Liability of company directors and the ultra vires doctrine under company law.

The existence of a limited liability company as a form of business entity in Indonesia contributes to the movement of the country’s economic life. The Limited liability company is also the most popular type of business entity given the limited liability principle.

In principle, what is done by the company as a legal entity will be its responsibility and cannot be requested or transferred to the responsibility of shareholders, directors, and/or the board of commissioners.

Therefore, a limited liability company requires rules and norms that can be used as a guide for business parties. According to Article 2 of the Law No. 40 of 2007 on Limited Liability Companies (“Company Law”), a limited liability company must have stated aims and objectives which are in accordance with the applicable laws and regulations, as well as with commonly held notions of public order and/or morality.

Article 8 of the Company Law also regulates that the aims and objectives, as well as business activities, must be stated in the company’s articles of association(“AoA”) under statutory provisions. The said company’s aims and objectives mentioned in the AoA become the legal basis for the authority of the board of directors (“BoD”) to act for and on behalf of the company concerned.

Article 1 number (5) of the Company Law states that directors are fully responsible for management of the company based on the aims and objectives and are authorised to represent the company, both inside and outside of the court, in accordance with the provisions of the Articles of Association.

Based on this provision, the BoD has two functions; namely, the management function into the company, and the second function is outward representation with third parties.

The BoD, in carrying out these two functions must adhere to the aims and objectives as the basis for the company’s activities. Further, Article 92 paragraph 1 and 2 of the Company Law, it is also stated that the BoD carries out the management of the company for the benefit of the company and following the aims and objectives of the company, with appropriate policies, and within limits specified in the Company Law and/or AoA.

The BoD, who is not in line with the aims and objectives, is categorised as having exceeded the limits of authority or known as the ultra vires doctrine.

Ultra vires comes from Latin, which means to exceed the power or authority permitted by law. Black’s Law Dictionary defines ultra vires as “beyond the scope of power allowed or granted by a corporate charter or by law.”

According to this doctrine, any member of the BoD who sign contracts with third parties that are not within the framework of the company’s aims and objectives, will result in the contract becoming invalid or null and void. Furthermore, according to Article 97 paragraph 2 and 3 of the Company Law, even if it turns out that the signed contract is detrimental to the company, the company may commence legal proceedings against the BoD on the basis of negligence or error in carrying out their duties, obligations, and authority.

Consequentially, the contract now becomes the BoD’s responsibility. This occurs when the BoD conducts business activities in areas that are not in accordance with the aims and objectives of the company in the AoA. Article 6 paragraph 1 of the Company Law also states that shareholders are entitled to file legal proceedings against a company in the relevant district court if a shareholder suffers losses due to any company actions that are considered unfair and unreasonable as a consequence of, among other causes, BoD resolutions.

Such lawsuits should aim to cease the damaging actions in question, seek ways of handling any consequences resulting from such actions, and prevent similar actions from occurring in the future.

In the past ultra vires actions have been regarded as null and void while any, In recent years, the ultra vires principle has shifted to provide greater protection to third parties through the acknowledgment that ultra vires actions remain legal and binding on any parties who act in good faith. Good faith should always be assumed in relation to third parties as they have no obligation to check whether a given transaction is within a company’s capacity or not.

The basis for ultra vires regulation lies in the company’s AoA. The AoA is the basis of the company’s work and activities for all existing organs (General Meeting of Shareholders, Commissioners, and Directors) in carrying out daily activities, and one of them is the provision of aims and objectives.

The aims and objectives have a dual role, namely recognition of the company’s existence and secondly as a basis for limiting the ability of directors to act. This means that the BoD members who take actions that are not included in the company’s aim and objectives are ultra vires and become the personal responsibility of the BOD and are not binding on the company.

Therefore, the BOD has to understand whether the action according to the law and the AoA are actions that are outside the company’s aims and objectives and whether the actions of the company’s BoD are outside the authority given to them based on applicable provisions, including the company’s AoA.

Both the above can be used as a reference for directors in measuring ultra vires that has occurred or not, but the BoD must also pay attention to the basis for actions outside the aims and objectives.

There are three criteria to determine whether the BoD’s actions are outside the intent and purpose if one of the requirements or below is fulfilled. Firstly, the legal actions of the BoD are expressly prohibited by the company’s AoA.

Secondly, considering particular circumstances, the legal actions of the BoD cannot be said to support the activities referred to in the company’s AoA. Thirdly, by considering particular circumstances, the actions of the BoD cannot be interpreted as supporting the interests of the company.

Therefore, the basis that can be used by the BoD in preventing ultra vires violations is to always hold and act on behalf of and in the best interests of the company within limits permitted generally by statutory regulations and specifically in the aims and objectives of the company’s AoA.

Conditions that are still within the framework of the company’s aim and objectives become intra vires (still within its capacity), so that the BoD’s actions become legal and binding on the company. The BoD is required to continuously implement their management authority in good faith and a responsible manner, as required under the Company Law.

Liability of company directors and the ultra vires doctrine under company law
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