Duties in the Articles

Moreover, as already mentioned article 142 states that directors are responsible for any regulations that are prescribed in the articles of association.

“The directors and the managing director of a company are responsible either individually or jointly, as the case may be, vis-a-vis the company and third parties in respect of any infringement of legal regulations or the provisions stipulated in the articles of association or the minutes of general meetings.⁵⁵¹”

551 Iranian Company Law 1968. Article 142. (Tehran: Didavar Book Publisher).

This deference of duties and regulations to the articles results in each company having its own unique set of duties in place as opposed to the jurisdiction having a universal set of duties. This is a considerable weakness to the law as it results in directors around the country being bound by varying levels of liability. Where a director might have liability for a decision in one company they might not in another. This variation in liability leads to many issues for shareholders and directors. Universal levels of liability are needed for companies having protection from directors and for judges to make consistent decisions.

3.5.3 Duties of Loyalty

The fiduciary duties are not adequately comprehensive in Iran and many key aspects to fiduciary duties are not included. Whilst there is a duty to act within powers it is not specific enough as it states that the scope of the power must be defined in the articles. By adding the dimension that the onus is on shareholders to specify the scope of the director’s power will result in many cases of nothing being specified. The alternative would have been to specify in the law what the scope of the power would be.

Articles 129 to 133 relate to conflicts of interest however they are too specific on the scope of the duty. Instead of having a ‘duty to avoid conflicts of interest’ the duty is made up of descriptions of scenarios in which director would be liable. For instance in article 29 directors cannot,

“Without the permission of the board of directors, be a party whether directly or indirectly, to a transaction consummated with or on account of the company, or share in the said transaction. Even if allowed, the

board of directors shall be bound to inform the inspector(s) immediately of the transactions allowed by them and, simultaneously, submit a report to the next ordinary general meeting. A board member or managing director who has an interest in such transactions, shall not be allowed to vote at meeting of the board of directors and general meetings when such transactions are put to motion.”

Equally article 130 refers to article 129 clarifying that,

“If, as result of such transactions, losses are inflicted on the company, then the board of directors and the managing director or the director or directors having an interest who sanctioned such transactions shall be jointly responsible to indemnify the company.”

Article 131 also refers to article 129 stating,

“If transactions are performed in the absence of approval of the board of directors and the ordinary general meeting does not confirm such transactions, then they will be rescindable. The company shall be entitled to apply to the court and obtain responsibilities of the interested director or directors or managing director vis-a-vis the company remain intact.”

Moreover, article 132 considers a different scenario of liability where,

“The managing director and the directors-with the exception of legal entities-will not

be allowed to obtain any loan credit facilities from the company; the company will not be allowed to guarantee or assume the obligation of payment of their debts.”

A different scenario of liability is considered in article 133 where,

“The directors and the managing director shall not be allowed to conclude transactions identical to the transactions of the company which are considered to compete with the company. If any director, acting in contradiction of the purport of this article, inflicts a loss to the company by his violation, he shall be held responsible to indemnify the company's losses. The losses mentioned in this article purport actual losses incurred or reductions in profit.”

There is a lack of broadness to these articles and many conflicts of interest do not fall within these parameters. For instance, there is no provision to prevent third parties from influencing the decision making of the director. In a country where both family companies and public companies make up such a high proportion of the company stock, there is a need for a law that makes directors liable for allowing their decision making to be influenced at the detriment of the company.

3.5.4 Duty of Care

Whilst article 141 refers to a particular liability for negligence it is far too specific to be an all-encompassing duty of care. Without the law, directors are free to cause considerable damage to a company without any risk of liability. For the shareholders this is a serious concern as their interests are constantly exposed without any protection and at present they

can only rely on trust or surveillance to protect their interest. Any shareholder who is aware of the danger would be prudent to include the duty in the articles of association however certainly there are many who do not do this.

3.5.5 Good Faith

Good faith exists only in Islamic law in Iran, as there is not any statutory law on the subject. Both Ghaedeye Ehsan and Al’Amalo bel Niat are broad versions of good faith law and they are not designed for company law applications, they are rather general laws that are applied to company law cases. Furthermore, the rules are rarely used in cases of breaches of duties (from articles). Directors need a level of protection against unjust cases of negligence being brought against them and at present this law is not comprehensive enough to be able to protect directors. Should the duty of care come into force, then a provision of good faith would be necessary alongside it.

3.5.6 Enforcement

A legislation update to enforcement was put forward in 2011. It contained a suggested reform of articles 276 and 277 to allow for the derivative action to be brought by any of the minority shareholders against the directors regardless of their portion of share capital. Furthermore the shareholders would be exempt from paying the fee for bringing the action.

The proposal was rejected. The fact that this proposed update was submitted demonstrates that there is some acceptance of flaws in the enforcement of breaches of duties in Iran.

Apart from bringing actions against directors, there is a common practice of resolving issues internally in companies. Directors who have

damaged companies might be well connected either as a family member or a politically connected individual. Punishments may take the form of fining a director or suspending them without pay. When a director does not have connections the typical solution is to dismiss them which is a considered the most useful tool for dealing with improper actions from directors. Needless to say dismissing a director does not compensate a company for damage incurred as a result of the director’s actions.

3.6 CONCLUSION

This chapter has investigated company law and in particular directors’

duties in Iran. The formation of companies in Iran is not that dissimilar to other jurisdictions. The private joint stock company and the public joint stock company are the two most common company vehicles.

The majority of Iranian law can be traced back to civil law for since its foundations the Iranian legal system has borrowed many sections that are now key points of legislation. This civil code has been placed within a rigid Shia Islamic framework, which demands adherence. The Islamic law is derived principally from religious scriptures, or secondary texts that refer to the scriptures.

Legislative reform of company law has been limited in Iran and there is clear preference from the Islamic Consultative Assembly to prevent updates coming through the system. Since 1932 directors’ duties have not been updated despite a later update to the company law in 1968.

There is considerably more guidance on directors’ appointments, share structures and the details regarding the formation of a company as

opposed to on duties. Article 142 dictates that directors’ duties will be contained in companies’ articles of association.

There are several articles that refer to duties of loyalty within Iranian Company Law, however they fail to broadly cover the main properties needed in such duties. Whilst article 118 states that directors should act within their powers, it defers responsibility for setting out the scope of their powers to the articles. Specific conflicts of interest are mentioned in article 129 to 133 however there is no ‘duty to avoid conflicts of interest’ that would be broad enough to cover all examples of conflicts.

Equally the closest Iranian law comes to applying a duty of care is in articles 141 and 114 where there are provisions against negligent directors.

These two articles do not set out any duty of care, skill and diligence’ that directors can follow, but they do state that companies can bring actions against negligent directors.

The articles that exist can be classed as wholly inadequate in their provision of allocating liability to directors for damaging companies.

Additionally, there is no form of protection in statutory law for directors in instances of actions brought against directors who have acted in good faith.

The Islamic law that does provide for good faith is too broad and the principles that are applied to company law are too general in nature to the extent that they are also applied to many other fields of law.

The articles of association, as mentioned, are where shareholders are able to specify a comprehensive series of duties. In theory this is satisfactory as long as all shareholders provide adequate duties through the assistance of a qualified legal practitioner. In reality though, many shareholders do not

seek legal advice when drawing up the articles of association and even those that do seek advice cannot be secure in the knowledge that their provision of duties will be adequate to cover all eventualities. Depending so heavily on companies developing their own articles of association is an unsatisfactory practice as it results in an inconsistent level of liability across the jurisdiction for directors.

The enforcement of directors’ duties is also lacking in that article 276 and 277 limit directors who are minority shareholders with less than a 20 per cent stake in a company from bringing an action. Furthermore, the costs of bringing an action must be borne by the shareholder.