Managing director’s liability for divisions under co-managing directors

A managing director’s duty of care is not just limited to “his” area of responsibility. He or she is also obligated to ensure that the divisions under any co-managing directors keep within the boundaries of the law and statutes.

In a case decided by the OLG [higher regional court] Frankfurt  (Judgement of 16 October 2016, ref.: 10 U 64/16), a GmbH [German equivalent of a limited company] did not have the necessary license for its business model “acquisition of life insurance” under the Kreditwesengesetz [German Banking Act] (KWG). When the company became insolvent, the plaintiff, who had previously sold his life insurance to the GmbH, claimed compensation against the two former managing directors because of the payment default. One of the managing directors argued that, because of the distribution of areas of responsibility, it was not him, but rather his co-managing director, who was responsible for the division “acquisition of life insurance”. He therefore had no liability towards the plaintiff. The court decided that the argument “a lack of competence in a different area of responsibility” does not float. Each managing director is jointly and severally liable that the company as a whole sticks to the principal of legality and only pursues business models for which the company possesses the necessary licenses and authorisations. As a result, each of the managing directors also has the duty to review all business models pursued by the company for possible license requirements with the diligence of an ordinary businessman pursuant to Section 43 (1) GmbHG [German Act on Limited Liability Companies] before beginning corresponding activities.

Conclusion

The judgement correctly shows that a managing director’s duty of care is not limited to “his” area of responsibility. He must also ascertain whether businesses run in other areas of responsibility are lawful, in particular whether the company possesses the necessary permits. Despite the distribution of areas of responsibility, all managing directors fundamentally remain responsible as a whole for the businesses of the company. Managing directors can only protect themselves from liability if they can demonstrate and prove with substantiated evidence that they fulfilled precisely this duty and they (or the company) were advised by experts, where applicable. Blanket assertions are not satisfactory for this purpose.