Indonesia: Duties, Responsibilities and Liabilities of the Board of Directors and the Board of Commissioners of an Indonesian Limited Liability Company.

Last Updated: 16 January 2012

By Makarim & Taira S.

The (new) Company Law, i.e. Law No. 40 of 2007 regarding Limited Liability Companies came into force on 16 August 2007. This law contains several provisions regarding the duties, responsibilities and liabilities of the Directors and Commissioners of an Indonesian Limited Liability Company (a "Company"). Compared to the previous Company Law, the provisions in this law are more detailed and introduce some new requirements for the Directors and Commissioners of a Company.

As general information about the organs of a Company, a Company is required to have three organs, namely the Board of Directors, the Board of Commissioners and the General Meeting of Shareholders. The Board of Directors is the organ responsible for the management of a Company or for running the day to day operations and business of the Company, while the Board of Commissioners is the organ responsible for supervising the Board of Directors in performing its duties and responsibilities in the Company. The General Meeting of Shareholders consists of the shareholders of the Company who contributed (shares) capital to the Company and has the right to appoint and terminate members of the Boards of Directors and Commissioners. There are actions of the Company that require approval from the General Meeting of Shareholders of the Company and therefore, the General Meeting of Shareholders can also be said have responsibility for 'controlling' the Boards of Directors and Commissioners in performing their duties and responsibilities in the Company.

The following is brief information on the general duties, responsibilities and liabilities of the Directors and Commissioners of the Company that are regulated in the Company Law.

A. Directors

The Board of Directors is authorized and responsible for the management of the company in the interests and to achieve the objectives of the company and for representing the company both inside and outside the courts in compliance with the provisions of the Articles of Association.

The Board of Directors can consist of one or more Directors. However, certain Companies, such as Companies engaged in fund raising (e.g. banks), publicly owned Companies, or Companies issuing notes or bonds to the public, are required to have at least two Directors.

To be eligible as a director, the individual must have capability to perform legal actions and within a period of 5 years prior to his/her appointment, he/she must have never been (i) declared bankrupt, (ii) a member of the Board of Directors or Board of Commissioners of a Company who caused that Company to become bankrupt; or (iii) sentenced for committing a crime causing a financial loss to the State. A statement letter from the individual to be appointed as a new Director confirming that he complies with the requirements must be provided to the Company.

Directors have duties and responsibilities or authorities delegated to them by the General Meeting of Shareholders and other responsibilities under the Law.

1. Duties and Responsibilities

Under the Company Law, the Board of Directors is under obligation to, among other things:

  1. deliver an annual report (that includes the financial statement of the Company) after it has been examined by the Board of Commissioners to the General Meeting of Shareholders within 6 months the end of the Company's financial year;
  2. prepare a business plan (that includes an annual budget plan) for the next financial year prior to the commencement of the next financial year and submit the business plan to the Board of Commissioners or General Meeting of Shareholders of the Company as regulated in the Articles of Association of the Company;
  3. prepare and maintain a Register of Shareholders of the Company and a Special Register containing information on the share ownership in the company and/or other companies of members of the Board of Directors and the Board of Commissioners and their immediate family members;
  4. archive the resolutions of the Shareholders and Board of Directors of the Company and all other corporate documents;
  5. obtain approval from the General Meeting of Shareholders for the transfer or the encumbrance of more than 50% of the total assets of the Company in one or more transactions, whether related or not, in one or more financial years as regulated in the Articles of Association of the Company;
  6. hold a General Meeting of Shareholders (including to send invitations or summons to the shareholders) either annually or extraordinary as necessary or requested by certain Shareholders, Commissioners or Directors of the Company as regulated in the Articles of Association of the Company;
  7. notify the Minister of Law and Human Rights (the "MLHR") of any change to the composition of the Boards of Directors or Commissioners of the Company within 30 days as of the date of the resolution of the General Meeting of Shareholders with regard to the change;
  8. record any transfer of shares (or encumbrance of shares) in the Company in the Company Register and notify the MLHR regarding the change of the shareholders within 30 days as of the date of the transfer of shares;
  9. notify the creditors of the Company if there is a reduction in the capital of the Company in at least one newspaper within 7 days of the resolution of the General Meeting of Shareholders regarding the reduction.

Also, in certain transactions such as the merger, acquisition, consolidation, segregation or dissolution of the Company, the Board of Directors also has a number of obligations regarding the transaction, such as to prepare the transaction plan, announce the proposed transaction in the newspapers, or act as the liquidator in the dissolution of the Company.

2. Liabilities

Directors must manage the company in good faith and with full responsibility. Every member of the Board of Directors is personally liable for any loss suffered by the Company if he/she acts wrongfully or fails to perform his/her duties in the manner stated above. If the Board of Directors consists of more than one member, the above liability applies jointly among each of the members.

However, a Director will not be personally held liable if he/she can prove that:

  1. the loss suffered by the Company is not due to his/her wrongful actions or failure to perform his/her duties;
  2. he/she has managed the Company in good faith and prudently for the benefit of the Company and in accordance with the purpose and objectives of the Company;
  3. he/she has no conflict of interest either directly or indirectly in the management of the Company that causes a loss; and
  4. he/she has taken all the necessary actions to prevent the occurrence or continuance of the loss.

In the case of the bankruptcy of the Company, a Director will not be held liable for the Company's bankrupt if he/she can prove that:

  1. the bankruptcy is not due to his/her fault of negligence;
  2. he/she has managed the Company in good faith, prudently and with full responsibility for the benefit of the Company and in accordance with the purpose and objectives of the Company;
  3. he/she has no conflict of interest either directly or indirectly in the management of the Company; and
  4. he/she has taken all necessary actions to prevent bankruptcy.

Further, the Board of Directors may also be held liable in the following transactions/situations:

  1. Share buyback

    The Directors are jointly and severally liable to shareholders acting in good faith who suffer a loss from a share buyback transaction conducted by the Company but voided by law.

  2. Inaccurate or misleading financial reports

    Unless the Directors can prove that it was not caused by their fault or negligence, the members of the Boards of Directors will be held jointly and severally liable to third parties who suffer a loss due to an inaccurate, untrue or misleading report being presented.

  3. Failure to accept returned interim dividends

    The Directors will be held jointly and severally liable for company losses if the Shareholders cannot return interim dividends that have been declared.

  4. Failure to report their share ownership

    Members of the Board of Directors who fail to report their shareholdings will be held personally liable if the failure causes the Company to make a loss.

  5. Liability for bankruptcy losses

    In the event that bankruptcy occurs as a result of the fault or negligence of the Board of Directors and the assets of the Company are insufficient to cover the losses incurred in the bankruptcy, the members of the Board of Directors may be held jointly and severally liable for the balance of the obligations that cannot be repaid from the assets.

3. Restrictions

Other than the above Duties, Responsibilities and Liabilities, the Board of Directors must also observe certain restrictions imposed by the Company Law, such as:

  1. Directors acting as proxies of the shareholders in the General Meeting of Shareholders will have no voting rights in the meeting;
  2. the Board of Directors may not perform any legal action on behalf of the Company after the expiration of the term of the Company;
  3. the Board of Directors cannot file for the bankruptcy of the Company without approval from the General Meeting of Shareholders; and
  4. for certain corporate actions, such as amending the Articles of Association of the Company, conducting a merger or acquisition, placing a security over the Company's assets, and any other actions regulated in the Articles of Association of the Company, the Board of Directors must obtain prior approval from the Board of Commissioners or the General Meeting of Shareholders before conducting the action.

In addition, a member of the Board of Directors is not entitled to represent the Company in the event (i) there is a dispute between the Company and the relevant Director, or (ii) the relevant Director has a conflict of interest with the Company. In this case, another member of the Board of Directors will represent the Company, or the Board of Commissioners will do so if all the Directors have a conflict, or another party appointed by the General Meeting of Shareholders if all the members of the Boards of Directors and Commissioners have a conflict of interest with the Company.

B. Commissioners

The primary duties of the Board of Commissioners are to carry out general and/or specific supervision in compliance with the Articles of Association of the Company and to give advice to the Board of Directors. Please note that the Board of Commissioners is not involved in the day-to-day operations of the Company, such actions being the responsibility of the Board of Directors.

The requirements to be eligible to be a Director provided above also apply to the Commissioners.

1. Duties and Responsibilities

The following are some of the duties and responsibilities of the Board of Commissioners in the Company:

  1. Supervising the Company

    The Board of Commissioners must in good faith, prudently and responsibly carry out their duties in supervising the Company and give advice to the Board of Directors for the interests of the Company and according to the purposes and objectives of the Company.

  2. Annual report and business plan

    The Board of Commissioners must examine the annual report and approve the budget plan (as required by the Articles of Association of the Company) submitted by the Board of Directors.

  3. Secretarial responsibilities
    1. to prepare minutes of meetings of the Board of Commissioners' meetings and keep or maintain a copy;
    2. to report to the Company their own and their immediate family member's share ownership in the Company or other companies;
    3. to report the performance of their supervision duties during the past year to the General Meeting of Shareholders.

In certain transactions such as a merger, acquisition, consolidation, or segregation, the Board of Commissioners must also assist or supervise the Board of Directors in the transactions, including approving the transaction plan.

2. Liabilities

Every member of the Board of Commissioners will also be held personally liable for every loss suffered by the Company if he/she acts wrongfully or fails to perform his/her duties in good faith, prudently and responsibly. If the Board of Commissioners consists of more than one member, the above liability applies jointly among each of the members.

However, a Commissioner will not be personally held liable if he/she can prove that:

  1. he/she has carried out his/her supervision duties in good faith and prudently for the benefit of the Company and according to the purposes and objectives of the Company.
  2. he/she has no personal interest either directly or indirectly in the management of the Company that causes a loss; and
  3. he/she has advised the Board of Directors to take all the necessary actions to prevent the occurrence or continuance of a loss.

In the case of the bankruptcy of the Company, a Commissioner will not be held liable if he/she can prove that:

  1. the bankruptcy was not due to his/her fault of negligence;
  2. he/she has carried out his/her supervision duties in good faith and prudently for the benefit of the Company and in accordance with the purposes and objectives of the Company;
  3. he/she has no personal interest either directly or indirectly in the management of the Company that has leads to bankruptcy; and
  4. he/she has advised the Board of Directors to take all the necessary actions to prevent the occurrence of the bankruptcy.

Other liabilities which apply to the Board of Directors also apply to the Board of Commissioners, such as if they provide inaccurate or misleading financial reports, fail to return interim dividends, and for bankruptcy losses.

3. Restrictions

Commissioners acting as proxies of shareholders in the General Meeting of Shareholders will have no voting rights in the meeting.

Please note that a member of the Board of Commissioners cannot act alone; all actions taken on behalf of the Commissioners must be taken through the Board.

The above information is only intended to be a brief summary of the duties, responsibilities and liabilities of directors and commissioners and should not be relied upon as legal advice or as a substitute for legal advice in individual cases. We shall be pleased to advise further on particular aspects of the above summary.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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