INTRODUCTION
Piercing the corporate veil is defined by Cornell Law School’s Legal Information Institute as a doctrine that may be applied where a corporation is used to facilitate improper conduct, including the commingling of personal and corporate assets or the deliberate undercapitalization of the company. Similarly, Munir Fuady, in his book Doktrin-Doktrin Modern Dalam Corporate Law dan Eksistensinya Dalam Hukum Indonesia (Third Edition, 2014), defines piercing the corporate veil as a doctrine that permits legal liability to be imposed not only upon the corporation as a separate legal entity but also upon the individuals behind it, including shareholders, members of the board of directors and board of commissioners.
Although Article 1 point (1) of Law No. 40 of 2007 on Limited Liability Companies (“Company Law”) recognizes a Limited Liability Company as a separate legal entity established based on a capital partnership, individuals behind the company may, under certain circumstances, be treated as one with the company through the application of the piercing the corporate veil doctrine. This principle is regulated in Company Law in Article 3 paragraph (2), Article 97 paragraphs (2) and (3), Article 114 paragraphs (2) and (3), Article 115 paragraph (1), and Article 69 paragraph (3). While these provisions generally serve the same purpose, each is directed toward different positions within the company, namely shareholders, directors, and commissioners.
A. EXTENSION OF LIABILITY UNDER THE PIERCING THE CORPORATE VEIL DOCTRINE IN INDONESIAN COMPANY LAW
It is important to note that the term piercing the corporate veil is not directly mentioned under Company Law. However, this principle is embodied in several provisions that allow the imposition of personal liability upon individuals behind the company in certain circumstances. These provisions reflect the law maker’s intention to prevent the misuse of the corporate form and to ensure accountability among those who exercise control, management, and supervision over the company. In short, there are three positions that are affected by the principle of piercing the corporate veil, including:
1. Shareholders
In principle, Article 3 paragraph (1) of the Company Law states that shareholders shall not be personally liable for agreements entered into on behalf of the company and for the company’s losses beyond the nominal value of their shares. However, Article 3 paragraph (2) of the Company Law sets forth the exceptions, including where shareholders act in bad faith for personal interests, participate in unlawful acts committed by the company, or misuse corporate assets resulting in the company’s inability to satisfy its obligations. These exceptions constitute the clearest statutory manifestation of the piercing the corporate veil doctrine in Indonesian company law.
2. Board of Directors
The application of the piercing the corporate veil doctrine has developed beyond shareholders and may also extend to directors. Under Article 97 paragraph (2) of the Company Law, directors are required to perform their duties in good faith and with full responsibility, and a breach of such duties may result in personal liability. If a director breaches these duties, the breach may give rise to a personal liability. In line with this, Article 97 paragraph (3) of Company Law further regulates that Directors shall also be fully and personally responsible for the losses of the company if the person concerned is at fault or negligent in carrying out his/her duties. If the Board of Directors consist of two members or more, the responsibility shall apply jointly and severally for every member of the Board of Directors as mentioned in Article 97 paragraph (4). Along with that, directors may also be held jointly and severally liable for misleading financial statements under Article 69 paragraph (3) and may bear personal liability where the company’s bankruptcy results from their fault or negligence.
3. Board of Commissioners
The doctrine may also extend to commissioners, although less frequently given their supervisory role. Article 114 paragraph (2) of the Company Law requires commissioners to perform their duties in good faith, with prudence, and with full responsibility, and a failure to do so may give rise to personal liability. Under Article 114 paragraph (3) and Article 115 paragraph (1) of the Company Law, if the company suffers losses or becomes bankrupt, members of the Board of Commissioners may be held personally liable if the losses or bankruptcy are caused by their fault or negligence in performing their duties. In the case of bankruptcy, it is crucial to note that this liability may also apply to former members of the Board of Commissioners who served within 5 (five) years prior to the bankruptcy declaration, as regulated under Article 115 paragraph (2) of the Company Law. Further, similar to Board of Directors, commissioners may be held jointly and severally liable for misleading financial statements under Article 69 paragraph (3) and for losses arising from negligence in carrying out their supervisory functions.
B. IMPLEMENTATION OF THE PIERCING THE CORPORATE VEIL DOCTRINE IN INDONESIAN JUDICIAL PRACTICE
In this article, we provide a practical example on how piercing the corporate veil is included in Indonesian legal practice, is under Supreme Court Decision No. 1916 K/Pdt/1991. This case involved PT Bank Perkembangan Asia against PT Djaja Tunggal and other related parties. In the ruling, the judges found that the management of PT Djaja Tunggal simultaneously served as the management of PT Bank Perkembangan Asia at the time a credit facility was granted to PT Djaja Tunggal. Furthermore, the credit facility was extended to a company controlled by the same parties without adequate credit analysis and was secured by a Right to Build (Hak Guna Bangunan) that had already expired. Based on these circumstances, the Supreme Court determined that there were indications of collusion and bad faith on the part of the company’s management, which resulted in losses to another party.
Furthermore, the judges expressly recognized the application of the extension de passif or piercing the corporate veil doctrine under the following considerations:
“Based on the foregoing facts, viewed in conjunction with the manner in which the credit facility was granted by the Claimant, which was in fact controlled by Defendants II–V, to a company likewise controlled by them (Defendant I: PT Djaja Tunggal), there are indications of collusion and bad faith on the part of Defendants I, II, III, IV, and V. In a case such as this, a legal doctrine known as extension de passif, also referred to as piercing the corporate veil (lifting the corporate veil), has developed, whereby the principle of limited liability of a limited liability company may be set aside and liability may be imposed upon the company’s management where legal acts undertaken for and on behalf of the company involve collusion and bad faith resulting in losses to other parties.”
Based on this reasoning, the judges concluded that the losses incurred should not be borne solely by PT Djaja Tunggal as a separate legal entity, but also by the corporate officers involved. Accordingly, PT Djaja Tunggal and its management were held jointly and severally liable for the debt owed to PT Bank Perkembangan Asia in the amount of IDR 5,502,293,038.84.
CONCLUSION
The doctrine of piercing the corporate veil constitutes an exception to the principle of limited liability and serves as a legal mechanism to prevent the misuse of the corporate form. As explained by Munir Fuady, the doctrine allows courts to disregard a corporation’s separate legal personality and impose personal liability upon the individuals behind the corporation where it is used as an instrument of bad faith, unlawful conduct, or other forms of abuse. In Indonesian judicial practice, courts have demonstrated a willingness to look beyond the formal structure of a corporation and instead focus on the substance of the parties’ conduct. This is reflected, among others, in Supreme Court Decision No. 1916 K/Pdt/1991, in which the Supreme Court recognized the piercing the corporate veil doctrine and imposed joint and several liability upon the company and its corporate officers. Accordingly, the doctrine plays an important role in ensuring corporate accountability and preventing the corporate form from being used as a means of evading legal responsibility.