Straw man managing director held responsible for breaches of duty

Ignorance does not spare anyone from punishment. The Oberlandesgericht (OLG) Celle [Higher Regional Court of Celle] confirmed that this holds true for managing directors who are merely a front, ruling that they are liable for breaches of duty.

In its judgment of May 10, 2017, the OLG Celle held that a managing director who is merely a front and leaves it to third parties to fulfil his responsibilities will be held liable for breaches of duty, e.g. in the case of a failure to properly pay social security contributions (Az.: 9 U 3/17).

The OLG Celle had to rule on a case concerning a managing director of a GmbH, a type of private limited company under German law, who had run a call centre. It was determined in the course of an investigation that two telephone operators were „Scheinselbstständige“, meaning that while they were treated by the company as self-employed they were in a position of economic dependence in relation to said company, and ought to be treated as employees subject to social security contributions. The managing director was then required to pay the late contributions for both employees.

The former resisted complying with the request, arguing that she had merely been a front and that control of the business had been exercised solely by those working behind the scenes. She claimed this is why she did not attend to the organisation of employment relationships, and all the more so since she had no reason to doubt that this was being properly taken care of. This line of argument was not accepted by the OLG Celle. It held that she was responsible for employees“ contributions being withheld, irrespective of whether she had merely been a front. The Court went on to note that managing directors have rights and responsibilities. The fact that she did not exercise her powers and responsibilities but instead left it to third parties to do so did not absolve her.

It was said that the formal position of managing director from which all possible legal and practical courses of action officially emanate justified this external accountability. This was also said to be the case if the managing director is merely a front and some other person is exercising his responsibilities and acts as the de facto managing director. The OLG concluded that anyone who serves as a front and fails to attend to their duties, instead relying on third parties, is at least partially acting wilfully.

In addition to other obligations, a managing director needs to ensure that taxes and social security contributions are properly paid. We at the commercial law firm GRP Rainer Rechtsanwälte note that he will be held liable should he fail to comply with his obligations. Lawyers who are experienced in the field of company law can advise managing directors and shareholders.

https://www.grprainer.com/en/legal-advice/company-law/managing-director.html

GRP Rainer LLP www.grprainer.com/en/ is an international firm of lawyers and tax advisors who are specialists in commercial law. The firm counsels commercial and industrial companies and corporations, as well as associations, small- and mid-sized businesses, self-employed freelancers and private individuals worldwide from offices Cologne, Berlin, Bonn, Dusseldorf, Frankfurt, Hamburg, Munich, Stuttgart and London UK.

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