Free online invoicing software
with KSeF support
Although the very name of the business form “limited liability company” suggests that such a company is a way to limit liability and protect private assets, remember that this protection has clear statutory limits. What are they, and when can a management board member also be liable for company debts? We discuss this in our latest blog post, also explaining ways to be released from such liability.
Limited liability company debts and board member liability – general rules under the Commercial Companies Code
Under Article 151 § 1 of the Commercial Companies Code: “A limited liability company may be formed by one or more persons for any legally permissible purpose, unless otherwise provided by law.” Paragraph 4 expressly states: “Shareholders are not liable for the company's obligations.”
A limited liability company must have a management board, which manages its affairs and represents it. Board members may be appointed from among shareholders, a very common choice, or from outside their group.
Article 299 § 1 of the Commercial Companies Code states that management board members are jointly and severally liable for the company's obligations if enforcement against the company proves ineffective.
This means that although shareholders' liability for company obligations is expressly excluded by Article 151 § 4, liability does arise for board members when enforcement against the company is ineffective, meaning its assets cannot cover all debts incurred. Under Article 299 § 1, board members then bear joint and several liability for the company's obligations with all their private assets.
However, the regulations provide situations in which this liability can be avoided...
Accounting that understands your business
Leave your email address and receive guides supporting your business’s growth once a week
Company obligations and board member liability – ways to be released from liability for a limited liability company's debts
These cases are specified in detail in Article 299 § 2 of the Commercial Companies Code. Under this provision, there are four ways to be released from liability for company debts after ineffective enforcement against it.
- Method 1: Demonstrating that an application to declare the company bankrupt was filed at the proper time.
Under Bankruptcy Law, the “proper time” is 30 days from the date grounds for declaring bankruptcy arose, meaning the onset of insolvency. Bankruptcy Law states that a debtor is insolvent when they lose the ability to meet due monetary obligations. This is presumed to occur when payment delays exceed three months, and also when the monetary liabilities of a legal person or organisational unit without legal personality exceed its asset value and this continues for more than 24 months.
- Method 2: Within the same period, an order was issued opening restructuring proceedings or approving an arrangement in arrangement approval proceedings.
- Method 3: The board member was not at fault for failing to file a bankruptcy application.
A board member may not be at fault, for example, in cases of long-term illness, serving a prison sentence, or being misled about the company's financial results and ability to meet due monetary obligations. Claiming ignorance of the law or of obligations associated with their position in the company certainly does not constitute absence of fault.
It must be emphasised that, in proceedings against a board member, interpretation of the rules points fairly clearly to a presumption of fault for failure to file a bankruptcy application. This significantly weakens that person's procedural position and requires evidence confirming an actual absence of fault.
- Method 4: Despite no bankruptcy application being filed and no order opening restructuring proceedings or approving an arrangement in arrangement approval proceedings being issued, the creditor suffered no loss.
The final way to avoid liability is to demonstrate that, despite the absence of a bankruptcy application, an order opening restructuring proceedings or approval of an arrangement in arrangement approval proceedings, the creditor suffered no loss. Case law indicates that this condition requires demonstrating that the creditor would have received the same satisfaction even if a bankruptcy application had been filed at the proper time.
Interested in this article? Explore our tax advisory services and see how we can help:
Summary
Although shareholders' liability for a limited liability company's obligations is excluded by Article 151 § 4 of the Commercial Companies Code, Article 299 § 1 of the same Act means liability may arise for management board members if enforcement against the company is ineffective. Board members then bear joint and several liability with all their private assets.
However, there are ways to exclude this liability...
Above all, this applies when it is demonstrated that a bankruptcy application was filed at the proper time.
An order issued within the same period opening restructuring proceedings or approving an arrangement in arrangement approval proceedings also excludes liability.
Finally, liability can also be excluded by proving the board member was not at fault for failing to file a bankruptcy application, or by showing that the creditor would have received the same satisfaction had the application been filed at the proper time.
Interested in this article?
Enter your email address and once a week you will receive practical materials and tips to help you grow your business.
Book a free consultation
Grow your business with accounting combined with advisory services:
or
