In corporate practice, company directors play a central role in managing operations and making strategic decisions on behalf of a limited liability company. In many cases, directors are required to act decisively to safeguard the company’s survival and growth. However, legal issues arise when such decisions are taken through an abuse of authority. Under Indonesian law, the misuse of directors’ powers may expose them to civil, criminal, and governance related sanctions.
This article examines the legal boundaries of directors’ authority, the concept of abuse of authority, and the legal risks arising from ultra vires actions under Indonesian Company Law.
Legal Scope of Directors’ Authority in a Limited Liability Company
Law No. 40/2007 on Limited Liability Companies, commonly referred to as the Company Law, defines directors as one of the organs of the company. Article 1 point 5 of the Company Law provides that directors are the corporate organ authorized and fully responsible for the management of the company for the benefit of the company, in accordance with its purposes and objectives, and for representing the company both inside and outside court as stipulated in the articles of association.
Article 97 paragraph 1 of the Company Law further affirms that directors are responsible for the management of the company as referred to in Article 92 paragraph 1. This responsibility implies an obligation to act in good faith, with prudence, and with full accountability when managing corporate affairs.
Where the company suffers losses due to the fault or negligence of directors, personal liability may arise. However, Article 97 paragraph 5 of the Company Law provides a statutory defense. Directors are not personally liable for losses if they can prove that the loss was not caused by their fault or negligence, that management was conducted in good faith and with due care for the company’s interest, that no conflict of interest existed, and that preventive measures were taken to avoid or limit the loss.
This provision functions as a legal safeguard for directors who act professionally and responsibly. Nevertheless, the burden of proof rests with the directors. In practice, this requires concrete evidence such as board meeting minutes, risk assessments, internal documentation, and professional opinions. The protection offered by Article 97 paragraph 5 is therefore not a license for reckless conduct but a mechanism that reinforces higher standards of corporate governance.
Elements of Abuse of Authority by Directors
In legal doctrine, abuse of authority refers to the use of legally granted power for purposes that deviate from its original intent. In the corporate context, abuse of authority occurs when directors exercise their management powers for personal interests, affiliated parties, or objectives that are inconsistent with the company’s purposes as stated in its articles of association.
Indonesian legal commentary generally identifies three core elements of abuse of authority. The first is intent, meaning the act must be carried out deliberately by a party who lawfully holds the authority. Directors, as corporate organs, clearly satisfy this element. The second element is deviation of purpose, which arises when corporate powers are no longer exercised for the company’s legitimate objectives. An example includes the use of company assets as collateral for a director’s personal debts without a clear corporate interest. The third element relates to negative consequences, namely actual or potential losses suffered by the company.
Importantly, losses do not need to have materialized. A reasonably foreseeable risk of loss may be sufficient to trigger legal consequences. In practice, proving this element often becomes the focal point in disputes concerning directors’ liability, whether in civil litigation or criminal proceedings.
Although directors are not public officials, the general legal principle prohibiting abuse of authority remains applicable. Where abuse of authority overlaps with fraud, embezzlement, or other dishonest conduct, criminal liability may also arise under Indonesian positive law.
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Ultra Vires Acts and Directors’ Legal Liability
Ultra vires actions refer to acts performed by directors that exceed the authority granted by law or by the company’s articles of association. Historically, the ultra vires doctrine developed to protect shareholders and third parties from unauthorized acts of corporate management. While modern corporate practice has softened the doctrine, its legal consequences remain significant.
Article 97 paragraph 3 of the Company Law expressly states that each member of the board of directors is personally and fully liable for company losses if they are at fault or negligent in performing their duties. Acts that clearly fall outside the directors’ authority are easily classified as fault or negligence.
Where ultra vires conduct is established, directors may face several forms of legal risk. Civil liability may arise through claims for damages filed by the company, shareholders, or third parties. The company may also refuse to ratify or recognize ultra vires legal acts, subject to statutory requirements. Criminal liability may follow if the ultra vires act is committed in bad faith and fulfills the elements of a criminal offense. Law No. 1/2023 on the Criminal Code recognizes corporate criminal liability and the personal liability of management when crimes are committed in the course of business activities.
Beyond formal legal sanctions, ultra vires actions also pose serious reputational and governance risks. Directors’ professional credibility may be damaged, investor confidence may decline, and the implementation of good corporate governance principles may be undermined. In the long term, these consequences can significantly affect a director’s career and the company’s sustainability.
Abuse of authority and ultra vires actions by company directors are not merely internal corporate issues but serious legal matters with multidimensional consequences. Indonesian Company Law provides a clear framework defining the scope of directors’ authority and responsibility, which must be consistently observed.
By understanding the legal limits of authority, recognizing the elements of abuse of power, and appreciating the legal risks attached to ultra vires conduct, directors are better positioned to manage companies prudently and in good faith. Legal caution should not be seen as an obstacle to business decision making but as a foundational element for sustainable corporate governance and long term corporate success.***
Regulations:
- Undang-Undang Nomor 1 Tahun 2023 tentang Kitab Undang-Undang Hukum Pidana (“KUHP”)
- Undang-Undang Nomor 40 Tahun 2007 tentang Perseroan Terbatas (“UU PT”)
References:
- Ciri dan Bentuk Penyalahgunaan Wewenang oleh Pejabat. Hukum Online. (Diakses pada 12 Januari 2026 Pukul 15.09 WIB).
- Akibat Hukum Jika Direksi Menyalahgunakan Wewenang. HukumOnline. (Diakses pada 13 Januari 2026 Pukul 09.45 WIB).
- Tanggung Jawab Direksi atas Tindakan Ultra Vires. Hukum Online. (Diakses pada 13 Januari 2026 Pukul 09.52 WIB).