New Hungarian Civil Code / 5 Urban Legends as to Limited Liability Companies
The new Hungarian Civil Code has come into force as of 15 March 2014. The new code regulates the legal affairs of the most popular legal entity, i.e. the Hungarian limited liability company (Kft.) There are news circulating in the internet and in other media exaggerating or even dramatizing particular innovations in the new code. We now clean up these Urban Legends, at the same time giving legal advice as to the reasonable handling of these issues.
#1 / Share capital to be increased immediately at first company change
Urban Legend: “The share capital of a Hungarian limited liability company has to be increased to HUF 3m at the time of the first company change.”
Facts: The statutory requirements for setting up a Hungarian limited liability company have tightened. Under the new Hungarian Civil Code having come into force as of 15 March 2014, the share capital has to be a minimum of HUF 3m (c. €10,000). Before that deadline, companies could be registered with a share capital of only HUF 0.5m (c. €1,666). The companies established under the “old law” enjoy a grace period, hence they have to meet the new share capital requirements only as of 15 March 2016. Only a few experts know that the grace period applies even if in the meantime there are company changes, e.g. change of seat or change of managing director as well.
bud-legal advice: The obligatory capital increase may be delayed until March 2016. Moreover, instead of a one-off payment, a capital increase may be earned out from future profits.
#2 / Managing directors are personally liable for damages?
Urban Legend: “Under the new Civil Code, managing directors have personal liability for the damages caused by their company.”
Facts: With regards to the personal liability of managing directors there is quite a number of hoaxes on the Internet these days. The fact is that under the new Hungarian Civil Code, only in terms of tort issues will the managing directors be liable for the company they represent. They are not personally liable for damages caused within an existing contract with a business partner. In B2B-relations, contract defaults are a much more realistic scenario than tort issues. However, the opponent contracting party will soon realise that a tort claim is much more suitable for imposing pressure on the client due to the vulnerability of the managing director. Thus, it does not take much talent to construe a legal situation where a friendly third party will file a claim against the client on a tort basis.
bud-legal advice: A D&O insurance for industrial accident and environmental damages is a must. Also, an indemnity clause might internally be agreed on with the shareholders. Last but not least, we recommend to have appropriate protecting clauses implemented in the commercial contracts.
#3 / Liability for contractual damages drastically increased?
Urban legend: A quiet pervicacious urban legend says that the liability for contractual damages have drastically been increased in the new code.
Facts: The liability for contractual damages have been increased on one side, but have been disburdened on the other – with the balance clearly in favour of alleviation. Here is the explanation in sequence: It is true that the standard of liability has been made stricter in order to strengthen the Pacta sunt servanda principle. This means that the author of damage will have less loop holes to come clear from personal liability. However, at second glance it turns out that the legislator could not bring itself to establish an „objective“ liability standard, where the only excuse for nonperformance would be a vis major case. Instead, a long list of exculpation criteria has been introduced, i.e. impossibility of controlling, unpredictability and inevitability of the damage to occur. Such legal terms will definitely cause additional interrogatory issues, causing further delays in court cases. On the other side, the new law is even less strict as to the measure of compensation: The compensation for damages is now limited to the amount which was foreseeable at the time of conclusion of the contract (!) in an objective manner. The burden of proof is, of course, on the plaintiff’s…
bud-legal advice: Under the new regime, liability issues may be regulated in the contract in more sophisticated way. We recommend to be leading in knowledge and to insist on liability increase/limitation terms, as the case may be. A valuable investment for the future!
#4 / Protest of managing directors – Cling together, swing together!
Urban Legend: “When there are 2 or more managing directors, each managing director’s position is strengthened by the introduction of the legal institution of ‘protest’.”
Facts: The main question for a company being managed by two or more managing directors to decide was whether the managing directors should have individual or joint signatory rights. In case of joint signatory rights, the new Civil Code introduces a new legal institution called “protest”. Any managing director will be entitled to communicate a protest if they do not agree with any action or statement of the other managing director. The issue in question is then decided by the shareholder(s). We believe that this new “right” of the managing directors will soon turn into a burdening obligation.
bud-legal advice: We recommend handling the particular areas of responsibility in a proactive way. This can best be done in a Management Bylaws. Otherwise, the co-managing director might fact the threat of personal liability.
#5 / Discharge from liability – Any material changes to come?
Urban Legend: “Under the new Civil Code, the discharge of managing directors from their liability will be more flexible.”
Facts: The discharge from liability for managing directors is granted by the shareholders or, in case of a single member company, by the single shareholder. According to the new Civil Code, the discharge from liability can not only be granted concurrently with the adoption of the annual report for the previous business year, but upon termination of the managing director’s position as well. Personally, we do not believe that this change will have any material benefit or added value for the companies. However, the good news is that under the new Civil Code, the discharge from liability can be granted even if it is not expressly included in the Articles of Association.
budlegal advice: We definitely recommend to put this question on the agenda every year, to discuss the particular affairs in an open way and finally to pass an unambiguous resolution about the evaluation of the managing director’s activity. Obviously, specific exceptions and legal reservations may be stipulated in such a resolution as well.