German law provides two legal forms for businesses in which the director is not necessarily the owner. In both the limited liability company (“GmbH”) and the joint-stock company (“AG”) the business operations are run by directors. In this text we would like to provide a quick overview over the legal liability of a director in a German GmbH.
German law provides the opportunity that a GmbH's owner may also be the director. But, while the owners only may be held liable with the sum they have invested into the company's capital, the director, by law, has no such protection. He can be held liable with his personal assets.
Simply put: the director has to adhere to the principles of an honorable merchant.
This means, he has to exercise the necessary care when conducting a merchant's deal. By law the GmbH is always a merchant, so this applies to every business venture undertaken. The director also has to make sure the legal publication-requirements and accounting regulations are fulfilled by the
company. He represents the company externally and is tasked with managing its assets and ensuring flawless day-to-day operations. He may not use the company for personal (private) gain, nor act in direct competition with the company.
A director's liability towards the company may be limited in his work contract. A director can always be held responsible for intent and negligence, though. Any limitation does not concern the director's liability towards the company's creditors. He may also be held liable by the company's owners for negligence of duty.
A director occupies a position involving a special level of trust. Because of this, he may be held liable if he betrays said trust. This may be the case, if he uses the company's money to speculate. If his speculations lower the company's capital, he might have to pay damages. Liability when representing the company The director might personally be held liable for the company's debts under special circumstances. This might be the case, if he acts outside of his responsibilities as defined in his work contract, fails to identify himself as the companies representative or acts on his own behalf while pretending to represent the company.
The director always acts as an employer and as such, he is responsible to oversee the proper handling of wage-taxes, revenue-taxes and the corresponding paper work. If he fails theses duties due to negligence or intent, he can be held liable. In addition, he might face criminal charges under the German tax law.
He might also be held liable for neglecting the companies accounting, this might happen through “blindly trusting the company's CPA” for example. For this he also might face tax law criminal charges.
The same goes for negligence in all social and workplace law areas. These might be failing to secure his employees work place safety or failing to pay the company's share of the employee's benefits, e.g. healthcare, unemployment insurance or pension fund.
The list of events leading to a liability by the director in this article is by no means complete. A director might also be held liable for quite a few (well meant) actions taken under the threat of insolvency. He might also be held liable for not calling for an owners meeting after a 50% capital loss. Possible charges brought up against the director might also include fraud in these circumstances.
During all phases of your GmbH's life cycle TRP's corporate law attorneys will assist you through a network of Germany-wide law offices and provide counsel based on specialized knowledge and experience.