- HRC Constance on Margin of Discretion and Liability of Managing Director
- July 1, 2015 | Author: Michael Rainer
- Law Firm: GRP Rainer LLP - Munich Office
- Managing directors of a GmbH (German limited liability company) enjoy a margin of discretion within which they are not subject to personal liability. Even in the case of unjustifiable dealings, liability for shareholder-managing directors is not triggered until later on.
GRP Rainer Lawyers and Tax Advisors in Cologne, Berlin, Bonn, Düsseldorf, Frankfurt, Hamburg, Munich, Stuttgart and London - www.grprainer.com/en conclude: As a matter of principle, managing directors of a GmbH enjoy a margin of discretion when it comes to their corporate activity. In the context of this activity, they must exercise the level of care of a prudent businessman. This also includes, e.g. assessing the risk of a transaction. The managing director may be liable if infringements arise. However, the Higher Regional Court (HRC) of Constance has generously defined the margin of discretion of a managing director who is also the sole shareholder in the GmbH. Following a ruling of the HRC Constance, the shareholder-managing director is only liable in cases involving unjustifiable dealings if these result in the liquidation of the GmbH or jeopardise its continued existence, or the company is divested of share capital (Az.: 3U 1544/13).
In the instant case, the sole shareholder-managing director concluded a contract for the delivery of vehicles with another firm. The firm granted a generous discount, but in return a down payment of between 30 and 50 per cent of the gross list price of the vehicles had to be made. This down payment arranged by the shareholder-managing director came to a total of around 160,000 euros without any associated sureties being demanded. The rude awakening followed shortly thereafter. The contractual partner went bust, the vehicles were not delivered and the down payment was gone. Not long after that, the GmbH had to declare insolvency. The insolvency administrator then asserted damages claims against the shareholder-managing director, stating that the latter had breached his obligations.
The HRC Constance did not, however, consider the managing director to be liable. It stated that the managing director is entitled to margin of discretion within which he is not subject to personal liability. If this discretion is exercised correctly then the managing director is not liable even if the transaction misfires. The Court said of the case in question that the risks when purchasing the vehicles were not consistent with those permissible to a prudent businessman and the managing director had thus breached his duty of care. It nevertheless went on to state that he was not liable; this would only have been the case if the GmbH had been divested of its share capital or its liquidity or existence jeopardised.
Managing directors and other executive bodies can turn to lawyers who are competent in the field of company law when liability and contractual issues arise.