Director Liability

Satrio Law Firm » Corporate » Director Liability

Directors of Indonesian limited liability companies actually have a lot of potential liability pursuant to the provisions of Law No. 40 of 2007 concerning Limited Liability Companies (“Company Law”).

I. Director Liability

Good Faith Management
Articles 92(1) and 97(1) and (2) of the Company Law provide that the members of the Board of Directors of an Indonesian limited liability company are accountable for good faith management of the company for the interests of the company in accordance with the intentions and purposes of the company.

Personal Liability
Article 97(2) and (3) of the Company Law provides that every member of the Board of Directors is fully personally liable for losses of the company if the relevant member of the Board of Directors is at fault or negligent in the performance of his/her duties in accordance with the duty to act in good faith and with full responsibility.

Exculpation
Article 97(5) of the Company Law provides that members of the Board of Directors cannot be held liable for the aforementioned losses if they are able to prove all of the following:

  1. the losses are not due to the Director’s fault or negligence;
  2. the Director has already conducted his/her management in good faith and with care for the interests and in accordance with the intentions and purposes of the company;
  3. the Director does not have a Direct or indirect conflict of interest in the management acts that have resulted in the loss; and
  4. the Director has already taken action to mitigate/prevent the emergence of or the continuation of the losses (that which is meant by “taken action to mitigate/prevent the emergence of or continuation of losses” includes measures to obtain information concerning the management acts which may result in losses, among others, through the forum of a Board of Directors’ meeting (id. at Elucidation of Art. 97[5][d])).

Proving the aforementioned defense requirements to avoid liability may be difficult in practice as the law requires proof of the non-existence of fault and conflicts of interest; matters which are inherently difficult to prove.

Bankruptcy Liability
Article 104(2) of the Company Law provides that in the event the company becomes bankrupt as a result of the fault or negligence of the Board of Directors, every member of the Board of Directors serving at the time of the bankruptcy is jointly and severally liable for the entirety of the obligations that cannot be paid from the bankruptcy estate.

Article 104(3) of the Company Law provides that Directors at fault or negligent who served at any time within the 5 (five) years prior to the bankruptcy are also liable.

Article 104(4) of the Company Law provides that members of the Board of Directors cannot be held liable for losses arising out of a bankruptcy if they are able to prove all of the following:

  1. the bankruptcy was not due to the Director’s fault or negligence;
  2. the Director has already conducted his/her management in good faith and with care for the interests and in accordance with the intentions and purposes of the company;
  3. the Director does not have a direct or indirect conflict of interest in the management acts that have resulted in the loss; and
  4. the Director has already taken action to prevent the bankruptcy.

Proving the aforementioned defense requirements to avoid liability may be difficult in practice as the law requires proof of the non-existence of fault and conflicts of interest; matters which are inherently difficult to prove.

Losses Arising Prior to a Director’s Appointment
A Director would not be liable for losses arising prior to the date of appointment of the Director, provided that the director was not in a position to mitigate losses after his/her appointment.

Shareholder Standing to Bring a Lawsuit on Behalf of the Company
Article 97(6) of the Company Law clearly states that one or more shareholders holding a combined total of 1/10th of the issued shares of a company can bring a lawsuit against a Director in the name of and therefore on behalf of the Company for losses incurred by the company due to the fault or negligence of the Director.

Article 97(7) of the Company Law permits other Directors or members of the Board of Commissioners to bring a lawsuit against a Director in the name of and therefore on behalf of the Company for losses incurred by the company due to the fault or negligence of the Director.

Third Party Lawsuits against Directors
In the event a third party (not a shareholder of the company or a Director or Commissioner of the company) alleges to have suffered injury as a result of a Director’s fault or negligence in the management of a company, the third party would be required to prove the actual fault or negligence of the Director and would in most circumstances be required to join the company in the lawsuit as a necessary party. Generally, the third-party claimant would not enjoy the benefits of the burden of proof shift to the Director arising out of Article 97(5) of the Company Law. Instead, the third party would be required to prove, with admissible evidence, that the director actually committed and act of fault or negligence that caused actual damages to the third-party claimant.

 

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Satrio Law Firm » Corporate » Director Liability

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