GmbH Managing Director Liability – an Overview
GmbH managing directors and liability – the limited liability company, like the entrepreneurial company (UG), is still an attractive legal form for many entrepreneurs. This is not least due to the limited liability.
This is because external liability to creditors of the GmbH is limited to the company’s assets (§ 13 Paragraph 2 GmbH Act). However, in recent years there has been an increasing tendency to make direct claims against the managing directors of GmbHs, which means that they are also liable with their personal assets.
Accordingly, personal liability is an essential issue for every managing director.
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This article provides an overview of the various elements of liability, relating both to external liability vis-à-vis third parties and to liability vis-à-vis the GmbH.
Table of contents
- External liability: When are managing directors of a GmbH liable vis-à-vis third parties
- Internal liability: When are managing directors of a GmbH liable vis-à-vis the company
- When is the managing director liable with his private assets?
- Legal advice
GmbH managing directors – liability in the external relationship
Under certain circumstances, managing directors of a GmbH are not only liable to the GmbH for breaches of their duties. There are also circumstances in which managing directors are liable to third parties, for which even slight negligence is sufficient:
Liability of the GmbH managing director for social security contributions and taxes
As the head of the company, the managing director is liable for non-paid social security contributions for employees and employers (Section 823 (2) BGB in conjunction with Section 266a StGB).
Criminal liability under section 266a of the Criminal Code may also be considered, in addition to civil liability.
The employer or the managing director as well as the company itself can be held responsible if they provide incorrect or insufficient information on social security-related issues in their declarations to the collection agency (e.g. on the number of employees or their wage levels).
If he keeps the collection agency in the dark about such facts and withholds from it the employee’s or employer’s social security contributions, including labour promotion, he is liable to prosecution. The situation is similar with contributions that only concern the employer, for example with regard to accident insurance.
Penalties include imprisonment of up to five years or fines, and in the case of particularly serious violations even up to ten years.
Furthermore, in the case of intent or gross negligence, the tax liability according to § 69 AO must be taken into account.
Liability of the managing director when representing the GmbH
If the managing director does not expressly state that he is acting on behalf of a GmbH, he may be considered personally liable. Since business-related transactions are recognised in such situations, the GmbH becomes liable on the basis of the power of attorney arising from this transaction, which is unlimited externally.
Furthermore, the managing director is jointly and severally personally liable if the business partner was not aware that his counterpart is a GmbH.
If the managing director does not comply with the restrictions on representation listed in the commercial register, he may be liable as a representative without power of representation under § 179 BGB (e.g. joint representation).
Furthermore, the managing director is liable for carelessness in contract negotiations if he relies on the business partner and trusts in his credibility, honesty or abilities and thereby influences the contract negotiations.
Only if the managing director has given the negotiating partner an additional assurance, originating from him personally, of the truthfulness and completeness of his statements, which was decisive for the other party’s decision, is the managing director personally liable.
Personal liability of the managing director in the event of a change of shareholders
If the number of shareholders changes, the managing director must immediately report this to the commercial register and submit an amended list of shareholders.
The managing director is personally liable to creditors who have suffered damage as a result of any omission if he fails to fulfil this responsibility.
Liability for late submission of annual accounts
According to the HGB (§ 325 HGB), the annual financial statements must be submitted to the commercial register by the end of the twelfth month after the balance sheet date at the latest.
Managing directors who fail to comply with this obligation face a penalty of at least 2,500 euros imposed by the registry court.
Liability of the managing director in tort
Failure to comply with the retention of title or failure to recall defective goods in a timely manner may result in tort liability to third parties.
Personal liability in tort
In addition to the GmbH, the managing director is personally liable as an infringer if the advertising and other actions of the GmbH violate competition law norms or industrial property rights (UWG, GWB, patents, trademarks, etc.).
Liability of the managing director in the event of insolvency
If he conceals the fact that the company is about to become insolvent, the managing director is personally liable.
According to § 826 BGB, the GmbH managing director can be held liable for damages due to intentional immoral damage if he knows or learns that the GmbH cannot fulfil its obligations or that the feasibility of the contract is endangered from the outset due to the indebtedness of the GmbH.
In the event of insolvency, the company’s creditors may claim damages from the GmbH managing director pursuant to section 823 (2) BGB in conjunction with section 15a (4) InsO.
GmbH managing directors – liability in the internal relationship
In addition to their external liability, GmbH managing directors are also internally liable to the company. Pursuant to § 43 (1) GmbHG, a managing director must manage the affairs of the GmbH with the diligence of a prudent businessman.
A managing director has the duty to avert damage to the company and to actively promote the purpose of the company in accordance with the requirements of the shareholders.
As soon as a managing director acts in breach of duty, he must pay damages to the GmbH. In this respect, the risk of a managing director is greater than often assumed, since he also bears the risk of personal liability towards the GmbH.
A GmbH managing director is liable if he causes damage or violates his duties.
The liability risks of a GmbH managing director are divided into three phases: liability during the ongoing operation of the company, liability with regard to duties during the formation period, and liability in the event of possible crises of the company:
Liability risks for managing directors in ongoing operations
- non-competition clause (prohibited activity for competitors)
- waiving realisable claims or allowing this to become time-barred
- Convening shareholders’ meetings (formal and deadline requirements)
- unlawful repayment of capital contributions (§§ 43 para. 3, 30 GmbHG)
- credit transactions involving excessive risk
- transactions contrary to the company’s purpose
- Contracts leading to relevant costs without benefits
The GmbH managing director is not only liable for the liabilities he has entered into, but is also exposed to an additional risk if he grants loans to creditors.
One of the clarifications of the 2008 GmbH reform states that such disbursements as cash pooling or back-and-forth payments are no longer considered inadmissible under sections 30, 19 (4) GmbHG if a full claim for consideration or repayment is asserted against the performance.
However, it is now the responsibility of the GmbH managing director to examine and assess the entire value. As a result, there is a risk that the managing director may negligently assess the creditors’ ability to pay incorrectly and thus become liable for damages.
Loans to GmbH managing directors and other senior executives are highly regulated in Germany (§ 43a GmbHG).
Accordingly, a loan must be refused if it affects the capital of the shareholders. This is the case, for example, if the loan is taken out of the share capital. Furthermore, loans to family members also fall under this regulation.
Liability risks for managing directors arising from duties during the formation phase
- Setting up bookkeeping
- Registration of the trade
- Health insurance registration (employees)
- correct information on business documents
- untruthful statements on entry in the commercial register (§ 9a GmbHG)
In the case of hidden contributions in kind, the GmbH managing director is additionally exposed to the risks of civil and criminal liability after the 2008 GmbH reform.
By registering the company as a cash contribution, although in reality it is a hidden contribution in kind, the GmbH managing director violates §§ 8, 57 (2) GmbHG.
If this contribution in kind is not of value, claims for damages can be asserted. Criminal liability for managing directors arises from section 82 (3) GmbHG, which also provides for a five-year limitation period for managing director appointments.
Liability risks for managing directors in the event of a crisis
- insolvency or over-indebtedness
- late application for insolvency
- failure to inform the shareholders’ meeting in the event of a loss of more than 50% of the share capital
- payments to the GmbH which had to lead to the occurrence of insolvency
- in the case of UG (haftungsbeschränkt): failure to convene the partners’ meeting in good time when insolvency is imminent.
A company can also refrain from making a claim against its managing director. There are several possibilities for this. For example, the liability of the managing director can be limited in the managing director’s contract, a unanimous resolution can be passed by all shareholders or a waiver can be agreed, whereby all shareholders must agree.
However, this does not allow the interests of creditors to be unfairly disadvantaged. In addition, the violation of duties for the GmbH managing director is relevant under criminal law.
The criminal offences in focus here are fraud and breach of trust (§§ 263, 266 StGB), breach of duty in the event of insolvency (§§ 283-283d, 14 StGB) as well as false statements and loss reports (§§ 82, 84 GmbHG).
When is the managing director liable with his private assets?
According to the GmbH Act, the GmbH managing director is legally obliged to compensate the company for the damage caused by the neglect of his due diligence as a prudent businessman during his activity as managing director.
If the following conditions are met, the GmbH managing director is liable to the company with his entire private assets:
- The GmbH managing director can be proven to have acted either negligently or intentionally. Negligence is deemed to have occurred if the care required of a prudent businessman in business transactions was not observed. A GmbH managing director also acts negligently if he trusted that no damage would occur. If the GmbH managing director has accepted a damage or even has it in mind, there is intent.
- The GmbH must have suffered financial damage or disadvantage.
- In order for a breach of duty to be considered the cause of a material damage, there must be a causal connection between the breach of duty and the damage itself.
If there are conflicts of interest and rivalry with one’s own company, the managing director of the company must compensate the GmbH for the damage.
Using company funds to finance private travel, hiring people for private interests, employing family members who are not trained for the position, or contracting companies in exchange for a share of the turnover may be considered activities to be sanctioned.
Also prohibited are offences such as fraud, bribery to obtain contracts for the company, embezzlement, condoning or aiding and abetting interference by shareholders with the company’s assets that destroys the company’s existence, and more.
The lawyers of the Herfurtner law firm advise companies and managing directors on all questions of company law. In particular, the question of the liability of the GmbH managing director and the related effects on private assets are common topics in practice.
In addition, we provide advice to shareholders and managing directors of companies during the formation, ongoing operation or in the event of insolvency.
If you have invested in or made payments to one of the companies on this list, our lawyers will be at your disposal at short notice.