Piercing the Corporate Veil

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Category: Business and Industry

Date Submitted: 09/30/2012 12:13 AM

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When a law is deemed unfit because it cannot follow no longer relevant with the dynamics of the society, it will eventually be revised or even revoked and then replaced by another decree. This action is of course, understandable, since law is a man-made product whose purpose is to fulfill its creators’ needs. Thus, when countries in Asia such as Indonesia was struck by the financial crisis in 1997 resulting in the collapse of not only their economy but also politics and national security, a review of the existing laws regulating business practices became essential. It was evident that there had been a lack of recognition of business ethics not only by the actual actors engaging in business but also by the Indonesian government itself.

With the 2004 OECD Principles of Corporate Governance in mind, the introduction of a framework that promotes transparent and efficient markets, consistent with the rule of law and clearly articulates the division of responsibilities among different supervisory, regulatory and enforcement authorities was deemed necessary to improve Indonesia’s economic situation. Unfortunately, the Act No. 1 of 1995 on Limited Liability Company was considered not up to par with the corporate governance standards. For instance, it gave no acknowledgement of the social and environmental responsibility, did not regulate the obligation to submit company’s annual report to be audited by a public accountant nor did it offer any means to monitor the enforcement of the Limited Liability Act.

The incongruity of Act No. 1 of 1995 with the spirit of corporate governance added with the rapid progress of economy and science in the globalization era and people’s increasing demand of a more efficient and legally certain incorporation procedure eventually led to the emergence of Act No. 40 of 2007 as a new decree governing Limited Liability...