Manager Liability: Even directors of Ltds. are liable

Members of the Management Board and Managing Directors may be personally liable for any payments that still need to be made after insolvency proceedings have begun or after determination of the company's excessive indebtedness. These insolvency regulations also apply to directors of limited companies (private companies limited by shares). This applies even if the limited company was established under English law. This was decided by the Federal Court of Justice on March 15, 2016 (II ZR 119/14).

German law also applies to British companies

This judgment was intended to alert directors of limited companies (Ltds.) of this development because they were originally protected under British law. A limited company (Ltd.) is a company incorporated under British company law that is comparable in many respects to a German GmbH. With a GmbH, as with a Ltd., there is a risk that the managing director or directors will still make payments at the expense of future insolvency creditors after factual insolvency, thus reducing insolvency assets. It is legitimate to equate the liability of a director of a limited company to the liability of a managing director of a GmbH in the event of liability for such payments. Thus German law can also be applied to a foreign company, as the ECJ (European Court of Justice) affirmed on appeal from the Federal Court of Justice (Bundesgerichtshof).
This specific case concerned the liability of the director of a limited company registered in the German Commercial Register for which insolvency proceedings were opened in Germany. The limited company became insolvent in November 2006 at the latest. However, in the following weeks (up through February 2007) the director had authorized payments of around €110,000. These payments could no longer be viewed as compatible with the actions of a prudent businessman. The insolvency administrator of the limited company sued for damages.
As a result, not only are managing directors of GmbHs subject to the risk of personal liability; the governing bodies of comparable foreign companies are as well.
Recommended Action: The directors of a limited company or of a comparable company are advised to inform themselves about the liability risks that a managing director of a GmbH has and to adapt and include corresponding mechanisms for limiting damages.

10 “Golden Rules” for the Limitation of Liability of the Managing Director of a GmbH

  1. The managing director is not liable for his/her entrepreneurial decisions if:
    • the managing director has comprehensively informed him/herself of the situation;
    • the managing director has prepared the decision in due form;
    • the measure is in accordance with the law and regulations and is guided by the good of the company; and
    • the basic principles of proper company management are respected.
  2. The managing director is not liable for erroneous measures of the other managing directors if:
    • a proper allocation of responsibilities is made and
    • the supervisory duties are observed.
  3. There is no liability on the part of the managing director for erroneous measures of the employees, provided that
    • there is no organizational fault.
  4. There is no liability on the part of the managing director if
    • the injurious measure is based on a decision of the shareholders in accordance with the law and articles of incorporation.
  5. There is no liability on the part of the managing director for actions that are contrary to the law if
    • the managing director has made an excusable mistake in law (but when in doubt: duty to inquire – ignorance does not protect the managing director from punishment)
  6. There is no liability on the part of the managing director if
    • the managing director is relieved by partners (and they were aware of the wrongdoings).
  7. There is no liability on the part of the managing director for erroneous measures taken at the subsidiaries if
    • the corporate group has been properly organized, managed, and supervised.
  8. 8. There is no liability on the part of the managing director if
    • an effective agreement concerning a limitation on liability or an exemption from liability was previously concluded with the company, or
    • an effective release from liability, e.g. with a partner, was concluded, or
    • the managing director has entered into a general agreement with the company.
    • The limitations of liability / releases from liability, however, apply only in the internal relationship to the contractual partner and not vis-a-vis third parties, in particular not vis-a-vis the insolvency administrator for insolvency claims.
  9. 9. There is no liability on the part of the managing director if
    • a comprehensive analysis and examination of existing and potential risks is carried out;
    • a corresponding risk management / compliance system has been established; and
    • this control system is continuously monitored.
  10. 10. There is protection against the claiming of the managing director’s own assets if
    • an adequate D&O insurance policy was concluded for the managing director, the agreed-upon contributions (even during a crisis!) are paid, the insurance policy is maintained, and
    • no grounds for exclusion are provided under the insurance contract.
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Tags: #Compliance, #Insolvency, #Intellectual Property, #Manager Liability

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