Responsibility of Directors in the Administration of a Panamanian Company

By: Mariano Oteiza Diaz

The Board of Directors of a Panamanian corporation, in accordance with Article 51 of the General Law of Corporations of Panama (Law 32 of 1927, hereinafter “the Law”), may exercise all the powers of the company, except those that the Law, the Articles of Incorporation or the Bylaws confer or reserve to the shareholders. Therefore, it is the responsibility of the Board of Directors to administer and direct the business of the company in a general manner and its powers or faculties, among others, include the following:

• Declare the company’s dividends;
• Authorize the issuance and repurchase of shares;
• Adopt and amend the Bylaws;
• Borrow and issue debt instruments;
• Appoint and remove the dignitaries of the society;
• Approve all types of agreements and contracts;
• Approve the sale and liens on the company’s assets;
• Delegate your authority and issue powers.

Due to the broad administrative power and faculties that directors generally possess, under Panamanian law it is understood that the relationship between them (the directors) with the shareholders and the company is that which characterizes the relationship between an Agent and a Principal. The directors of a company are considered to have been given a “mandate” to manage the company’s business and, therefore, they are responsible for executing their mandate under the standards of duty of care held by Agents and may be personally liable for negligence in the exercise of said duty and mandate.

Article 444 of the Commercial Code of Panama establishes that directors will not incur personal liability for the obligations of the company, but will be personally or jointly liable, as the case may be, to the company and to third parties in the following events:

1. False capitalization, that is, of the effectiveness of payments that appear to have been made by shareholders;
2. Due to lack of funds for the payment of dividends declared by the Board of Directors;
3. For the good management of the company’s accounting;
4. In general, of the execution or poor performance of his mandate;
5. For the commission of acts that go against what is established in the Social Pact, resolutions adopted by the shareholders, the bylaws of the company or the laws in general.

However, the same Article adds that those directors who have protested against the majority’s decision in a timely manner or who have not attended with justified cause will be exempt from liability. Liability may only be demanded by virtue of an agreement of the general shareholders’ meeting.

In addition to the provisions of the Commercial Code, Article 64 of the Law additionally enumerates certain acts or events in which the directors who have given their consent and who thereby affect the capital stock of the company may be jointly or severally liable to the creditors of the company for the resulting damages. Such acts are the following: (i) if any dividend or distribution of assets is declared or paid which reduces the value of the company’s assets to less than the amount of its liabilities, including the capital stock; (ii) if the amount of the capital stock is reduced; (iii) if any false statement or report is made in any material respect.

As a final recommendation to our article, every director in exercise of his functions must know and analyze in great detail and prior to his appointment as such, what are his functions, powers, obligations and responsibilities in the administration of the company, since these may vary from company to company based on the provisions of its Social Pact, statutes or resolutions of the Shareholders’ Meeting.

For assistance regarding Panamanian companies, contact us at igranet@stagingcd.com .