The position of managing director within a company is highly respected and is sought after by many employees. Ultimately, you can then run the company as you see fit. But in addition to freedom of choice and his rights, the managing director also has special duties to fulfill. Every GmbH managing director should know exactly his duties and the limits of his freedom of decision in order to be able to exclude personal liability. My expertise as a specialist lawyer for commercial and Corporate Law Munich as well as a specialist lawyer for international business law and my experiences in advising companies and GmbH managing directors in connection with managing director duties are explained below.
The regulations of GmbH law
Every managing director must conduct the company's business with the care of a prudent businessman. This means that every managing director must comply with the law. This applies even if he actually wants to act for the good of society. Therefore, paying a bribe to secure an order for the GmbH is a breach of duty. Paying bribes is a criminal offense for which the director will be held personally accountable and punished. In addition, the GmbH is liable for the criminal conduct of the GmbH managing director; this is also stipulated in the law. Crimes such as bribery, breach of trust or withholding social security contributions can never be justified. This also applies if the shareholders give the managing director instructions. The managing director must follow legitimate instructions, otherwise he will be violating his duties. However, he is not allowed to follow instructions that violate the law.
In individual cases, it may be difficult for the shareholder manager and the third-party manager to assess whether a decision, measure or instruction constitutes a breach of duty and triggers the GmbH manager's personal liability. In order to avoid tortious liability or even criminally relevant behavior, it is dutiful and justified to seek legal advice from a lawyer.
As a lawyer and specialist in commercial and corporate law, I am initially interested in the specific behavior, the respective decision or measure in which there is legal uncertainty. My next task is to examine the partnership agreement and the object of the company to see whether the decision or measure is covered by this. It also plays an important role whether the focus of the entrepreneurial activity has shifted to other business areas. This happens very often in practice.
Further liability issues also arise from other provisions of the GmbH Act (GmbHG). In particular, the shareholder-managing director may not “reach into the cash register” through hidden profit distributions. This also applies to one-person GmbHs, although the question of liability usually only arises at the insolvency stage.
The managing director’s duties in detail
At this point I would like to explain to you which managing director duties apply within a company, among other things.
Entrepreneurial decisions
Every shareholder manager or external manager is entitled to make business decisions. In this respect, he has a broad entrepreneurial discretion like any prudent businessman, but this depends on the circumstances of the respective company. What is permitted in one GmbH may be prohibited in another. The managing director must be prepared for this when fulfilling his most important tasks. This is the so-called business judgment rule, which also protects the GmbH managing director. The managing director does not have to compensate for any damage that the GmbH suffers as a result of a decision that subsequently turns out to be disadvantageous if he acted within the scope of his discretion. The regulations of the GmbH Act do not protect the company from all economic damages, but only from those that are based on a breach of duty of care. Whether the GmbH management is therefore subject to liability always depends on the individual case.
Compliance with the regulations regarding representation
When he is appointed, the GmbH managing director should find out how the representation of the company is regulated in the partnership agreement. Individual power of representation or general representation together with another managing director or an authorized representative is common. The partnership agreement often also stipulates how the shareholders' meeting may regulate representation after the GmbH has been founded.
In this context, limited liability company transactions requiring approval must also be taken into account. The partnership agreement or a resolution of the shareholders' meeting often stipulate that certain management measures may only be taken with the consent of the GmbH shareholders. Every external managing director and partner managing director should inform themselves about this when placing their order.
Supervision of other managing directors
Every managing director is obliged to supervise the other members of the management team and the senior employees. This also applies to the new managing director and to the shareholder-managing director. In practice, this can lead to difficult interpersonal situations, especially if the company is in crisis or a mistake has been made in representation. In principle, this monitoring obligation also exists if the partnership agreement, the management's rules of procedure or a decision by the shareholders' meeting provide for the distribution of departments. The departmental responsibilities in day-to-day business are then clearly distributed. The other GmbH managing directors must keep themselves informed about the other departments and intervene if necessary, for example if the company's economic situation requires it. The distribution of departments is not a license for them other managing director.
Obligation to provide information and provide information
The managing director must immediately provide each shareholder with appropriate information about the company's affairs and allow access to the accounting and other documents. This right and thus also the task of management cannot be waived in the partnership agreement. However, the shareholder's request for information must not run counter to the interests of the company or otherwise be contrary to good faith. In particular, if there are indications that the shareholder is using the information to compete with the company, each of the individual managing directors is obliged to initially refuse to provide information or access. Rather, the appointed managing director has to call the shareholders' meeting, which usually has to decide on the refusal of information with a simple majority.
The respective managing director is in a tricky situation. Refusal to comply with a legitimate request for information constitutes a reason for the immediate termination of the managing director's employment and his dismissal. He may then also be liable for damages. On the other hand, he may not comply with an unauthorized request for information.
Formal duties
The GmbH managing director must comply with all obligations under the GmbH law. For example, he may not distribute the assets required to maintain the share capital to the shareholders. The managing director must carry out all registrations in the commercial register. The management must immediately report changes to the object of the company, the number of shareholders, the conclusion of company contracts and a new business address to the commercial register. In addition, the managing director is obliged to submit documents to be disclosed to the electronic Federal Gazette.
Formal obligations also exist when founding a GmbH. Only a natural person can be a managing director. When appointed, every new managing director, including third-party managing directors, must, in accordance with the statutory provisions of the GmbHG, swear to the notary that his appointment does not conflict with any criminal convictions at home or abroad. If the managing director provides false information here, he is committing a criminal offense. This can also trigger full liability towards the company.
Tax managing director duties
Since the managing director is the legal representative of the company, he has to comply with all tax obligations of the GmbH. This includes tax payments, the payment of social security contributions, bookkeeping and the filing and correction of tax returns and other reports. He is also responsible for proper bookkeeping, which he may, however, delegate to qualified personnel. However, he must select and monitor these personnel carefully. Violating accounting obligations can also have criminal consequences. A special obligation is the payment of the employee's share of social security contributions. If the managing director does not fulfill this obligation, he is liable to prosecution. This also applies to the new managing director who is just joining the company. He cannot rely on the fact that one of the other managing directors did not pay employee shares due to his gross negligence.
Managing director duties in the event of insolvency
The GmbH managing director also has to check whether the company is or could be in a crisis. If more than half of the share capital has been used up, he must immediately inform the shareholders' meeting. If the GmbH becomes insolvent, the managing director must file for insolvency within three weeks. Otherwise he will be personally liable to prosecution. Even an instruction from the shareholders not to file for insolvency does not change this. Insolvency occurs when you are unable to pay or are over-indebted. If the managing director has signs of at least one of these situations, he must monitor on a daily basis whether insolvency has occurred or not.
Liability risks of the managing director
The numerous duties of managing directors are only partially clearly formulated in German law. It is the responsibility of every managing director to take note of the extensive catalog of duties, to ask questions if anything is unclear and to comply with every obligation outlined therein. This is the only way to avoid personal liability. However, it should not be understood that the managing director is always personally liable for a wrong decision or breach of duty and risks being removed. The mere fact that a business measure subsequently proves to be defective does not constitute an obligation to pay compensation. Personal liability only exists if the managing director acts in breach of his duty of care.
In addition to his appointment, each managing director usually also has a dependent employment relationship with the GmbH. The managing director's employment contract often also contains provisions on personal liability, dismissal for good cause, D&O insurance, non-competition clauses and/or post-contractual non-competition clauses. The managing director's contract can therefore also result in far-reaching obligations and further liability risks that supplement the obligations under the GmbH Act (GmbHG).
Managing Director Duties – Conclusion
From the moment of his appointment, the managing director is responsible for numerous rights and tasks, as well as special legal obligations towards the respective shareholder, the company and third parties. His liability arises from the regulations in the GmbHG, in the partnership agreement and his employment contract. The management is not personally liable for incorrect decisions and breaches of duty that subsequently prove to be contrary to duty. If the company manager has consciously committed a breach of duty from the start, he is personally liable. It is therefore advisable for every managing director to take a close look at the legal situation and to fulfill all managing director's duties. If you are interested in personal legal advice, I will be happy to assist you as a specialist lawyer for commercial and corporate law in Munich.
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