GmbH Managing Directors: Duties and Liability

Managing director liability in the GmbH: the key rules

Managing director liability in a German GmbH rests on a short provision with wide reach. Under § 43(1) of the GmbH Act (GmbHG), managing directors (Geschäftsführer) must apply the care of a prudent businessman in the company's affairs; those who breach their duties are jointly and severally liable to the company for the resulting loss (§ 43(2) GmbHG). Claims become time-barred after five years (§ 43(4) GmbHG). Alongside this internal liability towards the company, managing directors face personal exposure towards third parties in specific areas: for payments made after the company became insolvent, for the company's taxes, for employees' social security contributions, and in tort.

The position of a GmbH managing director differs from that of an AG management board member in one important respect: the shareholders can give binding instructions, and following lawful instructions generally protects the managing director, except where creditor protection rules apply.

This briefing explains the duties of GmbH managing directors, the role of shareholder instructions and discharge, the main areas of personal liability and how managing directors can protect themselves.

Duties of GmbH managing directors

The duty of care under § 43(1) GmbHG covers several distinct duties:

• Duty of legality: comply with the law and ensure that the company complies with it, including tax, social security, competition, data protection, sanctions and environmental law. This includes an appropriate compliance organisation.
• Duty of care in management: run the business diligently, take entrepreneurial decisions on an adequate information basis and avoid unjustifiable risks. The principles of the business judgment rule apply by analogy.
• Duty of loyalty: put the company's interests first, avoid conflicts of interest, refrain from competing with the company and not exploit business opportunities belonging to it.
• Organisational duties: keep proper books, prepare annual accounts, file the shareholder list and maintain internal controls.
• Capital maintenance: make no payments to shareholders out of assets needed to preserve the share capital (§ 30 GmbHG); managing directors are liable for such payments under § 43(3) GmbHG.
• Crisis duties: monitor the company's financial position, take early-warning measures under the StaRUG and file for insolvency in time.

Breaches of any of these duties can lead to managing director liability towards the company. Where there are several managing directors, the allocation of responsibilities can limit individual exposure, but each managing director remains responsible for monitoring the others and for matters of overall responsibility, such as tax compliance and the insolvency filing.

Shareholder instructions and discharge

Managing directors are bound by lawful instructions of the shareholders' meeting. If a managing director follows such an instruction, the company generally cannot claim damages from them for the consequences, because the company, through its shareholders, has itself made the decision. This protection has limits. It does not apply where the instruction is void, for example because it violates mandatory law, and it does not apply to payments in breach of capital maintenance rules where compensation is needed to satisfy creditors (§ 43(3) sentence 3 GmbHG). Equally, instructions do not protect against liability for payments made after insolvency (§ 15b(4) InsO).

Shareholders can also discharge managing directors by resolution (§ 46 no. 5 GmbHG). In the GmbH, discharge generally means that the company waives claims that were known or recognisable to the shareholders at the time, which distinguishes it from discharge in an AG. Again, creditor protection limits the effect of discharge for capital maintenance and insolvency-related claims. Our briefing on the business judgment rule explains how decisions can be structured to reduce risk.

Insolvency-related liability

The most significant personal risk for managing directors arises in a crisis. Managing directors must file for insolvency without culpable delay, at the latest three weeks after the company became illiquid and six weeks after it became over-indebted (§ 15a(1) InsO).

After the company becomes illiquid or over-indebted, they may no longer make payments on its behalf, unless the payments are compatible with the care of a prudent and conscientious manager (§ 15b(1) InsO). Payments in the ordinary course that serve to maintain business operations are deemed compatible with that standard during the filing period, but only as long as the managing directors pursue measures to remove the insolvency or prepare a filing; after the filing deadline has passed, payments are generally not compatible (§ 15b(2), (3) InsO).

This is the most expensive form of managing director liability in practice. Managing directors who make prohibited payments must reimburse them to the company, limited to a lower loss of the creditors if they prove it (§ 15b(4) InsO). The company cannot waive or settle these claims, except in specific cases such as a settlement made by an insolvency administrator, and acting on a shareholder resolution is no defence. The claims become time-barred after five years, or ten years for listed companies (§ 15b(7) InsO). Insolvency administrators pursue them routinely. D&O insurance generally covers them; see our briefing on directors and officers insurance.

Delaying the filing is also a criminal offence, and creditors who suffer loss because of a late filing can claim damages in tort. See our page on directors' duties in a crisis.

Personal liability for taxes and social security contributions

The legal representatives of a company must fulfil its tax obligations and ensure that taxes are paid from the funds they manage (§ 34(1) AO). Where taxes are not paid as a result of intentional or grossly negligent breaches, the managing director is personally liable (§ 69 AO), and the tax office can issue a liability notice. Wage tax is treated strictly: in a liquidity shortage, managing directors are generally expected to reduce net wages so that the corresponding wage tax can be paid.

Withholding employees' social security contributions from the collecting agency is a criminal offence (§ 266a StGB), and managing directors are personally liable in tort for the unpaid contributions. Because these obligations are among the first to be affected in a liquidity crisis, managing directors should give them priority and seek advice early. An internal allocation of responsibilities to a finance colleague does not release the other managing directors from monitoring that tax and social security payments are actually made.

Other personal liability towards third parties

Apart from these specific areas, managing directors are generally not liable to third parties for the company's obligations. Exceptions arise where the managing director personally commits a tort, for example fraud, intentional infringement of IP rights, product safety violations or competition law breaches, or where they personally create a special reliance in contract negotiations. In competition law, fines can be imposed on the managing director personally for breaches of supervisory duties (§ 130 OWiG), and the company may seek recourse for fines imposed on it, a question on which the case law has developed in recent years.

Managing directors of subsidiaries in international groups face particular risks: they are bound by German law even where group management takes decisions abroad, and they cannot rely on group instructions to justify breaches of German tax, social security or insolvency duties.

Managing director liability in international groups

Many GmbHs are subsidiaries of foreign groups, and their managing directors are often group employees based abroad or local managers reporting to a regional head office. Managing director liability does not depend on where the person lives or whose employee they are: the duties under German law attach to the appointment as managing director. Three issues come up regularly.

First, group instructions. The parent, as shareholder, can instruct the managing director, but instructions to make payments that endanger the subsidiary's ability to pay its debts, to strip assets below the share capital or to ignore German tax and social security duties do not protect the managing director and may even create liability for the parent. Cash pooling arrangements need particular attention, because upstream payments must be covered by a full-value repayment claim.

Second, information. A managing director who depends on group functions for accounting, treasury and tax must ensure that they receive the information needed to fulfil their own duties, in particular to monitor liquidity and the insolvency tests. Group reporting lines do not replace the managing director's own assessment.

Third, resignation. A managing director who disagrees with group decisions can resign, but resigning at the wrong time, for example to avoid a filing duty, may itself be abusive and does not end liability for past conduct. Advice before resignation is therefore advisable in every such case. Our page on international clients covers the wider set-up of German subsidiaries.

Reducing managing director liability

• Service agreement: clear allocation of responsibilities, a commitment to D&O cover including run-off, and contractual rules on indemnities and legal costs within the limits of the law.
• Rules of procedure: a written allocation of responsibilities between managing directors and a catalogue of transactions requiring shareholder approval.
• Documentation: board papers, minutes and records of information and advice for significant decisions.
• Shareholder approval: for risky decisions, a shareholder resolution or instruction, ideally documented.
• Compliance system: appropriate to the company's size and risks, with regular reporting.
• Crisis protocol: early warning indicators, liquidity planning and immediate advice when indicators appear.
• Hand-over on leaving: a written record of open issues and of the company's financial position on the date of resignation or dismissal.

Managing directors' service agreements are discussed in our briefing on service agreements for GmbH managing directors.

How TRW & Co helps

We advise managing directors and companies on managing director liability: duties and organisation, rules of procedure, shareholder instructions and discharge, crisis management and insolvency filing duties, tax and social security exposure, D&O coverage and the defence of claims by companies, insolvency administrators, tax offices and creditors. Our corporate and restructuring lawyers work together on these matters. Contact us for an assessment of your position.