Managing director liability - risks in the GmbH

Liability risks of the GmbH managing director

Managing directors in a GmbH or members of the board of directors of a stock corporation have special liability risks. Anyone who violates their duties as a managing director or member of the board of directors is liable for damages. Breaches of duty and possibilities for damages are increasingly coming to the fore for my clients. D&O insurance, with which a GmbH wants to protect itself against damage and the management against its own liability, is booming. Insolvency administrators and successors in management, in particular, are increasingly examining potential breaches of duty in order to assert claims for damages against former managers.

As a specialist lawyer for commercial and corporate law and specialist lawyer for International Business Law I advise companies, CEOs and managers on the following issues:

• When is the managing director of a GmbH personally liable?
• When is the managing director personally liable to third parties?
• What are the liability risks if the company goes bankrupt?
• Is the managing director liable for old debts of the GmbH?
• When do claims against the managing director become statute-barred?
• What should be considered when asserting claims?
• What is compliance?
• What does the limited liability of the shareholder mean?
• New Developments and Challenges in Managing Director Liability

director duties

A managing director must manage the company with commercial care. He must always act in the interests of the company and avert damage. The managing director may take business risks, but he must do so on the basis of reliable information and involve consultants. If a managing director violates his duties, he is liable to the GmbH for damages. A serious violation of the managing director's duties can also constitute a criminal breach of trust. 

When is the managing director of a GmbH personally liable?

The law provides for the personal liability of the managing director and the board of directors for the GmbH in § 43 Para. 1 and 2 GmbHG and for the stock corporation in § 93 AktG. Incidentally, this does not apply to the shareholders. Shareholders are only rarely personally liable under very narrow conditions. Only the company's assets should be available to third parties.

The personal Liability of the GmbH managing director and the board of directors are closely related to their tasks and duties. Wherever a managing director or board member violates his or her duties, there is a risk of damage for society – and corresponding liability risks for the CEO. Section 43 (1) and (2) GmbHG regulates liability relatively clearly as follows: The managing directors must apply the care of a prudent businessman in the affairs of the company. If they breach their obligations, they are jointly liable to the company for the damage caused. Violations of the duty of care can extend to all areas of a GmbH.

Conduct in breach of duty occurs, for example, in the following situations:

• Prohibited payments to shareholders, for example from the assets required to maintain the share capital
• Non-payment of social security contributions
• Statute of limitations on claims of the GmbH
• Violations of the law in connection with the bankruptcy proceedings
• Criminal offenses such as fraud, breach of trust, forgery of documents or tax crimes
• Black coffers, bribery or accepting advantages in business dealings
• Violations of other legal obligations such as bookkeeping, environmental regulations
• Lending from the assets of the company in breach of duty.

However, something different applies to risky business decisions. A CEO is allowed to do risky business. Risks are part of business life. So if a contract turns out to be a loss in retrospect, an investment does not bring the expected return or a company purchase does not generate a profit, the CEO is not liable. He is entitled to entrepreneurial discretion, also known as the “business judgment rule”. In such cases, the CEO only has to fear a claim for damages from the company if he has not obtained and considered all available information. If he lacks his own expertise, for example in legal issues, he must seek expert advice.

In all of these cases, the managing director of the GmbH is liable internally to the GmbH. The GmbHG therefore only provides for liability towards the company. Third parties, such as shareholders or contractual partners of the company, cannot hold the managing director liable under Section 43 (1) and (2) GmbHG. Incidentally, these liability principles also apply to the liability of the CEO of a GmbH & Co. KG. The prerequisite is that the GmbH has the task of being the general partner of the GmbH & Co. KG.

When is the managing director liable to third parties?

Even if Section 43 (1) and (2) GmbHG does not allow third parties to make use of the management, third parties are not without protection. However, the requirements for the so-called external liability of the managing directors of a GmbH are significantly narrower. This is because the third party's contractual and business partner is the company, but not the managing director. This even applies if the managing director is also a shareholder or even the sole shareholder. The law stipulates that contractual and business partners must adhere to the GmbH.

However, there are exceptions here too, in which the managing director is directly liable to outsiders:

• The managing director cheats, for example if he deceives about solvency when concluding the contract
• The manager promises to personally stand up for the company and the claim
• The shareholder managing director mixes his private assets with the assets of the company
• The managing director violates his obligations in the event of the GmbH insolvency

What are the liability risks in the event of insolvency?

In the event of insolvency, particular dangers lurk for the managing director. Every managing director is obliged to file for insolvency when insolvency occurs.

Insolvency occurs when a company is ready for insolvency. A company is insolvent if it is unable to pay or if it is over-indebted. Insolvency means that a company cannot pay more than 10% of its debts due within the next three weeks. Over-indebtedness occurs when the liabilities exceed the company's assets and there is no positive going concern forecast. In the event of insolvency or overindebtedness, the managing director must file for insolvency and initiate insolvency proceedings, even if the shareholders do not want it. If he doesn't do that, he's liable to prosecution.

In the event of a company crisis, every CEO must therefore always check, through appropriate monitoring, with the support of the company's tax advisor or lawyer, whether insolvency in particular has occurred or whether there is a case of imminent insolvency. However, a manager often thinks that there is only a liquidity crisis that will end with future payments. This is fatal because it means that the actual occurrence of insolvency in particular is overlooked. There is then a case of delayed insolvency.

Delaying insolvency has serious consequences for the liability of the managing director:

• He misses the time to file for bankruptcy and commits a criminal offence. This does not simply fall under the table. Because at some point you will have to file for bankruptcy. When an insolvency application is filed, the public prosecutor's office is automatically involved, which checks whether the 3-week period for the insolvency application has been observed.
• The managing director is liable for all payments that he or another managing director make to third parties without being recognized after the onset of insolvency. In practice, the insolvency administrator establishes when insolvency has occurred – often much earlier than on the day the insolvency application was filed. The managing director is personally liable for all payments from the time of the actual insolvency, even if he was not aware of it. In such cases, the managing director can only justify the fact that the payments served to continue the company.
• If, after the onset of insolvency, the managing director still places orders with third parties or concludes purchase contracts with them for the company, these companies can no longer enforce their respective claims for payment. The company is already insolvent. If payments are nevertheless made, the insolvency administrator will reverse them by contesting the insolvency. The managing director is then personally liable to the contractual partners with his private assets for damages.

An exception to the obligation to file for insolvency and criminal liability exists for the year 2020, more precisely for the period from January 1 to September 30, 2020, in which the obligation to file for insolvency was suspended due to the Corona crisis. This is the case if the company was not insolvent on December 31, 2019 and the insolvency is due to the Corona crisis. There was no obligation to file for insolvency and therefore no criminal liability. In these cases, however, every CEO was still obliged to inform his business partners about payment difficulties or insolvency. If he has not done so, he is liable to prosecution for fraud and is liable for damages.

Is the managing director liable for old debts of the GmbH?

Whether a new managing director is liable for old debts of a GmbH is a question that is often asked. A claim for damages only exists if the managing director breaches his own duty of care. However, if he was not yet the managing director when the debts arose, he cannot have breached his duty of care. In principle, therefore, there is no subsequent liability of a GmbH managing director.

However, there is an exception if an old breach of duty continues and the new managing director is obliged to take necessary countermeasures. This applies in particular to tax debts or the payment of social security contributions. These must always be removed. A new manager should therefore always first "look in the books" to see if there are any legacy issues. He then has to correct them immediately.

When do claims against the managing director become statute-barred?

Section 43 (4) GmbHG answers the question of how long a former GmbH managing director is liable or when the limitation period for the liability of a GmbH managing director begins. According to this, a claim for damages lapses after five years from the date of the breach of duty, but regardless of the knowledge of the shareholders or the insolvency administrator.

However, if there is also a criminal offense, such as fraud due to deception about insolvency, there is also tortious liability. Here, the limitation period ends within three years from the end of the year in which the beneficiary, the GmbH or the insolvency administrator, became aware. It is therefore possible that liability under Section 43 (1) and (2) GmbHG has already expired, but not liability in tort, because the shareholders, the insolvency administrator or the new GmbH managing director were not aware of the breach of duty.

As your lawyer, I therefore always check whether tortious liability is also an option. According to current case law, a serious breach of duty with a significant outflow of assets can always also be seen as breach of trust and thus a criminal offense in which tortious liability applies.

What should be considered when asserting claims?

The following aspects are important when asserting a claim for damages against a GmbH managing director:

• Provisions in the managing director employment contract on the statute of limitations and liability must always be checked, in particular limitations of liability for intent and gross negligence.
• If there is D&O insurance, this should also be activated. The Federal Court of Justice recently ruled that claims for delaying insolvency are also covered by D&O insurance.
• An exemption from liability for the managing director can also be considered, for example if discharge has been granted. In these cases, I always check how far the relief went.
• A lawsuit against a GmbH managing director always requires a resolution of the shareholders' meeting.

Incidentally, the division of responsibility between the managing directors does not protect against liability. All members of management must monitor each other. As a managing director, you cannot excuse yourself by saying that another managing director was responsible. In management, you always have to be informed about what is happening in the company and intervene if necessary. The only exception is for very large companies.

compliance

The issue of “compliance” is closely linked to liability risks. “Compliance” means all measures with which damage by or to society is to be prevented. Every managing director therefore has the duty of care to take organizational measures to ensure that no violations of the law are committed. These include in particular the 4-eyes principle, employee training and the top-to-bottom principle.

The limited liability of the shareholder

In contrast to the management, the shareholder only has limited liability. When a GmbH is founded, the amount of the liability of the shareholder is determined by his “capital contribution”, i.e. his arithmetical participation in the share capital. This capital of the respective shareholder, also known as the capital contribution, is entered in the commercial register. The entry in the commercial register recognizes the GmbH as having legal capacity. A GmbH can therefore only be held liable to the extent that its share capital is available. The shareholder is no longer liable with his private assets.

But the shareholder also has individual obligations, in the event of breach of which he can be liable to the company with his private assets. For example, if the GmbH loses its management, the shareholder must file for insolvency and initiate insolvency proceedings in the event of insolvency or overindebtedness. In addition, the so-called penetration liability applies, for example, to the mixing of private and GmbH assets, undercapitalization, unlawful payments and other breaches of duty.

It is advisable for entrepreneurs to contact a lawyer before founding and entering the company in the commercial register in order to know the liability regulations, risks and obligations. As a specialist lawyer for corporate law, I would be happy to advise you on this and on all liability issues of your company.