The requirements for granting the bankruptcy declaration petition in Article 2 paragraph (1) of Law No. 37 of 2004 (“Bankruptcy Law”) are (i) debtor has two or more creditors and (ii) debtor has not paid in full at least one debt which is due and payable. Article 8 paragraph (4) of Bankruptcy Law further stipulates that the bankruptcy petition must be granted if there are facts or circumstances which can be proven summarily that the requirements set out under Article 2 paragraph (1) of Bankruptcy Law are satisfied. From the provision above we can conclude that the requirements for granting the bankruptcy petition are there are facts or circumstances which can be proven summarily that there are two or more creditors and there is one debt which is due and payable.
In Article 1 number 6 of Bankruptcy Law, a debt is defined as an obligation which is stated or can be stated in monetary amount either in Indonesian or foreign currency, either directly or which will arise in the future or contingent, which arise from agreement or by law and must be fulfilled by the debtor, the failure of which entitles the creditor to obtain the fulfilment from the assets of the debtor.
The definition above stipulates that agreement is one of the bases on which debt can arise. In the case of an agreement made by corporate entity, if the agreement was made by a director in contravention of the provisions of the articles of association what is the consequence of the contravention? Can the debt arising from such agreement satisfies the requirements of Article 2 paragraph (1) in conjunction with Article 8 paragraph (4) of the Bankruptcy Law? This article will discuss the consequence of an agreement made by director in contravention with the company’s articles of association and the implication of the debt arising from such defective agreement in bankruptcy and PKPU case.
- Director’s Authority to Act on Behalf of Company
As a legal entity without concrete form, the existence of a Company can be seen form its organs, which has their own duties and authorities prescribed under the law and the Articles of Association: (i) General Meeting of Shareholders (“GMS”) as the organ having authority that is not granted to Director or Board of Commissioners, (ii) Director as the organ that manages the company, and (iii) Board of Commissioners as the organ that supervises and give advice to the Director.1The authority of the director in managing the company is prescribed in Article 92 paragraph (1) of Law No. 40 of 2007 (“Company Law”) which stipulates that the director shall manage the company for the interest of the company and in accordance with its purpose and objective. The authority of the director is not without limit. Article 92 paragraph (2) of Company Law stipulates that the authority of the director to manage the company is carried out within the limit set out under the Company Law and/or its article of association. According to Fred B.G. Tumbuan, the management authority of the Director is limited by (i) law, (ii) the restrictive character of the objectives of the company, and (iii) the restrictions mentioned in the articles of association.2
One example of the limitation of director’s authority regulated under the Company Law is the provision that director must request the approval of the GMS to transfer or put as collateral company’s assets which made up more than 50% (fifty percent) of the company’s net assets (assets minus all liabilities).3 Additionally, the Company Law also stipulates that the articles of association may grant the authority to the board of commissioners to approve or assist the director in doing certain legal action.4
Other limitations and conditions for director’s action may be set out in the company’s articles of association e.g. that the director must obtain the approval of the board of commissioner and/or GMS before doing certain legal action such as establishing new enterprise and borrow or loan money on behalf of the Company.
Consequences of Director’s Action Which Contravenes the Articles of Association of the Company
Consequence of director’s action which contravenes the articles of association of the company can be divided into internal and external consequence. Internally, the director shall take full personal responsibility for the company’s losses due to the fault or negligence of the director in performing his duties.5 Externally, such act may be null and void and does not bind the company if it is ultra vires or remain binding on the company if it is defective. Acts of director without obtaining the required approval from other corporate organs is categorized as a defective act. According to Fred B.G Tumbuan, such acts of the director is defective on account of the lack of approval and not an ultra vires act.6 Lack of required approval is different from ultra vires in that the defect from the lack of approval can be remedied by ratification by the company, whereas there is no organ of the company that could ratify ultra vires acts.7
According to Black’s Law Dictionary, ultra vires is defined as “Unauthorized; beyond the scope of power allowed or granted by a corporate charter or by law.”8 According to Fred B.G. Tumbuan, the notion of ultra vires denotes certain acts or transactions of the company which is beyond the legitimate powers of the company as defined by its articles of association. All acts committed beyond the scope of objectives set out in the articles of association of the company is ultra vires and null and void.9 Although the third party in the act in question has performed the contract or transaction in good faith it is not sufficient to protect the third party against the contract or transaction affected by ultra vires, the third party should constructively observe the objective and purposes or “capacity” of the company stipulated under the articles of association.10
Contrary to ultra vires, absence of approval does not render an agreement to be null and void. Acts of director which was committed without the approval of GMS shall remain binding to the company provided that the other party entered the transaction in good faith.11 Similarly, the act of director without the approval or assistance from the board of commissioners shall remain binding on the company provided that the other party entered the transaction in good faith.12 Indeed, Fred B.G. Tumbuan has opined that non-obtainment of prior GMS approval has no external effect.13
- Defective Agreement as the Basis of Debt in the Bankruptcy and PKPU CasesIn the previous section, the author has discussed the authority of the director and consequences of the director’s act which contravenes the provision of the company’s articles of association. In this section, the author will discuss the consequence of the debt arising from an agreement which is defective because it lacks the approval required by the company’s articles of association in the bankruptcy and PKPU cases.Pertaining to the status of the debt arising from an agreement made by the director that contravenes the articles of association of the debtor in bankruptcy case, the Resolution of Special Civil Chamber Meeting attached in Supreme Court Circular Letter No. 7 of 2012 (“SEMA 7/2012”) has resolved that a company cannot be adjudged to be bankrupt based on the debt made by director that contravenes the company’s articles of association.
The author is unable to find any Supreme Court decision which applied the resolution in the SEMA 7/2012 in bankruptcy cases. However, the author found one case, No. 55/Pdt.Sus-PKPU/2023/PN.Niaga.Sby. in which the panel of judges considered the resolution in SEMA 7/2012 in a PKPU case.
In that case, the judges considered that agreements between the claimant and the respondent, from which the debt was based, were personal obligation of the respondent’s president director because his action in managing the company was not in accordance with Article 92 paragraph (1) and (2) of the Company Law. The judges further considered that the above consideration is in accordance with the resolution in SEMA 7/2012 which resolved that a company cannot be adjudged to be bankrupt based on the debt made by director that contravenes the articles of association. The judges concluded that as such, there was a disagreement between the claimant and the respondent regarding the agreement, the validity of which must be ascertained and therefore the debt in this case cannot be summarily proven.
Prior to the resolution in SEMA 7/2012, there were several contradictory supreme court decisions regarding the debt arising from an agreement made in contravention of the articles of association of the debtor. In decision No. 30 K/N/2000 considered that the promissory note issued without the approval from the board of commissioners as required by the debtor’s articles of association shall not bind the debtor but only bind the director personally. Judges in decision No. 04 K/N/2004 also considered that it was necessary to prove the validity of the director’s action against the company and to what extent the company was liable for director’s action that contravened the articles of association of the debtor which cannot be summarily proven.
Contrary to the consideration in the above decisions, the judges, in decision No. 33/Pailit/1999/PN.Niaga.Jkt.Pst, the judges considered that the debt arising from the issuance of a promissory note is valid regardless the absence of the required approval from the board of commissioners because provisions of the articles of association of the debtor is not binding to the third party. Similarly, in decision No. 19 PK/N/2000, the judges considered that although the surety bond was issued in contravention with the debtor’s articles of association, the mistake was the debtor’s internal mistake as a company and therefore shall not prejudice third parties.
Director’s acts beyond to the objective of the company as prescribed in the company’s articles of association is ultra vires and null and void and does not bind the company while acts which contravenes the provision of the articles of association requiring permission from other corporate organ is defective but shall remain binding on the company provided that the other party in the transaction acted in good faith.
However, in bankruptcy and PKPU cases the debt arising from an agreement made by a director in contravention of debtor’s articles of association does not satisfy the condition prescribed by Article 8 paragraph (4) of the Bankruptcy and PKPU Law because it necessitates complex evidentiary proceeding regarding the contention between the debtor and the creditor on the validity of the agreement, and therefore the existence of the debt, and to what extent the company and the director as a person are liable for the agreement.
- Article 1 number 2 of the Company Law
- Fred B.G. Tumbuan, Indonesian Unincorporated Business Entities and the Limited Liability Company page. 131
- Article 102 of the Company Law
- Article 117 of the Company Law
- Article 97 paragraph (3) of the Company Law
- Fred B.G Tumbuan, Op.Cit., page 149
- Ibid. page 152
- Bryan A. Garner (ed), Black’s Law Dictionary 9th Edition, page 1662
- M. Yahya Harahap, S.H., Op.Cit. page 67.
- Ibid. page 66
- Article 102 paragraph (4) of the Company Law
- Article 117 of the Company Law
- Fred. B.G. Tumbuan, Op.Cit., page 168