FRRA Legal Blog: The intrayear discharge in the Limited Liability Company (GmbH)

The legal institution of discharge is of considerable importance in Austrian corporate law, in particular in the law governing Limited Liability Companies (GmbHs): By passing a discharge resolution, the shareholders show their approval of the management’s business policy. In addition, the discharge leads to the preclusion of the company’s claims for damages against the managing directors. It is also no longer possible to dismiss the managing director pursuant to Article 16 para 2 Austrian Limited Liability Companies Act (GmbHG) or to terminate his employment contract for good cause.

However, the above-mentioned effect of the discharge is limited to those circumstances which are known to the shareholders at the time of passing a discharge resolution or which were recognizable upon careful examination of all documents. The annual financial statements are of particular importance here, especially since the discharge is usually granted after their approval. However, unlike for the Stock Company (AG), this is not mandatory for the Limited Liability Company (GmbH). If there are special reasons, discharge can also be granted during the business year. One reason frequently encountered in practice is the dismissal of a managing director.

It is questionable how far the preclusive effect of an intrayear discharge extends. If no interim financial statements are prepared and there are no other written documents from which the shareholders can discern a potential breach of the managing director’s duties, the preclusive effect of the intrayear discharge is limited to those facts which have become known to the shareholders by other means. The managing director usually gains little from such a “half-baked” discharge. However, it also harbors dangers for the shareholders. If, despite such a discharge resolution, they wish to assert claims for damages against the managing director, they bear the burden of proving that they were not aware of the managing director’s breach of duties. In the absence of written documents, it is often one person’s word against another’s, and therefore a question of credibility, if it comes to a legal dispute.

In order to avoid this situation, which is unsatisfactory for all parties involved, the managing director could submit a comprehensive report on the development of the company since the last balance sheet date to all shareholders prior to his intrayear discharge. The latter can of course also actively demand such a report by exercising their instruction right before deciding on the discharge.

Author: Stefan Hammerschmidt

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