Especially since the “Brexit” announcement, our law office has witnessed an increased number of requests by foreign investors who want to establish a private limited company (Gesellschaft mit beschränkter Haftung; GmbH) in Germany. This article deals with an aspect that is often overlooked:
The general manager of a German GmbH (similar to British Ltd. and US LLC) has to consider two risks: the responsibility for the company and the risk of personal liability. Most of the general managers are not aware of these risks.
One of the major advantages of the German GmbH is that German company law protects the responsible staff of a GmbH from damage claims. “In case of emergency, the company simply collapses” is usually the first thought when third-party claims threaten the GmbH beyond its financial limitations, and “We’ll just set up a new corporation” often appears as the “magic bullet” for dealing with such cases. However, many acting managers are not aware that the GmbH is not an impenetrable protective shield. The general manager can be targeted personally by the creditor, by an injured third party or – in many cases – by the finance authority.
This is a risk foreign investors launching a new GmbH are not aware of. Therefore, it is imperative to have an eye on the most common cases of liability – at least with respect to the general manager.
The general manager (“Geschäftsführer”) is not only one of the chief executives: As the GmbH’s formal and legal representative, he represents the company as a German corporation according to German law legally, judically and extrajudicially. Frequently, the general manager is concurrently the owner of the GmbH (“Ein-Mann-GmbH”). If he is not simultaneously the owner, then he is called hired manager (“Fremdgeschäftsführer”).
Usually, the general manager executes all arising commercial and legal operations in order to achieve the business objectives, i. e. those which are necessary for the company to operate successfully. He signs contracts with suppliers and negotiates with contractual partners. He is appointed or assigned by the shareholders.
If the GmbH is a one-man corporation, the shareholder appoints himself as general manager. A hired general manager can be relieved from office at any given time. In such a case, the general managers contract continues to exist as long as the contract is terminated in due time. Thus, appointment and employment have to be considered differently. The appointment of a general manager has to be registered in an official register (“Handelsregister”). This appointment only takes effect to the business with third parties after the registration.
Externally, i. e. in daily business with third parties, the general manager’s full power of attorney cannot be restricted. However the agreement between the shareholders and the general manager can be set up in a way that the general manager needs to get shareholder approval for certain business operations.
In any case of business operations the general manager must follow the care of a decent businessman. If he violates said care, he can be held personally responsible for damages. In these cases, the GmbH does not protect the general manager – he personally is liable for damages of third parties and/or the shareholders.
With respect to accountability, the German company law differs between relationship to third parties (the manager’s liability to third parties, for example suppliers, authorities, clients) and internal relationship (the manager’s liability to the Ltd. and/or the shareholders). If the general manager exceeds his powers, he must compensate the shareholders even though the affected deals remain in full effect towards third parties. With respect to damages claims of third parties, the GmbH is responsible, and the general manager cannot be held liable on principle (i. e., there are exceptions to the rule)
If the chief executive however doesn’t work according to the rules of good business integrity, he himself is held liable. Some examples:
- In the field of taxes and bookkeeping (tax duties are not fulfilled), the finance authorities can get him personally;
- towards social insurance authorities in social insurance law (employee shares of social security contributions are not discharged);
- in case of infringement of property rights, for example if he sells goods which are still under reservation of ownership of the supplier and have not yet been paid by the Ltd.;
- in case of competition, copyright, patent, utility model and trademark law;
- In the context of insolvency, if the chief executive does not file for bankruptcy in due time;
- If at the conclusion of the contract, he does not make it clear that he acts in the name of the Ltd., and the third party assumes that he acts for himself.
In the above-mentioned cases, the general manager can not claim that he has delegated these tasks to a third party (accountant, proxy, etc.) because he himself is obliged to monitor these people. This is particularly critical for non-German speaking foreign investors, and difficulties with German officialese contribute to a heightened risk.
To avoid personal claims, one should consider if a directors and officers liability insurance should be effected – possibly during negotiations for the general manager’s contract. This however is just a fill-in for situation when it is already too late, so we advise taking precautionary steps before starting to set up the GmbH as dealing with the subject of personal liability is of vital significance.
The law office Boris Zimmermann advises corporations and foreign investors on entering the German market. If you have any questions, please contact us.