Court Of Appeal: Directors Generally Not Liable For The Company’s Debts
In a landmark case, our Dr. Peter Taller successfully defended Board Members of a cooperative company against a lawsuit brought by the shareholders.
The Court of Appeal in Budapest (Fővárosi Ítélőtábla) sided with Dr. Taller and held that as a matter of general principle, shareholders are not entitled to claim legal remedies against directors for the company’s debts. This rule applies even in cases where there might be a causal link between the directors’ actions and the company’s insolvency; even if a director’s criminal conduct was the primary cause for the insolvency.
The background of the case:
A Hungarian cooperative reported insolvency whilst owing nearly 4000 creditors in company debts (mainly its shareholders) which amounted to approximately 50 million €. The directors and one member of the supervisory board were found guilty of embezzlement and misappropriation of company funds and real estate property.
Once the criminal procedure was concluded, hundreds of the former shareholders initiated law suits throughout Hungary claiming compensation for their lost investment. However, none of them filed a petition with the insolvency court to establish the unlimited liability of the directors (or other board members) for wrongful trading as provided for by Hungarian (statutory) insolvency law, but every single plaintiff based the claim on a tort action and referred to the crimes committed by the board members.
Some courts of lower instance found the defendants liable in tort, whereas other judges found that there had been an “abuse of the institution of limited liability” and established the liability under case law pertaining to this respect.
NZP represented the former board members. According to our arguments, there was no legal relationship between the board members and the shareholders, but merely between the shareholders and the company, as well as between the company and the shareholders. Therefore, contractual liability could not be a basis for a judgment in favour of the plaintiffs. A tort liability could also not be established since no illegal act that was committed infringed on the rights of the shareholders; the only victim was the company itself.
The main question therefore remained whether or not the direct and unlimited liability of the board members can be established in an ordinary civil procedure.
The Court of Appeal found in our favour and entirely agreed with our written and oral arguments and established the following:
– There is no legal relationship between a director of a company and the shareholders of it,
– Only written statutory law can establish the possible unlimited liability of board members,
– The enumeration under statutory law is an exhaustive one,
– A petition to establish unlimited liability may only be filed with the insolvency court,
– Beyond the statutory limitation (60 days following the deletion of the company), there is no legal possibility to establish unlimited liability,
– Even a crime committed by the board members cannot establish their liability in tort towards the shareholders,
– Any case law disregarding the above principles violates the general principle of separation of powers as interpreted in the continental systems,
– Any contradicting case law (including previous judgments in the present case) must be entirely disregarded and shall not be referred to in the future.