In the structure of a Limited Liability Company (Perseroan Terbatas or PT), the Board of Directors holds the authority to manage day-to-day operations and represent the company, both in and out of court. However, this authority is not absolute. When directors abuse their authority, whether for personal gain, unlawful purposes, or actions detrimental to the company, it can lead to serious legal consequences, both civil and criminal.
Abuse of authority by directors can take various forms, such as misusing company assets for personal benefit, signing agreements without proper authorization, engaging in transactions that harm the company or its shareholders, violating the Articles of Association or General Meeting of Shareholders (GMS) resolutions, and acting beyond the authority granted by law or the Articles of Association. In corporate law, such actions are known as “ultra vires,” meaning acts that exceed the director’s legal authority.
Legal actions that can be taken in the event of abuse of authority by the Board of Directors include the following:
- Internal Oversight by the Board of Commissioners
The Board of Commissioners may issue warnings or reprimands, conduct internal investigations, propose the dismissal of directors through the GMS, and appoint an independent auditor to review performance and financial activities. If misconduct is proven, commissioners can recommend further legal action.
- Through the GMS
Shareholders, whether majority or minority, may request an extraordinary GMS to evaluate the directors’ actions, dismiss or replace directors, and hold them civilly liable for damages.
- Civil Lawsuit in District Court
According to the provisions of Article 97 paragraph (3) of the Company Law, “Each member of the Board of Directors shall be fully personally liable for the losses of the company if he/she is at fault or negligent in carrying out his/her duties.” Furthermore, Article 97 paragraph (6) authorizes shareholders representing at least 1/10 of the voting shares to file a lawsuit in district court on behalf of the company. Such claim may seek compensation, recovery of misused assets, and/or annulment of unlawful agreements or transactions.
- Derivative Suit by Minority Shareholders
Minority shareholders may file a derivative lawsuit on behalf of the company if the company fails to take legal action against the directors. For example, if directors use company funds for personal investments and the company does not take any action, minority shareholders may bring the case to court.
- Criminal Report
If the abuse of authority involves a criminal offense, such as Embezzlement, Fraud, or Forgery of documents, the aggrieved party may file a report with the police or public prosecutor. A criminal process can run concurrently with a civil lawsuit.
The legal consequences for the Board of Directors if found guilty may include civil sanctions in the form of compensation for the losses incurred, criminal sanctions such as imprisonment and/or fines, as well as corporate sanctions including dismissal from their position and being blacklisted in the capital market or banking sector.
Further, as preventive measures to avoid abuse of authority by the Board of Directors, the company can establish clear internal control procedures and standard operating procedures (SOPs), require written approval for transactions above a certain amount, conduct regular audits (both internal and external), strengthen the supervisory function of the Board of Commissioners, and enhance legal awareness for directors and management.
The Board of Directors plays a strategic role in ensuring the smooth operations of a company. However, when this authority is abused, legal mechanisms exist to protect the company and its shareholders. Swift, precise, and professional action is essential to minimize negative impacts and safeguard business continuity.
If you, a prospective client, have further inquiries about the topic discussed above, Schinder Law Firm is one of many corporate law firms in Indonesia that has handled numerous similar matters, with many experienced and professional corporate and civil lawyers in its arsenal, making it one of the top consulting firms in Indonesia. Feel free to contact us at info@schinderlawfirm.com for further consultation.
Author:
Dewi Susanti