Criminal Risks for Directors of Limited Liability Companies

Criminal risks arising from § 82 GmbHG exist for directors of a limited liability companies during the formation of the company.

The registration of a GmbH at the Company House requires a declaration by the director, confirming the availability and legality of funds used to capitalise the respective shareholdings in the company. The director is liable for prosecution under § 82 GmbHG if he wilfully makes a wrong declaration. Because capitalization and immediate subsequent withdrawal of equity cancels out the capitalization, it renders the declaration made in respect of the capitalization invalid at the same time. The director is personally liable for any damage resulting from the lack of equity. § 82 GmbH also prescribes penalties for the wilful provision of incorrect information in a company formation report.

A typical liability risk during company formation is the subsequent purchase of goods owned by the director using cash equity funds of the company (obfuscated non-cash contribution). The required equity is then considered unpaid and may be requested to be paid again. Criminal consequences are also entailed in the case of obfuscated non-cash contributions as set out in § 83 GmbHG.

Business decisions made by a director must not only satisfy commercial criteria, but also a number of further requirements, in particular in the following areas:

Organisation of internal procedures - the duties of a director include the organisation of operational processes in a way that prevents bodily harm or property damage. A director can not be held liable for unlawful actions by his subordinated employees. He is, however, under a duty to organise and supervise and must be able to provide evidence of fulfilling this duty, e.g. by way of documentation.

Product stewardship - the director is responsible for checking products on possible flaws and initiate call-backs if required. A breach of this duty may result in prosecution for personal injury, if the circumstances indicate that a product of the company causes bodily damage to third parties.

Employer performance - employer is always the limited liability company. The director is however liable for its compliance with certain employer’s duties. The director is liable to criminal prosecution under § 266a StGB, if he withholds the employer’s share of social security contributions from the social security agency or makes false statements in respect of the employer’s contribution to social security. He is also personally liable for the payment of social security contributions.

Conduct towards his own company - the limited liability company and the director are separate entities (even if the director is sole shareholder); the company assets are protected under criminal law. If the director interferes with the company assets, he commits embezzlement which will be prosecuted under § 266 StGB. Not only the use of company cash is relevant in practice. Criminal prosecution for embezzlement may result from commercial decisions that entail negative consequences for the company, e.g. the payment of unnecessary commissions. Entering into risky business transactions by itself does however not give rise to the accusation of embezzlement.

Changes in equity - similar to the formation period, the director is under special duties when registering an increase or decrease in equity and a breach of these duties will be prosecuted and penalised under § 82 GmbHG. In the case of a decrease of equity, this particularly includes the accuracy of a warranty in respect of the company's ability to service it’s debt given to those creditors, who have not approved the measure.

Obligation to confidentiality - a director may only disclose company secrets to third parties, if this serves the interests of the company. If privileged information is unlawfully made available or utilised, the director is liable for prosecution under § 84 GmbHG. A raised level of due care is prescribed in certain situations, e.g. a due diligence conducted for the acquisition of a company, which usually entails the provision of company secrets. It is helpful to obtain the consent of all shareholders for the provision of information. If the company acquisition fails, the director is then protected from criminal prosecution.

Accounting - balance sheet manipulation, e.g. accounting for non-existent inventory will be prosecuted under § 331 HGB even outside of crisis and insolvency situations. Prosecution is not subject to actual damage caused by the manipulation. The conduct itself is an offence.

Conduct towards third parties - investigative authorities recently became interested in corruption offences taking the form of employee corruption, e.g. by accepting advantages against benefits associated with the purchase of goods. Accepting undue advantages will be prosecuted under § 299 StGB. Only an employed director can be an offender as far as he is the beneficiary of such a transaction. If the director owns the company he will not be prosecuted. Anticompetitive agreements are an offence under § 298 StGB (submission fraud). It is a crime to submit an offer which is based on unlawful collusion. Taking undue influence in tender procedures are included in the offence of fraud as set out in § 263 StGB.

Taxation obligations - § 34 AO stipulates, that the director must comply with all taxation obligations of a limited liability company. Submitting a tax return outside the prescribed timeframe constitutes the offence of tax fraud by way of delay, committed by the director, but only if a tax liability exists. The delayed submission of a tax return is however considered to be a voluntary self-disclosure, which in turn exempts from prosecution. The payment of outstanding taxes is not required for the exemption from prosecution, because the company is the debtor and not its director. The liability of the director for taxes withheld in a tax fraud remains unaffected. Special conditions applying to the delayed submission of tax declarations for payroll tax and sales tax must however be observed. A voluntary self-disclosure, which exempts from prosecution, does not preclude the prosecution of administrative offences concerning payroll tax (§ 380 AO) and sales tax (§§ 26a and 26b UStG).

The number of tax investigation proceedings instigated on suspected insolvency offences has sharply increased in recent years. Insolvency and bankruptcy offences have been the focus of attention. One characteristic of these offences is, that significant economic ramifications are also impending for the director due to possible claims for personal liability.

A delayed filing for insolvency is an offence under § 15a InsO. The director must apply for the commencement of insolvency proceedings without culpable delay but no later than within three weeks after the company is either unable to pay or is overindebted in the meaning of the insolvency laws. This means, that the director is obligated to implement an early-warning system and perform liquidity calculations during ongoing business operations. A delayed reporting of a loss greater than half of the equity is also an offence under § 84 GmbHG. It is noted, that a report omitted by negligence also constitutes an offence.

Because of the special risk of manipulations in connection with the collapse of a company, the law makes it an offence under §§ 283 ff StGB to transfer or conceal assets in the run-up to an insolvency (bankruptcy offences). Bankruptcy offences are only prosecuted, if the insolvency proceedings are rejected due to insufficient assets and restructuring has failed. Culpable actions include, among others, the disposal of company assets, the concealing of assets or uneconomic expenditure, if committed or actioned while the company is factually insolvent.

Accounting offences are also increasingly being prosecuted. If, for example, a balance sheet is drafted in a way, that impedes an overview of the financial situation, the director may be liable for prosecution.

Fraudulent preference for certain creditors or debtors over others are an offence under §§ 283c and 283d StGB. A director sentenced for a bankruptcy offence is barred from directorship of a company for the duration of five years from the date of the final judgement.

Directorship carries many risks. The public prosecutor’s office investigates more frequently against directors. The risk is underestimated by many. Suitable early warning systems can assist and mitigate the risks. The risk for liability have increased due to the MoMiG. This means, that directors should inform themselves of the statutory changes early.