When am I liable for the debts of a company as the managing director of a limited liability company?

Being the managing director of a limited liability company (LLC) brings not only the advantages of independent decision-making, but also considerable responsibility. Many entrepreneurs mistakenly believe that "limited liability" protects their personal assets under all circumstances. The truth is that under certain conditions, the managing director may be liable for the company's debts with their own assets. In this article, you will learn when such a situation arises, how to prevent it, and what steps to take to protect yourself and your company.

Author of the article: ARROWS (JUDr. Kateřina Müllerová, office@arws.cz, +420 245 007 740)

When a managing director fails: a real-life scenario

Imagine the following situation: Jan Novák, the enthusiastic founder of a small limited liability company, has run into financial difficulties. Business partners are paying late and the company is starting to have problems meeting its obligations. However, Jan remains passive – he hopes that everything will soon improve and puts off making unpleasant decisions. Meanwhile, debts are piling up and the company is on the verge of bankruptcy. Creditors are waiting in vain for their money. Eventually, the company is declared bankrupt and the indignant creditors turn directly to Jan as the managing director. Jan is in shock – he thought that only the company was liable for the debts, not him personally. Now, however, he is facing foreclosure on his personal assets because his inaction violated his legal obligations as a managing director. Such a scenario is not mere fiction, but a real threat to any managing director who underestimates his or her responsibilities.

Legal framework: when a managing director is liable for the company's debts

Standard situation: a limited liability company (s.r.o.) as a separate legal entity is liable for its debts only with its assets. Managing directors and partners do not normally guarantee the company's liabilities with their private assets. This is the basic principle of limited liability, which makes the s.r.o. form so popular. However, there are exceptions to prevent abuse of this advantage, especially if the managing director fails to fulfill their legal obligations and thereby harms the company or creditors.

Duty of care

The key concept in Czech legislation in this area is "duty of care." Simply put, it is a standard of conduct that every managing director must adhere to. The law (specifically Section 159(1) of the Civil Code) expressly states that "anyone who accepts the position of a member of an elected body undertakes to perform it with the necessary loyalty, knowledge, and diligence." This means that the managing director is obliged to act responsibly, knowledgeably, and in the best interests of the company. In their decision-making, they must use all available information, weigh the risks and benefits, be loyal to the company, and not put their personal interests above those of the company. This obligation is also enshrined in the Business Corporations Act – the so-called business judgment rule in Section 51 of the Business Corporations Act specifies that if an executive acted on the basis of reasonably available information, in good faith and in the defensible interest of the company, he or she cannot be held liable for the resulting damage.

But what if an executive breaches his duty of care? Then he bears legal liability for the damage he causes to the company. According to the law, an executive must compensate the company for any damage he has caused by his unlawful conduct. In addition, if he fails to compensate for this damage, the so-called executive's liability to creditors comes into play. Section 159(3) of the Civil Code states that if a member of a statutory body (executive) has not compensated the company for the damage caused, even though he was obliged to do so, "he is liable to the creditor of the legal entity for its debt to the extent that he has not compensated for the damage, if the creditor cannot obtain performance from the legal entity." In other words, if you breach your duties and put the company in a situation where it cannot pay its debts, and you have not compensated the company for the damage, the creditors will be able to recover it directly from you. This liability applies precisely to the unpaid damage you have caused to the company – the amount of personal liability is therefore limited to the amount of this damage. Once you have compensated the company for the damage, your liability to the creditors ceases, because you have fulfilled your obligation and the creditors no longer have any reason to seek compensation from you.

Example of a breach of the duty of care: A managing director's sluggish approach in a critical situation may be considered a breach of their duties. For example, you know that your company is insolvent, yet you do not take any steps to restructure its debts or negotiate with creditors. Instead, you put off dealing with the problems and allow the liabilities to remain unpaid. Such conduct (or inaction) constitutes a breach of the duty of care of a prudent manager – the managing director is acting negligently and irresponsibly, which may cause further damage to creditors.

Personal liability of the managing director for the company's tax debts

According to the judgment of the Supreme Administrative Court 10 Afs 4/2024-38, this occurs when an executive breaches their duty to act with due diligence and thereby causes damage to the company, as a result of which the company is unable to pay tax arrears. The key point is that the damage is not the unpaid tax itself, but, for example, the depletion of company assets through disadvantageous transactions or the payment of their own remuneration despite known debts. The tax authority is entitled to assess this liability independently, without a court decision, and may directly request the managing director to pay the tax arrears.

The statute of limitations may not help the managing director – if its application would be contrary to good morals (e.g., in the case of intentional damage to the company), the tax administrator may disregard it. Managing directors therefore face a real risk of tax debts being recovered from their personal assets if they do not act prudently and in the interests of the company. Prevention, transparent decision-making, and timely legal consultation are key.

Obligation to file for insolvency in a timely manner

Closely related to the above is the obligation to file for insolvency in the event of the company's bankruptcy. The managing director (as the statutory body of the debtor) is required by law to file for insolvency without undue delay as soon as they discover (or should have discovered with due diligence) that the company is insolvent (Section 98 of Act No. 182/2006 Coll., the Insolvency Act). Insolvency means the inability to pay or over-indebtedness of a company. If the managing director fails to fulfill this obligation, he or she is exposed to additional personal liability. The law expressly stipulates that the statutory body is liable to creditors for damage caused by the late filing of an insolvency petition. In this case, the damage is assessed, for example, as the difference between what the creditor could have received if the petition had been filed on time and what it actually received in the subsequent insolvency proceedings. In other words, the longer you delay in resolving the bankruptcy as an executive, the greater the loss creditors may suffer – and that is precisely what they can then claim from you.

How to minimize the risk of executive liability – practical advice

The good news is that the risk of personal liability of executives can be largely eliminated. The key is a preventive and responsible approach. Below are specific measures and principles that every executive should follow:

• Act with due diligence: This is not just a legal cliché, but an everyday decision-making principle. In practice, this means being well informed (having an overview of the company's financial situation, reading financial statements regularly, consulting on important decisions), acting prudently (considering the risks of contracts, investments, and transactions), and being loyal (not favoring your personal interests or the interests of others at the expense of the company). If you are unsure whether a particular decision is in the best interests of the company, it is better to discuss it with colleagues or legal counsel. Always keep written records of important decisions and supporting documents – in the event of a dispute, this can serve as evidence that you acted in an informed and prudent manner.

• Monitor the company's financial health: A managing director should know the company's financial situation like the back of their hand. Regularly monitor liquidity, debt, and profitability indicators. Early detection of problems (e.g., cash running out for payroll or overdue liabilities growing) will allow you to act before it is too late. Proper accounting is also part of due diligence—properly maintained accounts are the basis for responsible management and will protect you from accusations that you were "unaware" of problems. If you do not understand accounting in detail, hire a reliable accountant and require regular reports from them.

• Address problems actively and don't put them off: If your company finds itself in crisis, don't turn a blind eye. Passivity is a common mistake – once problems arise, managers sometimes hope that "things will work out somehow." Instead, act immediately: start negotiating repayment schedules with creditors, look for new investments, and consider restructuring costs. This can avert bankruptcy or at least reduce the damage. If you see that the situation is heading towards insolvency and there is no way out, prepare in good time to file for insolvency. Remember that delayed filing significantly increases the risk that creditors will seek compensation from you. By filing for insolvency in good time, you are fulfilling your obligation and minimizing the personal consequences.

• Comply with laws and internal rules: In addition to the insolvency obligation, there are a number of other legal regulations that you must comply with as a managing director – from tax laws and employee protection laws to obligations towards the commercial register. Violating the law or even the company's articles of association can lead to damage and subsequent liability. For example, it is not permissible to transfer company assets to other persons, to favor certain creditors at the expense of others shortly before bankruptcy, or to conclude contracts that you know the company will not be able to fulfill. Avoid any conduct that smacks of fraud or deliberate action to the detriment of creditors – such actions may lead not only to civil liability but also to criminal prosecution. If in doubt, consult a lawyer to determine whether the intended course of action is legal and safe.

• Communicate with experts and seek advice: No one is born knowing everything, and the law and business environment are constantly changing. Even experienced executives can overlook changes in legislation or underestimate certain risks. That is why it is advisable to seek regular advice. Stay in touch with legal advisors, tax advisors, or auditors, especially when making important decisions or suspecting problems. For example, a lawyer can help you assess whether the conditions for bankruptcy have already been met or help you make an informed decision in accordance with the principles of due diligence, a tax advisor can point out tax risks (e.g., VAT liability), and an auditor can check your accounting. Regular consultations will help you avoid mistakes and demonstrate that you take your role seriously (which is useful if your due diligence is ever assessed).

• Consider directors' and officers' liability insurance (D&O): There is special insurance on the market for members of company bodies, known as Directors & Officers Liability Insurance (D&O). This insurance covers damages caused in the performance of your duties as a director and can protect you if financial claims are made against you because of your decisions. Simply put, it protects your personal assets in the event that you, as an executive, have to pay debts or damages. While D&O insurance does not replace responsible behavior (and does not cover intentional wrongdoing), it can be a last resort in unforeseen situations. Consider taking out such insurance, especially if you run a high-turnover or high-risk business.

Conclusion: prevention and timely advice are key

As the managing director of a limited liability company, you are not completely off the hook when it comes to your company's debts. The managing director's liability is a mechanism to ensure that the company's management bears the consequences if it causes damage to creditors through negligence or intentional misconduct. Fortunately, if you fulfill your obligations, act proactively and prudently, such situations can almost always be avoided. Manage your company actively and transparently, keep track of its status, and don't be afraid to ask for help—whether from colleagues or experts.

If you are unsure whether you are fulfilling all your obligations correctly or are facing a complex situation (impending bankruptcy, legal dispute, etc.), do not hesitate to consult a lawyer. Our law firm is ready to help you identify legal risks and propose appropriate procedures or solutions to crisis scenarios. Timely consultation can save you money and years of worry. Protect yourself and your company by acting cautiously – and, if necessary, turn to experts who will help you keep your ship on the right course in stormy weather. Your business deserves prosperity and you deserve peace of mind without the threat of personal liability for the company's debts.