Directors' and officers' liability refers to a breach of duty by representatives and supervisory bodies of legal entities for which they, i.e. in particular managing directors, board members of public limited companies and supervisory board members, can be held liable under civil or criminal law. The basis for personal liability is the damage caused to an enterprise or company and fault on the part of the managing director. In the case of directors' and officers' liability, it is irrelevant whether the director is an owner or an outside director. Liability on the part of the managing director is elevated by the presence of an impending insolvency and extends to the private assets of the managing director.
We have been serving many of our clients for more than 50 years and several generations. Trust and confidence between clients and advisors and a good knowledge of the company are important prerequisites. If you are confronted with liability claims, we can assure you of swift, professional support.
We have been advising managing directors on liability issues for more than 50 years. From advice on the drafting of managing directors' agreements and being available at all times to answer individual questions all the way to defending against claims for directors' and officers' liability.
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Liability presupposes that damage has occurred. This can be material damage, for example by giving away an asset, especially means of payment, but also immaterial damage in the form of loss of image. The executive body must have caused the damage and must be at fault. In this context, the executive bodies of a company, such as managing directors, are also liable for mistakes that they did not commit themselves but delegated to their team. Ignorance of a certain process therefore does not release the management from a breach of duty for which it is responsible.
A managing director can be held liable for acts and omissions - namely for those of his own person as well as those of third parties in the case of a so-called organisational culpability. This is the case if managing directors have delegated tasks for which they are personally responsible to third parties. Such delegation is part and parcel of the daily business of any company manager. A liability situation arises in the event that managing directors have not carefully selected the employee entrusted with such tasks, have not sufficiently instructed these employees or have not adequately supervised proper execution. Equally serious can be failure to perform an activity, such as payment of social security contributions. In this case of non-payment, managing directors can also be held personally liable.
It always makes sense for a company's executive bodies to take out a D&O insurance policy. This offers support if, for example, claims for damages are brought against a managing director for breach of duty. For external managing directors, it is best to address this issue before taking on a position at a company. If a conflict arises, the situation becomes much harsher, and you would be well advised to be prepared. Given the large number of providers in the market, it is advisable to consult an expert, as D&O insurance policies harbour a number of stumbling blocks - be it when settlements are reached or facts which were already known prior to taking out the insurance policy. A look at the press and the cases described there underscores why a D&O insurance policy is not an annoying obligation and nuisance, but a must for every responsible executive body.
If a company or a partnership enters a crisis or insolvency, this is almost always associated with a liability claim against the managing director. For insolvency administrators, the burden of proof is particularly easy, as they only have to show that the company is ready for insolvency and the amount of the damage incurred. In contrast, managing directors are subject to an extensive burden of proof to exonerate themselves. They must prove that either there was no factual insolvency or that they acted dutifully, or at least not culpably. This generally faces managing directors with a major challenge. Liability claims that go back a long time are particularly perilous: since in most cases managing directors have already left the company and no longer have access to important documents, this situation makes it more difficult for them to disprove the liability they are charged with.
Avoiding liability situations is, of course, the best path to take for every managing director and certainly the goal of every professionally working executive body. As a safeguard, it makes sense to set up a risk management system, i.e. to establish suitable business control and management systems. This is because these indicate at an early stage whether a company might be in economic difficulties. Taking into account the relevant auditing standards of the Institute of Public Auditors in Germany (IDW) and current case law handed down by the Federal Court of Justice, the various stages and causes of a crisis can be recognised and analysed, and insolvency can be prevented. If a managing director recognises warning signs of a crisis, either a crisis can be overcome or at least personal liability for the managing director can be avoided by consulting the appropriate advisors.
The management bodies of a company, be it a (GmbH) managing director, the management board or the supervisory board, can be held liable within the scope of their performance of duty. The liability issue becomes particularly virulent when the company is in a crisis or affected by insolvency. Managing directors are then held liable with their private assets in case of doubt. To prevent this from happening, effective compliance mechanisms need to be established in a company. In the event of a claim, legal advice should be sought quickly. In the case of insolvency or as early as a skewed development of a company, an insolvency law expert should be involved well before a claim is asserted.