Relief of the managing director from liability through allocation of responsibilities?
Comment on the judgment of the Federal Court of Justice of November 6, 2018 – II ZR 11/17
By way of allocation of responsibilities, managing directors cannot easily exclude their liability for breaches of duty by their co-managing directors. The Federal Court of Justice has recently specified the requirements for an effective allocation of responsibilities and the impacts on the liability of managing directors.
In its ruling of November 6, 2018, the German Federal Court of Justice commented on the liability of the managing director of a German limited liability company (GmbH) in the event of payments following illiquidity or over-indebtedness and, in doing so, specified the requirements for an effective allocation of responsibilities. In this context, the court especially stated that managing directors cannot easily exclude their liability for breaches of duty by their co-managing directors by way of allocation of responsibilities but that such allocation must comply with certain prerequisites.
2. Facts of the case
The plaintiff was the insolvency administrator over the assets of a German GmbH, for which the defendant and witness K acted as managing directors. The company's business purpose was the production of television shows. The defendant and K had agreed on an allocation of responsibilities, which provided for a responsibility of the defendant for artistic matters only and K for all commercial, organizational and financial matters. K deliberately concealed the deteriorating financial situation of the company from the defendant. K continued to make payments from the company's assets even after the insolvency of the GmbH had occurred. The plaintiff claimed the reimbursement of these payments in the present legal dispute based on the former sec. 64 para. 2 sent. 1 German Limited Liability Companies Act.
3. Considerations of the Federal Court of Justice
The Federal Court of Justice explained that the fulfilment of the duty to secure the assets pursuant to sec. 64 German Limited Liability Companies Act was incumbent on each managing director personally and could not be delegated. Each managing director was obliged to ensure an organization that enabled him at all times to keep track of the economic and financial situation of the company as required for the performance of his duties.
It was questionable whether there had been an effective division of responsibilities between the two managing directors. According to the Court, such a division requires a clear and unambiguous delimitation of the management tasks based on an assignment supported by all members of the corporate body, which ensures the performance of all relevant tasks by persons who are professionally and personally suitable for this purpose and which respects the overall responsibility of the management for non-delegable duties. In this context, the Federal Court of Justice clarified that an effective division of responsibilities did not necessarily have to occur in writing and thereby rejected a predominant point of view in legal literature.
In the present case, the Federal Court of Justice criticized that the Court of Appeal did not investigate material issues, especially the suitability of the allocation of responsibilities between the defendant and K, the aptitude of K for the management tasks assigned to him, the compliance with monitoring obligations incumbent on the defendant as well as the detectability of the crisis. As a result, the Federal Court of Justice sent the case back to the Court of Appeal.
4. Practical relevance
The judgement clarifies that the legal requirements for the proper allocation of responsibilities must not be underestimated. In particular, persons who are appointed as members of the management board of a German GmbH due to their special knowledge in a specific area, e.g. for the provision of artistic expertise for the production of television shows, but who are less well experienced in commercial, organizational and/or financial matters, can be exposed to considerable liability risks. Only a clear and unambiguous allocation of responsibilities can limit the liability of managing directors or have releasing effect, provided that this has been done properly and the managing directors who are not responsible for specific areas of responsibility fulfil their control and monitoring duties towards their co-managing directors who are responsible for the related areas of responsibility. Even though an effective allocation of responsibilities does not require written form, a written allocation of duties is strongly recommended in the interest of the managing directors, even if such a written allocation of duties plan alone will not suffice to relieve the managing director from his responsibilities in legal proceedings directed against a managing director. Against this background, managing directors should seek professional advice regarding the constantly growing catalogue of their duties in a timely manner. Only in this way liability cases can effectively be prevented.