What is a “GmbH”? Basically, a “GmbH” in Germany is a limited liability company incorporated under the laws of Germany. Managing directors of said companies are usually exposed to different kinds of liabilities: they may be held liable for a breach of their duty of care, sued by the company’s partners for their conduct, etc. In Germany, the managing director of a GmbH can even also be held criminally liable.
To understand the basics that involve liabilities regarding the managing directors’ involvement in a GmbH, one has to understand two different kind of liabilities that could be imposed:
Internal liability
With internal liability, we refer to the lability of the managing director towards the company itself. A managing director at a GmbH must always exercise what is most known as “the diligence of a prudent businessman”, in other words, the conduct expected of a person in the responsible position of a manager of third-party assets. If a managing director were to fail in meeting these standards and the company suffers as a result thereof, he shall be personally liable.
For the sake of understanding, below a couple of examples of duties of a managing director of a GmbH:
- To act in the best interest of the company.
- To pay the applicable taxes and social security contributions.
- Not to compete with the company while holding their position as managing director.
- To file insolvency proceedings in due time, as applicable.
- To ensure proper accounting and bookkeeping of the company.
External liability
As aforementioned, on the other hand, a managing director of a GmbH can be externally liable towards third parties. Since the managing directors act on behalf of the company as an organ of said entity, the GmbH is liable for damages caused by its actions. While the managing directors are usually not personally liable in these cases, there are exceptions that apply and that should not be overlooked.
One first exception to this rule is that the managing director must ensure that the company’s taxes are assessed and paid in time. If he fails to do so intentionally or through gross negligence, he is personally liable for the resulting defaults.
Secondly, we find an exception commonly known in German law as a sham or ostensible legal situation. Liability exists if a managing director of a GmbH fails to make it clear to a business partner that he is acting on behalf of the company.
Additionally, it is imperative to know that managing directors may result as liable under German tort law if, by carrying out their duties, they cause damages to another via an act that results as blameworthy or culpable.
There are of course further cases in which managing directors of a GmbH, under German law, result as personally liable, such as breaches of duty towards third parties, group liability and liability towards third parties in the incorporation phase, which are more specific and are therefore not dealt with in this extract.