Piercing the Corporate Veil in Indonésia

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 subsdiary 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.

In Indonesia, the term “piercing the corporate veil” is commonly recognized as Corporate Law Doctrine. This doctrine serves as a basis for the corporate organs such as the Board of Directors (“BoD”), Board of Commissioners (“BoC”), and Shareholders (together as the “Corporate Organs”) to be personally liable for any legal actions and consequences arising from wrongful or unlawful acts they have committed under specific circumstances in relation to the company. It is intended to provide the company protection as a separate legal entity that owns its liabilities due to its business activities against any personal interest of each 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 as Law (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 only liable for their own actions according to their shareholding portions in the Company.

However, this segregation can be disregarded under certain conditions, whereby the Corporate Organs may be held personally liable for the corporate actions under the Company Law:

Shareholders

For instance, Shareholder(s) may be personally liable for, among others:

• non-fulfilment of the company’s legal status requirements;
• acting in bad faith for personal interests;
• involvement in unlawful or criminal acts conducted by the company;
• unlawful use of the company's assets, resulting in the company's assets becoming insufficient to settle its debts; or
• non-fulfilment of the company’s minimum shareholder requirement;

(Article 3 (1) and (2) of the Company Law)

In such cases, the actions taken under these conditions will be regarded as piercing the corporate veil rendering the Shareholders personally accountable.

BoD and BoC

Member(s) of the BoD and BoC of a company may be personally liable 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 appropriate management or supervision of the company (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 if he/she fails to report his/her, including his/her family’s, shares ownership in the company or any other company.

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 will not bind the company and the founders 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).

The short answer is “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 Company Law provides a legal basis for imposing a personal liability on the Corporate Organs, particularly the Shareholders, in cases where the company is being abused for personal gain in bad faith.

In such cases, the Shareholders can no longer rely on the protection normally afforded by the virtue of law, which is limited to their shareholding portions in the company (Article 3 (1) of Company Law), and they may be personally responsible for the debts, obligations, or other legal consequences for acting in bad-faith. This is particularly significant in Indonesia's corporate legal framework, where the principle of limited liability is a fundamental aspect of the corporate structure, and piercing the corporate veil only occurs under specific circumstances, including abuse.

Meanwhile, the concept of “abuse” of legal personality applicable to the other Corporate Organs, such as the BoD and BoC is strictly 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.

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) paragraph b of the Company Law provides a legal basis for the Corporate Organs, particularly Shareholders, personally liable when they misuse the company’s legal status 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 debts and obligations, if their actions lead to an abuse of the company’s separate legal personality.

Similarly, the concept of the "corporate shield" in Indonesia also applies 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. As already mentioned, Shareholders may become personally liable for their actions as stipulated in Article 3 (1) of the Company Law. Though not expressly stated in the Company Law, the company may 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:

• 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.
• 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 provides some exceptions, where members of the BoD may not be personally liable for their actions, if they can prove as follows:

• the loss is not the BoD’s fault or result of their negligence;
• the BoD has prudently managed the Company in good faith for the interest of the Company, in the pursuit of its purposes and objectives;
• there is no direct or indirect conflict of interest over the management resulting in the loss; and
• the BoD has taken precautionary measures to avoid the loss.

Member(s) of the BoC cannot be personally liable for his/her actions related to the Company, if he/she can prove as follows:

• 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;
• he/she personally has no direct or indirect interest to the BoD’s management of the Company causing any loss to the Company; and
• he/she has provided the necessary advice to the BoD to prevent the occurrence or continuity of such loss.

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 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 debt or 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.

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.

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.

No, the Indonesian legal system does not recognize the concept of “hidden partner” or de facto administrator.  In the context of insolvency, the administrator appointed by the judges will supervise the process, if the company is undergoing the pre-insolvency or suspension of debt payment obligation – Penundaan Kewajiban Pembayaran Utang (PKPU).

While the segregation of a company from its Company Organs is recognized in Indonesia, where Shareholders as part of the Corporate Organs are only responsible for the corporate actions according to their shareholding portions in a company, it does not exempt the Corporate Organs from any misconduct or negligence they have performed in relation to the Company. 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 authorized capacities. It also provides a mechanism to hold the Corporate Organs personally responsible for any unlawful actions taken by the relevant Corporate Organs.