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February 2, 2024

German Federal Court of Justice Confirms: Liability of a Managing Director for Compliance Violations Can Be Limited by Internal Allocation of Responsibilities

In a recent decision (9 November 2023 – III ZR 105/22), the German Federal Court of Justice (Bundesgerichtshof – BGH) confirmed its view regarding the limitation of the liability of managing directors through an internal allocation of responsibilities: internal competence rules in the management board of a company can limit the criminal and civil liability of a managing director.

The facts of the case were as follows: an investor suffered losses through (indirect) investments in real-estate project companies, which were subsidiaries of a Swiss stock corporation. The investor concluded an “investment contract” with the stock corporation for an investment of EUR 50,000, which would have to be paid back after two years with interest in an amount of 6% per annum. The stock corporation did not have a license to carry out banking transactions, which in general leads to a criminal liability with regard to the agreed investment. Meanwhile, all companies are now insolvent. The investor claimed damages from the director of the stock corporation, who was also managing director of the project companies. The director defended himself with the argument that he did not know anything about the investment contracts since he was only responsible for the technical aspects of the real estate projects.

The German Federal Court of Justice was of the opinion that the formal position as managing director does not alone suffice to establish liability. The director also has to be responsible for the criminal offence of the stock corporation.  The Federal Court of Justice further stated that internal allocations of responsibility are in general suitable to limit the (criminal and civil) liability of the respective managing director not in charge of a certain matter. However, the managing director who is not directly responsible for certain tasks remains responsible for seeing that the responsible managing director actually takes care of the respective task.

In the case at hand there was not sufficient evidence to determine whether the director was responsible for the investment agreement or, if that was not the case, whether he violated his duty to supervise the responsible director.

The ruling is in line with previous decisions and the prevailing opinion in legal literature and confirms the view that a (criminal and civil) liability of individual managing directors can be limited by internal allocations of responsibility.

For companies with several managing directors, it is advisable to clearly divide the areas of responsibility, also to avoid uncertainty concerning potential liability risks. The terms should be well documented and revisited from time to time to ensure they reflect the day-by-day practice.

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