Liability of an s.r.o. managing director: what you answer for and what you risk

A managing director is the statutory body of a limited liability company (s.r.o.) — they act in its name and run it. Although the company answers for its debts itself and the shareholders have only limited liability, under certain circumstances a managing director can be liable with their own assets. What decides this is, above all, whether they meet their statutory duties. Below we explain simply what a director answers for, when personal liability threatens and how to prevent the risk.

Who is a managing director and what is their role?

A managing director represents the company externally and runs its day-to-day affairs — signs contracts, deals with the authorities, and is responsible for keeping the accounts and meeting the company's obligations. It is important to distinguish them from a shareholder. A shareholder owns the ownership interest; the managing director is the one who actually runs the company. One person can be both, but in law these are two distinct roles with distinct liability. The liability we discuss in this article attaches to the office of managing director.

What does acting with due managerial care mean?

The director's basic duty is to act with due managerial care and in the company's interest. Put simply, this means deciding in an informed, responsible and loyal way — not rashly and not for one's own benefit at the company's expense. This duty is imposed by the Commercial Code (Section 135a) and is crucial because it cannot be excluded or limited by agreement. An arrangement that would write off the director's liability in advance is void — and a provision in the memorandum of association will not help either.

When is a managing director liable to the company for damage?

If a director breaches their duties and the company thereby suffers damage, they answer for it. In practice this means, for example, entering into a plainly disadvantageous transaction, neglecting the care of the company's assets, or decisions that a reasonable director would not make in the situation. The company can claim compensation for such damage — how this works and what decides the dispute is examined in the expert article Claim against a managing director for damages.

When is a director liable to creditors with their own assets?

As a rule the company answers for its debts. The law, however, gives creditors two routes directly to the director: where a creditor cannot obtain satisfaction from the company's assets, they may assert, in their own name, the company's claim for the damage the director caused by breaching their duties (Section 135a(5) of the Commercial Code); and where a director fails to file a bankruptcy petition in time, they are liable to creditors for the damage thereby caused (Section 11a of the Act on Bankruptcy and Restructuring). At that point the risk shifts from the company to the director as an individual. That is why it is important to monitor the company's financial health and not wait until the problem builds up.

What tax and criminal-law risk does a director bear?

Part of a director's duties also has a criminal-law dimension. This concerns above all the curtailment of tax and levies (Section 276 of the Criminal Code), the failure to remit tax and levies (Section 277) — that is, situations where the company withholds or collects money intended for the state but does not remit it — and the non-payment of tax and levies on a larger scale (Section 278). Such conduct can have personal consequences for the director regardless of the s.r.o. form. The line between a mere tax arrears and a director's criminal offence is examined in the article VAT debt and the managing director's criminal offence. Where such a risk looms, it makes sense to address it with a lawyer in time — see our criminal law service.

Insolvency: when must a bankruptcy petition be filed?

If the company becomes insolvent — unable to pay its debts or over-indebted — the law imposes a duty to file a petition to declare bankruptcy, and that within 30 days of when the director learned, or could have learned with due care, of the insolvency (Section 11(2) of the Act on Bankruptcy and Restructuring). Anyone who misses this deadline is liable to creditors for the damage, becomes obliged by law to pay the company a contractual penalty of €12,500, and a final judgment ordering compensation is at the same time a decision disqualifying them from acting as a statutory body (Section 11(2) and Section 11a of the Act on Bankruptcy and Restructuring). This is one of a director's most sensitive duties, because it is tied to an exact time — we examine it in detail in the article When a managing director must file for bankruptcy.

How can a director reduce their risk?

Most problems can be prevented by order and timeliness. What works best is to:

• keep the accounts diligently and continuously monitor whether the company is able to pay its obligations,
• remit taxes and levies on time and not defer them at the state's expense,
• document and record important decisions so that you can prove you acted with due managerial care,
• not put off a solution when the company is sliding into a loss or into payment difficulties,
• in borderline situations consult a lawyer before the decision, not after it.

Summary and recommendation

A director does not answer for ordinary business risk, but for a breach of their duties. As long as they act in an informed, honest and timely way and resolve the company's problems, their personal assets are protected by the s.r.o. form. The risk of personal liability arises where the duties are neglected — in taxes, levies and above all the late handling of insolvency. If you are unsure where the line lies in your company, it is wiser to go through it with an expert in advance than to deal with the consequences.