Piercing the Corporate Veil in Limited Liability Companies

A Limited Liability Company (PT), as a legal entity, is a legal subject with rights, obligations, and assets separate from those of its owners. Its liability is therefore also separate from the personal liability of its owners.

For example, if an activity carried out in the name of the PT causes a loss to a third party, the third party can only hold the PT legally liable, limited to the PT's assets, and cannot reach the personal assets of the PT's owner.

Article 3 paragraph (1) of Law Number 40 of 2007 on Limited Liability Companies (the Limited Liability Company Law) provides that the shareholders of the Company are not personally liable for agreements made in the name of the Company and are not liable for the Company's losses in excess of the shares they own. Its Elucidation reaffirms that shareholders are only liable up to the amount paid in for all the shares they own, and this does not extend to their personal assets.

When the Separation Does Not Hold

This separation between the assets and liability of the PT and its owners is not absolute. In certain situations, the owners or organs of the PT may be held liable in their personal capacity, or jointly with the PT, to compensate a third party for losses, even though the activity was carried out in the name of the PT. This is known as piercing the corporate veil.

Literally, the phrase means tearing through the curtain of the company. The veil that separates liability between the PT and parties outside the company, which may be an organ of the PT or another legal subject, is lifted by the law.

In other words, piercing the corporate veil is a doctrine understood as a process of placing liability on another person or company for legal acts carried out by an acting company (a legal entity), regardless of the fact that the acts were actually carried out by or in the name of that company.