Piercing The Corporate Veil

A. INTRODUCTION

Nowadays, development of business in Indonesia is growing rapidly. Indonesian businessmen are protected through Law No. 40 of 2007 concerning to Limited Liability Company (“Law No. 40 of 2007”), its protection means there is a limited liability which given to the organ company (Shareholders, Board of Director and Board of Commissioner) in the event of occurring Company’s loss and/or bankruptcy. That thing happens because Limited Liability Company is recognized as individual persons who can perform legal acts themselves, have their own assets, and can be sued or sue as well before the court. Therefore this business form (Limited Liability Company) is the most favored business form among Indonesian businessmen.

However, businessmen are used to know that the protection they got from Law No. 40 of 2007, actually could be waived for certain situation. This article is conducted to introduce all businessmen in Indonesia regarding to the protection that could be waived for certain situation, that there is an exception for the protection given by Law No. 40 of 2007. We used to call it as Piercing The Corporate Veil.


B. PIERCING THE CORPORATE VEIL

As written in Article 3 Paragraph 1 of Law No. 40 of 2007 that “The Company’s shareholders shall not be individually responsible for commitments made on behalf of the Company and shall not be responsible for Company losses exceeding the nominal value of the shares subscribed by each of them”, means that the liability of the shareholders is actually limited.


However, when the board of Company Organs do not carry out their function properly and causes lost and even debt for the company, the limited liability of the shareholders could be transformed into unlimited liability. The transformation from the limited liability to the unlimited liability of company’s organ is called Piercing The Corporate Veil.


Black Law’s Dictionary defines Piercing The Corporate Veil as “The judicial act of imposing personal liability on otherwise immune corporate officers, directors, and shareholders for the corporation's wrongful acts.”


According to the definition above, Piercing The Corporate Veil are not only prevailing for Company’s shareholders but also fo r Directors and Board of Commissioner too. In line with its definition, Law No. 40 of 2007 adopts the principle of Piercing The Corporate Veil as stipulated in Article 3 Paragraph 2, Article 104 and Article 115 which reads:


“Article 3 Paragraph (2)


2) The provision as intended in paragraph (1) shall not apply in the following events:


a. the company’s requirements as a legal entity have not been or are not fulfilled;

b. the relevant shareholders either directly or indirectly and acting in bad faith take advantage of the company for their personal interest;

c. the relevant shareholders are involved in unlawful acts conducted by the company; or

d. the relevant shareholders either directly or indirectly unlawfully use the company’s assets, causing the company’s assets to be insufficient to settle the company’s debts.”

“Article 104

1. The Board of Director (“BOD”) shall not be authorized to file a petition for a declaration of the Company's bankruptcy with the Commercial Court without a prior resolution of the GMS, without prejudice to the provisions regulated in the Law regarding Bankruptcy.


2. In the event a bankruptcy as intended in paragraph (1) occurs due to the mistakes or negligence of the BOD and the Company's bankruptcy assets are insufficient to settle all the Company’s liabilities arising firm such bankruptcy, each member of the BOD shall be jointly and personally responsible for all outstanding liabilities of the bankruptcy assets.


3. The responsibility as intended in paragraph (2) shall also apply to the responsible and negligent members of the BOD who were members of the BOD during the 5 (five)-year period prior to the determination of the declaration of bankruptcy.


4. Members of the BOD shall not be responsible for the Company’s bankruptcy as intended in paragraph (2) if they can prove that:


a. the bankruptcy was not due to their mistake or negligence;

b. they have conducted management in good faith, prudently, and with full responsibility for the interest of the Company and in accordance with the purposes and objectives of the Company;

c. they have no conflict of interest either directly or indirectly in the management performed; and

d. they have taken actions to prevent the bankruptcy.


The provisions as intended in paragraphs (2), (3), and (4) shall be applicableto the BOD of a Company declared bankrupt based on a petition from a third party.”

“Article 115

1. In the event the bankruptcy is caused by a mistake or negligence of the Board of Company (“BOC”) in carrying out its supervision of the management performed by the BOD and the Company’s assets are insufficient to settle all the Company’s liabilities as a result of the bankruptcy, each member of the BOC shall be jointly and personally responsible together with the members of the BOD for the outstanding liabilities.


2. The responsibility as intended in paragraph (1) shall also be applicable to members of the BOC who held positions up to 5 (five) years before the decision on bankruptcy is pronounced.


3. Members of the BOC shall not be responsible for the Company’s bankruptcy as intended in paragraph (1) if they can prove that:


a. the bankruptcy was not due to their mistakes or negligence;

b. they have performed their supervisory duties in good faith and prudently for the interest of the Company and in accordance with the purposes and objectives of the Company;

c. they have no personal interest either directly or indirectly in the management by the BOD that causes the bankruptcy; and

d. they have offered advice to the BOD to prevent the bankruptcy from occurring.”

C. CONCLUSION & SUGGESTION

Essentially every Company’s organ have a limited liability for the Company’s loss or bankruptcy, however in the event Company’s organ do the things that prohibited in the Article 3 (2), Article 104 (1) and (2) and Article 115 (1) and (2) Law No. 40 of 2007 as mention above, then the limited liability become unlimited liability for the Company’s loss or bankruptcy which occur, therefore to avoid its principle, we suggest to the Company’s organ to always conduct many things carefully especially for the act that conduct on behalf of the Company, because it does not rule out the possibility for that things also can be given the criminal sanction if there is a criminal act which conducted by Company’s organ (fraud, etc).


All informations set forth above is only a brief explanation and based on the prevailing laws and regulations.

Source:

- Law No. 40 of 2007 concerning to Limited Liability Company.


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