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Duties, Responsibilities and Liabilities of Executive Officers in Hungarian Companies within Financial Difficulties

By: Dr. Szabolcs Hargittay and Dr. Zsolt Fsthy

Fusthy & Manyai Law Office

Budapest, Hungary

I. Legal Background

The duties, responsibilities and liabilities of the executive officers in a company are basically set forth in Hungarian corporate law, namely Act No. IV. of 2006 on Business Associations (hereinafter: Company Act). Where no unique provisions are laid down automatically the provisions of the civil law, i.e. the Hungarian Civil Code shall apply. When insolvency of a company comes to light, the provisions of the Insolvency Act, i.e. Act No. IL of 1991 on Bankruptcy Proceedings, Liquidation Proceedings should be taken also into consideration (hereinafter: Insolvency Act). Naturally, if the executive officer is appointed under employment the provisions of labor law, i.e. Act No. XXII. of 1992 on Labor Code (hereinafter: Labor Code) will be applicable, too. Of course, in certain exceptional circumstances also the rules of Hungarian Criminal Code and Competition Law would have to be borne in mind.

II. Duties and Responsibilities under Corporate Law

A/ Incapability and Conflict of Interests

a) Incapability

A person who has been sentenced to imprisonment by final verdict for the commission of a crime may not be an executive officer until relieved from the detrimental legal consequences related to his criminal record. Any person who has been banned by a standing court verdict from accepting an executive office may not serve as an executive officer under the duration of such ban. Any person who has been banned by a standing court verdict from any profession may not serve as an executive officer in a business association whose main business activity covers such profession.

For a period of three years after cancellation of a business association from the register of companies based on winding-up proceedings, a person who, during the calendar year preceding such cancellation served as an executive officer of the terminated business association, may not be an executive officer of another business association.

A person whose liability in his capacity as the executive officer of an economic operator terminated by way of liquidation or the member (shareholder) of such economic operator with majority control for any claims that remain unsatisfied in liquidation proceedings has been declared by final court decision in accordance with the Insolvency Act may not be an executive officer of a business association, and if this person failed to effect the payment obligations in compliance with the guarantee obligation contained in the final court decision. This prohibition shall apply for a period of five years from the time of failure of the enforcement procedure conducted against him.

b) Conflict of Interests

An executive officer may not acquire any share other than shares in public limited companies in any business association whose main business activity is identical to that of the company, and may not accept an executive office in a business association or cooperative whose main business activity is identical to that of the business association, with the exception if so permitted by the articles of association of the business association affected or if the supreme body of the business association has granted consent.

An executive officer and his close relatives or domestic partner may not conclude any transactions falling within the scope of the main activities of the business association in his own name and on his own account, unless specifically permitted in the articles of association.

An executive officer and his close relatives or domestic partner may not be elected as a member of the supervisory board at the same business association.

B/ Duties and Responsibilities

The executive officers are vested by virtue of the Companies Act with all powers necessary or useful to run the business of the company, except for those that are reserved to the shareholders. The company’s Supreme Body is allowed to reduce the management powers of executive officers when so authorized by law or under the Statutes. Executive officers must conduct their management duties with due care and diligence as generally expected from persons in such positions, and must give priority to the interests of the company. Instructions can only be rendered by the resolutions of the Supreme Body of the company but not by the shareholders. Such instructions can aim at various matters in connection with running the business such as implementing new projects or hiring or firing employees, etc. In respect of specific types of issues, executive officers may confer the right of representation upon employees of the company.

Within fifteen days of accepting a new executive office, the executive officers have to notify in writing any other companies in which they already serve as executive officers or supervisory board members.

The executive officers are responsible for notifying the court of registry by way of electronic means concerning the foundation of the business association, any amendment of the articles of association, the rights, facts and data contained in the register of companies and changes therein, as well as any other data required by law.

Executive officers must treat all business secrets of the business association as strictly confidential.

Unless otherwise provided by law, upon request by the shareholders, executive officer shall provide information concerning the affairs of the business association, and allow inspection of its books and documents. In the event of any executive officer’s failure to comply with such request, upon request of the member concerned, the court of registry may instruct the business association affected to provide the information in question and/or to provide for inspection.

Unless otherwise provided by the articles of association, executive officers exercise the employer’s rights over the employees of the business association.

Executive officers are liable to the business association in accordance with the general rules of civil law for damages caused by any infringement of the law or any breach of the articles of association, the resolutions of the supreme body, or their management obligations.

The executive officers are liable for damages caused to the business association by any infringement of the regulations set out in Chapter II/A. Claims may be enforced for a period of one year from the occurrence of such damage.

Executive officers bear joint and several liability toward the business association for any damage resulting from the incorrectness of the data, rights or facts notified, or from any delay in filing or failure to file the notification, including where the annual report prescribed in the Accounting Act and the relating business report is drawn up and published not in compliance with the relevant provisions of the Accounting Act.

III. Duties and Responsibilities under Insolvency Law

The Hungarian corporate law acknowledges the concept of wrongful trading. In exceptional circumstances the executive officers must not see the priority interests of the shareholders but that of the creditors. In the event of any imminent threat for the company’s insolvency, the executive officer should conduct the management of the company giving priority to the company’s creditors. In the event that non-compliance with this obligation is verified and if the business association is deemed to be insolvent, the executive officers affected may be subject to financial liability under the Insolvency Act.

Any creditor or the liquidator in the debtors name may bring action during the liquidation proceedings for the court to establish that the former executive officer failed to properly represent the preferential rights of creditors in the span of three years prior to the opening of liquidation proceedings in the wake of any situation carrying potential danger of insolvency, in consequence of which the companys assets have diminished, or that they prevented to provide full satisfaction for the creditors claims, or failed to carry out the cleaning up of environmental damages. If damage is caused by several persons together their liability shall be joint and several. A situation is considered to carry potential danger of insolvency as of the day when the executive officers of the company were or should have been able to foresee that the company will not be able to satisfy its liabilities when due. In the aforesaid court action, financial security may also be demanded with a view to providing satisfaction for the creditors claims. Within the meaning of the above provisions any person with powers to influence the decision-making mechanisms of the company is also be considered an executive of the economic operator.

IV. Recent Remarkable Court Judgment in Connection with the Wrongful trading

The following remarkable court judgment has recently been published.

In a particular case the liquidator of a company as Plaintiff instituted a lawsuit against the former owner and executive officer of the company as Defendant. Pursuant to the statement of claim the Defendant did not conduct the management of the company giving priority to the company’s creditors after the imminent threat for the companys insolvency. The companys assets diminished and the creditors suffered huge amount of damages concerning the omission of the defendant.

The court ruled that the statement of claim had been lawful and accurate. In harmony with the relevant regulations where an executive officer did not carry out the requirement prior to the opening of liquidation proceedings for having to deposit and publish the debtors annual accounts (consolidated annual accounts) in accordance with specific other legislation, or failed to comply with the obligations to draw up the reports and accounts, and to have the relevant documents and assets delivered, and – furthermore – to provide information, injury to the creditors interest should be presumed. Nevertheless, the executive officer should convene the shareholders’ meeting without delay in order to provide for the necessary measures whenever it comes to his attention that the company is on the brink of insolvency or has stopped making payments and its assets do not cover its debts. The court ruled that on the basis of the available documents the Defendant had breached the aforementioned obligations and not conducted the management of the company giving priority to the company’s creditors after the imminent threat for the companys insolvency

The court judgment ruled that within a sixty-day forfeit deadline following the final conclusion of liquidation proceedings any creditor may institute a lawsuit for the court to establish the liability of the debtors former executive officer under this judgment and hence to order this executive officer to satisfy the debtors claim to the extent of its claims not yet satisfied.

V. Executive Summary

The duties, responsibilities and liabilities of executive officers are governed by various areas of law in Hungary so creating a quite complex and complicated system of legal provisions. Although the obligations and liabilities in case of financial difficulties are set forth in law, analysis of such situation with special regard to finding the balance between the interests of the shareholders and the creditors and the turning point thereof pose very delicate issues.

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