on GmbH or UG

CEO Liability for Wage Taxes with Tolerated Credit Line

2009-08-08T16:59:21+02:00

CEO Liability for Wage Taxes with Tolerated Credit Line

In these times of financial and economic crisis, a lot of companies have a liquidity crunch and cannot meet the liabilities on time. What to do when you have not yet paid and you have a extended overdraft credit (tolerierter Überziehungskredit) for your account, Are you required to use that credit line in order to pay wage taxes, and is the CEO of the company responsible when he does not pay that tax under these circumstances? The FG Munich in its judgment of December 15, 2008 (re 15-K-4118/07) set up the rules for this scenario.

CEO Liable for not Forwarding Third Party’s Money to Fiduciary Account

2008-11-06T23:13:13+01:00

CEO Liable for not Forwarding Third Party’s Money to Escrow Account

OLG Frankfurt /Main ruled on August 16, 2006 (re 9 U 70/04) on the question if the managing director of a travel agency could be held liable pursuant to §823 II BGB in conjunction with §266 StGB if he refrains from transferring money held in trust into an escrow account.

The plaintiff, an association handling the sale of tickets for airlines sued the defendant, a former managing director of a travel agency in the legal form of a GmbH, for not forwarding funds from ticket sales. As the plaintiff wanted to directly debit the account of the defendant with € 25,244.76, the bank refused to debit the defendants account and returned the booking. In the mean time, the defendant had gone bankrupt.

§823 II BGB gives grounds for damages due to violating a “protective law”. The aforementioned section defines “protective law” as an act of law aiming at the protection of another person. Such protective law can be found in §266 StGB sanctioning fraud. Managing directors have the legal obligation to file for bankruptcy within three weeks after they notice the company has become insolvent (§64 I GmbHG). This is a typical case for a fraud if the business partner is not informed of such financial difficulties.

The plaintiff argues that the travel agency should have taken precautions, that the assets held in trust will be duly handled by depositing them into an escrow account. The managing director knew that the travel agency was in a financial crisis.

The defending ex director denies having committed fraud. In his opinion, fraud would have been committed if he had acted with motives of self-interest, which he had not. There is also no such obligation to hold a special account for third person monies – neither from the contract nor from the law. The defendant’s company was not in financial difficulties as it had a credit line and this credit line was secured with a personal guarantee. Furthermore, the plaintiff also had to know that this kind of business carries risks.

The court held that the plaintiff has grounds for damages pursuant to §823 II BGB in conjunction with §266 I StGB. The relevant elements of fraud by breach of trust are:

the lost assets belong to a third person,
the offender has the obligation to care for the third party’s money,
a fiduciary relationship of superior kind with duties of some significance that have not been laid down in all details and the main idea is to oversee third party financial interests,
breach of such specific fiduciary duties,
a financial disadvantage for the trustee,
intent.

The first two elements of a fraud have been fulfilled without any doubt. The parties had a fiduciary relationship. As shown in the association’s by-laws, the membership has agreed that it is the plaintiff’s task to control the payments and reimbursements to and from travel agencies and represent the membership against third persons.

A breach of the trust relationship is to be seen in neglecting to remit the plaintiff’s assets into a fiduciary account for the benefit of the plaintiff. The normal business bank account is insufficient to hold money unless it can be guaranteed that these funds cannot be seized. However, whenever the entrusted person is in a financial crisis, fiduciary duties will only then be obeyed if the funds are forwarded into a special account. The financial loss is also evident.

Considering the alleged non-intentional action of the former managing director, this cannot be recollected in a neutrally orientated mind. Latest the returned direct debit clearly demonstrated the financial situation of the defendant’s company. Following the defendant’s own arguments, he accepted that the ticket costs would not be able to be debited from his account. The plaintiff is suffering from a financial disadvantage because he did not retrieve the entrusted assets. The willful intent is to be seen in the defendant’s argument that he had to work around financial bottlenecks.

Collecting GmbH Shares or Duty of Allegiance of Major Shareholders

2011-08-06T16:24:03+02:00

Collecting GmbH Shares or Duty of Allegiance of Major Shareholders

The Federal Court of Justice (decisions of April 5, 2011, re II ZR 263/08 and II ZR 279/08) settled a dispute between minor and major shareholders of a German Limited. The question was if the major shareholder can, just because he has the most shares, execute into the minority shares?

Conflict of Managing Director’s Duties in Bankruptcy

2008-11-06T23:15:28+01:00

Conflict of Managing Director’s Duties in Bankruptcy between Wage Tax and Insolvency’s Estate

It is of no question that a GmbH’s managing director is responsible and liable for forwarding wage tax of the company’s employees to the tax office (§34 AO). But what to do when your company is in a bad financial state and you are in the process of evaluating the chances to rescue or to close the company? The BFH set out the rules to solve this problem in its decision of February 27, 2007 (published July 25, 2007, re VII R 67/05).

De Facto Managing Director’s Liability for Unpaid Taxes

2008-11-06T23:16:49+01:00

De Facto Managing Director’s Liability for Unpaid Taxes

Being the managing director a GmbH you have a lot responsibilities. The most prominent is to run the company. But what about the case that you only pro forma agreed to fill that position of a Geschäftsführer? Does the so-called “faktischer Geschäftsführerr” have the same responsibilities? Especially to pay the taxes? The FG Cologne decided this question on September 12, 2005 (re 8 K 5395/01, 8 K 5677/01).

Giving Notice as Managing Director of a Corporation

2008-11-06T23:17:54+01:00

Giving Notice as a Managing Director of a Corporation

Whenever the legal representative of a corporation cannot work with the shareholders anymore it might be wise idea to resign. To effectively resign as a Geschäftsführer the formalities have to be obeyed. If the shareholders do not like their managing director anymore, then they will give him or her notice after formally reaching such a shareholders' agreement. The required formality is that the resignation be made public. The OLG of Düsseldorf clarified these rules in the last instance on August 10, 2004 (re Wx 177/04).

Liability for Shareholders on Capital Stock

2008-11-06T23:18:39+01:00

Liability for Shareholders on Capital Stock

Surely, I need not explain that a German limited liability corporation needs a minimum capital stock. After completely filling this equity stock, the liability of the shareholder usually stops. But what is the case after a proprietor transferred property to the company and borrows it back? This property will have lost value whenever returned. What now?

Liability of a Ltd. Director

2008-11-06T23:19:09+01:00

Liability of a Ltd. Director

German legal professionals are having a hard time with the basic rights of European corporate law; i.e., how to integrate foreign legal institutes into the German legal system. This is especially true of Limited Liability Companies following the English Companies Act of 1985. The problem is not the concept of the Ltd., since Germany has its equivalent in the GmbH, but rather the extremely differing rules on founding and running such a company here in Germany. Normally, Germany would not allow a Ltd. to “unofficially” only operate from abroad, but being a member of EU, Germany must and therefore does allow such companies.

[PPD_PAYTOREADMORE]

The Federal Court of Justice recently ruled (judgment of 14.03.2005, re II ZR 5/03) on whether Directors of a Ltd. can be held liable if the company does not enroll itself in the German commercial registry. In this case, a director acted on behalf of the company while engaging in several different commitments, which were not met.

The company itself was not registered in the commercial registry even though it had its actual administrative site in Germany. The plaintiff argued that since the company was not registered here, it had no legal existence in Germany. Thus the director can be held liable as a falsus procurator. People acting as somebody else’s agent without being entitled can be held liable (§179 BGB).

The court dismissed this idea. Art. 43, 48 Treaty on European Union prohibits the obligation for European companies to register again in Germany. Once legally founded in the country of their origin, they have the right to do business wherever and with whomever they wish. Thus a director having power of agency cannot be held personally liable when he operates on behalf his unregistered company. N.B. This applies only to registration in Germany. The rules of piercing the veil of corporation otherwise remain valid.

Published on the old CMS: 2006/7/26
Read on the old CMS till November 2008: 4,549 reads

Liability of all Managing Directors in spite of Department Assignments

2011-05-18T14:17:57+02:00

Liability of all Managing Directors in spite of Department Assignments

In for a dime, in for a dollar? It is not unusual for a corporation to have more than one managing director. Of course each director has his own bailiwick but what about the liability for the co-managing director? FG Munich has again clarified this issue with its judgment of June 15, 2010 (re 14 V 1552/10).

Managing Director’s Power of Agency for a GmbH must be Simply Understood

2009-02-03T17:50:58+01:00

Managing Director’s Power of Agency for a GmbH must be Simply Understood

The shareholders of a GmbH wanted to make things simple and cheap with only one registration of their managing directors. This registration was also to include that the directors also had power of attorney for other connected corporations. Is this possible? The OLG Stuttgart gave an answer on October 18, 2007 (re 8 W 412/07).