used
as a category of illusory reference to express the court’s
disapproval of the use of the corporate form to evade
obligations, although the court has failed to identify
clear test based on pragmatic consideration such as
undercapitalization or domination. 2 The purpose of
the Shareholders to establish a company is only to avoid
the limited liability; however they do not fulfill their
obligations. For example: the intermingling of assets of
the Company and Shareholder.
Furthermore, the group enterprises theory will be
applied as piercing the corporate veil because a
corporate group is operating in such a manner as to
make each individual entity indistinguishable, and
therefore it is proper to pierce the corporate veil to
treat the parent company as liable for the acts of the
subsidiary.
For example : the Board of Director (“BoD”) can not
take any action without considering the regulations of
Parent Company with regard to the Company. In this
case, BoD will take action only for the interest of the
Parent Company as the Company’s shareholders.
The Shareholder in a Company may also seek to pierce
corporate veil to get the underlying reality of the
situation, in order to avoid an unfair outcome. In that
2 Widjaja,Gunawan, Risiko Hukum sebagai Direksi, Komisaris & Pemilik PT, Forum Sahabat, 2008
3 Art.3(1) Law No. 40 of 2007 regarding Limited Liability Company (August 17, 2007) (“Law 40/07”)
In the Fraud theory, the particular action is conducted by the Company in order
to avoid the personal liability
condition, the unfairness/justice theory can be applied
for the piercing corporate veil.
For example : The majority shareholder also involves
in making decision for the Company. Because of his
respective action, the party that has legal relationship
with the Company gets unfair outcome. If the
respective party files a suit against the Company, his
claim to Company will make the Company’s loss bigger.
In this case, it would make it possible for the direct
claim to the majority of shareholders to be made.
Piercing the corporate veil based on
Indonesian company law
Company Shareholders are not personally liable for
agreements entered into on behalf of the Company
and are not liable for Company losses exceeding the
nominal value of the shares individually subscribed. 3
The condition above will not apply if :
1. The requirements for [a Company’s existence as]a
legal entity have not been or are not fulfilled ;
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LEGAL
2. Shareholder, either directly or indirectly, in bad faith,
uses the Company solely for personal purposes ;
3. A shareholder is involved in unlawful acts committed
by the Company; or
4. A shareholder, either directly or indirectly, unlawfully
uses the Company’s assets, which causes the
Company assets to be inadequate to settle the
Company’s debts.
Point (1),
it is clear that the Shareholders are not serious to obtain
the status of limited liability. This status can only be
obtained after the Company has gained the Ministry
of Laws and Human Rights (“MoLHR”) approval. 4 If
the Shareholders neglect the formal procedure of the
establishment of the Company, it can be interpreted
that the Shareholders do not really want to establish a
limited liability company.
The request to obtain MoLHR legalization must be
submitted to the Ministry at the latest of 60 (sixty) days
after the Deed of Establishment (“DoE”) is signed,
together with the information about the supporting
documents.
If the request to obtain the Ministry’s legalization is not
submitted within this period, the Article of Association
4 Art.10 (1) Law 40/07
becomes void as from the passage of that period
and the Company that has not obtained the legal
entity status is dissolved by law and its settlement
shall be carried out by the founders.
The Company cannot obtain the legal status not
only because the Company has no MoLHR’s
approval but also for other reasons such as the
founders have not placed the capital as agreed
before, founders do not give their authority
to the Company’s officers to conduct the
Company’s activities because the founders wishto
conduct activities on behalf of the Company, etc.
Point (2),
The Shareholders in bad faith uses the
Company for their own interest. The Company
implements only the purposes and objectives of
the Shareholders. This is in line with the Agent
Theory. Therefore, the Shareholders in bad faith
can not be protected by law. Piercing Corporate
Veil can be applied in this case.
Point (3),
Shows that a shareholder is involved in unlawful acts
committed by the Company based on the Fraud theory.
Anyone who causes loss to others, must be liable upon
that loss. As an artificial person, the Company does
not have objectives. In the event that the objective
of Company is the same as the Shareholders’, the
Shareholders will become liable.
Point (4),
Related to the use of the Company’s assets illegally, in
the event the Shareholders use the Company’s assets
and losses exceeding the Company’s assets, which cause
the Company can not settle its debts to Creditors, then
the piercing corporate veil can apply to this case.
Parties that are being protected by the
principle of the piercing of corporate veil
Article 3 (2) Law 40/07 does not explain explicitly
the parties that are being protected by the Principle of
the Piercing of Corporate Veil. However, Article 3 (2)
Law 40/07 may give protection to the Creditors of the
Company.
Moreover, Article 61 and Article 62 Law 40/07 may
give protection to the Minority Shareholders. Article 61
and 62 Law 40/07 stipulate the followings :
1. Each shareholder is entitled to file a lawsuit against
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LEGAL
the Company in the District Court, if [that
Shareholder] suffers losses by the Company’s actions
which are considered unfair and without reasonable
ground as a result of a resolution of the General
Meeting of Shareholders (“GMS”), BoD and/or
Board of Commissioners (“BoC”). The lawsuit shall
be filled in the District Court whose jurisdiction
covers the Company’s seat.
2. Each shareholder is entitled to demand the Company
to purchase his shares at a reasonable price, if that
shareholders does not approve of the Company’s
action which is detrimental to the shareholder or the
Company, namely :
a. An amendment to the Article of Association ;
b. A transfer, or a change of the Company’s assets
that have a value of more than 50% (fifty
percents) of the Company’s net assets ; or
c. A Merger, a Consolidation, an Acquisition or a
Separation.
Where the shares requested to be purchased in the
abovementioned condition exceed the limit for
the provision regarding share repurchase by a
Company, the Company must make an effort
that the remaining shares be purchased by a
third party.
Those Articles show that the Shareholders
only have rights to sue the Company, if the
respective actions/or acts of the Company are
taken based on the prevailing mechanism, and/
or have been ratified by the Company based on
the prevailing laws and regulations.
Case example :
We may see the Bank Summa’s case in 1992
when Mr. Edward Soeryadjaya as a shareholder
as well as the Corporate officer of Summa
Bank must responsible for the Summa Bank’s
debts.
Summa Bank had loss and could not pay its
debts to its creditor. Mr.Edward’s father, Mr.
William Soeryadjaya (“Om William”) acted as
a personal guarantor of Summa Bank. Bank
Indonesia gave warnings to Bank Summa
because they could not fulfill their obligation.
Bank of Indonesia has stipulated the period
time for Bank Summa to pay its debts. When
the time was lapsed, Mr. Edward Soeryadjaya
could not pay its debts. Because of this, Om
William had to sell his shares in PT Astra
International to pay Summa Bank’s debts that managed
by his son. In this case, the Shareholders may loss its
immunity upon the limited liability subsequently the
Shareholder will be personally liable.
Also the limited liability principle may be absent when
the Corporate Officers (“Board of Directors or Board
of Commissioners”) are at fault or negligent in carrying
out their duties according to the principle of good faith
(Article 97 (3) Law 40/07).
For more information and other legal matters, please contact
Ms. Mary Osmond at law@ina.or.id
or
Mr. Muqthi Ali at cic@fcgi.or.id
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