External liability

PART 2 – EXTERNAL LIABILITY

While in cases of internal liability, the managing director is “only” liable to the company, in cases of external liability, there is direct responsibility towards third parties. Third parties can, therefore, sue the managing director directly for damages in these cases. In these cases, however, the general burden of proof in civil proceedings applies. The claimant must prove the breach of duty by the managing director.

Of particular importance in practice for the managing director is the liability for taxes of the company according to §34 AO, §60 AO, the liability for non-payment of social security contributions according to §823 para. 2 BGB in conjunction with §266a StGB, as well as §266a StGB. §266a StGB, as well as liability in cases of delay in filing for insolvency, §15a InsO.

Liability for taxes, §34 AO, §60 AO

The managing director must ensure that his company fulfills all tax obligations. This task alone is a Herculean task because of German tax law. This obligation becomes particularly relevant when situations arise following tax audits or tax investigation audits in which the company is assessed for additional taxes it cannot afford. In these cases, a liability notice is issued to the management by default, and a notice that criminal tax proceedings will be initiated against the management.

The managing director must, therefore, ensure that all documentation required under tax law is carried out, that the tax returns are prepared and submitted correctly, completely, and on time, and that the taxes owed are paid in full and on time.

Under certain circumstances and depending on the company’s circumstances, the managing director must ensure that the company maintains a functioning tax compliance system.

In times of scarce resources, the managing director must also observe the principle of pro rata repayment. If the company can only pay some creditors in full, the managing director only fulfills his obligation to the tax authorities if he pays proportionately less. In such cases, the managing director may not, for example, treat a significant supplier more favorably than the tax office in the repayment of any claims but must distribute the available funds proportionally equally among the creditors.

However, even if the company can bear the additional taxes, the managing director may be liable for the additional taxes under §43 Para. 2 GmbHG by general principles if proper management would have prevented the additional taxes from arising.

Liability for social security contributions

The managing director must ensure his employees’ social security contributions are correctly registered and paid. In contrast to wage tax, linked to inflow criteria, social security contributions are incurred directly when the facts are realized. It does not depend on the payment of wages. If there is flooding in this area, the managing director faces criminal liability for non-payment of employee contributions by Section 266a (1) StGB (German Criminal Law Act) and civil liability with private assets for the non-payment of contributions by Section 823 (2) BGB (German Civil Law Code) in conjunction with Section 266 (1) StGB. §266 para. 1 StGB. Suppose the company can no longer pay the employee contributions, which are subsequently determined through audits. In that case, this is usually followed by the personal insolvency of the managing director.

Liability under tort law

According to the German law perspective, tort law is the regulations according to which tortious acts outside of a contractual relationship, or at least not necessarily in connection with such a relationship, are judged that cause damage to a third party. The act must be imputable to the perpetrator, i.e., he must have committed it culpably (intentionally or negligently).

Injury to life or limb

For example, the managing director is liable if he places products on the market that cause injury to life or limb to third parties. He is also liable if he organizes the workplace so that an employee suffers an avoidable accident at work without the employee being responsible for this. This liability arises from §823 para. 1 BGB (German Civil Code) due to the violation of so-called absolute protected interests.

Violation of protective laws

Under Section 823 (2) of the German Civil Code (BGB), the managing director is also liable to third parties for compensation for financial losses and, thus, for money if he violates so-called protective laws. Protection laws are regulations that also serve to protect the rights of third parties.
For example, it is recognized that a managing director is liable if he commits criminally relevant fraud or breach of trust (§263 StGB to §266b StGB), commits a delay in filing for insolvency (§15a InsO), or uses construction funds (§1 BauFordSiG) in breach of duty.
In this area, liability for breach of trust is of particular importance. Suppose the managing director exceeds his limited powers in the internal relationship with the company. In that case, he is usually very quickly accused of misappropriating company funds, and depending on the dispute within the company, the public prosecutor’s office may issue a preliminary injunction.

Violation of the provisions of special tort law

The management rarely considers the provisions of market regulation law and unfair competition law.
Direct personal liability of the management can arise, for example, from §8 UWG and §9 UWG if the managing director, allegedly acting for the benefit of the company, violates the provisions of §3 UWG and §7 UWG. These areas are quickly reached if products and services are advertised under pretenses or misleading information or if overly aggressive advertising is used.
Violations of antitrust law can lead to liability of the managing director that destroys the company’s civil existence by Section 33a GWB (German Antitrust Law).
Finally, liability claims also arise from industrial and intellectual property rights, such as Section 97 (2) UrhG or Section 14 (6) MarkenG.

Legal or quasi-legal liability

Breaches of non-competition covenants

The managing director is not only subject to statutory non-competition clauses based on the principles of fiduciary duty but also, as a rule, to comprehensive contractual non-competition clauses in favor of the company. He is prohibited from competing with the company, using business opportunities attributable to the company for his purposes, or exploiting other knowledge of the company for his economic benefit. If these prohibitions are breached, the managing director may be held liable.

Acting on behalf of the company before entry in the commercial register, Section 11 (2) GmbHG

Suppose the managing director acts on behalf of the company after the company has been established (notarization of the articles of association) but before the company has been entered into the commercial register. In that case, he is personally liable for the liabilities incurred. Although the managing director is generally released from this liability by the company’s entry in the commercial register, the managing director can fall into the liability trap by interfering with the entry. Before the company enters the commercial register, it is advisable to refrain from concluding contracts or making declarations on behalf of the company.

Failure to submit the list of shareholders

Failure to submit an amended list of shareholders following changes to the shareholder structure (see §40 Para. 1 GmbHG) can lead to liability by the managing director by §40 Para. 3 GmbHG.

Legal liability, culpa in contrahendo

Finally, a managing director is liable under general principles of civil law if he or she takes actions towards third parties that he or she is not authorized to take in the internal relationship with the company (acting without sufficient power of representation). Liability may arise if the articles of association, the managing director’s employment contract, rules of procedure, or a shareholder resolution restrict the managing director’s authority to act internally. Still, the managing director must comply with this restriction in the external relationship. If the managing director fails to clarify in business dealings that he is acting on behalf of the GmbH, personal liability may also arise.