Director Liability – Directors and Officers

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.

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.