“In the dynamic business environment of Indonesia, a director plays a pivotal role in the future of a limited liability company. Directors are entrusted with significant responsibility in the governance and management of the company. Thus, directors must adhere to their duties and responsibilities.”
Regulated by Law No 40 Year 2007 on Limited Liability Companies (“Company Law”), a limited liability company in Indonesia is a legal entity structured as a capital partnership, established through an agreement among shareholders, and conducts its business activities using authorized capital. This legal framework not only governs the establishment of a company but also lays the foundational principles for its operational framework.
Company’s Organ
Within the Company Law, the Board of Directors (BOD), in conjunction with the General Meeting of Shareholders (RUPS) and the Board of Commissioners (BOC), is recognized as an organ of a company. Each organ possesses its own rights and responsibilities, detailed by the Company Law, establishing a structured governance system. This legal framework serves to define the rights and obligations of directors, establishing principles and standards that guide their actions.
Legally, the authority of a director is governed by Company Law with additional another specific Law for specific industries. However, in its application, a director’s authority, appointment procedures, and removal procedures, is specified in the Company’s Articles of Association (“AoA“). When the company is first established, the appointment of directors is recorder in the deed of establishment, which incorporates the company’s articles of association. The Director may engage in the Directorship Agreement when any specific terms and conditions would be applied.
Director’s Eligibility Criteria
According to Articles 93 and 94 of the Company Law, the Board of Directors members are appointed by the General Meeting of Shareholders. For the first time, the director’s appointment is done by the company’s founder, as stated in the Deed of Establishment of the Company.
Given their substantial duties in managing the company, a member of the Board of Directors are individuals capable of performing legal actions and in the 5 (five) years they must meet the following criteria:
- They must not have been declared bankrupt.
- They must not have previously served as a member of a BOD held responsible for causing a company’s bankruptcy.
- They must not have been convicted of committing a criminal offense that is detrimental to the state’s finances or related to the financial sector.
It is important to note that, according to Article 26 of Law No. 5 Year 1999 on the Prohibition of Monopolistic Practices and Unfair Business Competition, a director in a company is prohibited from concurrently holding the same directorship position in another company under the following conditions:
- Both companies operate in the same relevant market.
- There is a strong linkage in terms of sector or type of business activities between the two companies.
- Both companies are collectively capable of controlling the market share of certain goods and/or services, leading to the possibility of monopolistic practices or unfair business competition.
In addition to the aforementioned conditions, specific regulations pertaining to the company’s business activities must be considered, as certain business activities prohibit a director from holding multiple positions. An example of such restricted activities is related to the position of Director of the Stock Exchange.
Director’s Duties
As per Article 92 of Company Law, the BOD’s primary responsibility is to carry out the management of the company in accordance with the purposes and objectives of the company within the limits of the Company’s Articles of Association and the Law. Additionally, a company’s director serves as the official representative of the company both inside and outside of the courtroom. Other duties of the BOD include:
- Draw up annual work plan for the upcoming fiscal year
- Draw up annual report and financial statements of the company
- Prepare draft for merger and acquisition, consolidation and liquidation
- Draw up the register of shareholders, the special register, the minutes of the RUPS, and minutes of BOD meetings
- Maintain all registers, minutes, financial documents and other company records
- Holds annual General Shareholders Meetings and sends out respective invitations.
In performing specific legal actions, the BOC’s assistance or approval is required. As outlined in Article 117 of the Company Law, these legal actions are those specified in the AoA as requiring the BOC’s approval or assistance. If the BOD carries out such legal actions without the required approval or assistance from the BOC, the legal act remains binding on the Company as long as the other party acted in good faith. However, if this action results in a loss for the company, the BOD is personally liable for such losses.
Director’s Personal Liability
In carrying out the management of the company, it is imperative that directors act in good faith and with full accountability. According to Article 97 of the Company Law, the BOD shall be jointly and severally responsible for any losses incurred by the company due to the negligence or fault of a Director.
Furthermore, as specified in Article 104 of the Company Law, in the event of bankruptcy resulting from fault or negligence of the BOD and the company’s assets are inadequate to cover its liabilities in bankruptcy, every member of the BOD is jointly and severally liable for all unpaid liabilities. This provision applies to all directors for up to five years back preceding the bankruptcy.
A director can be acquitted of the liability if it can be proven that:
- the loss in question does not result from their negligence;
- the management of the company was done in good faith, with due care for the interest of the company and in alignment with its purposes and objectives;
- there is no conflict of interest in acts of management causing the loss; and
- Adequate measures to prevent or mitigate the loss or bankruptcy were taken.
Author: Felicia Cindy Hanubrata
Gaffar & Co. is an Indonesian Boutique Law Firm specializing and focussing on Commercial Law, including Investment Law and Corporate Secretarial Services.
For further queries and information, contact us:
+62 811 877 216 | info@gaffarcolaw.com | www.gaffarcolaw.com
