The German law on companies with limited liability (GmbHG) provides certain rules concerning the managing director’s position.
The rules (Sec. 6, Para. 1, GmbHG) provide there must be at least one managing director in the company (“GmbH”). The managing director represents the GmbH in all dealings with third parties, and he is appointed and removed by a shareholders’ resolution.
The shareholders can also, in the articles of association, determine any particular requirements with which the managing director must comply.
The managing director is responsible for the management of the company and acts as its legal representative. He must employ the diligence of an orderly businessman in the matters of the company (Sec. 43, Para. 1 GmbHG). In particular, he must:
pursue the business purpose;
manage the company properly;
be loyal to the company;
not disclose confidential information or company secrets; and
not take advantage of his position.
He is also bound by the restrictions on his powers provided in his employment/service agreement.
The managing director has a duty to keep shareholders up to date in relation to relevant company matters and must also ensure there is proper financial reporting within the company.
There is a further duty on the managing director to call a shareholders’ meeting in order to consider the annual accounts. Such a meeting may also take place upon the request of at least 10% of shareholders where, according to the annual financial statements or the interim accounts, the company’s share capital has decreased by half (Sec. 49, Para. 3 GmbHG).
In any dispute as to whether a managing director has applied the appropriate standards of care, the burden of proof is on the managing director.
In general, the managing director has a wide discretion as to what actions he may take in the best interests of the company. The managing director may, therefore, accept certain risks and he will not necessarily be held liable for any resulting loss suffered by the company. However, if the managing director accepts risks he must follow prescribed risk management principles, in particular, by properly preparing, implementing and monitoring the execution of his decisions. For example, the managing director is in breach of his duties if he lends money to high-risk borrowers or if he acquires worthless patents or worthless shares in companies.
The managing director is liable to the company for any damage the company incurs as a result of any wilful or negligent acts or omissions committed by him.
The managing director is under a duty to call a shareholders’ meeting as soon as the company accounts show that the difference between:
the company’s assets (excluding its share capital); and
is equal to, or less than, half of the company’s share capital.
If a managing director fails to take action at this point, his inaction can amount to a criminal offence.
The managing director is also obliged to file a petition for insolvency without delay and, in any event, within a period of three weeks from the company becoming insolvent (Sec. 64, Para. 1 GmbHG). The company is “insolvent” if it is either unable to pay its debts as they fall due or if it is “over-indebted”.
To the extent that a prudent businessman would not have made any payments from a company during its insolvency, a managing director is personally liable to repay to the company any money he paid out on behalf of the company after the date of the insolvency. The term “payment” in this context includes any obligation entered into by the managing director on behalf of the company without commensurate consideration (and which therefore reduced the company’s assets).
Notably, if a managing director delays filing for insolvency the managing director is personally liable to the creditors and creditors are entitled to claim damages. However creditors will only be able to claim the so-called “Quotenschaden”. This is the difference between the full amount of damages which would be due to a creditor if the managing director had filed for insolvency at the correct time and the amount the creditor actually received from the company. In respect of new creditors who acquired claims after the company was obliged to file an insolvency petition, the situation is different and the creditors are able to claim full damages. This is significant because in practice, this is the more common situation.
Limitation and exclusion of liability
Whether a managing director can effectively limit his liability to the company prior to signing his service agreement is a hotly debated topic and there have not yet been any relevant Court decisions on this issue.
As a general rule, a limitation of liability is only permissible where creditor interests are not put at risk. For example, a managing director may legitimately:
exclude liability for minor negligent conduct; or
include a reversal of the burden of proof regarding culpability.
Furthermore, the shareholders may discharge the managing director from liability for the administrative work he has done on behalf of the company by passing a shareholders’ resolution. The discharge of the burden means that the company is no longer entitled to seek indemnification for damages due to poor management. However, the discharge does not affect claims of the company which are required to satisfy its creditors.
Where the shareholders approve certain acts and omissions, the managing director cannot be held liable for those acts or omissions.
An additional method of limiting the managing director’s liability is to delegate certain tasks or functions to company employees. In this situation, the managing director’s duties are limited to the proper selection, instruction and supervision of those employees. If a company has several managing directors, it is also possible to assign to each managing director a specific area(s) of responsibility.
Dismissal of a managing director
The managing director can be dismissed at any time unless there is a provision to the contrary in the managing director’s contract (Sec. 38, Para 1, GmbHG). The managing director can also resign at any time although this does not release him from any liabilities that he has already incurred with the company.
Under BGB Sec. 626, Para 1, the managing director can also be dismissed if he delays filing for insolvency.
 German Civil Code (BGB) Sec. 823, Para. 2 and GmbHG Sec. 64, Para. 1 GmbHG.
 See for example: Federal Supreme Court of Germany, 5. 2. 2007 - II ZR 234/05; Federal Supreme Court of Germany, 25. 7. 2005 - II ZR 390/03; Federal Supreme Court of Germany, 20. 6. 2005 - II ZR 18/03.