CORPORATE GmbH & Co. KG (limited commercial partnership): Federal court of justice (BGH) completes its case law on management liability
- The managing director of a GmbH (limited liability corporation), which itself is not the general but one of the limited partners of a German limited commercial partnership (GmbH & Co. KG), is personally liable to the limited partnership under Section 43 (2) GmbHG (German limited corporation law).
- This ruling applies even if the management of the limited partnership is not the sole or essential task of the GmbH (BGH judgment from 14.04.2023 Ref. II ZR 162/21).
What were the facts?
According to the partnership agreement of a German limited commercial partnership (GmbH & Co. KG), a limited partner in the legal form of a GmbH was solely authorized to manage the company. This limited partner had several managing directors in succession, some of whom were authorized to represent the company alone. This limited partner also managed other fund companies in the legal form of limited partnerships.
The limited partnership was acquiring investment funds, which it lent to other companies through property loans. These loans were to be adequately collateralized. However, in May 2012, the partnership management transferred loan funds to a borrower. The managing director has not been involved in these transactions. He had started working for the company in January 2012 in return for a monthly fee of €2,500. Since the managing director had not prevented the outflow of funds, the limited partnership had suffered a loss, as it could neither reclaim the disbursement amount from the now insolvent borrower nor assert rights of segregation or separation of the borrower’s assets.
The lower court ordered the managing director to pay damages to the limited partnership based on Section 43 (2) GmbHG due to negligent management. The BGH confirmed this legal opinion.
Liability based on the legal concept of contract with a protective effect in favor of third parties
In continuation of its established case law on the liability of the managing director of the general partner, the Federal Court of Justice also considers the limited partnership to be included in the scope of protection of the executive and employment relationship existing between the managing limited partner and its managing director on the one hand and the limited partnership on the other. The managing director of the GmbH is liable under § 43 Para. 2 GmbHG by the principles of a contract with a protective effect in favor of third parties. Even without the requirements of Section 328 BGB (German civil code), a third party not involved in the contract but affected by its risks as intended may be entitled to assert claims for damages due to a breach of a duty to protect. This ruling requires that (i) a third party is affected by the central performance a managing director shall perform under his legal duties, (ii) the creditor has an interest worthy of protection in the inclusion in the scope of protection of the contract, (in the meaning of his legal duties), (iii) there is a need in good faith for the formation of contractual protection and (iv) the inclusion of the third party must be known or at least recognizable to the party obliged to protect.
The Federal Court of Justice considers all four conditions to be fulfilled in the case third-party-effect-principles shall apply. In particular, there is a justified need for extending liability and contractual protection in good faith, as the limited partnership is exposed to behavior by the managing director that is in breach of duty without direct rights of intervention (e.g., rights to issue instructions). It cannot even prevent the shareholders of the GmbH from discharging their managing director. However, such discharge does not lead to the exclusion of compensation rights of the limited partnership against the managing director.
Liability even if the managing GmbH also manages other companies; no discharge due to multiple management
The court also positions itself about a further legal question that still needs to be answered and recognizes the extension of liability to the managing director even if the management of the business of the limited partnership concerned was not the sole or principal business purpose of the GmbH. The limited partnership should trust that the managing GmbH will provide it with the care and attention owed to it, irrespective of the number of other management tasks taken on or other non-company tasks. The managing GmbH’s task is to ensure it can fulfill its management duties towards the limited partnership. If it realizes it is not in a position to do so, it must limit the extent of its duties.
Liability also despite an internal allocation of responsibilities due to breach of supervisory duties
The BGH reiterates the principles of liability in the case of the appointment of several managing directors. It again clarifies that each managing director is generally obliged to manage the company. A permissible allocation of responsibilities does not remove the responsibility for the business. The managing director, who is not affected in organizational terms, has at least supervisory duties due to his overall responsibility, the scope of which must be determined according to the respective circumstances of the individual case. In particular, the managing director must always and immediately follow up on indications of undesirable developments or irregularities in an external department! In the court’s opinion, there is no reason to limit the protective effect in favor of the limited partnership because there is “only” a breach of monitoring obligations. In this case, the court assumed there had been a breach of the duty to monitor because a report from November 2011, accessible to the management, had already shown that only a fraction of the collateral required in the company’s core business had been provided. The managing director concerned should not have been unaware of this shortcoming in the core business if he had managed the company properly and exercised his duty of supervision.
Our advice
Irrespective of the fact that liability under Sec. 43 II GmbHG can also be imposed in a partnership via a limited partner GmbH; BGH’s judgment is a further example of the compliance requirements management should observe. Management should prevent the company from running into damage by saying, “We’ll carry on like this for now,” which the newly appointed managing director is obliged to compensate even though he was not responsible for the originally damaging measure.
