What is a Director?
Limited companies are juristic entities that cannot act alone. A limit company requires directors and shareholders to act on its behalf. The Law on Enterprises (№ 11/NA, 9 November 2005) (“Enterprise Law”) is the main law governing the duties and liabilities of company directors in the Lao PDR.
In order to be the director of a company, an individual must meet the following qualifications: (i) a director must not be a legal entity; (ii) a director must have legal capacity; (iii) a director cannot be a bankrupt person who is restricted from conducting business; and (iv) a director cannot have been convicted of embezzlement or misappropriation of assets.
A company may have one or several directors, provided that the number of directors is specified in the Articles of Association (“AOA”) of the company and agreed to by the shareholders’ meeting. If the assets of the limited company are greater than fifty billion Kip (approximately US$6,250,000), a board of directors is required. The board of directors must consist of at least two directors and operates by dividing the responsibilities amongst the directors. Lao PDR law does not restrict the number of foreigners that are able to sit on the board of directors of a company established in the Lao PDR. Where a company has several directors, the director that is authorized to enter into contracts with third parties on behalf of the company is called the “general director”.
Directors of the company are elected and removed by the shareholders’ meeting. The Enterprise Law allows the voting for election or removal of directors to be carried out by cumulative voting or by ordinary voting. The initial term of office of a director is limited at two years, and directors may be re-elected for a second term.
The Enterprise Law states that directors are responsible for performing two types of duties: (i) acting as agent of the limited company; and (ii) performing specific duties. The specific duties of a director under the Enterprise Law include the following:
1. Administering the business of the limited company in compliance with the contract of incorporation, the AOA and the resolutions of the shareholders’ meeting;
2. Calling and collecting payments for shares at the determined amount and at the defined time;
3. Managing and using the capital of the limited company in accordance with the defined purpose and goal;
4. Establishing the accounting system of the company and maintaining and filling all documents of the company;
5. Cooperating with auditors by providing clarification on the source and accuracy of numbers and information appearing in the company’s balance sheet before submitting them to the shareholders’ meeting for approval;
6. Sending copies of the balance sheet to the shareholders and keeping copies for review by holders of bearer shares when required;
7. Properly distributing the profits;
8. Administering and deploying officers or employees of the limited company; and
9. Informing the company of his/her direct or indirect involvement in the transactions of the limited company that could benefit him/her, or of any increase or reduction in a director’s shareholding in the limited company or in the company’s subsidiaries within the accounting year.
Under the Enterprise Law, a director is liable for the following acts:
· Acting outside the scope of the limited company’s business purpose specified in its AOA or in the contract of incorporation;
· Breaching the AOA of the limited company;
· Exercising rights and performing duties beyond his/her assigned scope of power; or
· Failing to exercise his/her assigned rights or perform his/her assigned duties.
A director is also liable if he/she engages in the following prohibited activities:
· Conducting identical or similar business activities as the company, whether for personal interest or another person’s interest without the approval of the shareholders;
· Conducting identical or similar business activities as the company or as part of a partnership enterprise without the approval of the shareholders;
· Undertaking transactions with his/her own limited company for personal interest or another person’s interest without the approval of the shareholders; or
· Borrowing money from the company when that is not specifically allowed in the company’s AOA.
A director may be released from liability if it is proved that he/she has not been involved in the violation in question, or that he/she objected to any resolution on such misconduct, as evidenced by meeting records. Otherwise he/she has to reimburse the company for any payments made in breach of the AOA.
Measures to be taken against directors who commit any misconduct should be provided for in the company’s AOA or contract of incorporation. Where the company fails to apply such measures against a director who has engaged in misconduct, one or more shareholders representing at least 4% of paid shares in the limited company may file a notice requesting that the company fine the director. Shareholders may also take action against a director in court.
Apart from the Enterprise Law, there are other laws which address director’s liability, including the Accounting Law № 01/NA, 2 July 2007 (the “Accounting Law”) and the Decree on the Management and Use of Seals № 218/PM, 19 July 2005 (the “Decree on Use of Seals”).
According to the Accounting Law, directors are responsible for and must sign off on all financial statements, even if they are certified by an external auditor.
According to the Decree on the Use of Seals, the head of an organization (which could be interpreted to include a director) has the responsibility to properly manage the use of the seal of the organization.
Other laws, relating to labor, taxation, land and foreign exchange contain provisions on measures to be applied against violators, which could include directors of a company. Penalties often include re-education, warnings, fines, temporary suspension of a company’s right to conduct business, withdrawal of a company’s licenses, or in serious cases, civil court proceedings.
As Winston Churchill once said, “Responsibility is the price of greatness”. Directors have a significant amount of authority to make important decisions on behalf of a company. However, directors must exercise such authority responsibly, in accordance with the relevant laws and the company’s constitutional documents.