Legal View of Nominee Agreement in Indonesia

An agreement is an agreement between two or more parties, either in writing or orally, to do or not do something. An agreement is a legal relationship that gives birth to an obligation / agreement, and its legal consequences can be fulfilled in accordance with the provisions of the applicable law.

Article 1313 of the Civil Code states that an agreement is an action taken by one or more people to bind themselves to another or more people. An agreement is a legal act that is carried out on the basis of the same will and involves reciprocal actions by the parties who make it.

Then is the Nominee Agreement in practice in accordance with Indonesian law? And what are the legal considerations? Let's check the following explanation.

Legal Basis:

a. The 1945 Constitution of the Republic of Indonesia and its Amendments

b. Civil Code Number 23 of 1847

c. Law Number 5 of 1960 on the Basic Regulation of Agrarian Principles

d. Law Number 25 of 2007 on Investment

e. Law No. 40 of 2007 on Limited Liability Companies

Regarding Nominee Agreement, it is an agreement made between two parties to appoint someone as a representative to borrow a name, which is made in the form of an authentic deed by a Notary based on a statement letter or power of attorney between the parties.

A nominee agreement is considered invalid and null and void because it violates the applicable laws and regulations in the Republic of Indonesia. This agreement is also considered an attempt at legal smuggling.

A nominee agreement is considered invalid because:

1. It does not fulfill the objective requirements of Article 1320 of the Civil Code.

2. Contrary to Law No. 5/1960 on the Basic Regulation of Agrarian Principles (Agrarian Law)

3. Violates the statutory provisions on Limited Liability Companies.

Background of the Practice of Nominee Agreement

The background of the use of the concept of Nominee Agreement (borrowing a name) in Indonesia is to be able to get around the restrictions set by Indonesian government law.

One of them is the prohibition for foreigners (foreigners) in owning shares of Indonesian companies, land and buildings, and others with certain business fields and the prohibition for foreigners to be able to own land and / or buildings in Indonesia with freehold status.

The following are the reasons behind the practice of Nominee Agreement (borrowing a name):

1. Law No. 5/1960 on Basic Agrarian Principles (Agrarian Law)

The practice of Nominee Agreements is a form of legal misuse/smuggling of Law No. 5/1960 on Basic Agrarian Principles (Agrarian Law), especially in terms of ownership of land and/or building rights, where this law states that there are limitations and differences in treatment between Indonesian Citizens (WNI) and Foreign Citizens (WNA).

For example, foreigners can only obtain the Right to Use and the Right to Lease for Buildings. This is emphasized in Law No.5 of 1960 (Articles 41-42) as well as in Government Regulation No.103 of 2015 concerning the Ownership of Residential Houses by Foreigners Residing in Indonesia.

The practice of Nominee Agreement is chosen on the grounds that property rights in the name of Indonesian citizens can last long or forever, as long as the party whose name is listed on the certificate is still alive and can be passed down to his heirs. And if the certificate is passed down to the heir, then the foreigner can renew the agreement by including the name of the heir.

This is certainly different when using Cultivation Rights Title (HGU), Building Rights Title (HGB) or other rights other than property rights (SHM) where these rights have limitations, such as time limits and limitations on the types of businesses that can be run. Therefore, Nominee Agreement or Borrowed Name Agreement is preferred and chosen by foreigners who will do business and live in Indonesia.

2. Law No. 25 of 2007 on Capital Investment (UU PM)

Reflection of Law Number 25 of 2007 on Capital Investment (UUPM) which states that in establishing and running a Limited Liability Company (PT), shareholders in the Company are one of the main requirements that must be met.

In addition to being owned directly by the shareholder, share ownership in the Company is also often carried out in the form of a Nominee (a person or legal entity whose name is borrowed and used as a shareholder by the beneficiary).

The reason for using a Nominee Agreement in this case is because of the desire to be able to control 100% of the share ownership of a Limited Liability Company. Meanwhile, in accordance with the Company Law, this is prohibited because the requirement for the establishment of a PT is at least established by 2 or more people, both corporate entities and individuals.

3. Law No. 40 of 2007 on Limited Liability Companies (UU PT)

In the context of a Limited Liability Company, a Nominee Agreement or Borrowed Name Agreement is an agreement in which a person is entrusted to hold shares or in other words become the owner of shares in a Limited Liability Company on behalf of another person. This agreement is often used to fulfill the requirements for the establishment of a PT established by two or more persons.

Law No. 40/2007 on Limited Liability Companies (UUPT) has stipulated that shares are an indivisible whole, which means that the rights attached to shares, such as voting rights, remain with the shareholder or owner.

This is reaffirmed in Article 48 paragraph (1) of Law No. 40/2007 on Limited Liability Companies (UUPT) which stipulates that shares in the Company are issued in the name of the owner, but does not emphasize the prohibition of the use of Nominee shareholders.

Thus, when there is a use of Nominee shareholders in a Limited Liability Company, legally, the legal party as the owner of the shares is the party whose name or identity is lent or represented by the Nominee. In the real sense, the owner of the shares legally has the right to use, sell, or transfer the assets according to his wishes. Nominee agreements in Limited Liability Companies are prohibited because they are considered to have violated statutory provisions.

In a Nominee Agreement, the Beneficiary gives trust to the Nominee to conduct business activities. This is of course contrary to what is contained in Article 48 paragraph (1) of Law Number 40 of 2007 which states that company shares are issued in the name of the owner while the original owner is not the identity recorded in the register of shares of a Limited Liability Company.

The use of Nominee Agreement is prohibited as stipulated in Article 33 paragraph (1) and paragraph (2) of the Law on Capital Market (UUPM) which states that:

Domestic Investors (PMDN) and Foreign Investors (PMA) investing in the form of a Limited Liability Company are prohibited from making agreements and/or statements confirming that the ownership of shares in a limited liability company is for and on behalf of another person.

In the event that Domestic Investors and Foreign Investors make agreements and/or statements as referred to in paragraph (1), such agreements and/or statements shall be declared null and void.

Legal Prohibition of Nominee Agreement Practice

The prohibition of the practice of Nominee Agreement or Borrowed Name Agreement is prohibited in several laws in Indonesia, including the following:

• Referring to Law No.25 of 2007 concerning Capital Investment which contains a prohibition on making agreements that contain an affirmation that ownership of shares in the Company is for and on behalf of another person.
• This is also contained in Article 33 of Law No. 25 of 2007 on Capital Investment which contains a prohibition on Domestic Investors and Foreign Investors to make an agreement or statement confirming ownership of shares in a Limited Liability Company on behalf of another person.
• The prohibition of Nominee Agreements is also contained in Law Number 40 of 2007 concerning Limited Liability Companies. This is regulated in Article 48 paragraph (1) of Law No. 40 of 2007 on Limited Liability Companies which states that shares are issued in the name of the owner. If the investor violates this article, then the agreement or statement is null and void.
• The Nominee Agreement is deemed to be contrary to Law No. 5 of 1960 Article 21 paragraph (1) and Article 26 paragraph (2), which states that there are rules that prohibit foreigners from owning land and/or buildings with property rights status in Indonesia. This aims to keep the land owned by the state or Indonesian citizens.

Conclusion:

Nominee Agreement is an agreement between two parties, where one party (nominee) agrees to act for and on behalf of the other party (beneficial owner) in terms of property ownership (land, villas etc. or management of an asset).

Nominee agreements in Indonesia, have not been able to meet the provisions of applicable laws and regulations in Indonesia because of their non-binding nature, making it difficult to be held legally accountable.

For further consultation on investment and nominee agreements in Indonesia, please contact Lombok Lawyer - the Law Office Of Mahayudin & Partners at Mobile number +628175000121 (WA-24/7).

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