Limits of Directors Liability for the Errors or Negligence of Subordinates Viewed Through the Lens of The Business Judgment Rule

Abstract

Errors or negligence in the management of a limited liability company may arise not only from acts directly committed by the Board of Directors, but also from acts committed by parties who functionally operate under the Board of Directors. Directors may be held liable for such errors or negligence. The primary objective of this research is to analyze the construction of the Board of Directors’ managerial authority over the company and the limits of directors’ liability for errors or negligence committed by their subordinates that result in losses to the company. This research employs a normative juridical method with a statutory approach. The results demonstrate that: (1) the Board of Directors’ authority to manage the company is based on attributed authority, which must be exercised in accordance with the principle of trust; and (2) the limits of directors’ liability are determined on the basis of two considerations: first, the legal basis of the authority held by the relevant subordinate; and second, the establishment of fault or negligence, good faith, conflicts of interest, and preventive measures taken to avert the occurrence of losses. The study concludes that the management of the company by the Board of Directors must be conducted in accordance with the purposes and objectives stipulated in the company’s articles of association. The Board of Directors must exercise its authority in accordance with the principles of prudence and full responsibility. Theoretically, this research contributes to enriching the body of legal scholarship, particularly in relation to directors’ liability. Practically, the findings of this research provide clear parameters for determining directors’ liability for errors or negligence committed by their subordinates, thereby contributing to legal certainty in its implementation.