Managing directors and their personal liability
Managing directors of a GmbH enjoy a comfortable position: In principle, they are not personally liable for incorrect decisions, even if they cause financial damage to the company.
However, Section 43 of the German Limited Liability Companies Act (GmbHG) states that managing directors must “exercise the due diligence of a prudent businessman in the affairs of the company”.
If managing directors breach this due diligence obligation, they become personally liable to the company for damages.
Due diligence obligations and one’s own inability
As long as managing directors make rational and understandable decisions within the scope of their due diligence obligations, they do not face the risk of personal liability.
Yet, when do inability and a managing director’s personal liability come into play?
Strictly speaking, a prudent businessman’s due diligence obligations also mean that managing directors must know themselves and be aware of the limits of their own competence, and act accordingly. Managing directors who are aware of their own limits with regard to certain aspects of their own work must at least ensure that these tasks are performed reliably and properly by others.
This means that even if managing directors delegate tasks beyond their expertise, they always remain responsible for the proper fulfillment of these tasks.
Federal Fiscal Court ruling on liability due to inability of a managing director
One case before the Federal Fiscal Court (BFH) addressed this constellation (BFH, decision dated November 15, 2022, ref: VII R 23/19). The managing director of a GmbH effectively let his son manage the company, although his son was “only” employed as an authorized signatory of the GmbH. In the process, the managing director also entrusted his son with the tax affairs of the GmbH. However, his son reduced sales tax, trade tax and corporation tax for a number of years. When the tax authorities expected the managing director to settle the tax debts personally, he refused to pay, arguing that his son had managed the business alone and was responsible. Furthermore, due to his advanced age and lack of computer skills, he was unable to verify whether his son had properly fulfilled the tax obligations of the GmbH.
Negligent supervision results in personal liability
The BFH refused to accept this argument. The managing director was held liable for the tax debts of the GmbH.
He had violated his duties as managing director through gross negligence at the very least. Because even if he was unable to perform all of his duties himself, he must at least be capable of supervising these tasks to ensure that others perform them properly. This also applies submitting tax returns and suchlike. Otherwise, the managing director has failed to fulfill their monitoring duties.
Ruling only relevant for tax issues?
This case before the BFH concerned tax proceedings. However, this does not mean that the fundamental principles of liability arising from inability and negligence cannot be applied to other constellations.
That is why managing directors are always well advised to recognize and accept the limits of their own expertise and abilities, and to organize work processes appropriately. Managing directors who are unable to do so are advised to resign from office if necessary to avoid facing the risk of personal liability due to inability.
Summary of the key facts:
- Managing directors who do not perform their duties with the diligence of a prudent businessman run the risk personal liability for damages.
- Managing directors who do not perform all of their tasks themselves must at least capable of properly supervising the persons performing them.
- If they fail to do so, the managing directors may become personally liable by breaching their supervisory duties.
