The The liability of the managing director of a limited liability company (GmbH) or an entrepreneurial company (UG), to which the following applies equally, is an important and often complex part of corporate law. The GmbH legal form offers entrepreneurs in Germany the advantage of limited liability, i.e., in principle only the company’s assets are liable, not the private assets of the shareholders or of a managing director.
Nevertheless, the managing director of a GmbH in certain cases, for example if he fails to perform or neglects his duties, also be held personally liable. This personal liability can exist both toward the company itself and toward third parties. In some cases, the managing director may even commit a criminal offense.
In this article, we explain which duties a managing director has to fulfill, when he is liable for breaches of duty, what liability risks the insolvency of a GmbH entails and how a managing director can be held liable.
What are the most important duties of a managing director?
The GmbH is a corporation whose actions are determined by its corporate bodies. At a minimum, the acting bodies are the shareholders’ meeting and at least one managing director. While the GmbH’s decision-making takes place in the shareholders’ meeting, the managing director’s main task is to manage the business and to represent the GmbH vis-à-vis customers and suppliers.
In this context, upon his appointment the managing director assumes far-reaching duties, which can be divided into duties in external relations and duties in internal relations . The managing director is bound by the resolutions of the shareholders’ meeting.
Duties in external relations
In external relations, the managing director is responsible for performing legal transactions and representing the GmbH externally . He is authorized to represent the company in and out of court (§ 35(1) sentence 1 GmbHG). Externally, the managing director has power of representation that extends to all legal transactions and cannot be restricted (§ 37(2) GmbHG).
In internal relations, however, the power of representation can be restricted, for example, by the articles of association, resolutions of the shareholders’ meeting or individual instructions. However, such a restriction is ineffective vis-à-vis third parties (§ 37(2) sentence 1 GmbHG), so that the effects and obligations toward third parties can be valid even if the power of representation was exceeded in internal relations.
Duties in internal relations
In internal relations, the managing director of the GmbH has far-reaching and comprehensive management powers. His duties include pursuing the company’s purpose and objectives and acting as the acting body of the GmbH.
The managing director must exercise his management powers and perform his duties with the diligence of a prudent businessman at all times (§ 43(1) GmbHG). These duties of care as a corporate officer supplement the duties arising from the managing director’s statutory position and from his service contract.
The unwritten duties of a prudent businessman give rise to the following duties, among others, for the managing director of the GmbH under § 43(1) GmbHG:
Duty of proper management
A managing director has extensive authority to manage the GmbH. However, this does not mean that all actions and decisions are covered by framework conditions such as legal regulations, the GmbH’s articles of association, decisions of the shareholders’ meeting, or the employment contract. Therefore, permitted and prohibited actions must be distinguished from one another from a liability perspective.
However, this is sometimes difficult, above all because every business decision also involves an entrepreneurial risk , and such a risk can also have a negative impact on the company’s goals and finances. Yet even the managing director of a GmbH can make misjudgments despite exercising all the diligence of a prudent businessman.
In making business decisions, the managing director of a GmbH must therefore observe the principles of proper corporate management , which are to be understood as standards of conduct. Accordingly, decisions must be prepared in a manner appropriate to their significance and the circumstances, and the decision must be made on the basis of reliable knowledge and proven business experience. In addition, decisions must be appropriately monitored.
While this illustrated approach takes more of an economic perspective, there is also a corporate law perspective regarding the principles of good corporate governance. Here, the main focus is on the regulatory framework of the Corporate Governance, i.e., the principles of corporate governance, must be applied for good and responsible corporate management. Here, too, as with the business management approach of the principles of proper corporate management, the focus is on preparing business decisions.
All necessary and readily available information and sources of information must be used, analyzed and included in decision-making. This applies both to decisions to be made externally and to the company’s internal processes, procedures and business figures. After all, as a diligent businessman, a managing director must in any case keep an eye on whether action is needed, for example because grounds for insolvency are looming. Gathering information can also be understood internally, meaning that the managing director maintains or intensifies the necessary flow of communication within the company.
To ensure this, attention must be paid – depending on the size of the company – to an appropriate and suitable organizational and corporate structure . Only in this way can it be recognized, beyond decision-making, whether action is needed or whether there are potential risks within the company that must be addressed.
Alternative courses of action must also be identified and examined in order to be able to make an appropriate decision in accordance with the principles of proper corporate management. In addition to the company’s interests, other interests, e.g., those of the shareholders or employees, must also be taken into account and, if necessary, weighed against each other.
The duty of legality
The The duty of legality requires, as part of the duties of care under § 43(1) GmbHG, compliance with an external framework of action. This framework is defined by statutory provisions, the GmbH’s articles of association and the resolutions of the company’s bodies.
This involves not only ensuring compliance with these rules but also creating measures, processes and structures that enable and ensure compliance. Internal company rules, e.g., from works agreements, or ethical and moral principles also supplement the external framework of action.
To ensure compliance, to coordinate the measures, structures and processes introduced as part of proper corporate management, and to create internal regulatory frameworks, a compliance management system must serve as an external framework of action in implementing the principles of proper corporate management.
The obligation to establish a compliance management system (CMS) arises from the managing director’s duty of legality and is underscored by current case law . In its judgment of March 30, 2022 (Case No.: 12 U 1520/19), the Higher Regional Court (OLG) of Nuremberg discussed in detail the importance of a CMS and the associated duties of care of the managing director.
The OLG Nuremberg ordered a managing director of the general partner GmbH of a GmbH & Co. KG to pay damages amounting to a high six-figure sum because he had breached his duties of care and had not established an appropriate compliance management system. The legal basis for the damages was Section 43(2) of the GmbHG, according to which managing directors who breach their duties are liable to the company for the damages incurred.
In addition to the effects described, a CMS is also intended to prevent violations of the law by employees of the company. The company and the managing director can only determine the how, i.e., the design of the CMS, but not the fundamental necessity of introducing such a system, if they do not want to violate the principles of proper corporate management.
Case law in recent years shows that courts regard the establishment of a compliance management system as necessary to fulfill the duty of care or the duty of legality. Managing directors are therefore well advised to implement a comprehensive CMS in order to reduce potential liability and to ensure the legality of business activities. Failure to comply with this obligation may result in significant liability risks , as the judgment of the OLG Nuremberg impressively shows.
Organizational framework to be observed on the basis of the duty of legality:
a) statutory framework: e.g., insolvency petition – § 15a InsO, no payments after the company has become insolvent – § 15b(1) InsO, timely convening of the shareholders’ meeting – §§ 49, 50 GmbHG, duties of care in restructuring – § 32(1) StaRUG, § 43(1) StaRUG, establishment of crisis early warning systems – § 1 StaRUG, human rights and environmental due diligence obligations and related risk management § 3 LkSG
b) organizational framework: compliance with the rules of procedure; any restrictions on management authority must be observed; where there are several managing directors, there is a duty of collegial cooperation, a duty of the managing directors to inform each other and a corresponding right to information; a duty to inform superior bodies (e.g., the shareholders’ meeting or the shareholders); observance of the allocation of competences vis-à-vis other corporate bodies; working toward lawful conduct by other bodies; a duty to report to the shareholders’ meeting on one’s own initiative (e.g., on business policy and corporate planning); and a duty to inform a mandatory supervisory board. A duty of the managing director to report to the shareholders’ meeting is also assumed if the company’s economic situation is strained and intervention by the shareholders appears necessary.
c) financial framework: The managing director must always know the company’s economic and business key figures and is therefore obliged to carry out constant economic self-monitoring. This already follows from the managing director’s statutory obligation to file an insolvency petition once the company is insolvent. Such a duty of self-review is thus clearly part of the principles of proper corporate management.
d) Duty to follow instructions: The managing director of a GmbH is bound by the instructions of the shareholders or the competent bodies. This obligation does not cease even if the managing director considers the instruction to be inexpedient or unreasonable; he may, however, express his concerns and in some cases is even obliged to communicate them. The shareholders can then reconsider the resolution and the instruction in light of the managing director’s information and concerns. If the shareholders uphold the instruction despite being aware of the concerns and possible risks, the managing director must carry out the resolution – despite his concerns. No breach of duty giving rise to liability on the part of the managing director can result from this.
However, there are areas that are not subject to the shareholders’ instructions. These include, for example, the obligation to pay social security contributions (otherwise criminal liability under § 266a StGB), tax and commercial register obligations, safeguarding the share capital and observing payment prohibitions (§ 15b(5) InsO) or the obligation to file an insolvency petition (§ 15a InsO).
e) Other duties: Further duties arising from the external framework of action include the managing director’s duty to observe the object and purpose of the company (§ 3(1) no. 2 GmbHG).
Duty of loyalty
As the acting body of the GmbH, the managing director is subject to a special Duty of loyalty. Since the managing director manages the assets of others and is obliged to handle them responsibly every day, he must not exploit his position as a corporate officer to the detriment of the company or in his own interest or to cultivate his own image. Rather, he must safeguard the interests of the company. The duty of loyalty includes loyalty to the GmbH, but also the active duty to promote the company, e.g., by concluding transactions that are beneficial to the GmbH.
Non-compete obligation
Most managing director service contracts are likely to contain a contractual non-compete clause , which in some cases may also apply after the contract has ended. During his term as managing director, however, an unwritten non-compete obligation applies in any case.
During his term of office, the managing director must devote his working capacity to the benefit of the company and may not engage in any other activity , especially if it conflicts with the interests of the company. Nor may he promote any activity that competes with the GmbH. Any activity that falls within the GmbH’s business purpose as stated in its articles and actually pursued violates the unwritten non-compete obligation. This also applies to areas that are not yet pursued but are to be taken up, e.g., on the basis of development plans.
If a post-contractual non-compete clause is agreed in the contract, compensation for the non-compete period (Karenzentschädigung) must be provided for.
Duty of confidentiality
Even without a statutory provision, it presumably follows from the duty of loyalty and the duty of care of a prudent managing director that the managing director of a GmbH may not disclose confidential information or trade and business secrets to unauthorized third parties .
Duty to file for insolvency
If a GmbH gets into financial difficulties, the managing director must observe certain duties and act accordingly. First, with respect to the key business figures, he must know them and determine from them whether the company is already illiquid or over-indebted and thus potentially insolvent.
If this is the case, with a few exceptions, the company may no longer make any payments (§ 15b(1) InsO). Above all, however, upon the occurrence of illiquidity or over-indebtedness, an insolvency petition must be filed without undue delay. Under § 15a(1) InsO, this duty falls on the managing director of the GmbH, not on the shareholders.
If the managing director breaches these duties, this can lead to both liability and criminal consequences .
What is the legal framework of a GmbH?
Corporate law recognizes various forms of business organization. A distinction is made primarily between partnerships and corporations. While in partnerships the acting partners are the focus, in corporations it is the capital contributed by the shareholders or members. The partners of partnerships are therefore generally liable personally and without limitation with their assets. A counterexample is the limited partnership (KG), which consists of general partners and limited partners. While the general partner, as is usual in partnerships, is liable with his personal assets, the limited partner is only liable with the assets he has contributed to the KG.
Corporations are based on the idea of limited liability. With regard to liability, a distinction must be made between the company’s assets and the shareholders’ assets. A corporation is liable always and without limitation with its company assets. The private assets of the shareholders generally remain untouched in the event of insolvency; only the capital contributed to the company by the shareholders, e.g., the capital contribution, can be used to satisfy liabilities, so that liability is limited with respect to the shareholders’ assets.
Different rules may apply if statutory duties have been breached, e.g., in the event of insolvency or impending insolvency.
Corporate bodies of a GmbH
In the case of a GmbH, the idea of limited liability is already literally contained in its name – Gesellschaft mit beschränkter Haftung(company with limited liability). As it is a corporation, its shareholders are not liable with their private assets. The GmbH has a corporate structure and, as a corporate body, is a legal entity. When a GmbH is founded, share capital must be contributed, which in the case of a GmbH amounts to at least 25,000 euros and serves to protect creditors and as a threshold of seriousness. The share capital is intended to express the respectability and seriousness of the GmbH.
The GmbH acts through its corporate bodies. These are at least the Shareholders and at least one Managing Director. The articles of association of the GmbH may also provide for a supervisory board as a supervisory body. A supervisory board is mandatory for companies with more than 500 employees. The supervisory board must monitor the management.
The most important and highest organ of the GmbH is the shareholders’ meeting, in which all shareholders are represented. It adopts all decisions of the GmbH and is its decision-making body. The powers of the shareholders’ meeting extend to all matters that do not fall within the competence of the company’s management.
The regulations in the company’s articles of association may delegate certain responsibilities to the shareholders’ meeting. The basic powers of the shareholders’ meeting are listed in § 46 of the GmbHG. These include, among other things:
- Adoption of the annual financial statements and appropriation of profits
- Calling in capital contributions
- Appointment of authorized signatories (Prokuristen) and other authorized representatives
- Measures to review and monitor management
- Appointment, dismissal and discharge of managing directors
- Assertion of claims for damages against the managing director(s)
The shareholders' meeting must be convened by the managing director (§ 49(1) GmbHG), whereby the shareholders can request the convening of a meeting if their voting share at least 10% of the share capital (§ 50(1) GmbHG). In the expressly specified cases, the shareholders’ meeting must always be convened, as well as when half of the share capital has been lost (§ 49(2) and (3) GmbHG).
Relationship between Managing Director and Shareholder
The GmbH Act establishes the shareholders’ meeting as the undisputed supreme body of the GmbH. The managing director must comply with the shareholders’ meeting and its resolutions, so that the managing director is bound by the instructions of the shareholders’ meeting (see also the duty to follow instructions as a consequence of the duty of legality). This also applies to day-to-day management.
Although the managing director is the acting body of the GmbH and is responsible for its management, so that he generally exercises his management powers in day-to-day business, situations may arise even within the scope of the powers assigned to the managing director that require a resolution of the shareholders’ meeting.
Under § 49(2) GmbHG, the shareholders’ meeting must be convened if this is required in the interest of the shareholders . This includes extraordinary transactions that occur only very rarely in day-to-day business. The extraordinary nature may result from the exceptional economic significance of the transaction or from the fact that a transaction involves a high risk. The same applies if the managing director must expect an objection from the shareholders’ meeting.
Appointment and employment of a managing director
If a natural person is to be appointed managing director of a GmbH, this is a two-stage act. First, the managing director must be appointed; second, he must be employed. The appointment as a corporate officer is made by resolution of the shareholders’ meeting under § 46 No. 5 GmbHG. Once made, the appointment of the managing director can be cancelled through Withdrawal of the appointment by the shareholders’ meeting. The revocation can be made at any time and without giving any reason , unless the company’s articles of association contain specific provisions.
The appointment must be distinguished from the contract under the law of obligations governing the managing director’s employment – the so-called managing director’s service contract. The act of appointment by the shareholders’ meeting does not, for example, contain any provision on the managing director’s remuneration. Although the managing director’s service contract does not establish the managing director’s rights, duties and position as a corporate officer, it contains provisions on remuneration, any fixed term, vacation and powers of representation. The managing director’s service contract can end by expiry of its term, a termination agreement, or ordinary termination or termination for good cause.
The managing director’s service contract is not an employment contract, but a service contract, since even an external managing director (not a shareholder of the GmbH) acts for and represents the company as its acting body. However, if the external managing director is personally dependent on the GmbH, integrated into its operations and bound by instructions, the managing director can also be an employee. In most cases, however, managing directors are not employees.
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Dismissal, resignation and termination of employment
The The dismissal of a managing director is generally effected by a shareholders’ resolution pursuant to § 38 GmbHG. An essential aspect here is that dismissal is possible at any time and without stating reasons, provided that the company’s articles of association do not contain any provisions to the contrary. This means that the shareholders’ meeting can at any time withdraw its trust in the managing director and relieve him of his duties.
Resignation likewise only ends the relationship as a corporate officer, but not the service contract, unless it is also terminated or cancelled.
A resignation at an inopportune time (e.g., when the duty to file for insolvency applies) is effective but may give rise to claims for damages.
The managing director’s service contract can be terminated either ordinarily or for good cause. An ordinary termination is carried out in compliance with the termination periods agreed upon in the contract or required by law. In the event of a termination for good cause there must be good cause justifying the immediate termination of the contract under § 626 BGB. Such a cause can be, for example, a serious breach of duty or a breach of trust.
It is important to note that in GmbHs subject to codetermination, special protective provisions may apply to the managing director, which must be taken into account in connection with termination. These include, for example, the consent of the works council to certain decisions.
When is a managing director liable with his personal assets?
The managing director bears great responsibility for the company, its economic success and compliance with all statutory obligations. In doing so, the managing director must not only follow the instructions and resolutions of the shareholders. The managing director must exercise the diligence of a prudent businessman (§ 43(1) GmbHG).
What initially sounds rather intangible ultimately results in a multitude of unwritten but recognized and logically consistent duties that the managing director must observe in his daily work in order to secure the company’s success. In addition, there are statutory duties, which, especially in the case of economic problems of the GmbH (including insolvency), trigger action by the managing director.
Liability for breach of duties of care (internal relations)
As long as the managing director complies with the duties of care imposed on him, there is no risk that he can be held liable in his position as managing director. If an economic loss occurs as a result of a wrong decision or misjudgment, this need not trigger liability on the part of the managing director either.
Permissible risk or breach of duty?
If he has fulfilled his duty to obtain information and made a business decision after weighing the economic risks, there is usually no breach of duty . Every business decision usually involves a certain risk, so what matters is the diligence and the weighing of risks, not the outcome or financial success of the decision. However, if the managing director has, for example, recklessly granted an unsecured loan to a business partner even though the borrower is already insolvent or insolvency is imminent, this may trigger managing director liability.
Culpable breach of duty triggers liability
If the managing director violates the duties assigned to him, this can lead to liability. For the breach of the duty of care of a prudent businessman, § 43(2) GmbHG already establishes statutory liability of the managing director.
The following three conditions can therefore be established for the director’s liability:
- A violation of the duties imposed on the managing director has resulted in financial damage – breach of duty
- The duty was culpably violated – Fault
- The breach of duty caused the damage – Causation
Similar statutory provisions on managing director liability can also be found in, among others, Section 69 of the AO.
Liability in the formation phase
The managing director faces particular liability risks when a GmbH is formed. The formation of the GmbH is completed upon registration in the commercial register. During the formation phase, the managing director must take all legally required measures. Under the so-called formation liability , the managing director is liable, for example, for damage caused by (knowingly) false statements. However, joint and several liability with the shareholders may exist here.
In addition, during the formation phase there is the so-called liability of the person acting (Handelndenhaftung). Until the GmbH is registered, the managing director is personally liable for all contracts concluded in the name of the GmbH in formation. Upon registration in the commercial register, this liability ceases and the GmbH itself is liable. If the GmbH is not registered in the commercial register, e.g., because requirements of the registry court are not met, this can lead to liability problems for the managing director.
Liability for breach of tax and social security obligations
As the acting body of a GmbH, the managing director is also subject to tax and social security obligations. Payroll tax and social security contributions for employees must be calculated, reported and paid over monthly. In this respect, there is a duty to pay over social security contributions.
In addition, among other things, advance VAT returns and tax returns must be filed, input tax and other taxes paid over and any tax liabilities settled. Under § 34(1) AO , the managing director of the GmbH is responsible for fulfilling the GmbH’s tax obligations. Breaches of tax obligations (e.g., advance VAT and payroll tax returns, settlement of tax liabilities) usually lead to a swift response from the tax authorities and may result in surcharges and penalties.
If tax obligations are breached, the tax authorities may also hold the managing director liable , as expressly provided for in § 69 AO. If the GmbH’s tax liabilities cannot be paid, e.g., due to insolvency, and an intentional or grossly negligent breach of duty by the managing director can be proven, the tax office will try to collect the tax debts from the managing director of the GmbH.
Given the amount of the tax debts, this can not infrequently even lead to the personal insolvency of the managing director. In addition to liability risks, consequences under tax criminal law may also arise. Compliance with tax obligations is therefore of great importance in a managing director’s daily work because of the liability risk.
If social security contributions are not properly paid to the health insurance fund or the pension insurance fund, liability and criminal consequences may also result.
Social security contributions and bogus self-employment as liability risks
Under § 266a(1) StGB , there is a criminal provision penalizing the improper payment or non-payment of social security contributions. In addition, there is a risk under § 823(2) BGB of liability in tort for damage caused to the company by breaches of duty.
What can be particularly problematic is the employment of bogus self-employed persons . If the managing director or the GmbH repeatedly engages service providers on an invoice basis and the requirements for self-employment are not met, this can mean that there is no self-employment and that the service providers should have been treated as employees subject to social security contributions.
Such bogus self-employment can be uncovered, for example, by an audit by the German Pension Insurance (Deutsche Rentenversicherung). In most cases, depending on how long the bogus self-employment lasted, this leads to exorbitant back payments and surcharges on social security contributions, which can quickly add up to a six-figure loss.
Through so-called status determination procedures , companies and managing directors can have the clearing office of the German Pension Insurance clarify whether bogus self-employment or genuine self-employment exists.
If in doubt about the status, managing directors should make use of this in order to minimize liability risks.
Liability in business operations (external relations)
In addition to external liability in tax and social security matters, the managing director may also face liability risks in ongoing business operations . This is possible in particular under the so-called principles of apparent authority (Rechtsschein) if the conduct merely creates the appearance of acting or not acting on behalf of the company.
Liability toward a third party (e.g., a customer or supplier) may arise if the managing director concludes a contract without clearly acting as managing director of the company, or if he clearly acts for the GmbH but the contract is intended to concern the managing director personally. In the first case, the managing director does not want to become a contracting party himself, but he also does not clearly act as the acting body of the GmbH.
If the third party then assumes that the managing director wanted to become or has become a contracting party, this may give rise to personal liability of the managing director.
Change of shareholders/sale of the company
If a company is sold or the shareholders change in any other way, the managing director is obliged to inform the commercial register of this. In the event of a change of shareholders, this must be notified to the commercial register by submitting a list of all current shareholders. If the managing director fails to comply with this obligation and third parties suffer damage as a result of their lack of knowledge, the managing director is personally liable.
Further liability risks
Liability risks can also arise in other areas and situations. Examples of this are:
Liability in tort
– unlawful acts of the managing director in the course of his activities – liability under §§ 823 et seq. BGB
Breach of a non-compete obligation
– contractual penalties under a contractual non-compete clause as well as claims for injunctive relief and damages in the event of competing activities
Loss of share capital
– notifying the loss and convening the shareholders’ meeting are duties of the managing director if the company’s share capital is impaired – liability under § 43(2) GmbHG and possible criminal liability under § 84 GmbHG. The same applies to payments made at the expense of the share capital (§ 30(1) sentence 1 GmbHG) – liability under § 43(3) GmbHG
When is a GmbH insolvent?
If a GmbH is insolvent, an insolvency petition must be filed. This duty to file for insolvency exists for two of the three possible grounds for insolvency (§ 15a InsO). If the company is illiquid, the insolvency petition must be filed no later than three weeks after illiquidity occurs (§ 15a(1) sentence 2 alt. 1 InsO). If the company is over-indebted, the insolvency petition must be filed no later than six weeks after over-indebtedness occurs (§ 15a(1) sentence 2 alt. 2 InsO). These deadlines were revised by the Act on the Further Development of Restructuring and Insolvency Law (SanInsFoG) with effect from January 1, 2021.
Reasons for insolvency
The three possible grounds for insolvency – illiquidity, impending illiquidity and over-indebtedness – are governed by §§ 17 to 19 of the Insolvency Code (InsO).
- Illiquidity (§ 17 InsO) exists when the company is no longer able to pay its liabilities as they fall due. A merely temporary inability to pay, i.e., a payment stoppage of up to three weeks, is irrelevant. Shortfalls of less than 10% are likewise immaterial.
- Over-indebtedness (§ 19 InsO) exists when the company’s liabilities exceed its assets, unless it is predominantly likely under the circumstances that the company will continue as a going concern over the next twelve months. Over-indebtedness must be determined on the basis of a balance sheet.
- Impending illiquidity (§ 18 InsO) exists when liquid funds are still available to pay current liabilities, but financial planning shows that the liabilities will no longer be able to be paid as of a certain point in the future.
Duty to file
In principle, there are three grounds for insolvency. A duty to file for insolvency exists for a GmbH under § 15a(1) InsO only in the event of illiquidity or over-indebtedness. If the requirements for impending illiquidity are met, an insolvency petition may be filed, but there is no obligation to do so.
Possible criminal liability for delayed filing for insolvency
If no insolvency petition is filed despite the existence of a ground for insolvency and the duty to file, criminal liability for delayed filing for insolvency may arise (§ 15a(4) InsO). Not only is anyone who files no petition at all despite insolvency and the duty to file liable to punishment, but also anyone who files the insolvency petition late or incorrectly.
When is the managing director liable in the event of the insolvency of the GmbH?
The insolvency of the GmbH poses a significant liability risk for the managing director. In the event of insolvency or where grounds for insolvency exist, the managing director has additional duties that require correct and timely action.
In order to be able to recognize whether over-indebtedness or illiquidity exists, the managing director is obliged under § 43(1) GmbHG to know all necessary and meaningful financial key figures, to keep their significance for the company in view at all times and to act accordingly in the event of, e.g., financial difficulties.
Managing director’s duties of care: the GmbH’s key figures must be monitored at all times
If the financial key figures compel action because there is over-indebtedness or illiquidity, the managing director, as the acting body of the GmbH, must file the insolvency petition (§ 15a(1) InsO). Filing the insolvency petition is not the responsibility of the shareholders, who also cannot give the managing director any instructions to the contrary in this respect.
However, if as managing director you do not even know the financial key figures, so that you could not recognize the insolvency at all, you are already in breach of the duty of care of a prudent businessman (§ 43(1) GmbHG) as a first step. And if, despite the unrecognized insolvency, you still conclude transactions for the company or incur other liabilities, this will in most cases cause damage. As a rule, the managing director is then personally liable for such damage (§ 43(2) GmbHG).
Liability for payments after the onset of insolvency
Once the company has become insolvent, managing directors may in principle no longer authorize any payments (§ 15b(1) InsO). However, payments made in the ordinary course of business are compatible with the diligence of a prudent and conscientious businessman within the meaning of § 43(1) GmbHG (§ 15b(2) sentence 1 InsO). If, despite § 15b(1) sentence 1 InsO, payments are still made that should no longer have been made, § 15b(4) sentence 1 InsO (formerly § 64 GmbHG) establishes statutory liability on the part of the managing director (as the “person obliged to file for the legal entity”).
Liability for delayed filing for insolvency
If the managing director did not recognize that the GmbH was insolvent and did not file for insolvency, this constitutes delayed filing for insolvency. On the one hand, this is relevant under criminal law (§ 15a(4) InsO). On the other hand, if the late filing causes damage, this also gives rise to liability for delayed filing for insolvency. Since this is a tort, tort liability may arise. § 15a InsO is a protective law within the meaning of § 823(2) BGB and therefore entails a considerable liability risk.
Further liability risks may arise from the fulfillment or non-fulfillment of tax obligations (§§ 34, 69 AO – note, however, § 15b(8) InsO) and with regard to employee social security contributions (tort liability under § 823(2) BGB in conjunction with § 266a StGB). Payment of employer social security contributions is generally no longer permissible, as these do not fall under the principle of § 15b(2) sentence 1 InsO.
Liability risk – insolvency of the GmbH
In summary, in times of economic difficulty, in the phase before insolvency or in insolvency, the managing director of the GmbH has additional duties and must continue to observe his existing duties conscientiously. If a breach of duty by the managing director can be proven, this can – depending on the severity and nature of the breach – give rise to liability towards the shareholders, the GmbH, third parties, or the tax office or social security institutions, as well as to criminal prosecution.
In the phase of impending insolvency or insolvency, the managing director has a multitude of duties to fulfill, decisions to make and actions to take. As shown, mistakes in such a phase can lead to a significantly increased liability risk. If the GmbH you manage as managing director is in a crisis, it is advisable to seek legal advice. What you should absolutely avoid in a crisis, however, you can read in this article.
Who decides whether the director's liability is to be invoked?
When asking who decides on the actual liability of the managing director, it is necessary to distinguish between the various types of liability. In the event of a possible external liability of the managing director, it is, for example, solely up to injured third parties to decide whether they want to hold the managing director personally liable for a breach of duty. In this case, the claim for damages is asserted directly against the managing director and enforced against his or her private assets.
For the internal liability, i.e., the managing director’s liability towards the shareholders, a resolution of the shareholders’ meeting is required under § 46 No. 8 GmbHG. Without such a resolution, the shareholders do not assert internal liability or any claims for damages against the managing director.
If, in the course of his duties, the managing director has failed to pay over the employee share of social security contributions, the health insurance funds and pension insurance institutions have a claim for damages against the managing director in the amount of the employee share under § 823(2) BGB in conjunction with § 266a StGB. The same applies if tax obligations under § 34 AO have been breached. In this case, the tax authorities have a direct statutory claim under § 69 AO to satisfaction of, e.g., tax debts from the managing director’s private assets.
How long is a managing director liable?
A managing director is liable for as long as he holds that office. But even after his removal, breaches of duty can still be asserted against the managing director by way of continuing liability, and he remains liable with his private assets.
Under § 43(4) GmbHG, the GmbH’s liability claims against the managing director for breaches of duty (§ 43(2) and (3) GmbHG) become time-barred 5 years after the damage arises. Shareholders’ claims only become time-barred after 10 years from the occurrence of the damage.
Claims under § 15b InsO – i.e., unauthorized payments after the onset of insolvency – become time-barred after five years under § 15b(7) sentence 1 InsO. Tort claims (§§ 823 et seq. BGB) become time-barred three years after the injured party becomes aware of the damage.
What are the current developments regarding managing directors’ liability?
In recent years, additional duties have been added to the Managing Director’s already diverse responsibilities, which can trigger liability risks in the event of violations of duties.
German Supply Chain Due Diligence Act
The Supply Chain Due Diligence Act (LkSG) obliges companies, as of 01.01.2024 as part of their due diligence obligations, to ensure respect for human rights and protection against environmental damage, which may arise in their supply chains. Under § 3 LkSG, companies and their managing directors must, among other things, establish risk management for this purpose. A violation of the Supply Chain Due Diligence Act can lead to personal liability of the managing director.
StaRUG
The Corporate Stabilization and Restructuring Act (StaRUG) supplements the existing duty to monitor financial key figures and the duty to act in the event of insolvency. Under § 1 StaRUG, managing directors are obliged to introduce a crisis early-warning system in the company. In addition, managing directors can choose between filing for insolvency and first initiating restructuring or reorganization proceedings.
AI Act: Obligations for managing directors and entrepreneurs
With the adoption of the AI Act by the European Union, rules are entering into force for the first time that subject the use of artificial intelligence (AI) in companies to regulation. The AI Act is intended to ensure that AI systems are used safely and transparently and do not have discriminatory or harmful effects.
Managing directors and entrepreneurs are now required to implement and monitor the following measures:
Risk assessment and risk management
Companies must conduct a thorough risk assessment of the AI systems they use. This includes identifying and analyzing potential risks that could arise from the AI applications, particularly regarding privacy, discrimination, and security.
Transparency obligations
AI systems must be designed in such a way that their decisions are understandable. This means that companies must introduce mechanisms that allow the decision-making processes of AI to be understood and explained. Customers and affected individuals must be informed when interacting with an AI.
Documentation and reporting
There is a duty to maintain comprehensive documentation regarding the functioning, training data, and decisions of AI systems. This documentation must be updated regularly and made available to the relevant supervisory authorities upon request.
Data protection and data quality
Compliance with the General Data Protection Regulation (GDPR) is mandatory. Measures must be taken to ensure that the data used to train the AI systems is accurate, complete, and representative. Special care is required with personal data to prevent its misuse.
Liability for AI failures
Managing directors are liable for damages caused by the use of AI systems if they do not comply with legal requirements or violate the obligations mentioned above. This includes liability towards third parties as well as within the company.
Implementing the AI Act poses considerable challenges for companies, as it not only requires technical adjustments but also makes organizational and legal measures necessary. Managing directors should therefore take action early to meet the new requirements and seek legal advice in case of uncertainty. Setting up an interdisciplinary team that deals with the aspects of AI compliance can be helpful in this regard.
In summary, the AI Act significantly expands managing directors’ responsibilities regarding the use of AI and obliges them to take proactive measures to ensure compliance with the new rules. This not only contributes to legal certainty but also fosters trust in AI technologies and their responsible use in business.
Whistleblower Protection Act: Important changes for managing directors and entrepreneurs
The Whistleblower Protection Act (HinSchG) brings significant changes for companies in Germany by introducing comprehensive rules on the protection of whistleblowers . The aim of the Act is to ensure that persons who draw attention to wrongdoing within a company are protected from reprisals. This imposes new obligations on managing directors and entrepreneurs, which they must implement in order to meet the legal requirements.
Managing directors must ensure that the requirements of the Whistleblower Protection Act are fully implemented. This begins with establishing internal reporting systems, which enable employees to report possible wrongdoing securely and confidentially. These systems must be designed in such a way that the identity of whistleblowers is protected and their confidentiality is preserved.
A central aspect of the Whistleblower Protection Act is the establishment of an internal reporting office. Companies with more than 50 employees are obliged to set up such a reporting office. This internal reporting office must work independently and impartially to ensure that reports are handled fairly and objectively. In addition, companies must develop processes for handling reports that ensure swift and effective action to remedy the reported wrongdoing.
It is also necessary that all employees are informed about the existence and functioning of the internal reporting office. Regular training and communication measures are necessary to strengthen awareness of the importance of whistleblower protection and to promote employee confidence in the reporting system. A corporate culture that openness and transparency and encourages employees to report wrongdoing is crucial.
The Whistleblower Protection Act also stipulates that external reporting offices be set up, which whistleblowers can contact if they do not wish to use internal reporting systems or if these are not effective. Managing directors must therefore ensure that their internal reporting systems are efficient and trustworthy in order to prevent employees from preferring external reporting offices.
Furthermore, the Whistleblower Protection Act requires companies to take measures to prevent retaliation against whistleblowers. This includes protection from termination, transfer, salary reductions, and other adverse measures that could be taken in response to a whistleblower’s reporting. Companies must develop clear policies and procedures to ensure that whistleblowers are protected and do not have to fear negative consequences.
Compliance with the Whistleblower Protection Act also requires regular reviews and evaluations of the internal reporting systems and protective measures. Managing directors must ensure that these systems comply with legal requirements and are continuously improved. This promotes not only legal certainty but also employee trust and the integrity of the company.
Overall, the Whistleblower Protection Act presents new challenges for directors and entrepreneurs, requiring a comprehensive and proactive approach to protecting whistleblowers. By establishing effective internal reporting systems, conducting regular training, and complying with legal requirements, companies can meet the requirements of the Whistleblower Protection Act and foster a culture of transparency and openness.
NIS2 Directive: New requirements for directors and entrepreneurs
The NIS2 Directive brings far-reaching changes for companies in the European Union in order to strengthen IT security and the protection of critical infrastructure. For managing directors and entrepreneurs, this means a significant expansion of their responsibilities in the area of cybersecurity. Implementing the NIS2 Directive requires proactive measures and a comprehensive adaptation of existing IT security strategies.
Managing directors must ensure that their companies fully comply with the requirements of the NIS2 directive. This begins with the implementation of a robust IT security management, which is tailored to the individual needs and risks of the company. Effective security management encompasses the identification, assessment, and treatment of security risks, as well as the development and implementation of appropriate security measures.
A central element of the NIS2 Directive is the introduction of strict reporting obligations for IT security incidents. Companies are required to report significant security incidents immediately to the relevant authorities. This requires the establishment of a high-performance incident management system, which ensures the rapid detection and analysis of, and response to, security incidents. Timely reporting and handling of such incidents is crucial to minimize damage and continuously improve the IT security situation.
Regular security reviews and Audits are another essential component of the NIS2 Directive. These reviews serve to identify weaknesses in the IT systems and to implement necessary improvements. Managing directors must ensure that these audits are carefully planned and carried out and that the resulting measures are implemented promptly. This contributes to the continuous improvement of the IT security infrastructure and ensures compliance with legal requirements.
The Training and awareness-raising of employees is crucial for IT security. Employees must regularly be informed about current security threats and the appropriate protective measures. Regular training and awareness-raising measures are therefore essential to ensure a high level of security within the company . Managing directors are responsible for establishing appropriate programs and ensuring that all employees participate in them.
Another essential component of the NIS2 Directive is compliance with legal requirements and recognized security standards. Companies must adhere to proven security standards and guidelines in order to ensure the integrity, confidentiality and availability of their data and systems. This also includes compliance with the General Data Protection Regulation (GDPR) and other relevant data protection regulations.
In summary, the NIS2 directive presents managers and entrepreneurs with new challenges that require a comprehensive and proactive approach to IT security. By implementing comprehensive security measures, conducting regular audits and training, and complying with legal requirements, companies can meet the requirements of the NIS2 directive and sustainably improve their IT security.
Contact us, if you want to know whether you are affected and what measures you need to take.
More on current developments in managing directors’ liability you can read in this article.
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