Guide to GmbH law: The duties and liability risks of the managing director of a GmbH
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Guide to GmbH law: Managing director activities in the GmbH – On the duties and liability risks of the managing director of a GmbH
From years of advising medium-sized companies, the author of this article has come to realize that their managing directors are usually legally inexperienced and are not sufficiently aware of the obligations associated with their activities and thus the liability risks if these are not observed.
A. Introduction
The central legal standard that provides information on the duties of the managing director of a GmbH is § 43 Aba. 1 GmbHG:
“The managing directors shall exercise the diligence of a prudent businessman in the affairs of the company.”
Accordingly, the managing directors must act “in the affairs of the company” with the diligence of a prudent businessman.
In principle, the company’s creditors are liable for every contractual and non-contractual obligation.
fault of its managing directors (Sections 31, 278 BGB) only the GmbH. As a rule, the managing director must also only be liable to the company for the breach of duties incumbent upon him.
are responsible. They are liable to pay damages to the GmbH if the company suffers damage due to a breach of duty. This is regulated by § 43 Para. 2 GmbHG. In the case of intent, criminal liability, e.g. for breach of trust (§ 266 StGB), may even be considered.
In the external relationship, i.e. towards third parties, only the GmbH is liable, which can indemnify its managing directors as described above. However, this does not mean that external liability of the managing directors is excluded.
In addition to personal liability in the area of tax and social security law, the managing director may also be liable on the basis of his own contractual obligations, on the basis of an induced legal appearance, on the basis of (personal) culpability when concluding the contract and in tort.
For the aforementioned reasons, every managing director of a GmbH is urgently recommended to be as familiar as possible with the requirements for proper managing director activity and the impending consequences both internally and externally. The following article is intended to provide information on this.
B. The duties of the managing director
The prerequisite for any liability is a breach of duty by the managing director.
The duties of the managing director arise from the law, the articles of association and – if applicable – from his or her employment contract. In the case of several managing directors, the rules of procedure often result in binding, liability-relevant allocations of responsibilities.
The obligations resulting from the law are presented below.
I. Starting point: Business Judgement Rule
First and foremost, it is of considerable importance that the managing director is granted a wide scope of action in managing the business of the GmbH.
A possible liability for damages only comes into consideration if the limits
of this scope of action granted to him are exceeded.
As a rule of thumb, a lawful discretionary decision is deemed to have been made if the managing director concerned “could reasonably assume when making a business decision that he was acting in the best interests of the company on the basis of appropriate information” (so-called business judgment rule). Liability for a breach of duty is then generally excluded.
The background to this broad scope for action is that acting in the interests of the company can necessarily involve consciously taking business risks. The danger of misjudgement and miscalculation is inherent in this.
In short, entrepreneurial action is always associated with risks. Only actions that can be classified as completely irresponsible go beyond this scope of action.
II Duty to manage the company diligently and properly
The task of the managing directors is to manage the company. The managing directors have a duty to ensure that the company behaves lawfully in relation to third parties. In detail:
1. promotion of the purpose of the company
The management must actively pursue the purpose of the company as set out in the Articles of Association.
Accordingly, the Management Board is responsible in particular for managing the day-to-day business, developing the long-term corporate policy and, if necessary, implementing the corporate policy adopted by the shareholders.
According to
Section 43 (1) GmbHG, the benchmark for the proper fulfillment of these management duties is the “diligence of a prudent businessman”. This is substantiated by the duty to carefully determine the basis for decisions, to focus exclusively on the company’s best interests and not to take excessive risks (business judgement rule!).
If the above is observed by the managing director, taking a risk that later materializes or another wrong business decision is not in breach of duty and therefore does not give rise to liability.
2. binding to the law (so-called legality obligation)
When fulfilling legal obligations, a breach almost inevitably leads to a breach of duty in the internal relationship as well. Legal obligations must therefore be observed at all costs. The managing directors cannot assume that the shareholders do not wish to fulfill these obligations. This applies regardless of whether the duties are based on public law (e.g. tax law, social security law) or private law (e.g. the duty to ensure road safety).
3. no binding commitment to contracts
However, the situation is different when it comes to fulfilling obligations under private law arising from contracts.
It may well make business sense not to fulfill such obligations
and instead to wait for claims for damages and, if necessary, to fulfill them
(so-called “useful” breach of duty).
If the managing director comes to this conclusion after due consideration, there is no breach of duty on his part in relation to the company in this case.
III Duty of loyalty
The managing director has a special fiduciary duty to the company as an executive body, which means that in all matters affecting the interests of the company, he must pursue the company’s interests alone and not his own advantage or the advantage of third parties.
The fiduciary duty is important as a special duty compared to the general duty to manage the company because there is no entrepreneurial room for maneuver if the fiduciary duty is fulfilled. The above-mentioned duty to act in accordance with the law is a particular consequence of this duty of loyalty.
One of the consequences of the duty of loyalty is that
- Every managing director must make their full working capacity available to the company; overtime may also be owed.
- A managing director may not resign from office without consideration for the GmbH (no “resignation at an inopportune time”).
- Every managing director is subject to a comprehensive non-competition clause.
- Important: The managing director may not exploit his position for his own benefit. In particular, he may not exploit business opportunities of the GmbH for himself or enrich himself in any way to the detriment of the GmbH.
- Every managing director is subject to a comprehensive duty of confidentiality.
IV. Exemption from and reduction of liability
To a certain extent, it is an exemption from liability if the managing director has breached a duty without fault. This is because there is generally no liability without fault.
If there is a breach of duty, the managing director is presumed to be at fault. He would therefore have to prove that he is not liable in the individual case due to a lack of fault.
It is possible, for example, for the managing director to exonerate himself by claiming that he did not know and did not need to know that he was breaching a duty. This would have to be examined and assessed on a case-by-case basis.
In addition, the following cases may possibly exonerate the individual managing director:
1. allocation of responsibilities if there are several managing directors
Unless the articles of association or shareholder resolutions
provide otherwise, several managing directors are jointly authorized and obliged to manage the company.
Any delimitation of tasks may result from corresponding shareholder resolutions. In the absence of such resolutions, the managing directors themselves can allocate and delimit areas of responsibility among themselves. This requires that this division is made visible to the outside world, preferably in writing. In addition, the allocation in question must be in line with qualifications. It should also be noted that not every task can be assigned to the management.
The consequence of an effective division is that the individual managing director only has supervisory duties with regard to his co-managing directors. In principle, he is no longer responsible for the individual decisions made by the co-managing director.
2. delegation of duties
In principle, the GmbH managing director may delegate duties incumbent upon him without restriction. It goes without saying that such a permissible delegation of duties does not automatically lead to a release from liability. Rather, the managing director has a comprehensive duty of control and supervision as a result of the delegation. Read my separate article.
3. instructions from the shareholders
The shareholders of the GmbH can issue instructions to the managing directors at any time. The shareholders’ meeting is normally authorized to issue instructions, but not the individual
shareholders.
The managing directors’ duty to comply with instructions follows from the shareholders’ right to issue instructions. Failure to do so is a breach of duty and can lead to the managing director’s liability
. Conversely, managing directors are exempt from any liability if they act on the basis of a permissible instruction from the shareholders’ meeting.
The shareholder resolution therefore shifts the responsibility for the relevant action from the management to the shareholders. This even applies in principle if the company is deliberately harmed as a result!
This shift in responsibility is limited where the law sets limits for the shareholders and refuses to allow the corresponding shareholder resolution to take effect, i.e. declares it null and void. These are the cases of § 241 AktG, which also apply accordingly to the GmbH.
4. finally: liability relief in the employment contract
According to the prevailing opinion, the liability of the managing director can be limited via his employment contract. However, this appears questionable for reasons of creditor protection. This is because the creditors of the GmbH are dependent on the GmbH being managed with the necessary care. However, the law ultimately permits a restriction. In particular, the following limitations of liability are recognized as permissible:
- Exclusion of liability for negligent breaches of duty,
- Limitation of liability to a maximum amount,
- Shortening of the limitation period.
C. Cases of internal liability of the managing director
The standard liability standard is Section 43 (2) GmbhG, which applies if
– a managing director has breached a duty incumbent on him (see above),
– he is at fault,
– no other exemption from liability applies, and
– the company has suffered a loss as a result.
In addition, there are the following, more specific cases of liability:
I. Increased liability for damages in cases of § 43 para. 3 GmbhG
§ Section 43 (3) of the German Limited Liability Companies Act (GmbHG) provides for more stringent and mandatory liability for managing directors in two specific circumstances.
These circumstances relate to the capital maintenance requirement and serve to protect creditors. The increased liability applies if, contrary to
- § 30 GmbHG payments are made from the company’s assets required to maintain the share capital, § 43 Para. 3 Sentence 1 Alt. 1 GmbHG, or
- own shares in the company are acquired in accordance with the provisions of § 33 GmbHG, § 43 Para. 3 Sentence 1 Alt. 2 GmbH.
The facts are also fulfilled if equity-replacing loans within the meaning of Section 30 GmbHG are repaid to the shareholders. This follows directly from the fact that these are treated in the same way as share capital and therefore may not be repaid in the same way as share capital. However, the situation is different for equity-replacing loans in accordance with §§ 32a, b GmbHG. Repayment is permitted here, but the company may be entitled to reimbursement. Accordingly, the managing directors are not acting in breach of duty in the event of repayment in accordance with § 43 Para. 3 GmbHG. Whether the repayment is nevertheless in breach of duty in the specific situation must be assessed independently of this. In any case, it is permissible following corresponding instructions from the shareholders’ meeting.
The liability of the managing directors is mandatory in the aforementioned cases, whereby, as in all other cases, fault on the part of the managing director is a prerequisite for liability. If necessary, liability can also be reduced, i.e. limited to gross negligence, intent or a limitation of the amount. Acting on the instructions of the shareholders’ meeting only exonerates the managing director in accordance with § 43 para. 3 sentence 3 GmbHG as long as the claim is not asserted to satisfy the creditors.
II Compensation obligations in the event of a breach of the duty to file for insolvency, section 15a (1) InsO
The GmbH managing director’s obligation to file for insolvency, which was previously regulated in Section 64 GmbHG (old version), is now regulated centrally for all legal entities in Section 15a InsO.
If there is a reason for insolvency – insolvency or over-indebtedness – every managing director is obliged to file for insolvency and thus bring the company into proceedings in which the creditors’ claims are satisfied as far as possible.
According to Section 15b (1) InsO, managing directors may no longer make payments on behalf of a company once it becomes insolvent or overindebted. Payments are therefore generally prohibited from the time the obligation to file for insolvency arises. This is because the managing director may not favor individual creditors by making payments that reduce the available funds at the expense of the creditors as a whole.
An exception applies to payments that are compatible with the diligence of a prudent and conscientious manager, section 15b (1) sentence 2 InsO. In these cases, the payment may not be in breach of duty from the outset. The criterion for assessing the duty of care to be observed is the objective interest of the creditor.
The question of when a payment is deemed to be “consistent with the due care and diligence of a prudent and conscientious manager” is specified in Section 15b (2) and (3) InsO – a novelty compared to the previous legal situation:
According to Section 15b (2), payments that are made “in the ordinary course of business”, in particular those payments that are “necessary to maintain business operations”, are deemed to be consistent with the diligence of a prudent and conscientious manager.
However, pursuant to section 15b (2) sentence 2 InsO, payments made in the ordinary course of business within the meaning of section 15b (2) sentence 1 InsO are only privileged as long as the managing directors – which they must demonstrate and prove – “take measures to permanently eliminate insolvency maturity or to prepare an insolvency application with the diligence of a prudent and conscientious manager”.
§ Section 15b (3) InsO stipulates that payments made after the expiry of the insolvency application period pursuant to section 15a (1) InsO are not compatible with the diligence of a conscientious manager. This means that the manager who files the insolvency application late and has made payments that reduce the assets during the delay is regularly liable in accordance with section 15b (1) InsO.
The consequence of a prohibited payment is then a corresponding reimbursement obligation on the part of the managing director; section 15b (4) sentence 1 InsO.
D. The external liability of the managing director
Liability of the managing director towards third parties (external liability) is the exception, because the legislator has made a fundamental decision in § 43 Para. 2 GmbHG in favor of internal liability of the managing director towards the company.
The following cases of nonetheless existing external liability are significant:
I. External liability under civil law
External liability of the managing director may arise from civil law as follows:
1. quasi-contractual liability due to so-called culpa in contrahendo (c.i.c.), §§ 280 para. 1, 311 para. 3 BGB
An external liability of the managing director may arise on a contractual level from Section 311 (3) BGB.
According to Section 241 (2) of the German Civil Code (BGB), legal duties to protect can also exist for a third party who “claims a particular degree of trust and thereby significantly influences the contract negotiations or the conclusion of the contract”.
Liability is discussed in the following cases:
- Economic self-interest
Personal liability of the managing director towards third parties is initially considered if he has such a close (economic) relationship with the subject of the contract negotiations that he is ultimately acting as a representative on his own behalf.
The managing director is then liable under the aspect of culpa in contrahendo pursuant to Sections 280 (1), 311 (3) BGB due to direct economic self-interest. The standards to be applied for this self-interest are strict. It is not sufficient, for example, that the negotiating managing director is also the sole or majority shareholder of the GmbH or that he acquires a commission claim by concluding the contract. The BGH has affirmed liability in the event that the managing director’s activity is aimed at remedying damage for which he could otherwise be held liable by the company itself or in cases in which the managing director did not want to pass on the contractual performance to the company from the outset but wanted to use it for his own specific purposes.
- Utilization of special personal trust
A further group of cases is the use of special personal trust by the managing director. This refers to cases in which the managing director generates additional, particularly personal trust in the completeness and correctness of his declarations that goes beyond normal negotiating loyalty and on which the other party’s decision is based. It is required that the managing director has made a declaration similar to a guarantee to the contractual partner.
2. liability in tort, Section 823 (1) and (2) BGB
A managing director’s liability towards third parties may also arise from tort law.
The prerequisite is that the managing director damages a third party in direct connection with his activities as managing director and in doing so culpably violates either a protected good within the meaning of Section 823 (1) BGB or a protective law within the meaning of Section 823 (2) BGB.
The company itself may be jointly and severally liable with the managing director.
A distinction must be made between active action and omission:
Liability for active actions
If a managing director’s own actions violate a legal interest specified in Section 823 (1) BGB, in particular the life, limb or property of a third party, the managing director is personally liable alongside the company. This is largely undisputed.
The vicarious liability pursuant to Section 823 para. 2 BGB extends the external liability limited to only a few named legal interests pursuant to Section 823 para. 1 BGB by an additional
liability under protective law.
While § 34 GmbHG is not a protective law, the following can be considered protective laws whose violation by the managing director can trigger liability: § 35a GmbHG, § 58 Para. 1 No. 2 GmbHG, § 82 GmbHG, § 85 GmbHG and § 15a Para. 1 InsO.
Various other protective laws can be found in criminal law, such as § 266 StGB (breach of trust), § 263 StGB (fraud), §§ 266a para. 1 StGB, 14 para. 1 no. 1 StGB (obligation to pass on employee contributions to social security) and §§ 283 para. 2 sentence 1 no. 5, 7, 283b para. 1 no. 1, 3 in conjunction with § 14 para. 1 no. 1 StGB (bankruptcy offenses). § Section 14 para. 1 no. 1 StGB (bankruptcy offenses).
If the managing director violates such a protective law through his own negligent or willful, unlawful and culpable actions
, he shall be held directly and personally liable to the injured third party under civil law in addition to any criminal liability.
Liability for omission (guarantor liability)
Liability for injunctive relief under civil law presupposes that the managing director
is under an obligation to intervene in the sense of a duty to avert success.
This is particularly relevant in the area of traffic safety and organizational duties towards third parties. As already explained, a breach of the duties resulting from the managing director’s position as an executive body generally only leads to liability towards the company.
From this, the BGH deduces that the managing director is not liable to third parties even if he was aware, for example, of competition law infringements, copyright or trademark infringements and failed to prevent them.
Something else only applies if the managing director assumes a “guarantor position” to protect third parties from endangering or infringing their legal interests. This does not result from the mere position as managing director of a GmbH. Rather, the managing director must have breached his own duty of conduct or organization over and above his position as an executive body, which requires special justification in the form of a tort-specific duty to intervene.
It is recognized that GmbH managing directors have a guarantor position that gives rise to liability, particularly in the following cases:
- as a so-called protective guarantor for the assumption of warranty for third-party goods entrusted to the GmbH in the broader sense
- as a so-called supervisor guarantor from “traffic safety obligation” by virtue of taking over the safeguarding of “GmbH’s own” sources of material hazards such as: hazardous operating goods, vehicles, equipment, etc.
In the case of breaches of competition law by the GmbH, mere knowledge and the possibility of preventing the breach of competition law alone is not sufficient – contrary to what was previously assumed. Rather, the infringement of competition must be based on conduct attributable to the managing director, e.g. in the case of a measure that is typically decided at management level. Liability for injunctive relief may also be considered if the managing director has created a source of danger for competition law infringements, for example by staying abroad permanently, and in this way avoids the possibility of taking note of any competition law infringements and initiating appropriate countermeasures.
3. damages due to delay in filing for insolvency
The external liability of the managing director under tort law for delay in filing for insolvency deserves special mention.
§ Section 15a (1) sentence 1 InsO obliges the managing directors of a GmbH to file for insolvency within three weeks (insolvency) or six weeks (over-indebtedness) of the occurrence of a reason for insolvency. This obligation exists in the interests of all legal transactions, which are to be protected from insolvent companies. Accordingly, Section 15a (1) sentence 1 InsO is a protective law in favor of all creditors of the GmbH.
By breaching the duty to file an application, the managing director may therefore be personally liable for damages in accordance with section 823 (2) BGB in conjunction with section 15a (1) sentence 1 InsO.
The only prerequisite for liability is that the managing director is in breach of duty and
culpably fails to file for insolvency in good time. Please refer to the above explanations under C. II.
New creditors whose liabilities were established after the existence of a reason for insolvency are entitled to compensation for their full loss, not just the so-called quota loss. They can claim this themselves, but not the insolvency administrator. The managing director is liable for the so-called negative interest. He must therefore place the injured creditor in the same position as if the damaging event had not occurred.
Existing creditors, on the other hand, can only demand compensation for the so-called quota deterioration. For existing creditors, i.e. creditors who were already creditors of the GmbH before the reason for insolvency occurred, the damage consists in the fact that their claims became even more worthless than they already were. If the application had been filed in good time, the insolvency quota would have been correspondingly higher. Their loss therefore consists of the deterioration in the quota.
II External liability in tort for breaches of duties under public law
A GmbH is subject to a large number of obligations under public law.
These include obligations in the areas of occupational safety, social security, tax law, environmental protection law and, of course, product-related obligations such as food law or pharmaceutical law. As usual, the addressee of these obligations is primarily the GmbH itself. However, the managing director as an executive body is often also regarded as a “disruptor” within the meaning of the law on averting danger, meaning that the managing director can also be held liable under police and regulatory law. As the disruptive party can be required to eliminate the disruption, this can lead to personal liability of the managing director for the impairment of the legal interests of the general public or other third parties by the GmbH.
In addition, the liability of managing directors generally arises from Section 9 (1) OWiG and Section 14 (1) StGB. According to these provisions, corporate bodies are liable under criminal law and administrative offense law for the fulfillment of the company’s obligations, as the characteristics of the company are attributed to them personally. This also leads to civil liability of the managing directors under Section 823 (2) of the German Civil Code (BGB), insofar as these are duties that protect third parties.
The obligations arising from tax law and social security law deserve special attention:
1. tax liability
According to Section 34 (1) AO, the managing director must fulfill the company’s tax obligations at
.
He must keep the books, submit the tax returns and pay the taxes from the assets of the GmbH. Liability for breach of these duties is stipulated in § 69 AO. According to this, the managing director is liable if he breaches his tax obligations intentionally or through gross negligence.
The tax obligations are defined so broadly by case law that the
managing director is de facto responsible for ensuring that taxes are paid when due.
If this is not done, the managing director is liable.
However, the prerequisite is that funds are available from which the taxes can be paid. In this case, previous breaches of duty – e.g. failure to submit a tax return – no longer lead to liability, as they were not causal for the tax shortfall. The available funds also include credit funds that are available to the company or that can be procured. In principle, the due date of the taxes is decisive for availability.
2. liability for the payment of social security contributions
In the case of employee social security contributions, a distinction must be made between the employer’s share and the employee’s share. The former is a separate debt of the GmbH and must be paid by the GmbH from its own funds. It is a normal liability of the GmbH; no special rules apply to its payment. Therefore, the managing director is not personally liable in this respect.
However, the situation is different for employee contributions. The withholding of
employee contributions is punishable under Section 266a StGB. This obligation applies to the employer, i.e. the GmbH. However, the managing director is also criminally liable for the fulfillment of this obligation under Section 14 (1) StGB.
As Section 266a StGB is a protective law, the managing director is also liable under civil law in accordance with Section 823 (2) BGB if he does not pay the employee contributions. Particularly in a financial crisis, the managing director can no longer rely on the employees to whom he has assigned this task to carry it out as before. In this situation, the managing director’s duty of supervision comes into play; as a result, the managing director must personally ensure that the contributions are paid. If there are several managing directors, those managing directors who are not responsible for this according to the internal allocation of tasks also have an increased duty of supervision in the event of a company crisis.
As a result, the liability of the managing director for the employee’s social security contribution is similarly strict as the tax liability. This is the result of the criminal liability for non-payment of contributions under Section 266a StGB and the extension of employer status to the managing director under Section 14 para. 1 no. 1 StGB
III Finally: Liability for fines arising from breaches of supervisory duties
The possible liability under Section 130 OWIG for breaches of supervisory duties is also significant and should not be neglected. § Section 130 (1) OWiG reads:
“Any person who, as the owner of a business or enterprise, intentionally or negligently fails to take the supervisory measures necessary to prevent infringements of obligations in the business or enterprise which affect the owner and the violation of which is punishable by a penalty or fine, shall be deemed to have committed an offense if such an infringement is committed which would have been prevented or made considerably more difficult by proper supervision. The necessary supervisory measures also include the appointment, careful selection and monitoring of supervisors.”
The actual infringement is therefore committed by an employee who, however, cannot be held liable himself due to his lack of ownership. Therefore, the supervisor is liable under the law on fines for or in place of the GmbH, which is actually obliged but unable to perform, for incorrect supervision and organization of the company.
If such a “proxy offense” is committed, the GmbH is also liable for its own fine in accordance with § 30 OWiG.
The basic prerequisite for liability is the objective breach by an employee of the owner GmbH’s operating obligations. This breach is the reason for the (omitted) necessary supervision or monitoring on the part of the management, which depends on the type, sector, size, organization and risk areas of the company: Approximately the entire spectrum of the traffic duties of the negligence offenses as well as the guarantor duties of the omission offenses – in simple terms, “virtually everything”. In practice, omissions completely dominate.
As a minimum standard, proper business organization includes a proper division of tasks and organization, careful selection and supervision of employees, instruction and education of employees, monitoring and control of internal execution, reporting obligations of the supervisory and management bodies, intervention and, if necessary, sanctions in the event of violations as well as special supervision in the event of irregularities.
Please also read my separate article on the requirements for a delegation of duties
From a subjective point of view, the violation must have been conscious or at least foreseeable and avoidable by internal precautions with proper supervision and control of the supervisory body.
E. Conclusion
The aim of the above article is to show managing directors and those who want to become managing directors that the range of duties of the managing director as an executive body of the GmbH is very extensive and that personal liability, including external liability, is by no means rare.
The managing director is responsible for everything as the legal organ of the GmbH, which is incapable of acting on its own. Restrictions on his liability are possible to a limited extent – e.g. by delimiting responsibilities in the case of several managing directors – provided they have been implemented in an effective manner.
Many managing directors find it difficult to determine in individual cases which actions constitute the proper fulfillment of duties. As shown above, the managing director is obliged to act in the best interests of his GmbH on the one hand and to comply with the law on the other. As shown above, in individual cases, proper conduct may also include breaching a contract with a business partner.
In view of the numerous circumstances that can result in personal liability for the managing director, legal advice is strongly recommended, especially in unclear constellations.
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