Liability of the Managing Director of a "GmbH" in Germany

Managing directors of GmbHs must, when fulfilling their obligations, “exercise the due care and diligence of a prudent businessperson” (Section 43 (1) of the [German] Limited Liability Companies Act (GmbHG)). The standard used to determine this is the conduct expected of a person in the responsible position of an administrator of someone else’s property. If a managing director fails to meet this standard and the company suffers a loss on account of it, then he or she will be held personally liable (Section 43 (2) GmbHG).

Some of the most important duties of a managing director of a GmbH are for example:

Duty to properly register the GmbH in the Commercial Register (German: “Handelsregister”) pursuant to true facts.

Duty to act in the best interests of the company.

Duty to remit taxes and social security contributions.

Duty to observe general principles of proper accounting and balance-sheet reporting.

Duty to refrain from competing with the company while holding the office of managing director.

Duty to make the timely request to open insolvency proceedings.

Managing directors can be excluded from liability for acts carried out in response to the valid instructions of the shareholders’ meeting. Since managing directors are obligated by law to follow such instructions, the fulfilling of such an obligation cannot then be used to support a claim for damages. If, however, the instructions were not valid–for example because the resolution passed by the shareholders meeting was flawed–then it is the managing director who will be held personally liable. Of course any contributory fault on the part of the company in such a case will be taken into due consideration. In some cases involving invalid instructions, the claim against the managing director may be completely unenforceable. Examples of this include cases where the assertion of the claim in connection with the flawed resolution is regarded as an abuse of the law or where fault [intent and negligence] cannot be attributed to the managing director because the legal invalidity of the instruction could not have been recognized by him even if reasonable care had been taken. Managing directors are entitled to manifestly refuse to follow instructions that instruct them to make unlawful encroachments on the company’s share capital or to acquire the company’s own equity interests. In these cases, the law explicitly prohibits the managing director from relying even on a valid shareholders’ resolution if this is required in order to protect the creditors of the company.

If a GmbH has more than one managing director, then each of them has the full obligation to manage the company. If more than one managing director is responsible for a loss, then their liability towards the company for such loss is joint and several. This means that the company can sue any one of them for the full amount and it is up to them to apportion the loss among each other if need be. Even a clause in the company’s articles of association or a shareholders’ resolution that divides up the management responsibilities among the managing directors (division of responsibilities) will not operate to limit a managing director’s liability solely to the particular department allocated to him or her. Part of the due care and diligence expected of a prudent businessperson is the duty to ensure that the acts of another department do not cause any sustainable harm to the company. This includes the mutual and interdepartmental supervision of the managing directors among each other. Managing directors therefore have an overall duty to ensure that the company has a functioning information system. Because of this, any claim alleging an inability to know what had been going on in another department would not be able to support an exclusion of liability.

There are different ways in which a GmbH can waive the right to hold managing directors liable at a later point in time. The resolution of the shareholders’ meeting to formally ratify the acts of managing directors (Section 46 (1) no. 5 GmbHG) operates as an approval of their management acts. It prevents the company from making claims later against managing directors when such claims are based on events that were already known at the time the resolution was passed. The so-called “full and final settlement” clause, on the other hand, operates as a complete waiver by the company of all known and unknown claims against the managing director. It is often found in agreements to mutually terminate an employment contract. The company is also always free to waive the enforcement of certain individual claims. The proviso here is, however, that all of the ways discussed above pursuant to which a GmbH can waive liability will be regarded as invalid if the waiving of liability places the creditors of the company at an inequitable disadvantage.

Managing directors are already exposed to liability during the incorporating stage of the GmbH and not just once it is actually incorporated. One of their main obligations is to fulfil the statutory requirements for registering the company. If the managing director provides false information about the company when registering it, then he or she may be liable (jointly and severally with the shareholders) to the GmbH for what is referred to in German law as liability during the incorporating stage. Examples of such liability include having to furnish capital that was not paid in or having to compensate for other loss incurred. Managing directors who neither knew nor had to have known, assuming the due care and diligence of a prudent businessperson had been exercised (see discussion above on this), that the conduct of another party was harming the company are released from liability if they can prove their lack of knowledge. What this amounts to is a shifting of the burden of proof to the managing director.

Managing directors have a fiduciary duty towards the company for the entire term of their office. This prohibits them from competing with the GmbH during the term of their employment. Examples of this include operating their own competing commercial enterprises or carrying out individual transactions in the same or in a similar sector as the GmbH. A violation of this prohibition of competition gives the company the right to restrain its managing directors from such acts. The company is also entitled to claim damages and the relinquishment of any benefits obtained by the managing director through the violation of the prohibition of competition (so-called skimmed-off profits). This prohibition of competition is something of general knowledge and therefore does not have to be expressly agreed in a contract! However, a prohibition of competition that is to remain in effect for a certain period of time even after the managing director has left the company must be stipulated in the employment contract.

If a GmbH becomes insolvent, the managing director must–without undue delay but no later than three weeks after insolvency has been ascertained–file a request to open insolvency proceedings. The same applies commencing with the point in time when over-indebtedness has been ascertained. A company is insolvent from the moment in which it is no longer able to meet payment obligations that are due. Over-indebtedness is when the assets of a legal entity are no longer able to cover its liabilities. If a managing director makes payments to third parties after insolvency or over-indebtedness has been ascertained, then the managing director must reimburse the GmbH for these amounts. This law is aimed at preventing managing directors from giving preference to the claims of certain creditors to the disadvantage of others. What managing directors do not have to reimburse are those payments that any prudent businessperson is allowed to make despite the actual state of insolvency. This particularly refers to payments that serve the interim continuation of the business operations or those spent on reorganization measures that look promising, for example any necessary payments of wages, salaries, social security contributions, telephone bills, or rent. Managing directors are also liable to the company for loss incurred for their late filing of the request to open insolvency proceedings. An example of such loss is when the value of the company’s assets suffers a further decrease on account of the late filing of the request. Conversely, managing directors can also be held liable for loss caused by filing the request to open insolvency proceedings too early. An example of this is when they omit, during the three-week time period, to carry out potentially beneficial restructuring measures.

The first exception is liability for what German law refers to as ostensible legal situations. Liability is imposed when a managing director of a GmbH fails to make it clear to a business partner that he or she is acting on behalf of the company. If business partners assume that they are negotiating with the managing director in his or her private capacity, then the managing director may well be personally bound by the transaction concluded. For this reason, managing directors of GmbHs should always make it very clear that they are acting on behalf of the company. Liability for breach of trust also creates personal liability on the part of the managing director towards third parties. This concerns liability for misconduct during contractual negotiations. If managing directors conduct themselves in an unlawful manner–for example they conceal something that they are actually obligated to disclose or they deceive their contracting partner–then they will be held personally liable if they took unfair advantage of the contracting partner’s trust or had a personal interest in concluding the contract.

Managing directors must ensure that the company’s taxes are assessed or paid on time. If their failure to do this is intentional or the result of gross negligence, then they are personally liable for any resulting deficiencies. Managing directors are also held personally liable for failing to remit the contributions owed to the German social security authorities.

Managing directors are also personally liable under the general provisions of German tort law if in the exercising of their duties they cause harm to another through a blameworthy act.

In cases where managing directors fail to file a de facto necessary request to open insolvency proceedings or they fail to file it on time (see I.8 above), they are not only liable to the GmbH but to the creditors of the GmbH as well. This involves a special kind of liability under German tort law, which was just referred to above. The managing director must compensate those creditors whose claims against the GmbH were already established before the point in time that insolvency was actually ascertained. They must be compensated for receiving less from the later distribution of the insolvency estate on account of the late filing of the request to open insolvency proceedings (so-called dividend loss). Creditors whose claims are first established after the time insolvency is actually ascertained but before the opening of the insolvency proceedings can claim compensation for the loss suffered by them for having entered into business transactions with a GmbH that was already insolvent or over-indebted.

Another potential source of liability for managing directors is liability under the rules of the so-called qualified de facto corporate group. Liability is imposed when a sole managing director is the sole or majority shareholder of the GmbH and at the same time has controlling powers in other companies. The underlying reason for imposing liability on managing directors here is that a person who exercises controlling powers in a number of companies may possibly neglect or even intentionally prejudice one company in order to benefit another, for example by relocating staff members or by shifting capital. In such cases, the law sees the creditors of the harmed company as in need of protection. The German courts therefore developed the principle of the so-called “assumption of loss obligation” analogous to the laws applicable to public limited companies. According to this principle, a (shareholder-) managing director who neglects another company in which he or she has a controlling interest must compensate for the loss occasioned by such course of action. The managing director in such a case is personally liable.

Personal liability may also arise during the incorporating stage of a GmbH. As long as a GmbH is not registered in the Commercial Register (German: “Handelsregister”), and therefore does not yet constitute a legal entity, the person who acts for the (future) company prior to its registration is personally liable for any obligations created. This liability is imposed on anyone who has acted as the managing director or who has acted like the managing director for the future GmbH. Once registration is completed, the obligations pass to the company and personal liability ceases. Managing directors who are simultaneously shareholders are also liable under the general principles of shareholder liability for the pre-incorporated GmbH [legal form prior to notarization of articles of association] and for the pre-GmbH [legal form between the time the articles of association have been notarized and registration of the company in the Handelsregister].

This online information can only provide you with a very summarized overview of these topics and does not claim to be complete. If you need more information, you can visit our Commerzbibliothek (Library of Commerce) where you will find all the usual legal literature such as legislation, legal commentaries, collections of judicial decisions, periodicals, and monographs. The Commerzbibliothek is located on the ground floor of the Hamburg Chamber of Commerce at Adolphsplatz 1 in 20457 Hamburg. It is open Monday to Thursday from 10 am to 8 pm and on Friday and Saturday from 10 am to 3 pm.