Limited Liability Of Shareholders Under The Indonesian Company Law

Limited Liability Of Shareholders Under The Indonesian Company Law

Dr. Rudi Agustian Hassim, S.H., M.H.

There are many ambiguities if we are facing the question of how far the shareholders of a company are liable for their course of action. Margaret L. Barron (author of Fundamental of Business Law) provides that “members of a company have limited liability. In this respect they are not liable for all the company’s debts and contractual obligations. A shareholder’s liability related to the amount of the shareholder has invested in the shares of the company.” Whereas Henry R. Cheeseman (University of Southern California) states that “generally, the shareholders have only limited liability. That is, they are only to the extent of their capital contributions.”

Under the above circumstances, it comes to our attention why the position of shareholder in a limited liability company holding such an important role in modern business as Henry R. Cheeseman states that “in recent years, a majority of states have approved a new form of business entity called limited liability company (LLC). An LLC is an incorporated entity that combines the most favorable attributes of both partnership and corporations.”

A question arises as to why an LLC is now very favorable to the business community. In order to answer this question, we may refer to the opinion of James D. Cox, Thomas L. Hazen and F. Hodge Oneal (author of Corporation) which provides that a LLC can stimulate investment where the shareholders can easily calculate the loss and benefit of their investment in a LLC. In addition, a LLC is considered efficient. Lawrence S. Clark and Peter D. Kinder state: “A limited partnership is designed to meet the needs of Investors, who want to  tax the advantages of being a partner, but do not want to be active”.

What is happening in Indonesia?
The awareness of the fast development of the business world and economy and the requirement by economic globalization thus, in particular, a Limited Liability Company or Perseroan Terbatas is regulated in the amendment of the “Company Law”, namely Law number 40 of 2007 regarding Limited Liability Company which is hoped to be able to regulate various matters which so far arise in practice.

Under the New Indonesian Company Law, limited liability applies for the benefit of shareholders only from the time at which a company’s Deed of Establishment is approved by the Minister of Legal and Human Rights.  It is to be noted that actions of founders (i.e. shareholders) prior to that time will only bind the company if: (i) they are in the best interest of the company and (ii) the company subsequently (i.e. after limited liability attaches) accepts or confirms those actions, which would usually be by way of ratifying resolutions of shareholders.  If those actions are not accepted or ratified by the company, each founder is personally liable for all the consequences of those actions.

Piercing the Corporate Veil
Piercing the Corporate veil is the International Doctrine of the business law which holds that the corporate structure with its attendant limited liability of shareholders may be disregard and personal liability imposed on the shareholders in the case of fraud or other wrongful acts done in name of the company (Black Law’s Dictionary).  Therefore, it is an exception that requires shareholders to be held entirely responsible for debts of the company when the shareholders have done something improper in running the company that they should not have done.

The Indonesian Company Law applies also the doctrine, whereby the liability of shareholders is not solely limited to the nominal value of the shares for which they have subscribed. Therefore, if the shareholders misuse or manipulate the company for their own interest, those shareholders to be held liable and cannot retain this limitation on their liability. Provided that it must be proven that the shareholder unlawfully misused or manipulated the company.

Pursuant to the Article 3 of the Indonesian Company Law, a shareholder of a company is not personally liable for commitments made in the name of the company, as well as corporate losses beyond the value of the shares which he/she has acquired, unless:

  • the requirements of the company as a legal entity have not been or is not met;
  • the shareholder exploits the company, directly or indirectly, with bad intent for its personal interest;
  • the shareholder is involved in unlawful acts committed by the  company; or
  • the shareholder directly or indirectly illegally use the assets of the company in such a way which results in such assets becoming insufficient to settle company debts.

Moreover, in case of bankruptcy as result of the wrongful acts carried out by the shareholders, and the company is unable to pay its debts after having been declared bankrupt, or  the assets of the company are insufficient to discharge all of its debts, after a statement of bankruptcy, the shareholders are to be held liable for the company’ debts.

Considering the above, we believe the New  Indonesian Company Law can accommodate the interests of the business world even though there are a number of articles that are still debatable in force, among others, relating to the issues of Corporate Social Responsibility (which is additional mandatory obligation for each of Indonesian company) , the responsibility of Board of Commissioners (in case of the company suffering losses), and the distribution of dividend.

(Dimuat di Majalah Financial Wealth, Edisi July 2008, Hal. 128-130)