Internal liability: duty of care, capital maintenance and payments after insolvency

The managing director of a metalworking GmbH realises in early March that the company can no longer settle its due invoices. She is hoping for a large order, files no petition and over the following five weeks transfers €46,000 to suppliers, the landlord and one shareholder. In the later insolvency proceedings, the administrator claims that sum back from her personally.

The standard: the care of a prudent businessman

The limited liability of a GmbH protects the shareholders against the company's creditors. It does not protect the managing director against the consequences of his or her own breaches of duty. The GmbH Act deals with those consequences first in the relationship with the company itself, in section 43 GmbHG, headed simply "liability of the managing directors".

Subsection 1 puts the standard into a single sentence. In the company's affairs, the managing directors must apply the care of a prudent businessman. What matters is therefore not how carefully someone treats their own money, but what can be expected of a prudent businessman holding this position.

Subsection 2 draws the legal consequence. Managing directors who breach their duties are liable to the company for the resulting loss. Three elements must come together: a breach of duty, a loss suffered by the company and a link between the two. A loss on its own triggers no liability, because careful decisions can also fail commercially.

Where several managing directors are appointed, those who breached their duties are liable jointly and severally under subsection 2. The company therefore does not have to split the loss by head. Section 43 does not mention any internal allocation of responsibilities; how far such an allocation relieves a director in a given case is a matter for the courts.

It is worth noting what the section leaves out. It contains no catalogue of individual duties, no rule on the burden of proof and no express safe harbour for business judgement. What counts as diligent in a given case is filled in by the courts. This course stays with the wording and says where it stops.

The distinction has a practical effect. A supplier whose invoice the GmbH can no longer pay finds no basis in section 43 for suing the managing director personally. The section gives the company a claim. The company asserts it, and once insolvency proceedings have been opened, the person who then administers its assets does.

Who asserts the claim and when it becomes time-barred

While the company is trading normally, the shareholders decide. Section 46 no. 8 GmbHG assigns to them the assertion of damages claims that the company has against managing directors arising from their management. They also decide who represents the company in a lawsuit against the managing directors, so the director being sued does not conduct the case for both sides.

In a company with a single shareholder who is also its managing director, this rule has nothing to bite on: nobody resolves to sue themselves. That changes with insolvency. Under section 80(1) InsO, the opening of proceedings transfers the right to administer and dispose of the company's assets to the insolvency administrator.

Damages claims against the managing director are part of those assets. The administrator therefore has reason to examine the management of recent years, and is not bound by the restraint the former shareholders showed. What nobody objected to for years can thus come up for the first time in the proceedings.

Claims under section 43 become time-barred after five years under subsection 4. The subsection does not itself say when the period starts. For practical purposes the conclusion is enough: a breach of duty from an earlier financial year can still be the subject of a claim in later insolvency proceedings.

Section 46 no. 5 GmbHG also lists the discharge of the managing directors as a matter for the shareholders. The provision does not say what effect a discharge has on later damages claims. For an important group of claims, however, the statute draws a firm line elsewhere, which the next section shows.

Capital maintenance: payments out of the tied-up assets

Section 30(1) first sentence GmbHG prohibits paying out to the shareholders the assets needed to preserve the share capital. The share capital is therefore not a sum that is paid in once and then freely available. It ties up part of the company's assets, and that part must not flow back to the shareholders.

The second sentence exempts two cases: payments made while a domination or profit transfer agreement is in force, and payments covered by a full-value claim for consideration or repayment against the shareholder. The third sentence adds the repayment of a shareholder loan and payments that are economically equivalent to one.

The full-value claim exception matters most in the everyday life of a small GmbH. If the company lends money to its shareholder, cash leaves, but a repayment claim comes in. If that claim is of full value, the assets stay the same. If it is not, for example because the shareholder can hardly pay, the ban applies.

Where the ban is breached, the recipient must refund the payment under section 31(1). A recipient acting in good faith owes it under subsection 2 only to the extent needed to satisfy the creditors. If nothing can be recovered from the recipient, the other shareholders are liable under subsection 3 in proportion to their shares.

This is where the managing director comes in. Section 43(3) first sentence expressly names payments contrary to section 30 as a case of liability. Whoever carries out the prohibited payment is liable to the company. Under section 31(6), a director at fault is also liable to the fellow shareholders who had to step in under subsection 3.

The objection that the shareholders resolved on the payment carries only limited weight. Under section 43(3) third sentence, the liability remains to the extent that compensation is needed to satisfy the creditors, even where the managing director followed a shareholder resolution. An instruction from the owners does not shield the director as against the creditors.

The second sentence also refers to section 9b(1). Under it, a waiver by the company of the damages claim and a settlement about it are void to the extent that compensation is needed to satisfy the creditors. A resolution releasing the managing director from liability therefore achieves nothing to that extent.

The periods differ according to the debtor. The claim against the recipient under section 31(1) becomes time-barred after ten years under subsection 5, counted from the end of the day on which payment was made. The claim against fellow shareholders under subsection 3 is barred after five years, as is the claim against the managing director under section 43.

The entrepreneurial company, or UG, adds a further tie, the statutory reserve explained in the course on choosing between a GmbH and a UG. It too must not be paid out to the shareholders, and a managing director who does so anyway exposes himself or herself to the liability set out in this section.

The payment ban starts when the company becomes insolvent

When the company runs into crisis, the focus shifts from the shareholders to the creditors. Section 15b InsO governs payments made in a state of illiquidity or over-indebtedness. It is addressed to the members of the representative body who are obliged to file under section 15a(1) first sentence, which in a GmbH means its managing directors.

Subsection 1 first sentence leaves no doubt. Once illiquidity or over-indebtedness has occurred, they may no longer make payments on the company's behalf. The statute ties the ban to the moment insolvency occurs, not to the end of the filing period and not to the day on which the petition is finally filed.

The filing period itself, at most three weeks for illiquidity and six for over-indebtedness, is explained in the course on choosing between a GmbH and a UG. Here it is enough to note that the two rules fall apart in time: the ban applies from the first day, while the period only runs out afterwards.

The second sentence contains the general exception. The ban does not apply to payments compatible with the care of a prudent and conscientious manager. The standard recalls section 43 GmbHG but adds the word conscientious. Subsections 2 and 3 say which payments fall under it in the typical situations.

Which payments are still allowed after insolvency

Subsection 2 first sentence sets up a presumption. Payments made in the ordinary course of business, in particular those serving to keep the business running, are deemed diligent. Wages, rent, energy or material for current orders can fall under this, subject to the reversal in subsection 3.

The second sentence ties this presumption to a condition for the duration of the filing period. It only applies as long as those obliged to file pursue, with the required care, measures to remove the insolvency for good or to prepare an insolvency petition. A director who simply lets the weeks pass loses the protection even for ordinary payments.

The third sentence concerns the time between the petition and the opening of proceedings. Payments made in that phase are also deemed diligent if a preliminary insolvency administrator has consented to them. Agreeing with the preliminary administrator after the petition on which invoices get paid thus gives both sides clarity.

Subsection 3 reverses the position once the period has expired. If the point in time decisive for a timely petition has passed and no petition has been filed, payments are as a rule no longer diligent. The presumption in favour of the ordinary course turns into a presumption against it. A late petition thus becomes costly twice over.

Refund, limit to the loss and limitation

Where payments are made in breach of subsection 1, those obliged to file must refund them to the company under subsection 4 first sentence. The starting point is therefore the amount paid itself. The managing director is not liable only for a loss that someone would have to prove in detail, but first of all for every prohibited payment.

The second sentence limits this. If the body of creditors has suffered a smaller loss, the obligation is restricted to making good that loss. A payment for which something of value came into the company's assets can thus lead to a lower amount. How the smaller loss is to be established is not governed by the provision.

The third sentence takes up the idea from company law. If the managing director acts on a resolution of one of the company's bodies, that does not exclude the obligation to the extent the refund is needed to satisfy the creditors. The fourth sentence makes a waiver by the company and a settlement about these claims void.

The fifth sentence knows three exceptions: the illiquid person liable who settles with his or her own creditors to avert personal insolvency proceedings, provision in an insolvency plan, and the case where an insolvency administrator acts for the company. A settlement with the administrator is therefore possible, one with the shareholders is not.

Subsection 5 extends the ban to payments to shareholders insofar as they were bound to lead to illiquidity. This covers payments that bring about the crisis in the first place. Liability is excluded only if that consequence was not recognisable even with the care required by subsection 1 second sentence.

Subsection 6 extends the rules to companies such as the GmbH & Co. KG in which no natural person is personally liable; there, the duty falls on the organs of the partners authorised to represent. Subsection 7 sets the limitation period: five years, or ten years if the company was listed on a stock exchange when the breach occurred.

For a small GmbH this means that an administrator going through the bank statements for the months before the petition has time. Every transfer made after insolvency occurred is a potential item on the list, and for each one the managing director must later be able to explain why it was diligent.