The Hungarian Civil Code (Act V of 2013 effective as of 15 March 2014) establishes that a corporate entity and its executive officer will be jointly and severally liable vis-à-vis third parties for damages caused by the executive in his/her capacity as an executive officer. This provides for two main spheres in which an Executive Director can be held liable: Internal and external liability.
Section 3:24 of the Civil Code provides that the Executive director will be liable for damages to the company that are caused by him or her during his or her directorship, with specific liability for damages caused by breach of contract.
Therefore, business partners will be able to take directly against its director. Stricter liability is manifest in the Hungarian civil code. Directors must manage the company in the company’s best interests, which includes a care element. Nevertheless, care is understood as an increased level of care as it can be expected from a person who undertook his or her obligations in a contract, and who is in a responsible position of the director of a company. Hence, if the executive directors breached their management duties and, as a result, the company incurred damage, the executive directors will be held liable.
For example, the company (based on a resolution of the shareholders) may bring damage claims against the executive directors if the directors breached their management duties and, as a result, the company incurred damage. In addition, if the executive director attends to his or her duties under an employment agreement with the company, the company may also bring claims against the director under the employment agreement.
The Executive Director may also be held damages caused for not providing information or allowing access to the company’s documents to the shareholders as requested, in this case, the shareholders may attempt to enforce their right before court in non-litigious proceedings.
Directors may be held liable also for the liquidated company’s uncovered debts (if the statutory preconditions are met) in a lawsuit commenced against the directors by the liquidatoron behalf of the company.
Limitation of Internal Liability
The Hungarian Civil code also provides for limitation of internal liability of the Directors.
According to the Civil Code, the executive director will be released from liability for a breach of contract if he or she can prove that the breach was caused by circumstances beyond his or her control – that is, circumstances which:
- He or she could not influence;
- Were unforeseen when the contract was concluded; and
- Could not reasonably be avoided or prevented.
Therefore, the Civil Code provisions governing relief from internal liability are also stricter, making it harder for managing directors to avoid impeachment, since they must not only meet the general expectations of their position, but also prove that:
- They acted with a generally expected level of care;
- The factor causing the breach was out of the director’s control;
- The factor could not have been foreseen by a person acting with due care under the same circumstances at the point in time when the director entered into the agreement with the company for his or her mandate;
- The factor causing the damage or the damage itself could not have been be eliminated by a person acting with due care under the same circumstances.
In the other hand, with the exception of liability for willful breach of contract damaging life or physical integrity, the managing director’s liability can be limited through contract terms. For example, liability can be limited to a specific amount or through conclusion of proper liability insurance.
With respect to internal liability, managing director contracts which were concluded before the new Civil Code took effect will remain subject to the previous regulation. However, damages caused to third parties after March 15 2014 will be subject to the Civil Code.
Liability against Third Parties
According to Section 6:541 of the Hungarian Civil Code,if an executive officer of a legal entity such as the managing director, a CEO, a member of the board, or trustees of foundations in his/her capacity as executive officer causes damage to a third party,in connection with his or her legal relationship to the company, the executive officer can be held liable for the damages severally or jointly with the company.
The aim of this new rule is to strengthen the position of parties suffering damage and to provide a broader basis for compensation. Based on this provision, the executive director will be subject to joint and several liabilities together with the company.
Hence, if third parties suffer damage due to the decisions or actions taken by the company executive director whilst managing the company’s affairs, third parties may claim damages directly from the director, and the director may be held liable with his/her personal assets.
This means that the aggrieved party can file damage claims against the executive officer, against the company or against both, having the possibility to claim the whole compensation for damage not only from the company but also from the executive officer.
Consequently, if as a result of breaching this obligation or because of certain other unlawful actions of the executive director, the company’s debts are not fully covered in liquidation, the directors may be held liable with regard to the company’s creditors for such uncovered debts.
Limitation of External Liability
As this new rule can be found in Book 6 (Obligations) of Part 4 of the Civil Code – which applies to tort liability – managing directors’ new external liability applies only to damages caused outside the contractual relationship (ie, only where there is no contractual relationship between the company and the third party).For example, this rule does not apply to liability for:
- The company’s unpaid taxes;
- Incidental fines incurred by the company; or
- Work accidents or other damage caused to the company’s contractual partners (eg, customers and clients).
Rather, external liability applies only when the executive director acts within the scope of his or her duties as managing director and in the interests of the company.
Therefore, the managing director’s newfound personal financial liability is not automatically affected; rather, the circumstances and conditions of the damage must first be assessed. Relief from liability is available for generally foreseeable reasons in certain situations (Section 6:519 of the Civil Code). As with internal liability, external liability can also be limited through contractual means.
Directors are liable:
- Towards the company in accordance with the rules of the civil code relating to damages caused by the breach of contract (Internal Liability)
- In the event of forced liquidation of a company, creditors may claim damages against the executive officers up to their outstanding claims based on rules of non-contractual liability, provided that it is established in a court procedure that the executive officers ignored the interest of the creditors when the threat of insolvency of the company was imminent (External Liability)
- Directors are also subject to Hungarian criminal law. In case of criminal offences (e.g fraud in connection with a tender, payment of unlawful incentives etc) generally the Executive Director’s liability is established instead of that of the company.
For further information, please contact Kelemen Meszaros Sandor and Partners:
Ádám Boóc, Partner – email@example.com