Civil Liabilities of Corporations and Their Directors for Corporate Wrongdoings in Saudi Arabia - Coursework Example

LITERATURE REVIEW Saudi Arabian law has undergone extensive changes throughout the decades in terms of modernization and codification. In the area of corporate law, this change has been quite notable as businesses become more westernized in style and management. That said there exists only a minimal amount of literature dedicated to the area of director civil liabilities in Saudi Arabia. Nevertheless, there exists legislation that govern director responsibilities and accountability that are useful in shedding light to this legal issue. The following discussion therefore seeks to gain insight into the issue by providing a comprehensive overview of the changes the law has undergone over the past decades; making a comparative analysis of the law in the West with that of the Arab world; then finally taking a critical look at the existing Saudi law. The work of David and Tunc (1983) gives a comparative analysis of world laws. The section that focuses on civil liability laws; their evolution; and their applicability in modern times looks at various civil codes. It is unfortunate that as of now, Saudi Arabia does not have an elaborate Civil Liability Act in place. However, they aptly reveal that all Islamic law in general bases civil liability, not on fault, but on the mere fact of usurpation or on any unlawful act which causes damage. In the field of tort as elsewhere, it is a very elaborate law, in which the prescriptions of the Koran have been supplemented by the teachings to be derived from Muhammad’s life by the consensus of the scholars of the orthodox community and opinions received in the various schools of commentators.1 Coulson (1964), in his work on Islamic law, points towards the rigidity of Sharia law with regards to both civil and criminal liability. The author maintains that Islamic law requires rigid standards of proof and evidence which inevitably makes it very likely that a miscarriage of justice may occur. The impractical burden of proof, therefore, that a plaintiff has makes it easier for an unscrupulous director to get away with an offence.2 This laxity in Islamic law needs to be hastily dealt with to ensure justice is done, particularly as pertains to civil liability cases where directors are often seen as being above the law. An area of importance when studying current law is making a historical analysis, tracing the roots of Islamic law from the nineteenth century to present times. Anderson (1959) provides an insightful comparative analysis of Islamic Law through the decades. It gives a historical background of Islamic Civil Codes by tracing their roots to both the Koran/ Sharia and within European law. In many Middle Eastern countries, the law has, of necessity, been codified and modernized to fit in with modern demands. This type of codification in Islamic Law can be traced to the Ottoman Empire to the period between 1870 and 1877 is still used in many countries, for instance, Jordan. The trend, however, has been that most civil code laws in Islamic countries were inspired by French law and some of these include the Civil Codes of Egypt of 1875 and 1883 as well as Tunisia’s Code of Obligations of 1906. A code for Turkey in 1926 was implemented which was essentially a combination of the Code of Obligations and the Swiss Code Civil.3 In 1934, Lebanon adopted a code that was heavily inspired by a French judge named Josserand. Egypt furthered modified its Civil Code in 1949 by incorporating the various changes that were occurring in Germany, Switzerland and France. Syria, too, adopted her Civil Code in the same year which was basically a model of the Egyptian code. Iraq came up with a comparatively unique Civil Code two years later in 1951 in that it combined the rules of Madjalla with the Egyptian Civil Code.4 All these developments within the first half century of the twentieth century point towards a mostly uniform type of approach to civil codes and by extension, civil liability. It is important to note that most countries during that time frame were just recently developing, with some just having realised independence from colonialism and/ or national unification. Brown (1997), in his extensive work illuminates the growth and development of the civil codes of Islamic countries further. The author explains that the “Mixed courts” that were popular especially in the nineteenth century were largely done away with. In addition, he expounds on the European influence on the laws of Islamic countries. In the second half of the twentieth century, the influence of the French law continued. That said British law likewise played a greater role in Islamic codes, further enhancing these codes.5 The result is that most of these laws so a significant change in Middle Eastern countries towards the same legal direction as the rest of the world. A scholarly analysis on various works on Islamic law shows that most of the laws that govern Saudi Arabia are the same ones that govern the rest of the Middle East since the Koran and Sharia law is the unifying factor. The scholarly input of Tyan and Alem (2001) gives an outline of the various business laws that govern the whole of the Middle East. With regards to director civil liabilities, it alludes to the fact that many Middle East countries, including Saudi Arabia, do not have an elaborate Civil Liability Act. The authors nevertheless point to Lebanon’s Civil Code of 1934 which has since been severally amended. Article 107 (as amended by Decree no. 979 dated 4 May, 1968) holds that “every distribution of fictitious dividends involves the civil liability of the members of the board of directors towards whoever may be prejudiced there from”.6 This shows that directors in Middle Eastern countries are held accountable for various wrong doings especially as pertaining to the distribution of fictitious dividends. In addition, penal liabilities of such unscrupulous directors may be imposed if the dividends in question were distributed according to a fraudulent inventory, profit and loss account or balance sheet or without any balance sheet. The directors in such instances will be subject to fraud penalties signifying an increasingly harsher approach towards director civil liabilities. Ahmed Abdel-Fattah El-Ashker in his 1987 study elaborated about the roles and duties of board of directors in various industries. In Islamic countries such as Saudi Arabia, these duties are seen to also be in conjunction with a religious board and to ensure all decisions made are Sharia- compliant. This board of directors are charged with taking care of the balance sheets, profit and loss accounts, financial auditing, and religious auditing, among many other responsibilities. Importantly, the conduct of the board of directors must be in line with Sharia law and this religious inclination in the law forms the basis of dealing with director civil liability cases.7 One of the subjects of recent interest in much of the literature is the crucial area of director’s civil liabilities for defective disclosure in prospectuses as well as the administrative enforcement of civil liability. Phillips (2000) gives an Australian perspective on this. All countries should have a well- developed legal and regulatory framework governing disclosure of company secrets. Company directors are directly responsible for the implementation of the company’s disclosure regime on a daily basis. The author then explains that Australian directors who fail to comply with the existing JORC Code concerning disclosure and the listing rules are in breach of the common law and statutory duties which they owe to the company, in particular- “the duty under s180 of the Corporations Law to exercise their powers and discharge their duties with the requisite degree of care; and the duty under s181 to exercise powers and discharge duties in god faith in the best interests of the company and for a proper purpose.”8 Directors who do not exercise reasonable care to make sure that reporting to the ASX and other authorities is not misleading through omission or commission is likewise guilty of an offence under Part 9. 4 of the Corporations Law and may be subjected to legal liability under the law of negligence. Concerning prospectus disclosure and the liability regime, the prospectus must have all the information that the investors and their professional advisers need to make an informed appraisal of “the assets and liabilities, financial position and performance, profits and losses and prospects of the body that is to issue” the relevant securities.9 Comparatively, from an Asian angle, Solaiman (2005) likewise gives an in- depth analysis on the issue of director’s civil liabilities for defective disclosure in prospectuses in India, Bangladesh and Malaysia. According to the author, administrative enforcement refers to the enforcement of securities laws by the administrative or regulatory authorities. It is keys to regulatory success in the realm of securities and very important in Asian countries due to the absence of judicial enforcement. In 1999, Bangladesh adopted the Disclosure- Based Regulation (DBR), a regulatory regime for the developed securities markets to restore investor confidence after the unprecedented 1996 share scam. Malaysia, on its part, began moving towards the DBR in 1996 and finalized the shift in 2003 while India adopted their disclosure regime in 1992. In Bangladesh, the disclosure requirements in prospectuses are regulated by two laws- the company law and the securities law- and governed by two authorities- Registrar of Joint Stock Companies (RJSC) and Securities and Exchange Commission (SEC). The major liabilities for the violations of disclosures in prospectuses are spelt in the Companies Act of 1994. However, the SEC cannot place any civil suit under the Companies Act while the RJSC does not seem inclined to.10 Bangladesh is thus in dire need of a single and independent body to deal effectively with director’s civil liabilities for defective disclosure in prospectuses unlike India or Malaysia in comparison. The Clarifying Memo on the Powers and Responsibilities of Members of the Board of Directors of Saudi Commercial Banks documented by the Saudi Arabia Monetary Agency (2009) is a very important governmental document that is worth studying to fill in the gaps that authors have left in understanding Saudi law as concerns director’s civil liabilities in very important corporation- the banking industry. Banks are very crucial as they control the finances of a nation thus is necessary to be aware of how banks are run with regards to civil liabilities. The SAMA document first begins by analyzing Saudi Company Law. In the Company Law (Royal Decree No. M/6 of 1385) the provisions dealing with directors are found in Articles 66 to 82. These provisions mainly focus on the administration of joint stock companies. In Article 66, for instance, it provides that joint stock companies are to be administered by a Board of Directors whose members are to be appointed and/ or terminated by the ordinary general assembly.11 Shoult (2006) provides a further scholarly analysis on the topic. In Article 68, the directors requirements are outlined whereby all directors are to have a minimum of 200 company shares and these shares are to be deposited during the first 30 days of appointment. It is these shares that are used to secure a director's liability. The law provides for a period fixed for admissibility of law suits and these shares remain non-transferable until the end of that period whereby law suits against directors can then be decided if there is any responsibility as pertaining to errors resulting in damages to shareholders.12 Shoult also illuminates on how directors are kept accountable through rigorous financial reporting. All companies in Saudi Arabia are obligated to file with the Ministry of Commerce and Industry (MOCI). The MOCI requires that every single limited liability and publicly-held company has to file copies of the board of directors' report together with the audited financial statements at least six months after the company’s financial year ends. These reports are then analyzed and if any negligence or acts of bad faith are discovered, the directors are held directly liable for financial misconduct and can either be sued or filed. This is all in line with the principle of “proper performance” with regard to directors.13 The Memo by the Saudi Arabia Monetary Agency (2009) further outlines director accountability in Saudi Arabia. It spells out a related law in Article 69 of Saudi’s Company Law Royal Decree No. M/6 of 1385) which holds that a member of the Board of Directors cannot have any interest (whether directly or indirectly) in the contracts or operations of the company unless they have the express permission of the ordinary general assembly which is to be renewed each year or unless the operations in question are concluded through public tender in which the Board member submits the lowest bid. A Board member is obligated to inform the Board of any personal interest he/ she may have in the contracts and operations concluded for the company's account. Directors are also not allowed to take part in the vote on the resolution passed in such a matter. In addition, the board’s chairman has to report to the ordinary general assembly about the operations and contracts in which any director has a personal interest and this is to be accompanied by a special report from the auditor.14 Despite giving these regulations, though, the article does not spell out the penalties that directors incur for such civil liabilities. The SAMA Memo (2009) also points to Article 70 of the Company Law (Royal Decree No. M/6 of 1385) which forbids directors from taking part in any operation which is in conflict or competition with the company without the permission of the ordinary general assembly. In Article 71, joint stock companies are forbidden from granting cash loans to directors. Article 72 of this Company law obligates directors to maintain the secrecy of company operations thereby preventing directors from revealing to any other shareholders or parties any secret information they may be in possession of. Article 73 puts restrictions on the Board's powers by preventing them from extending loans for more than three years, selling or mortgaging the companies' properties/ businesses and exempting the company’s debtors from their obligations. In this Company Law, however, the process of instituting penalties for civil liabilities as well as legal proceedings against directors for errors resulting in damage to shareholders is broken down in Articles 77 and 78 clearly.15 This is the section of most importance in the entire Company Law. More specifically, though, lawyer Al Ibrahim (2006) provides greater practical insight into director civil liability particularly with regards to liability claims. The lawyer explains that individual and group shareholders have a right to raise a claim against a member of the board of directors of a joint stock company as long as they have notified the company in advance. Thereafter, shareholders are free to file for a liability claim without any fear as they are backed by the law. Moreover, Al Ibrahim expounds that there are three claims that can be filed against a director in case of wrong doing or negligence- company claims; claims by shareholders; and claims by a third party. Company claims are necessary as concerns the civil liability for financial crisis of company while claims by individuals and third parties are necessary in compensating for the damage caused to people not directly a part of the company.16 The rest of the article then groups to outline in detail how exactly the three groups can successfully sue for claims against an unscrupulous member of the board of directors. El Mallakh’s 1982 work mainly spells out Saudi Arabia’s Banking Control Law and how they relate to director civil liabilities. There have been several amendments to the law as can been found in SAMA’S Clarifying Memo (2009). The author focuses on Article 9 of the Banking Control Law which forbids banks from granting unsecured advances to members of their Board of Directors or their auditor. This shows that directors are not allowed to access unsecured advances and are thus liable if found doing so. In addition, Article 12 of the said law forbids directors from holding directorships in more than one bank and also that no one can be elected as a director of any bank if they had previously held a similar position in a bank that wound up without the approval of SAMA. Directors found in violation of these civil liabilities can be suspended or even expelled. El Sheikh (2003) in his study explains further director civil liabilities with regards to the Articles of Association of Saudi banks.17 The complete Articles of Association is contained in the SAMA Clarifying Memo (2009). One article specifies that the duties and responsibilities that are entrusted to the Managing Director are to be subject to another provision which gives the Board of Directors full powers in managing and supervising the banking company's affairs. This essentially means that the Board sets the limits within which directors of banks can exercise their powers and carry out their functions especially with regards to the areas of investments and advances. This shows that, in Saudi Arabia, directors cannot escape their personal responsibility if they are found guilty of mismanaging the banks affairs. The same rules apply in respect to foreign banks in Saudi Arabia whereby the Technical Management Agreement provides that the Managing Director must conduct the bank’s business and in general manage the bank according to the decisions, policies and regulations of the Board. In other words, he/ she only have a limited and controlled amount of powers as the Board may periodically deem fit.18 The Technical Management Agreement has, as provided for in the Articles of Association, been entered into by the Banking Company with the foreign bank concerned entrusting it with the technical management of the Bank for a specified period, the term "Technical Management" having been defined in the Agreement to mean the nomination of the Managing Director, the provision of necessary staff and techniques of banking business, the general guidance of the bank’s activities and the training of the Saudi staff. These Agreements are renewable for such further periods and on such terms and conditions as may be mutually approved by both parties.19 Directors who go against these articles are guilty of committing a civil offence and are thus legally considered liable. The guilty parties can thus be penalized through the enforcement of fines or the imposition of suspensions or even expulsions in extreme mismanagement cases. Finally, the World Bank Group (2009) rounds up this literature review by giving tabulation on how investors are protected in Saudi Arabia by analyzing how the director liability index is calculated in the Kingdom. It states that a director can only be held liable for damage caused to a company by a buyer- seller transaction if he/ she were negligent; if he/ she influenced the approval; if the transaction was prejudicial to minority shareholders or was oppressive/ unfair. In addition, the World Bank adds that a shareholder can only hold the Board of Directors liable if they acted in bad faith or fraudulently.20 This World Bank Liability Index thus sheds more light on how exactly directors in Saudi Arabia can be held liable for wrong doings in the present day. In summary, all the above scholars have all succeeded in shedding light on, not only the law as pertaining to director civil liabilities in Saudi Arabia, but also as concerns the rest of the Arab world. They have given a historical background as to the development of various civil codes in the Middle East as well as analyzing specific laws that touch on Saudi director civil liabilities. However, it is not a comprehensive overview of the topic since it has failed to show whether there have been any successful suits filed against errant directors thus the remainder of this topic shall attempt to determine whether the existing legislature has succeeded in being a sufficient deterrent in Saudi Arabia. REFERENCES Abdel-Fattah El-Ashker, Ahmed. 1987. The Islamic business enterprise. Bristol: Taylor and Francis Publishers. Al Ibrahim, Tariq. 2006. Claims of Liability in Joint Stock Companies. The Law Magazine. Anderson, JND. 1959. Islamic Law in the Modern Law. London: Stevens & Sons. Brown, Nathan J. 1997. The rule of law in the Arab world. Cambridge: Cambridge University Press. Coulson, Noel James. A history of Islamic law. 1964. Edinburgh: Edinburgh University Press. David, René and Tunc, André. 1983. International Encyclopaedia of Comparative Law. International Association of Legal Science. The Hague: Martinus Nijhoff Publishers El Mallakh, Ragaei. 1982. Saudi Arabia, rush to development. London: Taylor and Francis. El Sheikh, Fath El Rahman Abadalla. 2003. The Legal Regime of Foreign Private Investment in Sudan and Saudi Arabia. New York: Cambridge University Press: Phillips, R. 2000. The Liability of Directors and Competent Persons. Sydney: The Codes Forum. Saudi Arabia Monetary Agency. 2009. Clarifying Memo on Powers and Responsibilities Of Members of the Board of Directors of Saudi Commercial Banks Contents. Accessed on the 17th of May, 2009 from http://www.sama.gov.sa/sites/SAMAEN/RulesRegulation/BankingSystem/Pages/BankingSystemFD09.aspx Shoult, Anthony. 2006. Doing Business with Saudi Arabia. London: GMB Publishing Limited. Solaiman, S. M. 2005. Investor Protection through Administrative Enforcement of Disclosure Requirements in Prospectuses: Bangladeshi Laws Compared with their Equivalents in India and Malaysia. Journal of Financial Crime, Vol. 12 no. 4. The World Bank Group. 2009. Protecting Investors in Saudi Arabia. Accessed on the 16th Of May, 2009 from http://www.doingbusiness.org/ExploreTopics/ProtectingInvestors/Details.aspx?economyid=163#InvestorProtectionNotes Tyan, Nady and Alem, Mohamed Y. 2001. Business laws of the Middle East. The Hague: BRILL Publishers. Read More