Liability of managers

Entrepreneurial activity always involves risk. What many people are unaware of is that you don’t need to be the owner of a business to face such risks: under certain circumstances employees too can be personally liable, and this risk can be existential.

Managers’ liability means that the person who manages a company’s business is answerable with his or her own personal assets for poor decisions. In most cases this involves compensating the company, but there may also be liability to creditors or the tax authorities. Of course, not every poor decision inevitably results in personal liability. But the courts are drawing the margins of discretion ever more narrowly.

Managers in a company in crisis?
Exclude liability risks.

Focus

Who is affected?

From the time a company is founded, in its day-to-day operations, and at times of expansion or perhaps financial difficulties, it is subject to numerous requirements and prohibitions.

And even a person who does not formally hold the position of director or management board member but performs a comparable role for the company can quickly become the target of liability claims.

The focus is frequently on the company’s leadership, e.g. its

directors (including de facto directors)
management board members
liquidators
supervisory board members
advisory board members

When does it get dangerous?

1. Non-distressed situations

As a general rule, a company’s management has a duty of care. Liability is a particular risk in the following situations:

Shareholder disputes
If a company’s shareholder structure changes, or if there is a battle for predominance between two or more factions of shareholders, management can quickly become caught in the crossfire: situations relating to the duty of care are construed as a liability case, thus creating a liability risk for managers.
Change of management
A new CEO or director is appointed, and the search for errors made by their predecessor begins. To successfully defend yourself against retrospective allegations, it is a good idea to seek out legal advice when taking important management measures while you are in post.
Corporate actions
Whether capital increases or reductions or restitution of contributions – responsibility for compliance with the stringent statutory requirements in cases like these falls inter alia on directors or the management board. Management, for example, can be held liable for payments made to shareholders even if they did not benefit from any payments themselves.
Business activities involving higher risks
These include takeover attempts or the transfer of credit risks. It is vital to seek close, solid legal support when preparing and carrying out these activities. This is because, should the worst happen, the managers involved may be accused of recklessly placing at risk the company entrusted to them: this is a liability risk here.

2. Distressed situations

There is a high risk if the company falls into financial difficulty: Management obligations now multiply, and liability risks increase. This is the case in the following scenarios in particular:

Overindebtedness
Overindebtedness as defined in insolvency law (material insolvency) entails enormous liability risks for management. Customer payments into the company’s business account, payments to suppliers, or the consumption of company assets can all give rise to management liability. Expert knowledge of insolvency law becomes crucial.
Payment arrears and liquidity problems
Payment arrears and liquidity problems of all kinds can be indicators of illiquidity. This means material insolvency which in turn can lead to personal liability to suppliers as well as liability for drains on company assets.
Illiquidity
Illiquidity is present when the company is no longer able to meet its payment obligations when due and has ceased making payments. For the reasons outlined above, this situation can become very dangerous for the company’s management and can force the company to file for insolvency.
Insolvency
When signs of crisis appear, a company’s management and supervisory bodies must determine whether grounds for insolvency (illiquidity, overindebtedness) exist, and respond accordingly. If they do not have the required expertise, they must seek expert advice. In general, it is vital to ensure that the company’s assets remain intact, books of account are properly kept, and creditors are satisfied equally – otherwise there can even be criminal consequences.

Expertise

Adequate protection against liability

Liability claims arising from situations like the ones described above can quickly become existential, and they are not always covered by insurance. In addition, the circumstances surrounding these liability risks are so complex that even seasoned managers cannot stay on top of all the important details.

Schultze & Braun provides advice on key decisions such as changes of management, changes in shareholder structure and corporate actions.
We have extensive expertise with companies in crisis situations in particular:
We examine our clients’ liability situation and present concrete, practicable actions for overcoming the crisis and avoiding personal or even criminal liability. In addition to avoiding liability claims and defending against any claims that might arise, our services include enforcing claims of this kind. We also bring or defend liability claims in court if necessary.

Contact

Karsten Kiesel
Rechtsanwalt (Attorney at law)

More contact persons

Call +49 711 23889-235 Direct message

Managers in a company in crisis? Exclude liability risks.

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Managers in a company in crisis?
Exclude liability risks.