Manager liability

The success of a company is measured by the professionalism of its management.

The sphere of liability of the GmbH management begins with its appointment. In order to prevent your liability in the management, we develop appropriate strategies. Conversely, we assert corresponding claims for damages against managing directors. As a matter of principle, the management is obliged to conduct the business in an orderly manner. It shall exercise the diligence of a prudent businessman in the affairs of the company. The training and professionalism of the respective managing director is irrelevant here.

Liability risks arise, for example, from payments to shareholders and the granting of loans to shareholders. Payments that lead to insolvency maturity, liability for actions against shareholder creditors / creditor disadvantage.

Our experience shows that the biggest liability case for managing directors is always the timely submission of the tax return and payment of taxes for the GmbH. The personal liability of the managing director results according to the tax code opposite the tax office. There is also always a risk of criminal tax evasion for the managing director. The tax shortening results in the remainder with the payment of the income tax as well as the value added tax.

The same applies to the payment of social security contributions. Here, too, there is both civil and criminal liability. The managing director also has a duty of loyalty towards the GmbH. This results from the managing director employment contract. Therefore it is forbidden to him to become active for other companies (for the competition). In addition, the managing director of the GmbH is obliged to report a loss as soon as half of the paid-up share capital has been used up. In case of violation of this obligation by the managing director, a liability under civil law is accordingly given and also this is criminally proven. The biggest liability trap is also the obligation to file for insolvency. His breach of the obligation to file an insolvency petition leads to unlimited civil liability as well as to criminal prosecution for delay in insolvency. A resignation of the management does not exempt from liability either. According to the MoMiG, an alleged GmbH without a managing director is also obliged by the respective shareholder to file for insolvency. In this respect, the shareholders are now also subject to increased liability. We are also pleased to take over the negotiations with your D&O insurance for you.

In order to run a GmbH successfully, managing directors often enter into risky transactions. Therefore managing directors should consider with risk business transactions that neither the managing director adhesion nor a hidden profit distribution threaten them.

Hidden distribution of profits and suspicion of breach of trust to the detriment of the GmbH

The losses from so-called risk transactions have repeatedly occupied the financial courts. While the tax authorities often regarded the assumption of losses by the GmbH as a hidden distribution of profits (vGA), according to established case law, it is generally at liberty to carry out risk transactions.

In the opinion of the Bundesfinanzhof (BFH), it is not decisive whether the type and scope of the transaction in question is unusual for the business activity or involves a high risk. Instead, the fact that the GmbH has seized an opportunity to make a profit in the interest of its own pursuit of profit is likely to be relevant to the assessment.

However, if losses are realised, they can only lead to a hidden distribution of profits in exceptional cases, i.e. if the transactions were carried out predominantly or even exclusively in the private interest of their shareholders. As a rule, this then also fulfils the criminal offence of breach of trust and, at the latest in the event of insolvency, calls the public prosecutor into action.

For the operational recognition of losses, it is even irrelevant that there is no or at most a distant connection between the corresponding transaction and the actual object of the company, e.g. when investing operating funds in speculative investments. In the case of transactions with risk potential, the contracts must therefore always be concluded in the name of the GmbH.

Especially in securities transactions, the recognition of losses as operating expenses has repeatedly led to legal disputes with the tax authorities. Even if the jurisdiction of the Federal Fiscal Court (BFH) is clear, the tax authorities have regularly reacted to this with non-application decrees. That is, the respective judgement may not be used beyond the concrete individual case.

Risk management

The recognition of losses from risk transactions as operating expenses of a GmbH is of course not a carte blanche for the managing director. If the managing director does not supervise risk transactions sufficiently (stock companies must even furnish and operate comprehensive risk early recognition system due to legal regulations), then a liability consequence for the managing director can result from it, because despite fiscal deductibility a damage developed for the GmbH. The scope of risk transactions conducted, e.g. in relation to operating assets, is also decisive here. So it is always important to install a risk management system here, even if it is with the help of an external auditor who accompanies the GmbH. In concrete terms, this means that the managing director should create sufficient documentation, especially in the case of transactions with risk potential. In addition to the reasons for the decision for the respective transaction, if available, this includes excerpts from trade journals, written recommendations from banks or other financial service providers, yield calculations, statement of the tax consultant. In addition, management should describe the risk and consider whether it should be avoided or mitigated. The shareholders’ instructions should also be documented and signed by the shareholders if they are not in writing anyway.

Instructions of the shareholders

The managing directors do not have to follow the instructions of the shareholders if they would result in the managing director being liable to prosecution or damages. Instructions are only admissible if a shareholders’ resolution has been passed. The mere instruction of a majority shareholder is not sufficient (because it would circumvent the possibility for minority shareholders to bring an action for annulment before a court). Instructions of the shareholders may also be “economically nonsensical” up to the limit of systematically leading the company into insolvency.  The management must point out the economic disadvantages of the instructions, but then execute the instructions.

The inadmissible withdrawal to the shareholder

A withdrawal to the partners may not lead to the GmbH incurring a loss. This can happen, for example, if claims against shareholders are justified that are economically worthless, or if hidden profit distributions are granted to the shareholder. If these payments cannot be reclaimed by the shareholders, the managing director is liable for them.

Distribution of responsibilities among several managing directors and overall responsibility

Basically, the management is responsible for “everything”. This means that it is also responsible for “everything”. Several managing directors are liable as joint debtors, i.e. according to their heads. It is recognised that the division of responsibilities established by shareholders limits liability. This is usually done within the framework of rules of procedure. If a case of liability arises outside one’s own area of responsibility, only the person who is responsible for the respective area of responsibility is liable. But there is an overall responsibility of all managing directors for the economic and financial data of the company if a partner must have the “suspicion” that something goes wrong in the neighboring department, with tax debts, with social security contributions, with cash or goods shortfalls and with deliveries to insolvent companies.

Discharge of the management

When an annual financial statement is presented, not only is it adopted and a resolution on the distribution of profits adopted, but the actions of the managing director are also relieved. This discharge means the expression of confidence in the future actions of the managing director, but also the waiver of claims for damages, insofar as these are recognised at the time of the discharge decision or could have been recognised.

The crisis

The managing director is obliged to monitor the economic situation of the company on an ongoing basis and to obtain an overview of its assets by drawing up an interim balance sheet (or similar) if there are signs of a crisis in financial development. If the managing director cannot do this himself, he must commission an expert. This expert may even have to be independent, so that lawyers employed by the company or supervisory board members who are lawyers are not sufficient.

Employee social security contributions

Withholding employee social security contributions is a criminal offence. Anyone who does not pay these employee contributions to the social insurance institutions is personally liable. These amounts must be paid with priority. Only the due date of the contributions is decisive, not any payment of wages to employees, not even any partial payment.

Income tax

The income tax is based on the amounts paid to the employees. If there is too little freely available money, managers tend to pay out net amounts to the employee, but “forget” to pay the income tax to the tax office. If employees are paid reduced amounts compared to the normal entitlement, the income tax is reduced proportionately. The managing director is liable as if he had acted “correctly” and made the correctly calculated wage tax amounts available to the tax office.


Liability is excluded if the managing director could assume that he was acting for the benefit of the company on the basis of reasonable information. The red line to infidelity and punishability is only crossed if the management takes unmanageable risks that endanger the existence of the company. BGH, judgment of 28.5.2013, 5 StR551/11

The Directors & Officers Insurance, short: D & O

In the meantime there is a special property liability insurance for managing directors and supervisory board members. Since it comes from America, the term “D&O”, i.e. “Directors and Officers” liability insurance, has been adopted. There are about 40 insurers with different conditions. The company’s financial losses as well as the lawyer’s fees for defending claims are reimbursed (up to a maximum amount to be agreed). This replaces liability claims against the managing director, which is not only helpful for the managing director, but also regularly for the company, because the compensation claims often exceed the assets of a managing director.


OLG Koblenz

Deliberately violated obligation to submit tax returns and pay taxes by sole managing director

The Administrative Court in Koblenz has decided that the managing director of an entrepreneurial company (UG) must be liable for trade tax debts of the company.

In the underlying proceedings, the managing director of an entrepreneurial company (UG) filed a lawsuit against her claim for trade tax debts of the company she managed. During her time as sole managing director, the plaintiff had neither submitted tax returns nor paid taxes on behalf of the UG. Nor were the trade taxes determined on the basis of tax estimates by the defendant local authority paid. Reminders and enforcement attempts were unsuccessful. Therefore, the defendant finally claimed them personally for the trade taxes of the UG.

Applicant rejects accusation of wrongdoing

After an unsuccessful objection, the managing director filed a suit against this. The defendant had not suffered any damage because the trade taxes had been determined on the basis of unrealistic tax estimates. In the period in question, the UG had only generated losses and therefore had to file for insolvency. She had taken up the trade in the hope of becoming economically successful. However, since the business had not been running from the outset, she had neither been able to build up reserves nor to obtain professional advice. She had no experience in business matters, so that in the end she was overtaxed by the situation.

Estimated taxes must also be paid

The lawsuit was unsuccessful before the Administrative Court in Koblenz. The judges stated that according to the relevant tax law provisions, the plaintiff must be liable for the tax debts of the UG. As its sole managing director, she had deliberately violated her duty to file tax returns and pay taxes. As a result, the defendant suffered damage in the amount of the unpaid business taxes for which the plaintiff had to take responsibility. It was irrelevant that the trade tax had been determined on the basis of tax estimates. Estimated taxes must also be paid. Moreover, the estimates were made only on the basis of the plaintiff’s lack of declaratory behaviour. Also her alleged inexperience in business matters does not allow any other decision.

Oberlandesgericht Düsseldorf, Judgment of 20.07.2018
– I-4 U 93/16 –

D&O insurance does not cover the liability of the GmbH’s managing director for illegal payments made after insolvency maturity.

The insurance cover of a so-called D&O insurance does not include the claim of an insolvent company against its insured managing director for compensation of payments made by the company contrary to insolvency law in accordance with § 64 GmbH Law. This was published by the Oberlandesgericht Düsseldorf in its ruling on liability insurance for pecuniary loss for company management and executives.

The background to this is that according to § 64 GmbH Law a managing director is personally liable for payments that have been made despite the company becoming insolvent or being found to be overindebted.

Managing director continues to make transfers after insolvency maturity

In the case to be decided, the managing director of a GmbH had been successfully claimed by the insolvency administrator of the company in accordance with § 64 of the GmbH Law, since the GmbH had still carried out transfers amounting to more than 200,000 EUR after the start of insolvency maturity. The insolvency administrator had obtained a corresponding legally binding payment judgment against the managing director. The managing director had registered this claim with her insurance company and demanded indemnity. In her opinion, her D&O insurance company should also pay for such liability claims directed against her. After her action at first instance had been unsuccessful in this respect, she pursued her application in the appeal proceedings before the Higher Regional Court.

Liability claim not comparable with claim for damages due to pecuniary loss

In the Court’s view, the claim asserted is, however, not in principle a claim covered by the insurance contract. The liability claim according to § 64 GmbH Law is not comparable with the insured claim for damages due to financial loss. Rather, it was a “compensation claim of its own kind”, which served solely the interests of the creditor population of an insolvent company. Finally, the company does not suffer any financial loss as a result of payments contrary to insolvency law after insolvency maturity, since an existing claim is settled. Payment to preferred creditors only had a negative effect on the other creditors. However, the D&O insurance was not designed to protect the interests of creditors.

Objections in tort law are not provided for in § 64 GmbH Law

The liability claim pursuant to § 64 GmbH Law is also not comparable with a claim for damages because various objections which can be raised in tort law are not provided for in § 64 GmbH Law. Thus, a liability pursuant to § 64 GmbH Law could not be invoked as a defence that the distressed company had suffered no damage or only minor damage. Nor is it possible to invoke contributory negligence or a possible joint and several liability of a number of persons involved. If a D&O insurance company had to take out a D&O insurance policy here, its defence possibilities would be very limited compared to the claim for damages.

No entitlement to payment by insurance

Even if this legal opinion could lead to gaps in the coverage of the D&O insurance, the court stressed, the insurance company would not have to pay. The ruling is likely to be of great practical significance for managers of companies, insolvency administrators, insurance brokers and industrial insurers, as it is not uncommon for insolvency administrators to claim against the managing directors of companies because of the provision in § 64 GmbH Law.

Finanzgericht Rheinland-Pfalz, Decision of 07.02.2015
– 5 V 2068/14 –

Cash register system explicitly offered and sold as a completely risk-free instrument to reduce taxes

The fiscal court Rheinland-Pfalz has decided in an urgent procedure that the managing director of a company which manufactures and sells cash register systems together with manipulation software is liable for the taxes evaded by a customer (here around 1.6 million euros).

The applicant for the underlying procedure is the managing director of a GmbH that manufactures and sells cash register systems. In November 2002, the owner of an ice cream parlour purchased a cash register system which, in addition to various hardware, also included software for manipulating the data recorded in the cash register system.

Cash register system was sold together with manipulation software by the manufacturer

During an external and tax investigation at the café owner’s premises, manipulations of the data recorded in the cash register system have been detected since at least December 2003, which led to a considerable reduction in the sales actually achieved. In the criminal tax proceedings before the Regional Court of Koblenz, the man fully admitted the manipulations. He stated that the applicant had sold him the cash register system and had also instructed him in the use of the manipulation software. He had been assured that the software could be used without any risk. The Regional Court of Koblenz sentenced the café owner to three years’ imprisonment for tax evasion. The judgement and the amended tax assessments became legally binding.

Tax office holds managing director liable for tax arrears of the café owner

Subsequently, proceedings were initiated against the applicant for aiding and abetting tax evasion. In addition, the tax office issued a liability notice, which held the applicant liable for the tax arrears of the café owner (at the time around EUR 2.8 million) because the café owner had not paid the evaded amounts and none of the enforcement measures had so far been significantly successful.

According to his own statement, the managing director had no knowledge of the manipulation software

The applicant lodged an appeal against this decision with the tax office. He claimed that the manipulation program had been developed by an employee and that he himself had no knowledge of the manipulation software. It had been so hidden that even the tax investigators had not discovered it during the first search. He – the applicant – only helped out in sales and did not instruct the café owner in the use of the manipulation software. The café owner’s statements were protection claims in order to achieve a reduction in punishment. Nor is it true that the arrears could not have been recovered from the judgment debtor. The café owner had real property and bank deposits abroad.

On 26 June 2014, the tax office amended the contested liability notice and reduced the liability amount to around EUR 1.6 million, since in the meantime funds could be collected from the café owner.

Managing director considers liability notice to be illegal

In July 2014, the applicant brought an action and subsequently filed an application for interim relief. In support of his application, he claimed that the notice of liability was unlawful and that the immediate enforcement of the contested notice of liability would also mean undue hardship for him. Neither he himself nor the GmbH would have sufficient liquidity to make advance payments and pay the required amount (approx. 1.6 million EUR).

Managing director objectively and subjectively aided the café owner in tax evasion

The Financial Court of Rheinland-Pfalz rejected the urgent application and essentially stated the following in its reasoning: According to the documents available to the Court and the evidence available, there were no serious doubts as to the legality of the contested notice of liability. Anyone who commits tax evasion or takes part in such an act is liable for the reduced taxes under § 71 Abgabenordnung ( AO) and can be held liable under § 191 AO by means of a liability assessment. On the basis of the confession and the legally binding conviction of the café owner by the Regional Court of Koblenz, the tax office had correctly assumed that the café owner had evaded the taxes at issue. The applicant had objectively and subjectively aided and abetted this tax evasion of the café owner and thus participated in his action within the meaning of § 71 AO. He had sold the cash register system associated with the manipulation software to the café owner as managing director of the GmbH. This is proven by the invoice of the GmbH, which identifies the applicant as the processor. It was not decisive when exactly and by whom the installation and instruction in the program had taken place and whether the applicant himself or a third party had developed the manipulation software. Rather, the aid for tax evasion in the event of a dispute consists in the applicant selling a complete system to the café owner, knowing the possibilities offered by that system and with the aim of allowing the café owner a tax reduction. The applicant expressly offered and sold the cash register system as a completely risk-free instrument for reducing taxes.

No misconduct as managing director of the GmbH but deliberate participation in external tax evasion

If the tax office uses an assistant who deliberately aided in tax evasion as a liable party, this is usually a discretionary decision, irrespective of the amount of the liability debt and/or the financial possibilities of the assistant. The liability provision (§ 71 AO) is of a compensatory nature and is intended to establish a liability for damages in the amount of the reduced amounts. The applicant is not claimed here for his misconduct as managing director of the GmbH, but for his intentional participation in a foreign tax evasion.

No suspension of the execution of the notice of liability due to unreasonable hardship

Suspension of the enforcement of the notice of liability due to undue hardship was also out of the question, because even in the case of undue hardship, suspension of enforcement was only possible if doubts as to the legality of the contested tax notice could not be excluded. As explained above, this was not the case here.

Contact Partner

Dr. Frank Schmitz