Each and every important position is prone to liability. Managing directors especially are subject to liability, be it by creditors, law, tax or prosecuting authorities. This page will introduce the most common liability traps that a CEO can encounter.
A colleague of mine, also a managing director, had to file bankruptcy because he was held liable on behalf of the company. Can that be? I thought only the company was liable with its assets and not me with my personal funds. What is going on?
The law provides in certain cases personal liability of a CEO. Damages can really become very high. It can happen that a CEO goes bankrupt because of company debts.
For what am I typically liable?
Managing directors will be personally liable to the shareholders and third persons if they willfully or negligently fail to carry out their professional duties. The range of possible violations are as numerous as there are companies. Typical high-risk situations are with M&A, environment, product liability, taxes, competition law or cartel law.
This sounds pretty darn frightening! It is not at all encouraging to assume such position. What can I do about it ?
Well, as a start, have a good corporate lawyer at hand whom you can ask for help when things start to get tough. Even before that, when planning the right strategy, you will be able to avoid many pitfalls if you have the correct advice prior to any decision. Another good idea is to have a liability insurance (so-called D&O insurance). These risks will be typically considered with your salary — especially in dividends of the company.
When does the legal liability of a managing director start and when does it end?
Personal liability virtually starts once the director claims towards contractual partners to be one. It legally starts and ends upon entry and striking from the commercial registry.
Next to me, there are several other CEOs in the company. Each has their own department. How is liability? Now don’t tell me that I am also responsible for the nincompoop of the Chief Financial Officer! I can’t work with numbers.
Generally, all managing directors are liable for everything! Therefore, giving “full” responsibility for a department to only one director is not really warding off any liability from you. If the Articles do provide department responsibility then you still have to monitor your colleagues! You will be held liable if his activities are evidently unfortunate for the company and you do not notice them. So if your CFO starts spending 10x the usual turnover, you and the other directors close your eyes, you can be held liable. So, do yourself a favor and monitor your colleagues by staying in touch with them and discuss what is going on in the company.
You have to consider three main situations where high liability risks exist:
- Liability Traps While Founding the Company
- Liability Traps During day-to-day Business of the Company
- Liability During Crisis and Bankruptcy of the Company