Managing directors of a company face a great deal of responsibility and many decisions. Managing a company brings not only many rights but also obligations.
These give rise to managing director liability, which poses a major legal risk for managing directors.
In principle, managing directors are obliged to conduct the company’s business properly and in accordance with applicable law. If mistakes are made, mere negligence is often enough to trigger managing director liability. In addition, under certain circumstances, managing directors may also be held personally liable .
In this article, we show you when exactly managing director liability applies and how you can protect yourself.
Do you need legal support or want to put your company on a legally sound footing? With years of experience, our law firm assists many clients in resolving liability issues and minimizing legal risks. Please feel free to contact us for a non-binding initial consultation.
What does managing director liability mean in a GmbH?
The GmbH is a legal form that is often chosen to avoid personal liability. However, managing directors of a GmbH should not rely on the limitation of liability when it really matters. With regard to liability in a GmbH, a distinction must always be made between:
- Internal liability: Liability of the managing director to the GmbH
- External liability: Liability of the managing director to third parties
- Liability of the shareholders, where applicable
While the managing director’s liability toward third parties in external relations is generally limited to the company’s assets (§ 13(2) GmbHG), in internal relations the managing director may well be held personally liable. A prerequisite for liability is, in particular, that managing directors act in breach of their duty of care or that their management duties are violated.
If the managing director breaches his duty of care and thereby causes damage to the GmbH, the GmbH can claim damages from him. Contrary to general expectation, the managing director must prove that he bears no fault and thus has the burden of proof of his innocence (so-called reversal of the burden of proof).
In addition, there is a growing tendency for the courts to allow, alongside managing director liability, claims against the managing directors and shareholders personally.
Managing director liability in insolvency proceedings
If a GmbH becomes insolvent, i.e., it is over-indebted or no longer able to pay its debts, the managing director must, without undue delay, but at the latest within 3 weeks after the grounds for insolvency have been established, file an insolvency petition with the competent authority. If he fails to meet this obligation or does so too late, he may commit the criminal offense of delayed filing for insolvency (§§ 17, 19 InsO).
Illiquidity exists when the company is no longer able to meet its payment obligations as they fall due. According to the Federal Court of Justice (BGH), this is always the case if less than 90% of the liabilities can be met within 3 weeks after the reference date. Over-indebtedness , on the other hand, means that the company’s assets no longer cover its liabilities at all.
It is irrelevantwhether the grounds for insolvency (illiquidity or over-indebtedness of the GmbH) were known to the managing director or not. It is one of his duties to be informed about such matters concerning the company. Criminal liability can therefore also arise if, due to ignorance , insolvency proceedings are opened too late or not at all.
If the opening of the insolvency proceedings is knowingly or unknowingly omitted or delayed, the managing director is liable for all resulting damage with his personal assets. Personal liability can also arise toward creditors or the GmbH, for example if contracts were concluded or payments ordered after the company became insolvent.
Managing director liability for taxes and social security contributions
Obligations to be met arise not only from contracts with suppliers and customers. Toward the state as well, in particular toward the tax authorities and social security agencies, managing directors have duties.
This includes, in particular, submitting the advance VAT and payroll tax returns on time, paying the social security contributions and ensuring that bookkeeping and accounting are carried out correctly, whether by themselves or by others. If these contributions and taxes are not reported and paid on time, there may be a breach of duty for which managing directors may also be held personally liable . This usually also applies if managing directors are not responsible for these tasks themselves but have delegated them to an employee.
Managing directors lead the company and are responsible for the lawful conduct of its employees. Only in exceptional cases can personal liability be excluded.
Darius Dubiel – insolvency advisor and business attorney for crisis management – helps companies in existential crises not only to survive but to become successful again.
When does managing director liability become time-barred?
Managing directors are liable throughout their entire term of office personally for breaches of duty and unlawful acts. This covers the entire period during which they serve as managing directors of the company.
However, managing directors can still be held liable even after leaving the GmbH. The limitation period for claims in this context is 5 years (§ 43(4) GmbHG).
Current developments in managing director liability
In recent years, several new laws have been added to the general rules on managing director liability that may expand liability risks and should therefore be given special consideration.
This includes, in particular, the Whistleblower Protection Act (HinSchG), which was introduced on the basis of the EU Whistleblower Directive and came into force on July 2, 2023. Among other things, this law protects employees, who uncover and report internal wrongdoing (so-called whistleblowers). In the future, companies must provide reporting systems to protect whistleblowers within their own ranks from reprisals or other disadvantages.
Companies with 250+ employees must implement the rules immediately upon the entry into force of the HinSchG. For companies with 50+ employees an extended implementation deadline of December 17, 2023 applies. Managing directors should start implementation as soon as possible so that a violation of the law and the associated revenue-related fines are avoided. It is also in the company’s interest to be alerted to internal wrongdoing before it develops into a public scandal.
What is also new is the Supply Chain Due Diligence Act (LkSG), which comes into force on January 1, 2024. Under this law, companies can be held liable for environmental damage and human rights violations that occur within their supply chain . This can have significant consequences for the managing director’s personal liability.
In addition, under the new Stabilization and Restructuring Act (StaRUG), companies have the option of drawing up and implementing a restructuring plan on their own responsibility. In the event of impending insolvency, managing directors can now choose whether to file an insolvency petition or first initiate restructuring proceedings or restructuring measures in order to prevent insolvency.
What should managing directors pay attention to?
To avoid personal liability, managing directors should always act dutifully and in compliance with the law. In addition, general practical guidance is provided below. However, it is in no way a substitute for individual advice from an experienced attorney.
- Always keep an eye on finances in order to avoid tax and financial offenses and to detect impending insolvency as early as possible
- Know existing risks in the company and minimize them as far as possible in order to reduce the risk of personal liability
- A legal form such as the GmbH can provide additional protection but cannot completely exclude managing director liability
- Obtain sufficient information, in particular assessments of liability risks, before making important decisions
- Check legal compliance and seek legal advice if necessary to be prepared for legal consequences
- Always secure risky decisions with shareholder approval
- Consider private D&O insurance protection
- Define areas of responsibility in the articles of association to allocate liability (Note: not all tasks can be delegated!)
- Agree on liability limits and maximum amounts in order to set a framework in the event of a claim
- Always document shareholders’ instructions in writing for evidentiary purposes
- Always observe the rules on signing authority
As an experienced law firm in the field of corporate law , we support you in implementing protective measures against managing director liability. To this end, we draw on all the regulations and rules that managing directors must comply with and, together with you, establish compliance management systems and early warning systems under § 101 StaRUG. We are also happy to advise you on your options during an ongoing crisis. Just get in touch with us.
Conclusion
- Managing directors are obliged to conduct the company’s business properly and in compliance with the law. If they breach their duties, they may, in case of doubt, also be personally liable for any resulting damage.
- In particular, during insolvency proceedings, it is necessary to check whether all regulations have been followed in order to avoid legal consequences and personal liability.
- New regulations such as the HinSchG and the LkSG tighten the liability of managing directors.
- Thoughtful compliance measures, insurance policies, the right legal form, and a legal review of the processes within the company can protect directors from liability. Our law firm is happy to assist you in this.
FAQ
Can you be held liable as a managing director?
Yes. Managing directors are obliged to conduct the company’s business properly and in compliance with the law. If they breach their duties, they may, in case of doubt, also be personally liable for any resulting damage.
What must managing directors consider if their company is facing illiquidity?
If their company is facing illiquidity, managing directors must act without delay. They should carefully monitor the financial situation, take restructuring measures and, if necessary, file for insolvency. Filing for insolvency late can lead to personal liability.
When is the managing director of a GmbH liable with his personal assets?
The managing director of a GmbH is liable with his personal assets if he breaches his duties through gross negligence or intent – for example, if he conceals illiquidity and knowingly or unknowingly fails to apply for, or delays, the opening of insolvency proceedings. Personal liability can also arise toward creditors or the GmbH, for example if contracts were concluded or payments ordered after the company became insolvent.
Do you need support in your company? Our experienced law firm provides comprehensive support with your questions and concerns. Thanks to our specialization in business law and insolvency advice, we have already helped countless companies with their challenges and found a way out of crisis together. Schedule a non-binding initial consultation on your case now.
Image credits: milanvirijevic | fizkes | canva.com
