Germany – Duties of the GmbH Managing Directors

There is no single piece of legislation setting out all the duties and obligations to which managing GmbH directors (“Geschaeftsfuehrer”) are subject. These duties are set out i.a. in the law on GmbHs (“GmbHG”), the Commercial Code (“HGB”), Insolvency Act (“InsO”), Civil Code (BGB), the Antitrust Law (GWB), environmental and tax laws. Furthermore, they are set out in the Articles of Association of the GmbH (“Gesellschaftsvertrag”), Shareholders’ resolutions, Internal rules for management and if applicable the Service agreements of the GmbH and the directors.

Directors will normally not be held accountable for acts and debts of the GmbH, for GmbHs are separate independent entities accountable in their own right. Directors will be held accountable for their own behaviour, however, and be required to pay money out of their own pockets by way of compensation for breach of duty or as a fine. They may be disqualified from holding office as director, or even imprisoned.

General Obligation of Diligent Management in Relation to the GmbH

Directors have a general obligation of diligent management, including in particular:

• to use his / her best efforts to promote the purpose of the GmbH;
• to control the company’s liquidity and financial position;
• ensure the GmbH’s compliance with all applicable legal obligations;
• not to compete with, or appropriate the business opportunities of the GmbH;
• not to disclose confidential information belonging to the GmbH.

Directors must employ the diligence of an orderly businessperson. Pursuant to the “business judgment rule” the management is immunized from liability if and to the extent the management, making an entrepreneurial decision based on appropriate information, could reasonably assume to act in the best interest of the company.

Annual accounts

GmbH directors must ensure that the company keeps proper books and accounts showing clearly the financial position of the company. Failure to fulfil this obligation can lead to a fine or even a term of imprisonment of the director.

Contribution and Preservation of Share Capital

The GmbH must have a share capital of at least 25,000 EUR. Upon the formation of a GmbH or increase of its share capital, the director(s) must affirm to the commercial register that the subscriber(s) of the (increased) share capital paid in the amount of cash determined in the Articles of Association, i.e. that the full amounts due were fully paid in, not paid back and are entirely to the free disposition of the director(s). If incorrect statements were made, directors are liable to the company.

Section 30 para 1 GmbHG prohibits disbursing assets to shareholders without an adequate consideration, so-called unlawful repayments. For their determination, a “balance-sheet test” is decisive. This means, a payment is not unlawful, when:

• the company’s counter-performance or restitution claim is fully-fledged and
• the contract meets the cover imperative (payment of the market price).

If an unlawful repayment of share capital contributions has occurred, the other shareholders are proportionately liable for the refund owed to the company. The directors whose negligent or intentional acts caused the illegal repayment are in their turn liable to those shareholders required to refund the sum.

Duties in Relation to Shareholders

Each director is entitled to call shareholders’ meetings. Those are to be called – inter alia – if this appears to be required by the interest of the company.

Under German GmbH law, GmbH shareholders are entitled to instruct the director(s) of the company in detail through shareholders resolutions to act or not to act in a certain way. Directors must comply with those instructions unless they are illegal. A negligent or intentional violation of this obligation renders the directors liable to the GmbH for damages and may justify their dismissal for cause.

Obligations Arising From Insolvency, Over-Indebtedness and Loss

Insolvency and Over-Indebtedness

In case of over-indebtedness or insolvency, each director must file a petition for the institution of an insolvency petition without undue delay but no later than three weeks from the date on which the over-indebtedness was ascertained or the insolvency arose (Section 15a Insolvency Code). Directors negligently or intentionally failing to meet this obligation (in time or properly) commit a criminal offence punishable by up to 3 years imprisonment and are liable for damages to the company.

Loss

If a balance sheet of the company shows a loss of one half or more of its share capital, the directors must call a shareholder meeting without undue delay. Directors failing to do so are liable to the company and subject to criminal penalties.

Duties in Relation to Taxes and Social Insurance Contributions

Apart from the obligation to file tax returns and pay corporate, trade and sales tax, the company must withhold some taxes (income tax, capital gains/settlement tax). The tax laws impose on directors a direct responsibility for tax payments. In case of violation by intention or gross negligence, they are liable personally (Section 69 German Fiscal Code) and subject to administrative sanctions or criminal penalties. Similar obligations apply to statutory social insurance contributions.

Duties in Relation to Employees and the Environment

Directors must observe special laws for the protection of employees (ArbSchG) and environment (USchG). If failing to do so, directors are personally responsible.

Duties in Relation to Third Parties

Directors’ Liability for an Appropriate Organisation of the Company

Directors have the duty and responsibility to organise the company such that the life, health, property, and similar rights of third parties are not violated.

Directors’ Liability for their Company’s Contracts, and its Acts or Omissions

Such a liability arises e.g., if a director agrees to personally guarantee a contract and the company fails to perform. A director may also be personally liable for torts (i.e. civil wrongs, incl. negligence) authorised by him/her, committed by the GmbH.

Antitrust Issues

A company and its directors commit an administrative offence, punishable by up to 1,000,000 EUR, if they violate Art. 101 s. EC Treaty or provisions of the GWB. This encompasses e.g. agreements, having as effect the restriction of competition.

Disqualification as a Director

A GmbH director will be disqualified from the position as director if he/she is convicted for the commission of particular criminal offences like fraudulent bankruptcy, violation of the duty to keep books or delaying insolvency proceedings.