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Directors Duties

Duties and Responsibilities of the Managing Directors

1) Managing the Business of the Company
The managing director is responsible for the daily business of the company. The managing director will also represent the company; the managing director will conclude contracts in the name of the company and will represent the company in court. If more than one managing director is appointed all managing directors will represent the company together due to statutory provisions. Since this is inconvenient the articles of the company usually provide that one managing director is entitled to represent the company alone or together with a Prokurist. This will also be registered in the commercial register. The managing director will have to observe the orders of the shareholders. However, if the managing director does not observe the orders (for example concludes a contract above a fixed limit) the contract is still valid. Since most restrictions and orders in this regard cannot be registered third parties can rely on the fact that the managing director is not restricted within his right to represent the company.

a) Diligence
The managing directors must exercise the diligence of a prudent businessman in the conduct of the company’s affairs. They have a paramount duty of loyalty to the company. For example, each managing directors must cooperate in a spirit of good faith with the other managing directors, the shareholders and the other bodies of the GmbH, keep himself informed about all material affairs of the company, maintain silence on all confidential information and secrets of the company, conscientiously supervise and direct subordinate bodies and employees, and be led by the common good of the company and not his own benefit in all matters which affect the company’s interests. If a managing director violates his obligations towards the company, he may be liable for damages (§ 43 GmbHG).

b) Compliance
Since the managing director is the head and the representative of the company the managing director is more or less liable for the whole business. Although the managing director may allocate tasks to other employees the managing director remains responsible. The managing director may even be liable for criminal offences conducted by employees. There is one decision of the Highest Criminal Court in which the court held a compliance officer liable because the compliance officer did not prevent the company from overbilling. The court found that the compliance officer did not only owe a duty to the company and its shareholders but also to the clients of the company. The overbilling constituted a fraud and the compliance officer was liable due to omission. This decision is also applicable to managing directors if they are not able to prove that they appointed an employee as compliance officer and that they implemented a reporting and supervisory system to prevent mistakes etc.

The managing directors will invite the shareholders to shareholders meetings; sign the balance sheet and the tax return etc. Managing directors will inform the shareholders about the company’s affairs. Managing directors have to keep proper accounts and to prepare the annual financial statement. If the company becomes insolvent, the managing directors must, without undue delay, but not later than three weeks after the insolvency occurs, petition for the opening of bankruptcy proceedings or court composition proceedings. Failure to do so may constitute a crime and a respective conviction may prevent the managing director from becoming (or remaining) a managing director in the future.

The managing directors are responsible for ensuring that the social security contributions payable by the GmbH are paid punctually and in full to the respective collecting agency. If they fail to do so they may be liable for damages and may render themselves liable to prosecution.

The managing director must not render payments to shareholders if the company is bankrupt or becomes bankrupt due to the payment. In these cases the managing director may become personally liable, i.e. will have to repay the money from his own funds.

2) Consequences of Breach
If the managing director does not fulfil the obligations the managing director might be liable to damages to the company. Furthermore, the managing director may be subject to criminal proceedings.

3) Indemnity and Insurance
D&O insurance may cover most of the financial risk of the managing director. However, in any case the insurance does not cover any mistakes made intentionally. As long as the mistakes are not committed intentionally the managing director will be treated as an employee. This means that the company will be liable first. Internally the company (or the shareholders) might be entitled to indemnity payments rendered by the managing directors. However, in most cases the company will not be able to recover damages. As ordinary employees managing directors are not liable for every single mistake. The concept is that nobody is perfect and that in most cases it seems to be unfair to held employees and managing directors liable for minor mistakes. Hindsight is not allowed. Thus it will be necessary to weight the different interests such as: who made the mistake and why, did the person ignore orders, what does the person earn, would be possible for the company to obtain insurance coverage etc.

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