Piercing the corporate veil is the process by which a court disregards the separate legal personality of a company and holds its shareholders or controllers personally liable for its obligations.
The Starting Point: Separate Personality
A limited liability company is a legal person distinct from its shareholders. As established in Salomon v A Salomon & Co Ltd (1897), shareholders are generally liable only up to the amount of their investment. This principle encourages enterprise by limiting personal risk.
When the Veil Is Pierced
Courts treat piercing as exceptional. In English law, Prest v Petrodel Resources Ltd (2013) confined it to cases where a person deliberately uses a company to evade an existing legal obligation or to frustrate its enforcement. Other jurisdictions apply broader tests based on fraud, sham arrangements or the complete domination of the company.
The Indonesian Statutory Rule
Article 3(2) of Law No. 40 of 2007 on Limited Liability Companies sets out when a shareholder loses the protection of limited liability: where the company's requirements as a legal entity have not been or are not fulfilled; where the shareholder, directly or indirectly, uses the company in bad faith for personal interests; where the shareholder is involved in an unlawful act committed by the company; or where the shareholder unlawfully uses the company's assets so that they become insufficient to pay its debts.
Practical Lessons
Keeping company and personal finances separate, observing corporate formalities, capitalising the company adequately and avoiding the use of the company to defeat creditors all reduce the risk of personal liability.