ARTICLES & UPDATES

When a company experiences a decline in its assets and an increase in its debts to a level that threatens its continuity, this raises legal questions about the responsibilities of the Board of Directors, the role of shareholders, and the auditors. The Board of Directors is the highest executive authority responsible for setting policies, overseeing executive management, continuously monitoring the company’s performance, and carrying out all actions required for managing the company in accordance with its objectives. This authority is only limited by what is stipulated in the law, the company’s articles of association, or resolutions of the General Assembly, as the Board of Directors is obligated to implement the General Assembly’s decisions, unless those decisions violate the law or the company’s articles of association, which define the Board’s powers regarding borrowing, mortgaging company properties, issuing guarantees, arbitration, settlement, and donations.

Therefore, it is the responsibility of the Board of Directors to continuously monitor the company’s performance and take appropriate measures when signs of asset decline or debt inflation appear. They must disclose any material indicators that affect the company’s financial position. If the company’s losses reach half of its capital, the Board must call for an Extraordinary General Assembly to consider whether the company should continue or be liquidated. Failing to meet this obligation results in personal liability for the board members.

Failure to disclose such matters is considered a serious breach and exposes the board to accountability, especially if the misrepresentation is intentional or due to gross negligence. The chairman and board members are liable to the company, shareholders, and third parties for any acts of fraud, abuse of authority, mismanagement, and violations of the law. This liability may be personal, affecting an individual member, or joint and several among all members of the Board, unless a member objected to the decision causing the liability and recorded their objection in the meeting minutes.

The shareholder also bears responsibility, not just limited to the value of their shares, but also direct or indirect responsibility. Every shareholder, regardless of the number of shares owned, must attend the General Assembly and participate in its deliberations. Any clause that denies the shareholder this right is null and void. The shareholder must also study the company’s financial statements, the Board’s report, and the auditor’s report, and discuss them. If the financial position of the company appears unsound, the shareholder is obliged to request the Board to restructure the debts, strengthen the company’s capital, and improve operational management.

If a resolution is issued by the General Assembly, whether ordinary or extraordinary,   any shareholder has the right to file a lawsuit to annul these decisions if they violate the law or the articles of association, or if they harm the interests of the company or unfairly prejudice the rights of minority shareholders.

As for the auditor’s liability concerning the poor financial position of the company, it is established by law. The auditor has the right, at any time, to access all company books, records, and documents, and to request any data they deem necessary. The auditor must verify the company’s assets and liabilities. If they are not enabled to exercise these rights, they must submit a report to the Board of Directors, which is then presented to the General Assembly, and a copy is sent to the Ministry of Commerce and the Capital Markets Authority. If the auditor breaches these duties, they may be dismissed and held liable for compensation, as they are responsible for the financial information included in their report and for any damage suffered by the company, shareholders, or third parties due to errors or negligence on their part.

The decline in assets and the continued increase in debt are primarily the responsibility of the Board of Directors, which is the first line of defense in taking corrective measures. Then comes the role of the shareholder in monitoring and reviewing the company’s financial statements and fulfilling their responsibilities as mentioned above. Most importantly, it is the auditor’s role to notify the Board of Directors and the General Assembly when noticing deterioration in the company’s financial position.

This article was recently published in Aleqtisadyah newspaper. You can view the original in Arabic in the newspaper clipping above 

Lawyer / Abdulrazzaq Abdullah E-mail: azq@arazzaqlaw.com