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A limited liability company (“Company”) has this one characteristic, namely limited liability. Due to this characteristic the Company’s shareholders, board of directors, and board of commissioners, basically, free from liabilities of any losses suffered by the Company. This is the consequence of separation principle that the Company has because under the law, a company is considered to be a separated entity with its shareholder, board of director, and board of commissioners. The assets of a company is separated from the assets of its shareholders; a company can also have a legal obligation that is separated from any obligation that its shareholders, board of directors, and board of commissioners has. The company’s action only binds the company itself as a legal entity and generally speaking its shareholder, board of director, and board of commissioners cannot be held liable.

However, such principle is not absolute and without exception. The Law Number 40 Year 2007 regarding Limited Liability Company (the “Company Law”) regulates that in certain conditions the shareholders, board of directors, and board of commissioners may be held liable for the losses suffered by the Company.

This article focuses to explain the liability of the board of directors and board of commissioners. We have made an article explaining the liability of shareholders, which can be read <here>.

Duty and Responsibility of the Board of Directors and Board of Commissioners

First, we need to understand the duty and responsibility of the board of directors and board of commissioners that is regulated in the Company Law. The board of directors has the full authority and responsibility over the management of the company for the interest of the company, in accordance with the purpose and objective of the company and also to represent the company in and outside of the court in accordance with the provision of the articles of association (Article 1 point 5 of the Company Law). While the board of commissioners, have the duty of general and/or specific supervision in accordance with the articles of association and also to give advice to the board of directors (Article 1 point 6 of the Company Law).

Furthermore, the board of directors must undertake the management of the company in the interest of the company and in accordance with the purpose and objective of the company (Article 92 paragraph (1) of the Company Law). The board of directors also must undertake the management in accordance with the policy which considered appropriate, with the limitation as set out in the Company Law and/or the articles of association (Article 92 paragraph (2) of the Company Law). Each of the members of the board of directors also must undertake the management with good faith and full responsibility (Article 97 paragraph (2) of the Company Law). On the other hand, each of the members of the board of commissioners must undertake the duty to supervise and giving advice to the board of directors with good faith, prudence, and responsibility, and for the interest of the company (Article 114 paragraph (2) of the Company Law).

Fiduciary Duty

According to the Black’s Law Dictionary, Fiduciary Duty means “a duty to act with the highest degree of honesty and loyalty toward another person and in the best interests of the other person (such as duty that one partner owes to another)”. Same with the Black’s Law Dictionary, according to https://definitions.uslegal.com/b/breach-of-fiduciary-duty/ it is explained that Fiduciary Duty is: “an obligation to act in the best interest of another party. For instance, a corporation’s board member has a fiduciary duty to the shareholders, a trustee has a fiduciary duty to the trust’s beneficiaries, and an attorney has a fiduciary duty to a client”.

Furthermore, in the same website it is explained: “A fiduciary obligation exists whenever the relationship with the client involves a special trust, confidence, and reliance on the fiduciary to exercise his discretion or expertise in acting for the client. The fiduciary must knowingly accept that trust and confidence to exercise his expertise and discretion to act on the client’s behalf. When one person does agree to act for another in a fiduciary relationship, the law forbids the fiduciary from acting in any manner adverse or contrary to the interests of the client, or from acting for his own benefit in relation to the subject matter. The client is entitled to the best efforts of the fiduciary on his behalf and the fiduciary must exercise all of the skill, care and diligence at his disposal when acting on behalf of the client. A person acting in a fiduciary capacity is held to a high standard of honesty and full disclosure in regard to the client and must not obtain a personal benefit at the expense of the client.”

According to an expert, Yahya Harahap, Fiduciary Duty means “trusted” which means that each of the members of the board of directors and board of commissioners in all time is trusted and in all time perform its duty in honesty.

Bambang Kesowo, S.H., LL.M in his article entitled “Beberapa Prinsip Dalam Undang-Undang Perseroan Terbatas” (Some Principles in the Company Law) published in the Newsletter of Center of Law Study No.: 24/VII/Maret/1996, on page 8 states the following:

“Each member of the board of directors, basically, is a co-trustee of the company, and not mere an employee of the company, therefore legally owns a specific liability to the company in undertaking its function and duty in relation to the management of the company (fiduciary duties).
The company law does not regulate in detail regarding this matter, but use general language with the intention that objective fairness values in the course of performing the fiduciary duties may be developed flexibly through the activities of the company. Eventually, the judiciary institution is expected to be able to promote such values into a legal norm.
Naturally, the fiduciary duties cover the responsibility of each member of the board of directors to perform its duty of care and skill, obligation to put the interest of the company above their own interest (duty of loyalty), and the obligation to provide information regarding the performance of its management duty (duty of disclosure). Among the three duties, the company law has regulated a part of duty of disclosure, which among other the duty to submit annual report to the GMS and the duty to allow the shareholder to check the company’s bookkeeping.
The two other duties should be further elaborated, and the pattern that is applied by the company that is open for foreign investment is relatively more advanced on this, and can become a reference.
In the same way as the board of directors, each member of the board of commissioners owns fiduciary duties to the company and must report it shares ownership to the company”

Violation of Fiduciary Duties and its Consequences

The consequence that may be faced by each of the member of the board of directors and board of commissioners in relation to the violation of the fiduciary duties is that each member shall be personally held liable for the losses of the Company caused by such violation. Article 97 paragraph (3) of the Company Law stipulates the liability of the board of directors as follows:

Each member of the Board of Directors shall fully personally liable for the Company’s losses if the Director concerned is at fault or negligent in carrying out his/her duties in accordance with the provisions contemplated in paragraph (2).”

While for the board of commissioners it is regulated in the article 114 paragraph (3) of the Company Law that:

“Each member of the Board of Commissioners shall share in personal liability for the Company’s losses if the Commissioner concerned is at fault or negligent in performing the tasks contemplated in paragraph (2).”

Actions of the Board of Directors and Board of Commissioners that can Result in Personal Liability for the Company Losses

The company law specifically regulates actions or conditions that can cause the board of directors or the board of commissioners to be personally liable.

1. Mistakes in the financial statement:

The board of directors is obliged to submit the annual financial statement to the GMS (article 66 paragraph (1) of the Company Law). Further, for this duty, the board of directors together with the board of commissioners have the responsibility for the correctness and accuracy of the content of the financial statement, further each member of the board of director and board of commissioner is required to sign the financial statement.

In the event that the financial statement is not correct and/or misleading, the member of the board of directors and the board of commissioners shall jointly liable for any third party that suffered losses (Article 69 paragraph (3) of the Company Law). So, if any third party suffered loss due to the mistake in the financial statement then the member of board of directors and the board of commissioners may jointly be held liable.

2. The board of directors causes bankruptcy

In relation to bankruptcy, if it can be proven that the bankruptcy is caused by the fault or negligence of the board of directors and further the assets of the company is not sufficient to repay all the company’s obligation in the bankruptcy, then each member of the board of directors shall be obligated to repay all the company’s obligations (Article 104 paragraph (2) of the Company Law).

3. Does not report any shares that is owned by the member or its family in the company or other company

Article 101 paragraph (1) of the Company Law regulates the requirements of the member of the board of directors to report the company about the shares that the member and/or its family owns in the company and other company to be further recorded in a special record. If the member of the board of directors do not fulfill this requirement and causes loss to the company, then such member of the board of directors shall be personally liable for the company losses (Article 101 paragraph (2) of the Company Law).

Ground for defense available for a member of the board of directors and board of commissioners

If the violation as explained above occurred, in general such violation shall result in liability to all members of the board of directors and board of commissioners.

In relation to the board of directors’ violation of fiduciary duties, under article 97 paragraph (4) of the Company Law it is regulated that if the board of directors consist of 2 persons or more, then all member of the board of directors shall be jointly liable, the same is also applicable for the commissioners’ violation of fiduciary duties as regulated in article 114 paragraph (4) of the Company Law.

In the event of bankruptcy it is also regulated that if the bankruptcy is caused by the fault or negligence of the board of directors and the company’s assets is not sufficient to pay all company’s obligation, then all member of the board of directors shall jointly be liable to pay the unpaid obligations (Article 104 paragraph (2) of the Company Law).

The question now is if there is a member of the board of directors and /or board of commissioners who have performed its duty honestly in accordance with the provision of the Company Law and the articles of association, can such member make a defense in order that he/she can be released from liability caused by the violation of other member of the board of directors or board of commissioners?

1. Ground for defense of member of the board of directors and board of commissioners in the occurrence of violation of fiduciary duties

The Company Law answers this by giving requirements to a member of the board of directors and board of commissioner to defend themselves in the occurrence of violation of fiduciary committed by a member of the board of directors and board of commissioners.

Article 97 paragraph (5) of the Company Law states as follow:

A member of the board of directors shall not be held liable for the loss as referred to in the paragraph (3) if he/she can prove:
1. That the loses is not due to his/her fault or negligence;
2. That he/she has undertaken the duty of management with good faith and prudence for the interest of and in accordance with the purpose and reason of the Company;
3. That he/she has no conflict of interest either directly or indirectly with the management undertakings which causes the losses; and
4. That he/she has taken measure to prevent the occurrence or the continuance of the loss.”

The four requirements mentioned in the article 97 paragraph (5) must be proven by the relevant director in order to release him/her form the liability over the company’s loss. But one thing to note is that the relevant director must prove all four requirements, and not only just one or some of it. The requirements are cumulative in nature, not alternative. Similar to the board of directors, member of the board of commissioners is also has the right to make a defense. Article 114 paragraph (5) of the Company Law elaborate the reasons that needs to be proven by a member of the board of commissioner, and also similar to the reasons for the board of directors, the reasons for the board of commissioners is cumulative in nature, as follows:

“A member of the board of commissioners shall not be held liable for the loss as referred to in the paragraph (3) if he/she can prove:
1. That he/she has undertaken the duty of supervision with good faith and prudence for the interest of and in accordance with the purpose and reason of the Company;
2. That he/she has no conflict of interest either directly or indirectly with the board of directors’ management undertakings which causes the losses; and
3. Has given advice.”

2. Ground for defense of member of the board of directors in the event of bankruptcy due to the fault or negligence of the board of directors

In the event of bankruptcy, it is regulated that a member of the board of directors can make a defense in order to release him/her from the liability for the company’s bankruptcy. The grounds for defense are elaborated in the Article 104 paragraph (4) of the Company Law, as follow:

“A member of the board of directors shall not be held liable for the company’s bankruptcy as referred to in the paragraph (2) if he/she can prove:
1. That the bankruptcy is not due to his/her fault or negligence;
2. That he/she has undertaken the duty of management with good faith and prudence for the interest of and in accordance with the purpose and objective of the Company;
3. That he/she has no conflict of interest either directly or indirectly with the management undertakings; and
4. That he/she has taken measure to prevent the bankruptcy.”

Summary

We can conclude that the limited liability principle exist to provide protection for the shareholder, board of directors, and board of commissioners. However, in certain situation and conditions such principle may become inapplicable if each person in the position has violated the duty and limitation set out for each of them. If the violation is proven, then each member of the board of directors and board of commissioners shall be held liable even personally to compensate the company and or the third party who suffer loss.

Hope this is useful.

FREDRIK J PINAKUNARY LAW OFFICES

LinkedIn: FJP Law Offices | Facebook: @FJPLaw | Instagram: @fredrik_jp

This article also available in Bahasa Indonesia: Pertanggungjawaban Direksi & Dewan Komisaris Perseroan Terbatas.

This Article is written by our associate:

Gerald Saratoga Sarayar
email : gerald@fjp-law.com
phone: +622129332990
linkedIn: Gerald Saratoga Sarayar

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