As fiduciaries, the board of directors is responsible for managing the company based on its business judgment rules. This power is stipulated under Law No. 40/2007 on limited liability companies, which states that such power must be in line with the purposes and objectives of the company and within the limits set forth under the laws and regulations and/or its articles of association.

With great power comes great responsibility, and in this regard, the responsibility is mainly owed to the government as the majority shareholder of the airline. Notwithstanding, Indonesian law also subjects the director’s authority to the supervision of a board of commissioners with regard to the management of the company.

The Garuda case, however, is unique in the sense that the center of the issue lies not in the day-to-day management of the company but rather in the director’s duty of good faith.

The very core of the duty of good faith itself infers that a director must always act in a bona fide manner, and as such, must always be honest. As company law experts MC Oliver and EA Marshall have put it, “A director is permitted to be very stupid as long as he is honest.”

Nevertheless, honesty manifests internally and interpretation of its existence cannot be proved objectively. As such, whether or not it is proper for a director to carry out an action is at least subject to three limitations: statutory duty, loyalty duty, and last but not least, duty to act for a proper purpose.

Directors’ obligation to fulfill their statutory duty refer to the laws and regulations in the general sense, as well as the company’s regulations and articles of association. A director has a duty to obey the laws and regulations as a regular citizen and a legal subject under the law.

Additionally, the appointment as director results in the obligation to obey the company’s own regulations, as mandated under the Limited Liability Company Law. The legal consequence of violating the statutory duty may be considered an unlawful act, or if the director acts beyond the authority bestowed upon him or her, then it may be categorized as an ultra vires act. As regulated under the civil code, an unlawful act that causes damage or loss gives rise to the obligation to give compensation to the party suffering from such damage or loss.

Smuggling is a crime under Law No. 17/2006 on customs, and consequently, violation of the statutory duty in this regard can be perceived very clearly.

Furthermore, the loyalty duty, which can be regarded as one of the embodiments of the duty of good faith, relies almost entirely on the trust between members of the board of directors, the shareholders and the board of commissioners as organs of the company.

Civil law expert and former Supreme Court justice Yahya Harahap is of the opinion that in carrying out the loyalty duty, directors are obliged to act based on utmost good faith, especially when it concerns their own personal interests. This includes obviating misuse of the company’s assets or money for their own interests.

Last but not least, a director is also obliged to act for a proper purpose. Failure to do so will yield the act of the director to be an action that is carried out based on bad faith.

A bit different from examining violations of statutory duty, which is more straightforward and intelligible, analyzing whether violations of the loyalty duty and the duty to act for a proper purpose happens is more complicated and multilayered. By the same token, determining the legal consequence of such violations will be problematic due to the absence of clear regulations in that respect.

The Limited Liability Company Law provides neither a clear elaboration on the obligation of duty of good faith nor the legal remedy in the instance of violation of such duty. Such violation of the obligation of duty of good faith does not fall under the scope of corporate crime under Indonesian law either.

Addressing this legal gap becomes crucial because it has become evident that a violation of the duty of good faith can inflict serious damage and financial loss on a company — in this instance not only financial loss since the violation also impacts Garuda’s reputation and public trust.

What happens if the violation of the duty of good faith does not cause damage and financial loss even though it concerns disloyalty and improper action? Will the director then be able to get away?

The issue of duty of good faith of directors should be taken into consideration for future amendment of the Limited Liability Company Law and careful considerations must be made to prevent violations like this from happening again.

__________

Faculty member of the international business law program, Prasetiya Mulya University

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