QnA Country Guide on Piercing the Corporate Veil in Indonesia
What cases (hypothesis) of piercing the corporate veil are known in your legal system?
In Indonesia, the term “piercing the corporate veil” is commonly recognized as Corporate Law Doctrine. This doctrine serves as a basis for the protection of the company from any legal actions and consequences arising from wrongful or unlawful acts of the corporate organs being the Board of Directors (“BoD”), Board of Commissioners (“BoC”), and Shareholders (together as the “Corporate Organs”).
In principle, Law No. 40 of 2007 on Limited Liability Company as amended by Law No. 6 of 2023 on Enactment of Government Regulation in Lieu of Law No. 2 of 2022 on Job Creation (the “Company Law”) recognizes a company as a legal entity, separated from its Corporate Organs. This segregation does not only arise from the company’s status as a legal entity, but also serves to protect the Corporate Organs against personal liabilities incurred by the Company. In addition, this segregation also means that the respective shareholders are liable only limited to their shareholding percentage in the company (Article 3 (1) of the Company Law).
However, this segregation can be disregarded under certain conditions, whereby the liability of Corporate Organs may be extended become personally liable for any corporate actions under the Company Law as explained further below:
Shareholders
For instance, Shareholder(s) may be personally liable for, among others:
(a) non-fulfilment of the company’s legal status requirements;
(b) acting in bad faith for personal interests;
(c) involvement in unlawful or criminal acts conducted by the company; or
(d) unlawful use of the company's assets, resulting in the company's assets becoming insufficient to settle its debts (Article 3 (2) of the Company Law)
BoD and BoC
Member(s) of the BoD and BoC of a company may be personally liable among others: for a corporate action if the director or commissioner is guilty of an unlawful action related to the company, or being negligence in conducting his/her role in the management or supervision of the company, respectively (Articles 97 (3) and 114 (3) of Company Law). In addition, a member of the BoD can also be personally liable for a corporate action resulting the loss of the company if he/she fails to report his/her, including his/her family’s, shares ownership in the company or any other company.
In light the above, the actions taken under these conditions will be regarded as piercing the corporate veil rendering the respective Corporate Organs personally accountable.
Does compliance with the formal requirements and disclosure requirements in connection with the incorporation of companies constitute a mere condition of regularity or of the existence and external effectiveness of the corporate contract? What happens if the formalities are not complied with?
Non-compliance with the formal requirements for incorporating a company in Indonesia may affect the company's legal status. Article 7 (4) of the Company Law stipulates that a Company only obtains its legal entity status upon the issuance of the approval from the Ministry of Law and Human Rights ("MoLHR"). In other words, the separation between the founders and the company is legally recognized or effectively applied once the MoLHR approval, formally establishing the company as a legal entity, is granted.
To achieve this, the shareholders of the Company must meet certain legal requirements to formalize the establishment of the company as a legal entity, including preparing the Deed of Establishment (“DoE”) made before a Notary, as well as submitting the company information to the MoLHR electronic systems. The information includes (i) the name and domicile of the company, (ii) the duration of the company, (iii) the purposes, objectives, and business activities of the company, (iv) the company’s capital amount, and (v) the company’s address. This submission must be carried out no later than 60 (sixty) days from the date of the DoE (Articles 9 and 10 of Company Law).
As noted above, failure to obtain the legal entity status will impact on the company’s legal standing. However, any legal action taken by a company that has not been properly established will not immediately make the company establishment null and void. Instead, the liability shifts to the Corporate Organs. The legal actions taken by the founders/shareholders will not bind the company and the founders/shareholders will be personally responsible for these actions, unless ratified by the general meeting of shareholders within 60 days following the obtainment of the company’s legal status (Article 14 of Company Law).
Does the concept of "abuse" of legal personality exist in your legal system?
Yes, the concept of “abuse” of legal personality exists in Indonesia despite it not being explicitly defined. As mentioned above, Article 3 (2) paragraph b of the Company Law provides a legal basis for imposing a personal liability on the Corporate Organs, if their action was made resulting the company losses by misuse the company in bad faith (abuse).
In terms of the Shareholders, it can no longer rely on the protection normally afforded by the virtue of law, which will not be personaly liable and only liable limited to their shareholding portions in the company (Article 3 (1) of Company Law), if such shareholders conduct the any of above circumstances as mentioned in Article 3 (2) of the Company Law which can be considered as “abuse” toward the company as separate legal entity. Based on this Article 3 (2) of the Company Law, the Shareholders may be personally liable.
Meanwhile, the concept of “abuse” of legal personality applicable to the other Corporate Organs, such as the BoD and BoC is applicable when the relevant member of the BoD or BoC carries out his/her duties without good faith, resulting in the company losses (Articles 97 (5) and 114 (5) of Company Law.
Does the principle of “corporate veil piercing” exist in your legal system as a response to the phenomenon of “abuse of legal personality”?
Yes, the principle of "corporate veil piercing" exists in Indonesia as a legal response to the "abuse of legal personality." As already mentioned, Article 3 (2) of the Company Law provides a legal basis for the Corporate Organs, particularly Shareholders, personally liable when they misuse the company for personal gain in bad faith. This doctrine allows for the "piercing" of the corporate veil, meaning that the protection of limited liability (up to its shareholding amount) normally granted to Shareholders is disregarded, and they can be held personally responsible for the company’s liabilities, if their actions lead to an abuse of the company’s separate legal personality.
Is the so-called “corporate shield” recognised in your legal system without exception?
Similarly, the concept of the "corporate shield" is also recognised in Indonesia whereby the Corporate Organ, being the shareholders, members of BoD and BoC, will not be personally liable for any company action and liabilities (i.e. debts or obligations) with the case of shareholders, they are only liable limited to their shares ownership.
This corporate shield will not be applied to the Corporate Organs under specific circumstances, particularly when the relevant Corporate Organ is engaged in actions that are deemed unlawful or contrary to the company’s intended purposes and it was made for personal interest in bad faith.
In terms of shareholders, the shareholders may become personally liable for their actions as stipulated in Article 3 (2) of the Company Law as mentioned above. The Company may only be liable for the actions taken by the Shareholders unless it can be proven otherwise, or these actions are already ratified by the general meeting of shareholders.
Meanwhile, the specific circumstances applicable to the BoD and BoC are as follows:
(a) BoD: According to Article 97 (3) of Company Law, a director can be held personally liable for a corporate action if the losses are incurred due to his/her wrongdoing or negligence in performing his/her duty.
(b) BoC: The BoC may be held jointly liable if the company suffers a loss due to their wrongdoing or negligence in performing the supervision and advisory to the BoD (Article 114 (3) of Company Law).
Further, the Company Law provides some exceptions or corporate shield to the members of BoD and BoC as follows:
if the member(s) of BoD can prove the following:
(a) the loss is not the BoD’s fault or result of their negligence;
(b) the BoD has prudently managed the Company in good faith for the interest of the Company, in the pursuit of its purposes and objectives;
(c) there is no direct or indirect conflict of interest over the management resulting in the loss; and
(d) the BoD has taken precautionary measures to avoid the loss.
If the member(s) of BoC can prove the followings:
(a) he/she has prudently performed the supervisory duty in good faith for the interest of the Company, and in accordance with its purposes and objectives;
(b) he/she personally has no direct or indirect interest to the BoD’s management of the Company causing any loss to the Company; and
(c) he/she has provided the necessary advice to the BoD to prevent the occurrence or continuity of such loss.
Is the corporate shield also provided for in favour of those shareholders who use their limited liability merely to exempt themselves from their personal debts and obligations?
The Corporate Shield adopted by the Company Law is intended to protect the Company and Corporate Organs, including Shareholders, from personal liability for any actions and obligations incurred by the Company during the conduct of business. The Shareholders’ liabilities are only limited to their shareholding portions in the Company.
As such, any personal debt or obligation of a Shareholder will be the responsibility of the particular shareholder. Such liability cannot become the Company’s obligation by virtue of the corporate shield implementation. This is because Article 3 (2) paragraph b of the Company Law prohibits shareholders from utilizing the company for their own, personal interest.
How is the case of controlling shareholders who use their limited liability company to pursue personal interests rather than those of the company regulated/sanctioned?
Any personal interest pursued by any of the (controlling or minority) shareholders may lead to the piercing of the corporate veil, making the shareholder personally liable for the company's actions. The company, in this case, will not be sanctioned due to this shareholder’s missconduct.
How does your legal system react in the face of such negligent conduct by shareholders that damages the interests of creditors?
Article 3 (2) paragraph d of the Company Law stipulates that in the event the Shareholders directly or indirectly utilizing the company’s assets resulting in the Company’s inability to settle the company’s debt to its creditor, such shareholders will be personally liable for the loss incurred by the Company.
Therefore, any negligence of the Shareholders resulting in the failure to fulfil the company’s obligations toward a third party (i.e., creditors) shall be the sole responsibility of the respective Shareholders.
As such, to avoid above shareholders negligence, it is common that the creditors conduct borrower due diligences and make sure in the loan agreement entered between the company and creditors, certain representations and warranties including indemnity are agreed, such as legal standing of the company and its shareholders, the required approvals and consents in relation to loan agreement has been obtained including general meeting of shareholders approval, the signatory party has been authorized to enter and sign the loan agreement, etc. Failure to maintain these representations and warranties, the creditor can take compensation from the enforcement of indemnity clauses.
Is there in your legal system the notion of a “hidden” partner or de facto administrator, how is their liability regulated in the insolvency context?
No, the Indonesian legal system does not recognize the concept of “hidden partner” or de facto administrator. In the context of insolvency, the administrator is appointed if the company is undergoing the pre-insolvency or suspension of debt payment obligation – Penundaan Kewajiban Pembayaran Utang (PKPU).
Does the notion of piercing the corporate veil also apply in the context of groups of companies and in particular with regard to parent companies, i.e. the companies exercising control?
Under the Company Law, a parent company and its subsidiary are treated as distinct or separate legal entities, as they are established independently pursuant to their deed of establishment. As a result, the parent company’s obligations and liabilities are limited to the value of the shares it holds in its subsidiary, thereby protecting the extension of the parent company’s responsibility toward the subsidiary’s debts or legal matters.
In light of the above, the application of the piercing of the corporate veil doctrine in Indonesia, particularly in the context of parent companies or controlling shareholders, would follow a similar approach as that applied to ordinary shareholders. This doctrine, which disregards the limited liability of the parent company, would only apply under particular circumstances as stipulated in Article 3 (2) of the Company Law, as explained earlier.
If the exercise of the parent company’s control over the subsidiary company causes circumstances as mentioned in Article 3 (2) of Company Law (e.g acting in bad faith to pursue the parent company’s interest, or unlawful use of the subsdiary company’s assets resulting in the subsdiary company’s inability to repay the loan), such parent company’s liability may exceed its total shareholding portion that it holds in the subsidiary company.
Conclusions about the doctrine of corporate veil in your legal system.
While the segregation of a company from its Company Organs is recognized in Indonesia which they may not be personally liable, it does not exempt the Corporate Organs from any misconduct or negligence they have performed in relation to the Company for their personal interest and bad faith. The adoption of the piercing of the corporate veil principle into the Company Law is to protect the Company against any personal interest of the Corporate Organs, who act beyond their authority and capacities.
The article above was prepared by Audria Putri (Senior Associate), Mia Sari (Senior Associate), and M. Irfan Yusuf (Associate).
