Tightening of management liability: BGH expands the scope of protection under the board and employment relationships for limited partnerships

Under the settled case law of the Federal Court of Justice (Bundesgerichtshof, BGH), the protection inherent in the board and employment relationship with the director of a general partner GmbH of a GmbH & Co. KG and any liability under § 43 (3) of the Act on Limited Liability Companies (Gesetz betreffend die Gesellschaften mit beschränkter Haftung, GmbHG) extends to the limited partnership. With its judgment of 14 March 2023 (in Case No. II ZR 162/21), the BGH extends this jurisprudence to the liability of the director of a limited liability company (GmbH), which is the managing limited partner of a public limited partnership.

Facts of the case

The claimant was the insolvency administrator of a GmbH & Co. KG (the “debtor”). The articles of association of the debtor provided that only the limited partner, U-GmbH, managed the business. The defendant was a director of U-GmbH. U-GmbH was also the managing partner of other investment companies. The debtor raised funds for a stock company (AG) and made these funds available as loans for real estate investments. The loan agreement provided comprehensive collateral as security. The claimant sought recourse from the director for an amount of EUR 200,000 because of payments made to the insolvent stock company. The defendant did not play a part in the transfer.

Judgment of the BGH

Like the lower courts, the Second Senate of the BGH affirmed the debtor’s claim for damages against the director of the GmbH under § 43 (2) of the GmbHG.

Under § 43 (2) GmbHG, the scope of protection of the board and employment relationship between the limited partner GmbH and its directors extends to the KG in the case of negligent management. Managing the business of the limited partnership does not need to be the sole or central task of the GmbH.

BGH affirms contract with protective effect to benefit the KG

The Senate affirmed the requirements of a contract with protective effect to benefit a third party:

Under the articles of association, the KG will experience the services of the director when the limited partner GmbH manages the KG. Failures of the directors of the GmbH will always negatively affect the KG.
There is a legitimate interest in including a third party – here the KG. A director of the managing GmbH exercises their duties in the interests of the GmbH & Co. KG.
There is a good faith need to protect the KG. A breach of the director’s duties when managing the business of the KG will be particularly detrimental to the KG. The KG does not generally have a right to instruct the director. The rights to revoke the power of attorney and object to directors are not contrary to the need for protection.
The interests of the KG in being included under the scope of protection is apparent to the GmbH and the extension of the protection is reasonable for the GmbH. This applies even where U-GmbH also managed other funds so that the management of the GmbH & Co. KG was not its sole or material task. The latter issue remained open until now. The BGH followed the judgments of the higher regional courts and the prevailing view in the literature: the fact that directors manage multiple companies does not change their duties. A KG must be able to trust that the director will discharge their duties with care and diligence, regardless of the number of other companies it manages.

Liability, regardless of the internal division of responsibilities

The defendant is also liable when, in line with the internal division of responsibilities, the director was not primarily responsible for managing the debtor. While responsibilities may be divided up, directors will nevertheless remain jointly responsible. In any case, directors will have a supervisory duty. They must follow up on any irregularities or negative developments in areas that are not their direct responsibility. There is no objective reason to limit the protective effect for the KG. The Senate confirmed that the defendant had breached her duty of supervision as she did not prevent the transfers. A report found that the AG had not made enough security available and that only a certain percentage of the investor monies were invested in real estate. If the director had exercised her duties diligently, she would have noticed the maladministration of the core business of the debtor.

Summary

The landmark BGH judgment tightens director liability by extending the scope of the protection inherent in the board and employment relationships of the director. Under the jurisprudence of the BGH, this protection and, accordingly, the liability of directors under § 43 (2) of the GmbHG applies to the limited partner GmbH of a GmbH & Co. KG and extends to the limited partnership. The BGH clarified that the board and employment relationships of a director of a managing limited partner-GmbH lead to protection for the benefit of the limited partnership. The director is therefore also liable to the limited partnership for breaches of their duties under § 43 (2) of the GmbHG.

Dr Florian Weichselgärtner
Valerie Hoffmann