Liability of the managing director

Obligations, risks and protective measures

The position of managing director in a company brings with it not only power and responsibility, but also considerable legal liability. Directors in many countries around the world are required to carry out their duties with the utmost care and fidelity as they play a key role in the management of the company. In this article, we take a closer look at directors' liability, the duties that come with it, the risks they bear and the protective measures they can take.

The duties of the managing director:

Directors have a number of duties to the organisation and its stakeholders, including:

1. Duty of loyalty: Managing directors must always act in the best interests of the company and put their personal interests behind them. They may not take advantage of any business opportunities of the company for themselves.
2. Duty of care: Directors must exercise due care and attention to manage the company's business appropriately. This includes careful financial monitoring, risk assessment and strategic planning.
3. Legal duties: Directors must comply with applicable laws and regulations, including tax, labour and environmental regulations.
4. Avoid conflicts of interest: Managing directors must disclose conflicts of interest and take steps to ensure that these conflicts do not have a negative impact on the company.

The risks of managing director liability:

Managing directors are not immune to personal liability. The risks to which they are exposed can be considerable:

1. Liability towards creditors: If a company becomes insolvent and is unable to pay its debts, creditors can hold managing directors personally liable if they can prove gross misconduct or fraudulent behaviour.
2. Criminal liability: In the event of serious breaches of the law, such as tax evasion or environmental offences, managing directors can be prosecuted and fined or even imprisoned.
3. Civil liability: Shareholders, employees or other stakeholders may be able to bring civil claims against managing directors for financial losses or damage caused by negligence or breach of duty.
4. Liability in the event of insolvency: In many countries, the liability of managing directors is increased if a company becomes insolvent and goes bankrupt. This can include personal liability for the company's debts and liabilities.

Protective measures for managing directors:

Managing directors can take various steps to protect themselves from the risks of liability:

1. Advice from professionals: Directors should seek advice from lawyers, accountants and other professionals to ensure that they understand their duties and responsibilities and act appropriately.
2. Directors and officers insurance: Directors and officers insurance (D&O insurance) can protect directors from personal liability and cover the costs of litigation.
3. Documentation: Directors should adequately document all key decisions, resolutions and transactions to demonstrate due diligence.
4. Compliance programmes: Companies can implement compliance programmes to ensure that all employees, including management, are aware of and comply with applicable laws.