Comparison of Indonesian LLC and Vietnamese SC

Law of Business Organizations

Comparison of Indonesian Limited Liability Company and Vietnamese Shareholding Company under the Law No. 40 Year 2007 and the Vietnam Law on Enterprises

MUHAMMAD NOOR FRIYATNA ESA 1206227970

Faculty of Law

University of Indonesia Depok 2015

I.

OVERVIEW OF LIMITED LIABILITY COMPANY IN INDONESIAN AND VIETNAMESE LAW

In Indonesia, the term “perusahaan” (company or corporation) is historically derived from the provisions in the Indonesian Commercial Code (KUHD) which are not relevant anymore in the modern day progress in business and commerce activities.1 The irrelevancies ultimately pushed for a new law in which the ‘company’ are extensively stipulated under, namely the UU No. 40 Year 2007 or the UndangUndang Perseroan Terbatas (UUPT). The form of company the aforementioned law regulates is specifically the “perseroan terbatas” or Limited Liability Company (LLC), which is different from the other ‘perseroan’, the Perseroan Firma and Perseroan Komanditer (‘Firm’ and ‘Commanditaire Vennootschap’ respectively). One of the most identifying characteristic of the LLC under the UUPT is the shares (saham), which defines the LLC as the other perseroan doesn’t issue shares or even involve them at all. The shares are the form of an LLC’s capitals2 and are also used as means to increase the company’s capital and also to roughly determine the ownership of the company. Another defining trait of an LLC is that it acquires the status of a legal entity since its establishment. The combination of both the shares and its legal entity status defines a Limited Liability Company, as the owners of the company (the shareholders) are protected in the way that their liability over the company’s actions are limited to the amount of shares they hold over that company. It should be noted however that limitation of liability refers only to the members and not

1

Mulhadi. Hukum Perusahaan: Bentuk-bentuk Badan Usaha di Indonesia. 2010. Bogor: Ghalia Indonesia., p. 3 2 Art. 1 (1) of the UUPT

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to the company itself. The liability of the company is always unlimited in the sense that it must discharge its liabilities so long as it has assets to do so3. As the comparison to be analyzed in this paper, the Vietnam’s law regarding business companies, the Law of Enterprises (LoE), distinguishes what Indonesia defines as a Limited Liability Company into two entities, the Limited Liability Company (further separated into Single Member Limited Liability Company and the Multi-Member Limited Liability Company) and the Shareholding Company. However, the names if taken without context can be severely misleading, as the closest equivalent to an Indonesian Limited Liability Company is not Vietnamese Limited Liability Company, but rather its Shareholding Company. Despite both the LLC and the SC share the legal entity status, the Vietnamese LLC lacks the most defining trait of an LLC: the ability to issue shares4, which only the Shareholding Company has. Taking into context the provisions on Art. 26 (1) point c of the Law on Enterprises, we can point out that this LLC and SC separation could be the way the Vietnamese government manage the corporate business activities, as the Article stated that any LLC with the members exceeding 50 should be converted into a Shareholding Company; this means that an LLC in Vietnam will almost certainly a small corporation while large corporations will almost always be a Shareholding Company. Despite lacking such distinction under the UUPT, we cannot say that Indonesian law on companies are better or even worse from those of Vietnamese law, as the different take on companies reflect both states’ different take on the law as a whole and the factors that influence it.5

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Denis Keenan. Smith and Keenan’s Company Law. 2002. Harlow: Pearson Education., p. 22 Art. 26 (2) of the Law on Enterprises 5 The Vietnamese law on companies and business and commerce activities are initially, like most aspects of the Vietnamese legal system, influenced by the French law during their occupation of Vietnam. However, after Vietnamese independence, as the Communist Party of Vietnam took reign, 4

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II.

ANALYSIS ON THE INDONESIAN LIMITED LIABILITY COMPANY AND VIETNAMESE SHAREHOLDING COMPANY

a. Establishment Under the UUPT6, a company is established by two or more people through a notarial deed (a deed of establishment) which should be written in Indonesian. This, as stated in the Art. 7 (1) of the UUPT, rules out the possibility of a sole proprietorship company under Indonesian law. The founders should file the request of establishment of a company to the Minister of Law and Human Rights (Menteri Hukum dan HAM) and his Ministry7. The founders of the company is also required to claim the ownership on the shares on the moment of the company’s establishment. There are several documents that should be submitted to complete the establishment of a company; namely the Articles of Association of the company (Anggaran Dasar) and other documents related to the establishment of the company8. As a comparison, in Vietnam, the establishment of new companies are handled by the Business Registration Authority, and the procedures are similar to the Indonesian law, in which the founders of the company should submit required documents (called as Business Registration Documents) to the Business Registration Authority, which also includes the Articles of Association (called as Charter in the LoE) of the new company. After the procedure –which are explained in the Art. 12 through 20 of the Vietnam Law on Enterprises-- is completed, the Business Registration Authority then

the Party influence the conception of the new Vietnamese Law on Enterprises, taking out most French parts and replacing them with their counterpart concepts from a Socialist-Communist legal system, whilst not fully become a Socialist-Communist legal system. 6 Further detail on the establishment, see the provisions under Chapter II (Art. 7-30) of the UUPT. 7 Art. 1 (16) of the UUPT 8 These other documents are stipulated under the Art. 8 of the UUPT.

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shall issue a Business Registration Certificate to establish the company; the Certificate also acts as a legal basis for the company’s existence and business operations. The legal entity status of a company in Indonesia is acquired on the moment of the issuance of the Ministrial Decree (Keputusan Menteri) which legalizes the company’s establishment and legal status9. To acquire this legal entity status, as stipulated under the Art. 9 of the UUPT, the founders should file a separate request to the Minister which should be preceded by a company’s name request first. It is worth to note that the founders of the company is allowed to conduct legal actions on behalf of the company even before its establishment. The rights and obligations arising from these legal actions then bind the company after it acquires its legal status, only if the first General Meetings of Shareholders (Rapat Umum Pemegang Saham – RUPS) explicitly confirms to take over all the said rights and obligations. These are stipulated in the Art. 13 (1) of the UUPT. The similar also applies in the Vietnam law, in which the Art. 11 of the LoE stated that the founders of the company may enter into contract on behalf of the company before it is established, and the rights and obligations arising from the contract shall be taken over by the company on its establishment. In Indonesian law, the establishment of a company is conducted after the Minister of Law and Human Rights reviews the request of the establishment of a company and its legal and formal requirements, and if he approves it, the establishment of the company is then to be issued on the Additional State Gazette of Indonesia (Tambahan Berita Negara Republik Indonesia) and icludes the company name in the List of Companies (Daftar Perseroan), as per the Art. 29-30 of the UUPT. As

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Art. 7 (4) of the UUPT

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explained above, the approved request for an establishment of a company in Vietnam is issued through a publication of Business Registration Certificate. However, the LoE only requires the Business Registration Authority to publish the establishment of the new company in the national and local mass media10, as opposed to the Indonesian procedure to publish the establishment in the Additional State Gazette. The Business Registration Certificate sets out the scope of business operations of the company, pursuant to the Art. 21 (1) point c of the LoE. However, this ‘line of business’ and objectives of the company can also be expanded or altered by altering the Business Registration Certificate throught request to the Business Registration Authority11.

b. Capital and Shares In order to establish a new company in Indonesia, the basic capital should be at least Rp. 50.000.000, as stipulated in the Art. 32 of the UUPT12; and at least 25% of the capital should be paid in full, whether in the form of currency or other forms.13 In Vietnam, the equivalent of a basic capital is called as “charter capital”14. Unlike Indonesia however, the Law on Enterprises did not set out the minimum amount of this charter capital, save for a few exceptions (for example, minimum VND 800 billion for a derivative securities brokerage services company, as set in a separate Law on Securities). The founding members of the company is then required to contribute their portions of the charter capital in full to the company and on the time as undertaken.15

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Art. 21 (1) of the Law on Enterprises Art. 19 of the Law on Enterprises 12 The article also sets that for certain business operations, the basic capital can be different and shall subject to the related Law. 13 Art. 33 and 34 of the UUPT 14 Art. 3 (6) of the Law on Enterprises 15 Art. 27 of the Law on Enterprises 11

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Failure to pay in full and on time will lead to the member being liable for any damages caused by his failure to contribute the portion of charter capital to the company. A company in Indonesia shall not issue shares to be owned by the company itself or another company which shares are already owned by the issuing company, both directly or indirectly.16 The logic behind this provision is to ensure that the capital flow inside the company is going healthy; the finance of the company would be stagnant if its shares are owned by itself. However, the company is allowed to buy back the shares already issued, under several conditions, as provided by the Art. 37 of the UUPT. This provision is unique to the Indonesian law and there is no similar provision on the Law on Enterprises. An Indonesian company may increase or decrease its capital, both through the GMS; however, in case of a decrease of capital, the company should obtain an approval from the Minister earlier, as it constituted an alteration to the Articles of Association.17 The same applies to Vietnam shareholding companies, in the sense that the companies may increase or decrease its charter capital through the GMS, albeit without the requirement to notify the governmental body regarding a decrease of capital as found in the Indonesian law. In Vietnam law, shares are portions of capital of a company which is owned by a person or another company (a “shareholder”). The Law on Enterprise distinguishes share into several classifications: ordinary shares and preference shares, which are further classified into voting preference shares, devidend preference shares, redeemable preference shares, and other preference shares stipulated by the Charter of

16

Art. 36 (1) of the UUPT Art. 46 of the UUPT. For further information on procedures of increase and decrease of capital in Indonesian law, see Art. 41 – Art. 47 of the UUPT. 17

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the company18. Similarly, Indonesia in its UUPT classifies the types of shares into ordinary shares and preferences shares which comprised of voting preference shares, shares with special rights to propose a candidate for a member of BoD or BoC, redeemable preference shares, devidend preference shares, and liquidity preference shares19. Both countries set that shares should be amounted in their respective currencies, and Indonesian UUPT stated that shares should be issued on behalf of its owner. Both the Law on Enterprise20 and UUPT21 also stipulate that shares imbue their owners with several rights such as the right to attend and vote in the GMS, to receive devidend and liquidity, and other rights. The ownership of a share is proven by a Share Ownership Certificate, both in Indonesian UUPT and in Vietnamese LoE. In Vietnam, as the Law on Enterprise stated that shares may or may not indicate names22, used these share certificates as a means to conduct a sale and purchase of shares, whereas in Indonesia a sale and purchase of shares shall be conducted through a Deed of Transfer of Rights of a share, as stated in Art. 56 of the UUPT, as the shares are required to be issued on behalf of its owner.

c. General Meeting of Shareholders There are several other significant similarities between the Indonesian companies and the Vietnamese ones, in which the management of the respective companies are almost exactly the same; both countries’ companies preserve the

18

Art. 52 of the Law on Enterprises Art. 53 of the UUPT 20 Art. 53 of the Law on Enterprises 21 Art. 52 (1) of the UUPT 22 Art. 59 of the Law on Enterprises 19

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prevalence of a General Meetings of Shareholders 23. The General Meetings of Shareholders in Indonesian UUPT holds the most decision-making authority of the company and is composed of all the shareholders or their representatives of the company. In Indonesian law, a company is required to convene an annual General Meeting of Shareholders24, and permits the company to conduct other types of GMS (the “extraordinary” GMS25); while such explicit obligation isn’t found in the Vietnam Law on Enterprises, the LoE does stated that GMS should be conducted at least once a year or pursuant to the request of the shareholders or the Board26. In the matters of a conduct of GMS, both the Indonesian UUPT and the Vietnamese Law on Enterprises set the minimum attendees (quorum) for the GMS to be conducted based on the total portion of shares that the present shareholders represent. In particular occasions or objectives of the GMS, a different quorum may be applied.

d. Management In an Indonesian company, the management of the company is held by the Board of Directors (BoD) and the Board of Commissioners (BoC). The BoD is composed of Directors with one President Director, which are appointed by the GMS. The BoD is fully responsible for the management activities of the company in order to achieve the objectives of the company, and also to represent the company and its activities. The

23

For further minor details on the difference on the nature and procedure of GMS in Indonesian companies and in Vietnamese companies, please refer to the Art. 75-91 of the UUPT for the Indonesian companies and the Art. 70-79 of the Law on Enterprises for the Vietnamese companies. 24 Art. 78 of the UUPT 25 Ahmad Yani & Gunawan Widjaja. Seri Hukum Bisnis: Perseroan Terbatas. 2000. Jakarta: RajaGrafindo Persada., p. 96 26 Art. 71 of the LoE

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BoD answers to the company and the shareholders, and also to the other parties in legal relationship with the company27. The role of BoD in a Vietnamese shareholding company is held by an organ called as the Board of Management (BoM)28. The Board of Management is a body managing the company and shall have the full authority to make the decisions in the name of the company on all issues relating to the objectives and benefits of the company, except for the issues that fall within the authority of the GMS 29. The authority and responsibilities of the BoM, as stipulated by the Law on Enterprises, are basically the same with the Indonesian BoD, and the BoM is also composed of managers which are appointed by the GMS and is headed by a Chairman of the BoM. This Chairman of the BoM usually concurrently held the position of General Director of the company, a position which primary role is to represent the company and is appointed by the BoM. A significant characteristic of the BoM is that its members shall not be more than 11 members30, while such limitation is not found in the Indonesian BoD. Another major organ in the company is the Board of Commissioners (in Indonesian company) or the Inspection Committee (in a Vietnamese company). The role and functions of these organs are basically as watchdogs to supervise the performance of the BoD or the BoM, and answers directly to the GMS and the shareholders. The members of both the BoC and the Inspection Committee are appointed and dismissed or removed by their respective GMS. A major difference between the Board of Commissioners and the Inspection Committee is that the

27

Ahmad Yani & Gunawan Widjaja., op. cit. p. 104 Stipulated in the Art. 80-87 of the Law on Enterprises. 29 Art. 80 of the Law on Enterprises 30 Art. 80 (4) of the Law on Enterprises 28

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members of the BoC can be one or more members31 (note that this means there are no maximum number of members), while the Inspection Committee is specifically stated to be composed of 3 to 5 members32, with one member acting as the Chairman of the Inspection Committee. The Inspection Committee is also required to have at least one of its members as a professional accountant, while this kind of provision cannot be found in the UUPT. And the significant difference is that the Inspection Committee is only required if the number of shareholders that a shareholding company have is more than 11 members, while the Board of Commissioners is required by the UUPT for any company.

e. Merger, Consolidation, Acquisition & Separation Merger, consolidation and acquisition are aspects of strategic management of a company. They can be defined as a type of restructuring in that they result in some entity reorganization with the aim to provide growth or positive value. Under the UUPT, merger is defined as a legal act conducted by one or more companies to merge with another existing company which results in the actives and passives of the merging company to be transferred into the receiving company and the cease of the legal status of the merging company33. As merger, consolidation and acquisition is a fairly universal corporate concept, the same can be found in the Vietnam Law on Enterprise. The Law on Enterprise provides the same concept of merger as the UUPT, albeit with different phrasing in the Art. 108 of the LoE34

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Art. 108 (3) of the UUPT Art. 88 of the Law on Enterprises 33 Art. 1 (9) of the UUPT 34 Art. 108 of the Law on Enterprises define merger as “One or more companies of the same type (hereinafter referred to as merging companies) may be merged into another company (hereinafter referred to as merged company) by way of transfer of all of lawful assets, rights, obligations and 32

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The concept of consolidation, also a fairly universal corporate concept, can be found within both the UUPT and the LoE; a consolidation is the legal act of several companies merging into one new company. The merging companies then transfer their actives and passives into the new company and their legal status and existence is terminated. Consolidation is regulated in the Art. 122 of the UUPT and in the Art. 107 of the LoE. An acquisition is a transfer of ownership of a company through way of purchasing the shares of the company. In the UUPT, acquisition is stipulated in Art. 125; meanwhile there is no explicit provision regarding acquisition in the LoE, however the concept is still possible through purchasing the majority shares of the company, effectively gaining control of the company by being a preference majority shareholder. A separation is an alternative act that can be taken by a company to maximize the business efficiency and to compress the operation cost, as a separation allows a company to separate one or several operations into distinct companies. The benefit of a separation is that a company can focus more on its core business. Under the Vietnam Law on Enterprise, the concept of “separation” is further classified into “division” and “separation”. Division35 leads to the termination of the divided company, while a separation36 involves no termination of any legal status and existence of any company at all, in the sense that the separated company still exists. A same concept and classification is also recognized by the UUPT37 in which a separation (pemisahan) is

interests to the merged company and, at the same time, termination of existence of the merging companies.” 35 See Art. 105 of the LoE 36 See Art. 106 of the LoE 37 See Art. 1 (20) jo. Art. 135 of the UUPT

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classified into pemisahan murni, which in essence is a division, and pemisahan tidak murni, which fulfills the concept of separation.

f. Dissolution Under the Vietnam Law on Enterprises, a company may be dissolved by way of a revocation of the Business Registration Certificate, or through the decisions of the shareholders38; the shareholders shall passed on a resolution on dissolution to be submitted to the Business Registration Authority before it is approved to be dissolved. Further details on procedure of dissolution of a company in Vietnam is regulated under Art. 112 of the LoE. Meanwhile under the UUPT, the conditions for a dissolution of a company is found under Art. 142 of the UUPT, which entails more conditions than those of the LoE. The UUPT also expressly stated that a dissolution shall be immediately followed by a liquidation, and that the legal entity status of the company is not terminated until the liquidation process is complete39. The issue of termination of legal status raises a question when posed to the Law on Enterprise, as the Law of Enterprise does not specifically mention exactly when the legal status of a company is terminated on its dissolution. Following the logic of Art. 51 (3) of the Law on Enterprises40, we can conclude that the legal entity status of a company is terminated on the revocation of the Business Registration Certificate, which is before the liquidation process; this contrasts the provisions in the UUPT which states that the legal entity status remains until the liquidation process is complete.

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The conditions for a dissolution of company is regulated under Art. 111 of the LoE; of the conditions provided, the point (b) and (d) are the points most fulfilling the characteristic of Vietnam shareholding company. 39 Art. 143 of the UUPT 40 The article stated that a shareholding company gains its legal entity status since the issuance of its Business Registration Certificate

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g. Piercing the Corporate Veil Piercing the Corporate Veil (sometimes also called as lifting the corporate veil), is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders. By default, a company is treated as a separate legal person, which is solely responsible for the debts it incurs and the sole beneficiary of the credit it is owed. The concept of piercing the corporate veil is basically to ignore the legal entity status of the company and holds a shareholder of the company directly liable as opposed to the company. Despite the terminology of “piercing the corporate veil” makes it appear as though a shareholder’s limited liability emanates from the view that a company is a separate legal entity, in reality the entity status of the company has almost nothing to do with shareholder’s limited liability41; this shareholder limited liability in fact emanates mainly from the law (or the Charter). The aim of a piercing the corporate veil is the truth on the person liable for an unlawful act which causes damages to the other parties. This, in fact, is for the protectin of the company itself, and the other parties from the inside persons who caused the damages.42 A piercing the corporate veil is allowed under the UUPT through the Chapter IX (Art. 138-141) of the law; in contrary, the Law on Enterprise of Vietnam does not expressly recognized the concept of Piercing the Corporate Veil. This does not say, however, that the concept of piercing the corporate veil is totally nonexistent in Vietnam. Even without express regulation, the concept has already been applied in cases such as the most recent significant case that involves a piercing the corporate 41

Melvin Aron Eisenberg. Cases and Materials on Corporations & Other Business Organizations (concise 9th Edition). 2005. Eagan: West Publishing., p. 171 42 Agus Sardjono, et al. Pengantar Hukum Dagang. 2014. Jakarta: RajaGrafindo Persada., p. 91

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veil, the Petrodel v. Prest (2013) case. A worthy note is that the concept of piercing the corporate veil will be incorporated into the Law on Enterprise as the amended Law on Enterprise is applied in 201543.

III.

CONCLUSION

The development of modern corporate law in the mid 18th century Western nations (primarily in England through the Bubble Act) and the following rapid globalization and use of the modern corporate business model has spread a similar corporate law across the globe. This effect can also be found in Indonesia and Vietnam through their respective law on corporates in which they contain many similarities pertaining to the corporation and its legal aspects. This fact in itself is not a bad thing, as the closing uniformity of the corporate law aspects will ease up the interaction of the states in the fields of business and commercial activities in the global trade.

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In November 26th, 2014, the National Assembly of Vietnam passed on the amended Law on Enterprises and Law on Investment, and is set to take effect in July 1st, 2015. The amendments will replace the Law on Enterprises and Law on Investment, respectively. In the 2014 Law on Enterprises, among others, the major development is the inclusion of piercing the corporate veil concept and the usage of term “joint-stock company” replacing the term “shareholding company”. For further reading on revised Law on Enterprises: http://asialawportal.com/2015/02/26/vietnam-newlyenacted-investment-and-enterprise-law-to-stimulate-more-investments/

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BIBLIOGRAPHY  

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Laws o Undang-Undang No. 40 Tahun 2007 tentang Perseroan Terbatas o Vietnam Law on Enterprise Books o Fuady, Munir. Hukum Perusahaan dalam Paradigma Hukum Bisnis. 1999. Bandung: PT Citra Aditya Bakti. o Keenan, Denis and Josephine Bisacre. Smith and Keenan’s Company Law. 2002. Harlow: Pearson Education Limited. o Mulhadi. Hukum Perusahaan: Bentuk-Bentuk Badan Usaha di Indonesia. 2010. Bogor: Ghalia Indonesia. o Sardjono, Agus., et., al. Pengantar Hukum Dagang. 2014. Depok: PT RajaGrafindo Persada. o Yani, Ahmad & Gunawan Widjaja. Seri Hukum Bisnis: Perseroan Terbatas. 2006. Jakarta: PT RajaGrafindo Persada. Websites o Asia Law Portal: “Vietnam’s Newly Enacted Investment and Enterprise Law to Stimulate More Investments”. http://asialawportal.com/2015/02/26/vietnam-newly-enacted-investmentand-enterprise-law-to-stimulate-more-investments/ Accessed on May 1st, 2015.

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