Managing director´s liability

Managing director´s liability / Geschäftsführerhaftung

December 14, 2022

Those who choose the legal form of a limited liability company usually do so deliberately in order to limit personal liability risks to a tolerable minimum. This applies primarily to the shareholders, because with the registration of the company in the commercial register, the liability privilege apply, according to which only the company's assets are liable for all liabilities that are created after the registration. However, the limitation of liability in the formation of a GmbH or UG comes "at a price":

In order to act with full legal authority, the company must appoint one (or more) managing director(s), who are acting as representative organs for the company and can be held liable for its breaches of duty. Especially in the case of a start-up, the managing director(s) is/are regularly the founding shareholders, who are now threatened with liability risks from two sides:

Liability to the company (internal liability)

According to section 43 (1) Limited Liability Companies Act (GmbHG) the managing director must apply the "the due care of a prudent businessman". This means that he/she is subject to certain duties due to his/her position, and if these duties are culpably violated, the shareholders' meeting can decide to assert claims for damages against his/her managing director(s). The scope of these duties is determined by the nature and size of the company, but the managing director may not invoke individual characteristics such as his or her "inexperience". The managing director is generally responsible for the financial situation of the company. He/she is therefore obliged to keep proper accounts and must ensure that the share capital is maintained. In the event of imminent insolvency or over-indebtedness he must apply for the opening of insolvency proceedings and provide the shareholders with information on such transactions. In addition, the managing director has monitoring duties with regard to his/her personnel and any other managing directors, including those from outside the company. The managing director is bound by instructions to the shareholder, but also has a duty of loyalty to the company as a separate legal entity and is subject to a statutory non-competition clause as well as the duty of confidentiality until the end of his/her term of office. However, the managing director does not bear the risk of general business success. Risky decisions must nevertheless be able to be justified and must be in the interest of the company.

Liability towards third parties (external liability)

Managing directors may also be liable for damages to third parties. This may initially be the case if the managing director does not make clear that he is acting on behalf of the company and thus commits himself or gives personal guarantees during contract negotiations, which creates additional trust in the business partner, based on the person of the managing director. The managing director is also liable for unpaid social security contributions, in the event of concealment of the fact that the company is insolvent or has delayed filing for insolvency, in the event of breaches of competition law and the failure to file annual accounts or register a change of shareholder in good time. The managing director may also be liable for grossly negligent violation of tax law obligations.

Avoidance of the manager liability

Although the possibility of a limitation of liability towards the company to gross negligence and intent is controversial, it should be considered by the managing director, as should the limitation to a certain amount of liability.

Company and managing director can agree on a claim for the discharge of the managing director according to section 46 No. 5 GmbHG. Through this, claims for damages, which normally only become statute-barred after 5 years, are not applicable if the facts leading to the claim were recognisable from the information provided by the manager. The agreement of a shorter limitation period is also possible under certain circumstances, and the consent of the shareholders to certain risk transactions should also be obtained. Finally, the conclusion of a D&O insurance policy may also be recommended.