POTENTIAL LIABILITY OF THE DE FACTO MANAGING DIRECTOR FOR DELAYED INSOLVENCY FILINGS

Overview

The distinction between de facto management and mere delegation of tasks is difficult, but the liability potential of a de facto managing director is quite high. In its decision 17 Ob 5/21s dated 19 May 2021, the Austrian Supreme Court (Oberster Gerichtshof) once again dealt with the criteria of de facto management and further with the liability of the de facto managing director for delayed insolvency filings.

Facts

The plaintiff, a big insurance company, rented business premises to a limited liability company. The first defendant was the sole managing director and the second defendant was the mother of the sole shareholder of the company. She was employed part-time, but was not further involved in any business activities of the company and had no insight into the financial matters of the company. Nevertheless, she acted on behalf of the later insolvent company in various meetings between the plaintiff and the first defendant, often acting emotionally and campaigning for the company by, for example, requesting a reduction of the deposit. On the other hand, the first defendant and managing director behaved rather passive and deliberate. Later, at the request of the company itself, insolvency proceedings were opened over its assets. The illiquidity of the company had already existed for three years prior to opening of the insolvency proceedings and would have been apparent in case of proper accounting. The plaintiff claimed, not only from the first defendant as managing director, but also from the second defendant as de facto managing director, jointly and severally, compensation for the damages caused by the delayed insolvency filings.

The court of First Instance dismissed the claim of the plaintiff against the second defendant. The Court of Appeal allowed an ordinary appeal based on the fact that legal doctrine and case law were still unclear about the criteria of de facto management in this regard.

Decision of the Austrian Supreme Court

The Austrian Supreme Court made clear that a de facto managing director is obliged to actively influence the managing director regarding his obligation under Sec 69 Insolvency Code (“Insolvenzordnung”) to file for insolvency. If the de facto managing director fails to do so, this could potentially result in his or her liability. According to the OGH, the de facto managing director is a person who – without having been effectively appointed as managing director – manages the company or at least exerts significant influence on the management. It is of no relevance whether this person is an employee, shareholder, relative or even an external. As a rule, de facto management is assumed in case the appointed managing director does not exercise the function and instead another manages the company. In most cases, it is also required that third parties perceive the de facto managing director as the appointed managing director.

Furthermore, the Austrian Supreme Court stated that, based on the teleological interpretation of Sec 69 para 3  Insolvency Code, the liability for delaying insolvency filings requires that a de facto managing director is considered a person who permanently and unambiguously takes the place of a corporate body authorized to file for insolvency.

The Austrian Supreme Court concluded – as well as the previous instances – that the behavior of the second defendant did not justify the managing director neglecting his own area of responsibility in the company. It is not unusual for employees to be assigned with tasks in which they represent the company externally. Even the independent decision-making within the areas assigned to the second defendant do not lead to the assumption of de facto management. Essential financial matters, which are decisive for the responsibility according to Sec 69 IO, remained in the competence of the first defendant. Even the presence in the meetings with the plaintiff do not constitute de facto management. Consequently, the Austrian Supreme Court denied the de facto management and therefore the liability of the second defendant in the case at hand.

Conclusion

In this case only the appointed managing director is liable for the damages caused by the delayed insolvency filings. However, the Austrian Supreme Court defined – once more – certain criteria for de facto management of a company and the liability of a de facto managing director for delayed insolvency filings. The decision by the Austrian Supreme Court clearly shows the risks associated with de facto management. Therefore, caution and specific attention is required in case of de facto management.