One characteristic of an Indonesian limited liability company (Perseroan Terbatas) is the separation nature between the company itself and its shareholders. The shareholders are considered separated entities with the company. Further, the shareholders enjoy a limited liability in the company. This is known as the limited liability principle.
The implications are the assets of the company are considered to be separated from the shareholders’. The shareholder shall not liable to the company’s obligations. The shareholder’s loss is only limited to the money they’ve invested in the company as capital injection.
This main characteristic of a limited liability company makes it a popular choice of business form among the business people. Business people establishes a limited liability company with the expectation that if the limited liability company suffered loss then the loss shall not impacted the shareholder’s personal assets.
However, according to the law, this limited liability company’s main characteristic is not without exception. There are some conditions that can negate the limited liability characteristic of a limited liability company, and therefore the shareholders must also liable for the loss suffered by the limited liability company, thus the shareholder’s liability becomes unlimited. This should give a warning to the shareholder so that they will exercise caution and prudence in running the limited liability company.
In general, the conditions that negate the limited liability principle are known with the doctrine of piercing corporate veil.
The limited liability principle under the Indonesian Company Law
In is obvious that generally the shareholders has a legal protection over the loss suffered by the company so that the shareholders cannot be held liable over the company’s losses. It is regulated under the Article 3 paragraph (1) of the Law Number 40 Year 2007 regarding Limited Liability Company (the “Company Law”) which states as follows:
“The company’s shareholders shall not be liable personally over any obligations made on behalf of the Company and shall not be liable for the Company’s losses exceeding the shares it owns.”
It is further explained in the elucidation of Article 3 paragraph (1) of the Company Law, as follows:
“This provision confirms the characteristic of a Limited Liability Company that the shareholders shall only liable in the amount of the subscription of all the shares it owns and shall not include its personal assets.”
The Piercing Corporate Veil
However, the Company Law also regulates that in certain conditions the limited liability principle of the shareholders can be negated. Article 3 paragraph (2) of the Company Law stipulates these conditions as follows:
- The Company’s requirement for the legal entity status have not been or are not met;
- The shareholder directly or indirectly with bad faith uses the company for its personal interest;
- The shareholder is involved in an unlawful act committed by the company; or
- The shareholder directly or indirectly uses the company’s assets unlawfully, which causes the company assets to be insufficient to repay the company’s obligation.
Below are further elaborations of the abovementioned conditions.
Ad. 1. The Company’s requirement for a legal entity status have not been or are not met
Firstly, we need to understand that according to the Company Law, the limited liability company obtains the legal entity status after receiving the approval from the Ministry of Law and Human Rights of the Republic of Indonesia (“MOLHR”). Article 7 paragraph (4) of the Company Law explains this:
“The Company shall obtain the legal entity status at the date of issuance of Ministerial Decree regarding the approval of the legal entity of the Company”
The question, what makes the obtaining of the legal entity status is important for the shareholders? Article 14 paragraphs (1) and (2) of the Company Law answers this:
“(1) Any legal action on behalf of the Company, that is not yet obtain the legal entity status, may only be performed by all member of the Board of Directors together with all founder and all member of the Board of Commissioners, and they shall jointly liable for the said legal action .
(2) If such legal action referred to in the paragraph (1) above is performed by the founder on behalf of the Company that is not yet obtain the legal entity status, the legal action shall become the liability of the founder and shall not bind the Company.”
As explained in Article 14 paragraphs (1) and (2) of the Company Law above, if a limited liability company hasn’t obtain the legal entity status then the founder, shareholders, all members of board of directors and board of commissioners shall be jointly liable for the company’s obligation. This explains how the shareholders will be liable for every company’s obligation in the case that the company’s requirements as a legal entity is not yet or is not fulfilled according to the Article 3 paragraph (2) point a of the Company Law.
To give a better perspective on this matter, we will briefly explain about the company establishment in Indonesia. The Company is established by drawing up a Deed of Establishment before a public notary. After the Deed of Establishment is drawn up and the founder signed it, the founder must apply for a MOLHR decree regarding the approval of the limited liability company’s legal entity status. The Company Law regulates the requirements for application for the decree in the articles 9–11 of the Company Law. In practice the public notary will apply for the decree. The decree will be issued at the latest of 14 days after the application is completely received by the ministry.
Therefore, we can see that from the signing of the Deed of Establishment until the issuance of the MOLHR Decree there is a time interval. Within this time interval, actually, the Company is already permitted to perform legal actions. However it must conform to the provision of article 14 of the Company Law. Further, if there is a legal action performed before the date of issuance of MOLHR Decree then all founders, member of board of directors and members of board of commissioners shall jointly be liable for such legal action.
Other than that, in different condition, in case that the Company has obtained its legal entity status and the shareholders of the company becomes less than two, then according to the provision of Article 7 paragraph (6) of the Company Law the shareholder shall personally liable for every company’s obligations and loss.
Ad. 2. The shareholder directly or indirectly with bad faith uses the company for its personal interest.
We summarize from the opinion of Yahya Harahap, in this kind of condition the shareholders becomes dominant or ruling or controlling the company and such domination is made for improper purpose. Beside that there is a “bad faith” of the shareholder to the company. The existence of bad faith and improper purpose are deemed to exist if, there are indications as follows:
- Deceive the creditor, for example; transferring the company’s asset to the shareholders or its affiliates without a proper consideration;
- The company is under capitalization. And to deceive the creditor cooperating with the dominant shareholders by raising the debt-to-equity ratio;
- Looting; transferring the company’s asset to the shareholders, in which the transfer agreement between the company and the shareholder is unlawful, in order to deceive the creditor;
- Circumventing the statutes;
- Avoiding an existing obligation, such as establishing a new company in order to avoid a legal obligation arises out of an agreement with third party.
Ad. 3. The shareholder is involved in an unlawful act committed by the company.
In the event a third party suffered a loss due to company unlawful act, then according to the Article 1365 of Indonesian Civil Code, such third party has the right to demand compensation to the company. Further, if in such action it can be proven that a shareholder of the company is involved in the unlawful act which causes loss to the third party, then according to the law such shareholder is also liable for the loss. In this case the concerned shareholder cannot use the limited liability principle to defend himself and arguing that only the company that should bear the liability. For its involvement in the unlawful act, the shareholder may be sued and held liable for the loss suffered by the third party.
Ad. 4. The shareholder directly or indirectly uses the company’s assets unlawfully, which causes the company assets to be insufficient to repay the company’s obligation.
This category may also be included in the action of looting as explained above. For example, the actions of the shareholders, who also a member of board of director or management of the company, who with bad faith loot the company through a very high and a beyond fairness salary, including also the action of the company that repay the shareholders’ personal obligation. Such action taken by the company, and/or the management causes the company become unable to repay the company’s obligation. 
In this category, it is also needed to be proven that the shareholder has domination to the company, and such domination is used with bad faith or improperly.
The shareholder become a personal guarantor of the company
Beside the conditions as described above, the shareholder may also be liable against a third party in the event that the shareholder become a guarantor of the company’s obligation. For example, a company is receiving a loan facility from a bank. As a security of the loan the shareholder then become a personal guarantor of the company for such loan (borgtocht). In this case, if in the future the company is defaulted in repaying the loan to the bank, then the bank may demand the shareholder to repay the company’s loan. Therefore, the shareholder shall be liable to the obligation which arises from an agreement made by and between the company and the bank.
In this case, we may conclude that the negation of the shareholders’ limited liability from the company is caused by a voluntary action of the shareholder to bind itself as a guarantor for the company
Thus we share our explanation on the liability of the company shareholders, in the case of piercing corporate veil.
Hope this is useful.
This article is prepared by our Associate Gerald Saratoga Sarayar.
FREDRIK J PINAKUNARY LAW OFFICES
This article also available in Bahasa Indonesia. Follow this link to access the Bahasa Indonesia version: Tanggung Jawab (Tak) Terbatas Pemegang Saham.
 Yahya Harahap, Limited Liability Company Law, Ed. 1, Cet-6,( Jakarta: Sinar Grafika), page 78-81.