LIABILITY GROUNDS AND LIABILITY AVOIDANCE OF THE GMBH – MANAGING DIRECTOR IN THE EVENT OF (IMMINENT) INSOLVENCY
2010.12.07
I. Introduction
The managing director of the GmbH[1] bears comprehensive responsibility in the event of a corporate crisis, which is reflected in concrete tasks, sets out an obligation to restructure the company and the culpable violation of which can result in liability claims.[2]
It is essential that liability can affect not only the formal managing director, but also the "de facto managing director". A de facto managing director is a natural person who actually manages the company without having been - formally - appointed as managing director. De facto management exists above all when the formally appointed managing directors do not carry out any business activities and the de facto managing director is the sole decision-maker of the GmbH.[3] Although the de facto managing director cannot file for insolvency by law, a de facto managing director can also be liable for damages due to delaying insolvency for which he is responsible.[4] Whether the de facto managing director is also liable for tax liabilities is disputed in legal theory and case law.[5]
The managing directors who violate their obligations are jointly and severally liable for the resulting damage - the managing directors' liability is therefore joint and several (Section 25 Paragraph 2 GmbHG). If several managing directors are appointed and there is a division of responsibilities, the liability of the individual managing director is limited unless the given overall responsibility is mandatory due to legal provisions. This overall responsibility is mandatory, for example, with regard to the timely filing of insolvency proceedings, the initiation of reorganization proceedings and various public law obligations.[6]
II. Liability concept for managing directors
In principle, a distinction must be made between internal and external liability in the case of managing director liability: Internal liability is divided into the areas of liability towards the company, whereby the standard of liability is the care of a prudent businessman. This gives rise to the liability cases of Section 25 Paragraph 3 GmbHG (liability to pay compensation if company assets are distributed in contravention of the provisions of the GmbHG or the partnership agreement, namely share capital or additional contributions are returned to the shareholder in whole or in part, interest or profit shares are paid out, shares are acquired for the company, taken as collateral or confiscated, or if payments are made after the time at which the managing director should have applied for the opening of insolvency proceedings). In connection with liability towards the company, liability in the founding stage must also be seen. Internal liability also includes liability from the employment relationship under the Employees Act and contractual liability from service contracts, freelance service contracts, orders and work contracts.
As already mentioned, in addition to internal liability, the managing director also has external liability. This external liability is divided into
- liability towards third parties,
- liability towards individual shareholders,
- liability in the event of a corporate crisis and
- liability to the public.
After the general liability requirements and the liability cases in internal and external relationships, the liability of the managing director in the event of a corporate crisis is discussed below.
III. Conditions of liability
III.1. General liability requirements
The prerequisite for liability (obligation to pay damages) is the existence of compensable damage. In principle, damage is to be borne by the person whose assets it occurred. If someone else is to compensate for this damage, the following general requirements must be met: The damage must have been caused causally, unlawfully and culpably:
A behavior is causal if it cannot be thought away without the result being lost[7]. This formulation includes both active action and omission. However, since the person causing the damage should only be liable for damage that he has adequately caused, liability is limited by the fact that the person causing the damage only has to answer for the damage if his action or omission was capable of causing the damage. The person causing the damage is not liable for damage caused by a very unusual chain of circumstances.
Behavior is unlawful if it violates the commandments or prohibitions of the legal system or common decency. For contractual liability, behavior contrary to the contract is unlawful.
A behavior is culpable if the person who caused the damage is personally responsible for it. However, unlike with illegality, an objective standard is to be applied, rather than a subjective one. The perpetrator must, however, demonstrate a lack of average care.
The behavior can be intentional, but also negligent.
III.2. Special liability requirement of the managing director
Applied to the managing director, this means the following: the managing director is liable if he has not behaved as he should and could have.[8] The behavior must therefore have been personally blameworthy. The managing director acts unlawfully if he does not comply with the standard of care incumbent upon him. The standard of care is assessed according to objective criteria, and fault according to individual blameworthiness.
According to Section 27 GmbHG, both the managing director acting in accordance with the provisions of the law and his deputy are jointly and severally liable.[9] The specific liability provisions are discussed below.
IV. Duties of the managing director upon knowledge of insolvency
Particularly in the case of insolvency, it is important to distinguish strictly whether liability is meant in the criminal law sense or in the sense of “having to answer” for the company’s civil or tax law obligations.
IV.1. Obligation to conduct insolvency examination
Section 69 (2) and (3) IO stipulates that if one of the reasons for opening insolvency proceedings exists, the (timely) filing of an insolvency application is required, which means that the managing director is liable in the event of delaying insolvency (failure to file an application or filing it late). This obligation also entails the responsibility for examining and determining whether the reasons for opening insolvency proceedings exist - impending insolvency and over-indebtedness - and thus in particular the responsibility for drawing up an over-indebtedness status and a forecast of continued existence for the managing director. The obligation to file for insolvency also determines the managing director's crisis responsibility, which entails the obligation to carry out ongoing future forecasts, planning and ultimately to examine the company's continued existence and thus to examine its restructuring by complying with the insolvency prevention provisions.[10]
IV.2. Obligation to file for insolvency
If the conditions for the opening of insolvency proceedings pursuant to Sections 66 and 67 IO are met, this must be applied for without culpable delay, but no later than 60 days after the onset of insolvency. This provision forces the debtor to apply for the opening of insolvency proceedings when the reasons for insolvency arise, but no later than 60 days thereafter. The start of the 60-day period is assumed to be due to the managing director's culpable ignorance (minor negligence is sufficient) of the insolvency/over-indebtedness. Insolvency pursuant to Section 66 IO is assumed in particular if the debtor is unable to meet due payments or stops making payments.[11] It should be noted that the 60-day period represents a maximum period.
The application is not culpably delayed if the opening of restructuring proceedings with self-administration has been carefully pursued. The background is that the debtor should be given the opportunity to save the company instead of ruining it. If it is established before the expiry of the 60-day period that restructuring is impossible or unrealistic, the insolvency application must be made immediately.[12]
IV.3. Civil liability
If the managing director has violated the application requirement under Section 69 IO, he is personally and unlimitedly liable to the creditors. A distinction must be made between old and new creditors in terms of the scope of liability. Old creditors have claims that already existed when insolvency or over-indebtedness occurred. Old creditors are entitled to the quota loss, which is the amount that they would have received in excess of the quota actually paid out if insolvency proceedings had been opened on time.[13] The new creditors' claim for compensation includes the loss of trust. This is the damage that results from the fact that they still concluded business with the debtor company because insolvency proceedings were not opened on time.[14] The new creditor is to be placed in the same position as he would have been without the conclusion of the contract.
The managing director has the burden of proof that the damage would have occurred even if he had acted in accordance with his duties.
IV.4. Tax liability
IV.4.1.
The managing director is liable for tax claims against the federal government and for contribution debts to the social insurance provider (Section 67 Paragraph 10 ASVG) if these cannot be collected due to a culpable breach of the duties imposed on the managing director. Such a culpable breach occurs if the managing director does not initiate insolvency despite knowing that the insolvency situation is in place, and as a result employee contributions are not paid. Liability exists for employee contributions that are withheld but not paid, as well as for contribution losses that are based on culpable breaches of the reporting obligation.[15] In the case of breaches of the reporting obligation, slight negligence is sufficient. The key point is that, regardless of the requirement of equal treatment and the question of the funds still available, employee contributions must be paid in full.
This liability exists generally, i.e. regardless of the breach of the obligation to file for insolvency. However, in the event of insolvency, there is of course an increased risk of claims being made against managing directors by public creditors.
However, the burden of proof rests with the managing director to prove that he is not at fault for the non-payment or late payment or for the fact that no other creditor was given preferential treatment.
IV.4.2.
The liability provision of Section 9 BAO is comparable to that of Section 67 Paragraph 10 ASVG. The managing director is liable for fault (minor negligence is sufficient) if the tax debt can no longer be collected from the company. The managing director's duties under tax law include in particular the requirement of equal treatment (tax debts may not be treated less favorably than other debts) and the duty to keep proper accounts and to observe the reporting obligations under financial law.
There is no obligation to give preferential treatment to tax debts – with the exception of taxes withheld by deduction (income tax and capital gains tax), which must be paid to the tax office in full.
The burden of proof of lack of fault lies with the managing director.[16]
IV.5. Criminal sanctions for delaying insolvency
To protect creditors, the German Criminal Code (StGB) penalizes grossly negligent “actions that are likely to result in insolvency” in Section 159 of the German Criminal Code. In the event of the company’s insolvency, creditors whose financial rights have been damaged can claim compensation for the damage caused by the managing director who is responsible for such actions. The following actions are considered to be likely to result in insolvency: squandering or destroying assets, spending excessive amounts on an exceptionally risky business, gambling or betting, no or inadequate accounting and control measures, failure to prepare or inadequate preparation of mandatory annual financial statements.
It is important to note that simply delaying the filing of insolvency proceedings is not (any longer) punishable. What is punishable is essentially the grossly negligent bringing about of insolvency through actions that are liable to insolvency, or continuing to operate in statu cridae in a manner that is liable to insolvency:
Section 159 of the German Criminal Code (Grossly negligent impairment of creditors’ interests) states:
(1) Anyone who, through gross negligence, causes his insolvency by acting in a manner that is likely to incur insolvency (paragraph 5), shall be punished with imprisonment for a term not exceeding one year.
(2) Any person who, knowing or negligently ignoring his insolvency, grossly negligently prevents or reduces the satisfaction of at least one of his creditors by acting in a manner that is prejudicial to insolvency pursuant to paragraph 5 shall be punished in the same way.
(3) Any person who, through gross negligence, impairs his economic situation through actions that are likely to cause insolvency (paragraph 5) to such an extent that insolvency would have occurred if one or more local authorities, without any obligation to do so, had not directly or indirectly made grants, taken comparable measures or caused grants or comparable measures to be made by others shall also be punished.
(4) Any person shall be punished with imprisonment for a term not exceeding two years
in the case of paragraph 1, causes a loss of satisfaction by its creditors or at least one of them exceeding EUR 800,000,
in the case of paragraph 2, causes an additional loss of satisfaction by its creditors or at least one of them exceeding EUR 800,000, or
by committing one of the acts punishable under paragraphs 1 or 2, the economic existence of many people is damaged or, in the case of paragraph 3, would have been damaged.
(5) Anyone who acts contrary to the principles of sound business conduct
destroys, damages, renders unusable, squanders or gives away a significant part of his assets,
through an exceptionally risky transaction that is not part of his normal business operations, spends excessive amounts of money through gambling or betting,
incurs excessive expenditure that is in striking contradiction to his financial circumstances or economic performance,
fails to keep business books or records or keeps them in such a way that it is considerably more difficult to obtain a timely overview of its true assets, financial position and earnings, or fails to take other appropriate and necessary control measures to provide it with such an overview, or
Failure to prepare annual financial statements which it is obliged to prepare or to prepare them in such a way or so late that a timely overview of its true assets, financial position and results of operations is made considerably more difficult.
The provisions of Section 156 of the German Criminal Code (fraudulent bankruptcy), Section 158 of the German Criminal Code (favoring a creditor) and Section 160 of the German Criminal Code (activities in insolvency proceedings) must also be observed.
IV.6. Special liability under the Corporate Reorganisation Act (URG)
If insolvency proceedings are opened against the assets of a company (AG or GmbH) subject to audit[17], the managing directors are liable under certain conditions in accordance with Section 22 URG if the assets alone cannot cover the liabilities. The URG does not provide for an explicit obligation to file an application for reorganization proceedings, but is intended to offer companies assistance in times of crisis. The URG is not a protective law for the benefit of creditors; however, if the risk of insolvency incurred by failing to file an application materializes, then the person who was responsible for it should be held responsible. This liability is purely a liability based on results. Fault is not a prerequisite.[18]
According to Section 22 URG, liability is given if the managing directors have not immediately applied for or properly continued reorganization proceedings within the last two years before the insolvency application, if they have received a report from the auditor according to which the equity ratio is less than 8% and the fictitious debt repayment period is more than 15 years. Finally, conduct that triggers liability is the failure to prepare the annual financial statements or not to do so on time or the failure to immediately commission the auditor to audit the annual financial statements.
The managing directors are jointly and severally liable for any damage incurred, with the maximum liability limit per person being €100,000.00.
V. Special crisis responsibility, special topics
V.1. Obligation to pay an advance on costs
The managing directors are jointly and severally obliged to pay an advance on start-up costs of up to €4,000.00 (Section 72a IO). All persons who were managing directors within the last three months before the insolvency application was filed are also obliged to pay this advance on costs, but not the emergency managing director in accordance with Section 72a Paragraph 2 IO.
Since the IRÄG 2010, this obligation also applies to the non-managing majority shareholder.
V.2. Prohibition of deposit refunds
The capital maintenance provisions serve to protect creditors against future negative developments in the company, as enshrined in company law, and are intended to compensate for the lack of personal liability of shareholders in capital companies. According to their purpose, these provisions are intended to cover any direct or indirect payment to a shareholder that is not a distribution of profits or that is not matched by equivalent consideration and that economically reduces the company's assets.[19]
This includes, among other things, the granting of loans to the shareholders, the provision of security by the GmbH in favor of the shareholders and other free or discounted services to the shareholder.
The violation of the prohibition on the return of capital contributions results in the nullity of the prohibited actions. The legal transaction must be reversed and the shareholders are obliged to reimburse the prohibited service (Section 83 Paragraph 1 GmbHG). The managing director is also liable for compensation in this case, whereby the obligation to pay compensation arises from Section 25 Paragraph 3 Item 1 GmbHG.[20]
The company's claims shall become time-barred after five years unless it proves that the person liable for compensation knew that the payment was unlawful.
V.3. Equity replacement law
In the event of insolvency, however, the provisions of the Equity Replacement Act must also be observed. Its provisions are based on the idea that risk capital can also be made available as a loan and that loans that function as risk capital should also be treated as such.[21] This law essentially only covers companies that have a capital maintenance obligation (GmbH, AG, cooperative with limited liability and those partnerships that do not have a natural person as an unlimited personally liable partner with power of representation).
According to Section 5 EKEG, a company is in crisis if it is insolvent (Section 66 IO), over-indebted (Section 67 IO), or if the company's equity ratio according to Section 23 URG is less than 81% and the fictitious debt repayment period according to Section 24 URG is more than 18 years, unless the company does not require reorganization.
If a "privileged shareholder", i.e. a controlling shareholder or a shareholder with at least a 25% stake, grants the company a loan during a crisis, while equity capital "should in principle be added", this shareholder cannot demand the loan back as long as the crisis continues, in accordance with Section 14 EKEG. In the event of insolvency, such claims from shareholder loans replacing equity capital are subordinated, they can only be satisfied after the bankruptcy claims (and are therefore normally uncollectible!).
Another problem is that collateral that the shareholder provides for "his" company can also be lost in this way. Therefore, if the shareholder sells a property that serves as collateral in favor of a company debt, he cannot demand compensation from the company.
VI. Exemption from liability
VI.1. Agreement/Waiver
According to general tort law, the creditor is in principle free to actually enforce his claims or to waive them. Due to the limited liability of capital companies, company law provides for a different regulation:
According to Section 39 Paragraph 4 of the GmbHG, the shareholder who is released from an obligation by the resolution or who is to receive an advantage does not have the right to vote in the resolution. Otherwise, the majority shareholder, who is also the managing director, could release himself from liability towards the company.[22]
According to Section 25 Paragraph 7 in conjunction with Section 10 Paragraph 6 GmbHG, a company cannot waive claims for damages or reach an agreement with the managing director if the compensation of these claims is necessary to satisfy the creditors.[23]
However, it is considered permissible for the managing director to conclude a liability indemnification agreement with the shareholders of the GmbH, according to which the shareholders undertake to indemnify and hold the managing director harmless in the event of a claim being made against him. Such an agreement only applies internally.
It must always be borne in mind that in the event of insolvency, claims will be enforced by the insolvency administrator, who is intent on increasing the assets.
VI.2. Discharge
The discharge must be distinguished from the above-mentioned agreement. This is generally understood to be the unilateral declaration of the company by shareholders' resolution (Section 35 Paragraph 1 Item 1 GmbHG), with the effect that the managing director is released from claims for damages to which the company is entitled against the managing director. The release is a unilateral declaration by the company.[24]
The exemption only applies to claims for damages which the shareholders could have identified upon careful examination of all submitted and complete documents and information.
The discharge has the effect that claims against the discharged managing director are precluded (extinguished).[25] However, the preclusion effect is also limited by creditor protection in the area of discharge.[26] The managing director has no right to discharge, but is entitled to resign from office if he refuses without reason.
The managing director can also have the non-existence of claims for damages against him established by a court.[27]>
[1] Only physical persons with legal capacity can be appointed as managing directors (Section 15 para. 1 GmbHG).
[2] Jaufer, The Company in Crisis, 165.
[3] Feuchtinger/Lesigang, Practical Guide to Insolvency Law³, 214 mwN.
[4] OGH 23.02.2009, 8 Ob 108/08b.
[5] Feuchtinger/Lesigang, Practical Guide to Insolvency Law³, 215 with further references; VwGH 28.04.2009, GZ 2006/13/0197; VwGH 21.09.2009, GZ 2009/16/0086.
[6] Bollenberger-Klemm, Managing Director Liability², 70.
[7] Koziol/Welser, Civil Law II13, 309.
[8] Jaufer, The Company in Crisis, 166.
[9] Koppensteiner/Rüffler, GmbHG³, § 27 Rn 1.
[10] Jaufer, The Company in Crisis, 188f.
[11] Jelinek/Zangl, Insolvency Code8, § 66 IO; Feuchtinger/Lesigang, Practical Guide, 30.
[12] Jaufer, The Company in Crisis, 193.
[13] Sigmund-Akhavan Aghdam, Insolvency Law in Practice², 68.
[14] Jaufer, The Company in Crisis, 204f; Sigmund-Akhavan Aghdam, Insolvency Law in Practice², 68.
[15] Shubshizky, Guide to Social Insurance², 118.
[16] Feuchtinger/Lesigang, Practical Guide to Insolvency Law³, 210f with further references.
[17] The obligation to audit exists according to Section 221 UGB in conjunction with Section 268 UGB.
[18] Jaufer, The Company in Crisis, 216.
[19] Jaufer, The Company in Crisis, 273.
[20] Jaufer, The Company in Crisis, 277.
[21] Feuchtinger/Lesigang, Practical Guide to Insolvency Law³, 53 ff.
[22] Koppensteiner/Rüffler, GmbHG³ (2007) Rz 40 to Section 39 GmbHG with explicit reference to Rz 21 to Section 35 GmbHG.
[23] Jaufer, The Company in Crisis, 182.
[24] Bollenberger-Klemm, Managing Director Liability², 10.
[25] Jaufer, The Company in Crisis, 182f.
[26] Koppensteiner/Rüffler, GmbHG³, para. 19 to Section 35 GmbHG with explicit reference to para. 24 to Section 25 GmbHG.
[27] Koppensteiner/Rüffler, GmbHG³, para. 20 to Section 35 GmbHG with explicit reference to para. 31 to Section 16 GmbHG.