Under the Law of the Republic of Indonesia Number 40 of 2007 on Limited Liability Companies, as lastly amended by Law of the Republic of Indonesia Number 6 of 2023 on Government Regulation in Lieu of Law Number 2 of 2022 on Job Creation into Law (“Company Law”), the governance of a limited liability company is anchored by the Board of Directors (“Directors”). As the company’s organ appointed by the General Meeting of Shareholders (“GMS”), the Directors are entrusted with managing the company’s activities and representing it both in and out of court. Given this strategic role, the Company Law establishes a framework governing various aspects of directorship, from appointment through dismissal.
Mechanisms of Dismissal of Directors
The Company Law sets out specific procedures not only for the appointment but also the dismissal of Directors, with the aim of ensuring transparency and fairness in corporate governance. While the Directors are generally appointed for a fixed term of office, their tenure may be terminated prior to its expiration through dismissal in accordance with the applicable legal provisions.
Under the Company Law, the Directors can be terminated either temporarily by the Board of Commissioners or permanently. As for permanent dismissal, the Company Law provides the following 2 (two) mechanisms:
1. Dismissal Through the GMS
Article 105 paragraph 1 of the Company Law stipulates that Directors may be dismissed at any time by the GMS, provided that the Directors are informed of the basis for the dismissal, such as failure in satisfying the statutory requirements stipulated under the Company Law, having taken actions detrimental to the company or any other basis deemed appropriate by the GMS. Article 105 paragraph 2 of the Company Law further requires the Directors to be given the opportunity to defend themselves at the GMS before being dismissed.
In practice, the dismissal of Directors may be effected through either an annual GMS or an extraordinary GMS. However, the Directors’ right to self‑defense should be exercised specifically at an extraordinary GMS convened for the purpose of considering such defense. Any GMS held for this purpose must comply with the applicable quorum and voting requirements. Unless otherwise stipulated in the company’s articles of association, the GMS must be attended by shareholders representing more than 50% (fifty percent) of the voting rights, and the resolution must be approved by more than 50% (fifty percent) of the shareholders with voting rights.
2. Dismissal Through Circular Resolution
Apart from dismissal through a GMS, Article 91 of the Company Law allows shareholders to adopt resolutions outside the GMS by way of a written resolution (circular resolution). Such a resolution has equal legal force to a GMS resolution, provided that it is unanimously approved and signed by all shareholders representing 100% (one hundred percent) of the shares carrying voting rights.
Where a circular resolution is adopted to dismiss Directors, the affected Directors must first be duly notified of the proposed dismissal and afforded the opportunity to present a defense. If the Directors raise no objection, they are required to submit a written statement confirming their acceptance of the dismissal. Conversely, if the Directors object to the proposed dismissal, their defense must be submitted in writing to the shareholders for consideration, as contemplated under the Elucidation to Article 105 paragraph 3 of the Company Law.
The Mandatory Right of Directors to Self-Defense
As discussed earlier, the Company Law establishes essential procedural safeguards in the dismissal of Directors, namely the requirement that the affected Directors be afforded the opportunity to defend themselves prior to any dismissal resolution, as expressly provided under Article 105 paragraphs 2 and 3 of the Company Law.
This requirement embodies a fundamental principle of fairness in corporate governance, ensuring that shareholders reach their resolution only after considering an explanation or clarification from the affected Directors. The right to self-defense enables Directors to respond to any allegations, justify their actions, and present relevant information that may materially influence the shareholders’ decision-making process.
Notwithstanding the foregoing, the requirement to afford Directors the opportunity to defend themselves does not apply where the affected Directors raise no objection to the dismissal, as stipulated under Article 105 paragraph 4 of the Company Law. In such circumstances, the Directors are deemed to have accepted the dismissal and, accordingly, are not required to exercise the right of self-defense.
Legal Recourse in Cases of Directors’ Dismissal Without Procedural Self-Defense
If Directors are dismissed without being afforded the opportunity to defend themselves, they may file a lawsuit against the shareholders before the Indonesian courts on the grounds of an unlawful act, pursuant to Article 1365 of the Indonesian Civil Code. This provision stipulates that any unlawful act causing loss to another party gives rise to an obligation on the part of the wrongdoer to compensate for resulting damages.
Through such legal recourse, the Directors may contend that the shareholders’ failure to comply with the mandatory procedural requirements under Article 105 of the Company Law constitutes an unlawful act that has caused them harm. In such proceedings, the aggrieved Directors may request the court to declare the dismissal null and void, seek reinstatement to their positions, and/or claim compensation for losses resulting from the unlawful dismissal.
By contrast, where the dismissal procedures have been duly complied with but the Directors remain dissatisfied with the dismissal resolution, the Company Law does not provide any specific legal remedy. In such circumstances, the affected Directors may still pursue legal action. However, such action must be grounded on bases other than procedural non-compliance, including, but not limited to, bad faith, conflicts of interest, abuse or misuse of authority, or violations of the company’s articles of association, as applicable.
Unlawful Dismissal of Directors in Practice
Notwithstanding the dismissal procedures prescribed under the Company Law, procedural defects may still arise in practice. In Ong Jimmy Angesti v. Chu Ping Han and Chu Chun Ta, No. 39/Pdt.G/2011/PN.JMB (2011), the defendants, the shareholders of a shoe manufacturing company, convened an extraordinary GMS and dismissed the plaintiff from his position as President Director without affording him the opportunity to present a defense.
In that case, the panel of judges held that the shareholders had committed an unlawful act by dismissing the plaintiff without affording him the opportunity to exercise his right of self‑defense. As a consequence, the court declared the dismissal invalid and awarded compensation for the losses suffered by the plaintiff. This judgment was subsequently upheld by the Supreme Court of Indonesia at the cassation stage, which reaffirmed that the dismissal of Directors by the GMS without providing an opportunity for self‑defense contravenes the procedural requirements set out under Article 105 of the Company Law.
Final Remarks
While shareholders have the authority to dismiss Directors at any time, such authority must be exercised in strict compliance with the applicable statutory procedures, including affording the Directors the opportunity to defend themselves. Where these procedures are disregarded, the dismissal may be deemed unlawful, entitling the affected Directors to pursue legal recourse against the shareholders to restore their rights and/or obtain compensation for the losses suffered.
