Resignation from Office of the Sole Managing Director of a German Limited Liability Company

If the sole managing director and shareholder of a German limited liability company (Gesellschaft mit beschränkter Haftung – “GmbH”) resigns from his/her position as managing director in an economic crisis and, in particular, during on-going insolvency proceedings, this constitutes an abuse of law (Rechtsmissbrauch) and is therefore ineffective, if the company is without management as a result. This was the ruling of the Higher Regional Court (Oberlandesgericht – “OLG”) of Frankfurt/Main in its decision dated 11 November 2014 (case no. 20 W 317/11).

Background

The plaintiff is the sole shareholder and sole managing director of a GmbH. On 3 May 2011, following the commencement of insolvency proceedings with regard to the assets of the company on 3 January 2011, he applied to the commercial register for registration of his resignation as managing director.

The commercial register rejected the application, stating that the resignation from office constituted an abuse of law, as it did not coincide with the appointment of a new managing director.

The OLG dismissed the appeal brought by the managing director against this decision, ruling that the admissibility of a resignation from office by a sole shareholder-managing director is subject to more stringent requirements due to the fact that, in such a case, the management and decision-making functions of the company are embodied in one and the same person. It held that the executive position of the managing director of a legal entity will not be affected by insolvency proceedings. A company requires a body capable of representing it and acting on its behalf even during insolvency proceedings. Therefore, the resignation from office constitutes an abuse of law and is thus ineffective. A sole shareholder-managing director may reasonably be expected to remain in office as a managing director irrespective of the persistence or otherwise of his/her employment relationship with the company. The court stated that, although the possibility of appointing a temporary managing director (Notgeschäftsführer) or "guardian ad litem" (Verfahrenspfleger) to represent the company in insolvency proceedings exists, this is hardly a practicable option in a crisis situation.

Comment

The OLG’s decision differs from the prevalent opinion of legal commentators and at the same time follows the rulings of other courts. Nevertheless, according to the German Federal Court of Justice (Bundesgerichtshof – “BGH”) a managing director may resign from office at any time. Such resignation shall be effective, even in the absence of good cause.

However, lower-instance courts have limited the scope of application of this principle in cases of abuse of law, in particular if it results in a company’s incapacity to act and the party resigning from office is the sole shareholder-managing director. To date, the BGH has not been called upon to make a final ruling on this issue; however, the OLG Frankfurt/Main has now granted an appeal on the matter.

The issue of whether an allegation of an abuse of law can also be brought against a shareholder-managing director (who is not the sole shareholder of the company) or even a third-party manager (Fremdgeschäftsführer) has to date largely been left unaddressed. This seems unlikely in light of the arguments brought by the BGH and the lower-instance courts, resulting in such resignation from office probably being effective even when the company is in a crisis. This could ultimately lead to a company being permanently without management if the shareholders are unable to find a new managing director.

Shareholders should bear in mind that they are entitled and also obligated to passive representation of the company in the event that the company is without management. This means that they are entitled to accept declarations of intent and service of process on behalf of the company, and are also obligated to file for insolvency, in the event that the conditions therefor are met.

Additionally, a managing director will face the risk of a resignation from office without sufficient cause constituting a breach of his/her employment contract and of his/her executive duties, which may result in a claim for damages by the company.