Does approval of annual financial statements discharge the managing director?

 The Brandenburg Higher Regional Court has ruled that it does not – at least not always and not automatically.

Does approval of annual financial statements discharge the managing director?

Legal disputes repeatedly arise in connection with the approval of the annual financial statements and the discharge of the managing director. The Brandenburg Higher Regional Court has provided an answer to one question in this context: Does the approval of the annual financial statements automatically constitute discharge of the managing director? (Brandenburg Higher Regional Court, decision dated June 29, 2022, Ref.: 7 U 133/21)

Discharge

Section 46 No. 5 of the Law on Limited Liability Companies (GmbHG) states that the managing director can be discharged by resolution of the shareholders’ meeting. This is immensely important for managing directors because the discharge generally rules out their personal liability towards the company for certain periods of time.

However, this only applies to processes which shareholders can verify, for example, via the annual financial statements and related reporting, etc. If a managing director conceals certain facts “in the books”, the discharge resolution does not cover these facts. In this case, the company can then assert claims for damages against the managing director – despite a valid resolution to grant discharge.

Conversely, this does not apply if the managing director’s misconduct is verifiable or recognizable for the shareholders and could have been investigated: If shareholders work to resolve inconsistencies in the annual financial statements, then a resolution to discharge the managing director is effective despite any misconduct – ruling out any claims for damages.

If shareholders somewhat carelessly pass a resolution to grant discharge although they could have identified the misconduct, this rules out claims for damages by the company against a managing director for the relevant period.

Managing director’s salary: A salary increase, perhaps?

The Brandenburg Higher Regional Court also reached a decision in a dispute concerning discharge resolutions, annual financial statements, and claims for damages. The dispute arose between a GmbH and its shareholder-managing director, who has since been dismissed.

The managing director had treated himself a salary increase without the mandatory consultation with the shareholders. This also became apparent in the respective balance sheets. Despite the unusually high figure in the balance sheet, the shareholders’ meeting nevertheless approved the managing director’s actions for two financial years. However, only the approval of the annual financial statements was issued for other years and not an explicit discharge resolution.

The shareholders eventually realized that the managing director had granted himself a higher salary without their consent. In response, the GmbH demanded compensation from its former managing director, claiming the difference between the original and the increased salary.

Approved annual financial statements are not a discharge

Yet the claim for damages was only partially successful.

The claim for damages was denied for the years for which a discharge resolution had been passed. The shareholders should have been able to identify the “overpayments” in the balance sheets in these years and investigate accordingly.

In contrast, this is not the case for financial years in which only the annual financial statements were adopted. In this case, the Higher Regional Court awarded the company damages equal to the overpayment for these periods: The approval of the annual financial statements does not discharge the managing director. It only confirms certain expenditures without any examination of whether the transactions themselves are lawful. As such, the approval of the annual financial statements can only serve as a discharge if the resolution indicates that the discharge of the managing director is also intended (if the discharge was also specifically discussed in the voting context, for example).

The court was of the opinion that the approval of the annual financial statements does not automatically discharge a managing director.

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Summary of the key facts:

  • The discharge resolution of the shareholders’ meeting protects managing directors from liability claims by the company for certain periods. Yet, exceptions are possible.
  • Approval of the annual financial statements does not automatically discharge the managing director.
  • The approval of the annual financial statements can only be regarded as a discharge in exceptional circumstances where the approval identifiably includes the discharge of the managing director.