COVID-19 in Germany: Legal obligations of managing directors in the corona crisis

By Dr. Stefanie Orttmann, LL.M, Christoph Meves

04-2020

The COVID-19 pandemic is increasingly having a significant impact on the economy and companies. In connection with the crisis, managing directors of limited liability companies (GmbH) are confronted with a wide range of questions and problems in several areas of law. They must guide the companies they are leading through the crisis safely, taking into account the needs of business partners, employees, authorities and the public.

This article provides an overview on the special duties of managing directors, the issues they should keep in mind during the crisis and recent changes.

Overview of the general duties of managing directors:

Also in times of crisis, managing directors must fulfil their general duty of care, this includes in particular:

  • Monitoring the financial situation of the company, in particular with regard to possible insolvency

  • Compliance with legal regulations, official orders and internal guidelines

  • Cooperation with other corporate bodies

In doing so, the managing director must act with the diligence of a prudent businessman and in particular observe the business judgment rule.

Monitoring the financial situation during the crisis

In times of crisis, it is particularly relevant to continuously monitor the financial condition of the company in order to identify financial bottlenecks or even the threat of insolvency at an early stage and in order to be able to take countermeasures.

The legislator has reacted to this situation with the "Law to Mitigate the Consequences of the COVID-19 Pandemic in Civil, Insolvency and Criminal Procedure Law" (see also our article regarding the protection of companies in the corona crisis). Among other things, the law provides for the suspension of the obligation to file for insolvency pursuant to Section 15a German Insolvency Code (InsO), initially until 30 September 2020. This, however, requires that the insolvency situation is based on the consequences of the spread of the COVID-19 virus. This is to be presumed if the company was solvent on 31 December 2019. In the event of illiquidity, in addition, the company must have the justified expectation that such illiquidity can be eliminated (see also our detailed article on the legal effects on insolvency law).

To ensure that managing directors are not subject to uncontrollable liability during the period of suspension of the obligation to file for insolvency, the legislator has also regulated the consequences of suspension. Among other things, payments which are made in the ordinary course of business, in particular those payments which serve to maintain or resume business operations or to implement a restructuring concept, are considered compatible with the diligence of a prudent and diligent business manager within the meaning of Section 64 sentence 2 German Law on Limited Liability Companies (GmbHG) and are therefore not subject to the prohibi-tion of payments in situations close to insolvency and thus do not lead to a liability of the managing director.

In individual cases, a precautionary exchange with the house bank or other financial sources about possible scenarios regarding the following weeks is certainly advisable.

Duty of care and legality obligation of managing directors in times of crisis

Managing directors must always apply the diligence of a prudent businessman when managing a company. This means that their actions must be aimed at protecting the company's advantage as well as at preventing damage.

In individual cases, however, a measure can trigger both, advantages and risks or even disadvantages. In order to avoid liability for actions detrimental to the company, managing directors may rely on the so-called business judgment rule. According to this limitation of liability provided for in the German Stock Corporation Act (AktG) for the members of the management board of a stock corporation (Section 93 (1) sentence 2 AktG), which is applied to the managing directors of a GmbH accordingly, the existence of a breach of duty is excluded if:

  • the managing director could reasonably assume to act to the benefit of the company

  • when making a business decision

  • on the basis of adequate information.

In times of crisis, managing directors must pay particular attention to the identification, analysis and assessment of risks for the company they manage.

The obligation to act in accordance with the law, but also the possibility to rely on the business judgment rule, requires knowledge of the current legal situation. Therefore, we have compiled for you not only the most important changes in the law from the last few days, but also unchanged, but today particularly relevant regulations:

  • What restrictions exist due to data protection regulations (see our FAQ on data protection in Germany)
  • What are the consequences for dispute resolution in Germany?

Furthermore, acting on the basis of appropriate information may mean that managing directors have to involve external advisors to verify the basis for planned business decisions.

When evaluating different decision-making options to be made on the basis of sufficient information and in compliance with the business judgment rule, the managing director in fact only acts in the best interests of the company if his or her decisions are based on the company's interest in (a) maintaining the company's existence, (b) promoting sustainable profitability, and (c) increasing the sustainable value of the company. In our view, however, the recently passed Law to Mitigate the Consequences of the COVID-19 Pandemic in Civil, Insolvency and Criminal Procedure Law (German language version) indicates that the legislator has readjusted the criteria for business decisions made in the times of the corona crisis such that the managing director can still rely on the business judgment rule even if he or she bases his or her entrepreneurial decision exclusively on the interest in maintaining the company's continued existence in order to stabilise the overall economic situation and to secure jobs.

When dealing with complex and difficult problems, it is further recommendable for managing directors to always take a business decision in close consultation with the shareholders. Furthermore, a corresponding instruction of the shareholders can exclude the liability of managing directors for the decision taken, as they are bound by such an instruction, provided that it takes into account and complies with the legal framework.

Cooperation with other corporate bodies and maintaining the operational capability of the company

Subject to reporting obligations determined on an individual basis, directors should coordinate closely with the other corporate bodies during the corona crisis. These include in particular the shareholders, but any existing supervisory board or advisory board should also be involved in the decisions to be taken. Furthermore, the articles of association or rules of procedure for the management may provide that certain essential decisions require the prior approval of another corporate body.

In particular, managing directors pursuant to Section 49 (3) GmbHG are obliged to immediately convene a shareholders' meeting if it becomes apparent from a balance sheet prepared in the course of the business year (or from the annual balance sheet) that half of the company's share capital has been lost.

With the "Law to Mitigate the Consequences of the COVID-19 Pandemic in Civil, Insolvency and Criminal Pro-cedure Law", the legislator has created the possibility, initially until the end of 2020, to adopt resolutions of the shareholders' meeting in written circulation or text form, without all shareholders having to agree to such procedure (see our article regarding the Act to Combat the Effects of the COVID-19 Pandemic, including further amendments to the AktG and the German Transformation Act (UmwG)).

You can find industry- or project-specific topics that our experts have also prepared for you here:

The challenges in the corona crisis are manifold and the situation is evolving daily. For this reason, we will update this article regularly and also continuously keep you up-to-date regarding other matters both in the German language and internationally. We are ready to answer your questions about the corona crisis, please feel free to contact one of our experts at any time.

Last reviewed: 09 April 2020