Directors’ Liability in Austria

The following refers to the liability of the managing director of a limited liability company (GmbH). The GmbH-company is represented by the managing directors (Geschäftsführer).

The managing director of a limited liability company is subject of liability under civil and criminal law.

Liability of the managing director under civil law

The liability of the managing director is regulated in § 25 of the Austrian Company with limited liability Act (GmbH-Gesetz).

A distinction must be made between the managing director's internal liability to the company and external liability to third parties (primarily creditors).

1) Internal liability

The managing director's internal liability is his liability towards the limited liability company itself. The managing director is directly and personally liable to the company with his private assets if he causes damage to the company unlawfully, hence the conduct is objectively contrary to the legal system, and with fault = the conduct is personally reproachable.

Only the company is entitled to claim damages. This means that the company as a legal entity can bring an action against the managing director.

It must therefore always be examined whether the company has suffered damage (above all financial loss), whether the damage was caused by the managing director (causality), whether the conduct was unlawful and whether the managing director acted with fault (negligence or intent).

However, the managing director is only liable if he or she objectively failed to act diligently: This is because the managing director has a duty to observe the diligence of a prudent businessman - he is responsible for the skills and knowledge that can usually be expected of a managing director in the relevant line of business and according to the size of the company. The manager’s personal (subjective) abilities are insignificant. The managing director cannot, for example, plead that he was overloaded with work.

Whether the managing director has complied with the required diligence is to be assessed at the time of the measure taken by the managing director that led to the damage.

Examples of negligent conduct by the managing director:

• distribution of company assets contrary to the provisions of the law or the articles of association (so-called return of capital contributions);
• damage resulting from legal transactions concluded by the managing director with the company without having obtained the prior consent of the other managing directors (self-dealing contracts).

Note: Business Judgement Rule - BJR

Since entrepreneurial decisions are almost always associated with a certain risk, the Business Judgement Rule (BJR) must also be considered when assessing liability. According to this rule, which originated in the Anglo-American legal system, the managing director acts in accordance with due diligence in any case and is therefore not liable if, in making his decision, he does not pursue any objectives that deviate from the interests of the company and one may assume, based on appropriate information, that he is acting in the best interests of the company.

Burden of proof

The company must prove the damage, causality, and the unlawfulness, whereas the managing director must prove that he has complied with due diligence and according to the BJR (Business Judgement Rule). This is the reversed burden of proof for fault.

Joint and several liability

If more than one managing director are responsible for the damage, each of them is liable for the entire damage, but the managing director who is held liable may seek recourse from the other managing directors. Joint and several liability of several managing directors is only possible in the case of members of the management board who have themselves acted unlawfully, with fault and that they were causal for the damage.

2) External liability

External liability refers to third party claims against the managing director. These can be, for example, business partners of the limited liability company, social insurance institutions, creditors, or the tax office.

Direct liability to third parties, e.g., shareholders, creditors, or authorities, is the exception, but may exist because of general tort law or special statutory provisions.

General tort law includes the violation of protective laws (Verletzung von Schutzgesetzen), e.g., violation of mandatory statutory provisions.

Liability to creditors

In certain cases, liability also exists towards the company's creditors. In Austria there is a special legal provision for this: the managing director is obliged to apply for the opening of insolvency proceedings within 60 days of the occurrence of insolvency or over indebtedness. If he fails to do so, he is liable to the creditors for the reduction of the satisfaction quota ("quota damage") in the insolvency procedure.

Liability to the public = tax office, social insurance agency: liability also exists if the managing director fails to pay company taxes and social security contributions.

Liability to the shareholders

The Austrian Company law contains individual provisions aimed at protecting the shareholders - for example, the managing director is liable to the shareholders if he fails to make the corresponding requests for changes or amendments in the company register and the company suffers damage as a result.

Instruction by general shareholders’ meeting

It should also be noted that the managing director of a GmbH is not a body free from instructions but is bound by the instructions of the general shareholders’ meeting. Therefore, the managing director is in principle obliged to follow the instructions of the company and is in this context exempt from liability towards the company.

However, despite instructions, the managing director is liable if the third-party claim for compensation is necessary to satisfy the creditors. This means: An effective instruction resolution taken in shareholder’s meeting has the effect of exonerating the managing director from liability. The exoneration does not apply in case of void (ineffective) resolutions insofar as the financial compensation is necessary to satisfy the creditors (e.g. in the company’s financial crisis). But this only applies in case of void (ineffective) resolutions. These are instructions that violate creditor protection provisions and capital maintenance provisions. In these cases, the managing director is liable despite the instructions directed on him.

Legal action by the company against the managing director

A shareholders’ resolution is required for the company to assert its liability – in principle, shareholders' resolutions are passed by a simple majority.

Minority shareholders can also take legal action against the managing director and file a lawsuit if they hold a share of at least 10 % of the share capital or share capital contributions of at least € 700,000 in total.

The legal action can be brought against the managing director if he has committed a gross breach of duty (see question I, 1.a.).

Liability of the managing director to third parties

Within the framework of the managing director’s external liability (see question I, 1. b), third parties may bring a direct action against the managing director in the event of damage being caused.

Creditors can claim their quota damage for insolvency delay by direct action. This means they can take direct action against the managing director (see question I, 1.b).

Managing directors of a limited liability company and a stock company may be liable to criminal prosecution for accounting offenses under the Austrian Criminal Code (StGB) or may be held criminally responsible for economic offenses such as fraud and breach of trust.

Examples of criminal offenses that may be related to the performance of a managing director's duties include the following:

• misappropriation (§ 133 StGB);
• disloyalty (§ 154 StGB) e.g., managing director concludes a purchase contract although the shareholders have forbidden him to do so, and this contract causes damage to the company;
• fraud (§ 146 StGB);
• fraudulent dishonesty (§ 156 StGB) e.g., the company's assets are reduced in order to prevent the creditors from being satisfied;
• favoring a creditor (§ 158 StGB) e.g., managing director makes payments to a specific creditor after insolvency has occurred;
• grossly negligent impairment of creditor interests (§ 159 StGB) e.g., in the event of insolvency: spending excessive amounts on an exceptionally risky transaction;
• unreasonable representation of material information about certain associations (§ 163a StGB) e.g., falsification of annual financial statements.

Penalties include fines and imprisonment, with the amount of imprisonment ranging from six months to ten years, depending on the offense.

If a criminal offense is committed, due to an unlawful act of the managing director, anyone who has suffered damage as a result may file a complaint with the public prosecutor's office.

The Public Prosecutor's Office shall investigate and file charges ex officio against the Managing Director.

Any person affected by a criminal offense can also join the criminal proceedings as a private party because of private law claims.

Who will act against the managing director in a specific case depends on the criminal offense in question:

If the managing director commits the criminal offenses of fraudulent dishonesty, grossly negligent impairment of creditors' interests and favoring a creditor, the creditors may act against the director.

In the case of misappropriation or disloyalty the Company itself can bring an action against the managing director.

Statute of limitations for civil claims

1) Claims of the company

The company's claims are subject to a limitation period of five years.

The period begins to run as soon as the company becomes aware of the damage and the damaging party.

There is also an absolute limitation period of thirty years. This means that after 30 years the claim will become time-barred in any case.

An absolute limitation period of forty years applies with respect to certain beneficiaries, such as the tax authorities.

2) Third-party claims for damages

Third-party claims for compensation are subject to a limitation period of three years from the time the third-party becomes aware of the damage and the damaging party.

The absolute limitation period is thirty years, too.

Statute of limitations for criminal claims

The statute of limitations for criminal offenses ranges from one year to 20 years, depending on the offense and the amount of the penalties.

Professional liability insurance is intended to protect freelancers or self-employed persons who, because of their professional activities, bear an increased risk of being exposed to a claim for damages. For some professions, professional liability insurance is advisable, for others it is even mandatory by law.

Professional liability insurance can be taken out with almost all major Austrian insurers.

A coverage obligation exists within the framework of product liability law: manufacturers and importers of products are obliged to ensure that damage compensation obligations can be satisfied by taking out insurance or any other form of liability coverage.

Since managing directors are liable with their entire private property for culpable breaches of duty, it is urgently advisable to take out managing director liability insurance, also known as D&O insurance (=Director’s and Officer’s insurance). This protects managing directors against claims from authorities, social security and customers and against lawsuits from their own company.

By taking out insurance, managing directors protect their assets against claims for damages if they take a decision against the statues or the law (see question I,1. a).

Managing director liability insurance, D&O insurance, is suitable for any legal form of a company. On the one hand it protects against unjustified liability claims; this is if it is established that the managing director did not act in breach of due care and diligence. On the other hand, it also protects against justified claims that managing directors have committed with slight or gross negligence.

The insurance also covers the entire legal costs of proceedings to the extent insured.

However, there is no insurance for criminal conduct (e.g., fines).

In terms of liability the Austrian law does not differentiate between executive directors, non-executive directors, and independent directors. The same rules on liability apply for all of them.

A holding group is made up of legally independent companies that are, however, linked to each other through shareholdings.

The parent company and subsidiary together form a group of companies under uniform management. In this case, de facto management no longer lies with the executive bodies of the subordinate subsidiaries, but with the top management of the group (parent company). Yet, liability remains with the management body (managing director) of the subsidiary. This means that, in principle, there is no transfer of liability from the subsidiary to the parent company.

However, there are exceptions to this:

• Liability of the "de facto managing director": shareholders who directly, e.g., by virtue of exercising the right to issue instructions in the limited liability company, or indirectly, e.g., through the influence of the controlling shareholder in the stock company, exert an influence on the management of the company may only do so in compliance with those duties of care which must also be observed by the management bodies themselves. However, the parent company can only be held liable if it has breached its duty of care in the use of third-party assets when exerting influence on the subsidiary. This is a recognized principle in the Austrian law. Liability may exist if the parent company does not consider the interests of the subsidiary or if the subsidiary is managed like a mere operating department.
• Liability of the parent company for tax debts of the subsidiary due to "de facto" influence: influence that leads to subsidiaries violating their duties under tax law (e.g., not paying taxes) can trigger liability on the part of the parent company. Liability can only be considered in the case of culpable (i.e., intentional) exertion of influence and only if this results in a breach of tax obligations.