The new Hungarian Civil Code’s stipulations regarding the liability of managing directors have unleashed some heated debate. Our Budapest team has put together a short overview to help you get an initial impression of the most significant changes:

Contractual Limitation of Liability

The Hungarian rules on business companies permit derogation. Therefore, in cases involving non-contractual liability, parties – the company and the managing director(s) – may, in addition to restrictions imposed by the new Hungarian Civil Code, conclude an agreement to further limit managing director liability for acts such as breach of contract. Parties may also regulate compensation in the form of the amounts or the basis of payments (e.g. the stipulations of the earlier Act on Business Companies). Parties are still not permitted to limit liability for intentionally caused tort or tort resulting in cases involving the loss of life or harm to the physical integrity or health of individuals.

Hold-harmless Warrants

Previously, hold-harmless warrants already have been permitted under the Act on Business Associations but will probably take on more significance with the new Hungarian Civil Code. Upon request from the managing director, the company board now is permitted to grant a hold-harmless warrant together with approval of the annual financial report without such a stipulation having to be included in the articles of association. The hold-harmless warrant is considered proof that the managing director has fulfilled his/her duties in the previous financial year. Once the company provides a hold-harmless warrant, it may only file a claim for damages against the managing director if it proves that the facts and information underlying the hold-harmless warrant were false or incomplete.

If the managing director leaves during the financial year, he/she may ask the company board to issue a hold-harmless warrant when it next convenes.

Company with a Sole Member

A managing director’s liability is also limited if he/she has received orders from the sole member of the company to act in a certain way. This does not apply to companies with more than a sole member.

Peremptory Supervisory Board

According to the new Hungarian Civil Code, a company may establish a peremptory supervisory board. In this case, the articles of association can order the managing director to obtain the approval of the supervisory board for decisions in certain cases. If the supervisory board approves the managing director’s decision, members of the supervisory board who have approved the decision – together with managing director are jointly and severally liable for any damages caused. If the supervisory board turns down approval but the managing director would like to proceed nonetheless, he/she may override the supervisory board decision through approval from the company board.

Managing Director’s Objection

If the company has more than one managing director, one managing director can object to the action of another managing director or directors at anytime – even after the fact. In such cases, the company board must make a decision about the action which the managing director has objected to.

If you have any questions regarding the new Hungarian Civil Code or any other legal questions we could assist you with, please feel free to contact us at office (at) spechtboehm.hu.