Budapest Court of Appeal: the liability of executive officers is not unlimited either

In a precedent-setting case before the Hungarian courts, the lawyers of our firm successfully represented the executive officers of a Hungarian cooperative in a damages action brought by members of the same legal entity.
The Budapest Court of Appeal fully agreed with our firm’s legal position, according to which the members / shareholders / creditors of a legal entity cannot successfully bring a damages action against its executive officers merely because the legal entity is unable to pay its debt owed to them. This principle also applies in cases where there is a causal link between the conduct of the executive officer — in the given case, the commission of a criminal offence — and the legal entity’s insolvency.

The background to the case was as follows:
A Hungarian cooperative declared insolvency. In the liquidation proceedings, nearly 4,000 creditors filed claims in the approximate amount of EUR 50,000,000. The former members of the board of directors and one supervisory board member were found guilty by a Hungarian criminal court of misappropriation and embezzlement committed in relation to the legal entity’s cash and real estate assets.

After the conclusion of the criminal proceedings, hundreds of former members brought damages actions before various Hungarian courts, seeking compensation from the former executive officers for their unrecovered investments lent to the legal entity. However, none of the creditors made use of the possibility provided by the Bankruptcy Act, under which the liquidation court could have established the unlimited liability of the former directors and supervisory board members. Instead, all creditors brought damages actions before courts of general jurisdiction under the legal title of “damage caused by a criminal offence”, merely relying on the criminal offence previously committed by the executive officers.
Some lower courts considered it possible to impose liability by reference to “damage caused by a criminal offence”, while other lower courts, relying on the Civil Division recommendation No. 1/2005 (VI. 17.) of the Szeged Court of Appeal (available online), found that executive officers could be held liable on the basis of “abuse of a legal institution”.
In defence of the directors and supervisory board members, our firm argued as follows: there is no legal relationship whatsoever between a member / creditor / shareholder of a legal entity and the executive officer of that legal entity. A legal relationship exists only between the executive officer and the legal entity, and between the legal entity and its member / creditor / shareholder. Consequently, there can be no contractual relationship and therefore no contractual liability for damages. Nor is there any non-contractual damages relationship, since this would require the executive officers to have committed some unlawful act against the member. For this, it would have been necessary to identify a statutory rule intended to protect the member.

The main question in the case therefore remained whether, and if so how, the unlimited and direct liability of an executive officer can be established before an ordinary civil court.

The Court of Appeal fully agreed with the arguments presented by our firm both in writing and orally, and therefore held as follows:
– There is no legal relationship between the executive officer of a company and its member;
– The unlimited liability of an executive officer may be established only on the basis of an express rule of written positive law;
– In this respect, the law lists the forms of liability exhaustively;
– Proceedings for the establishment of unlimited liability may be initiated exclusively before the liquidation court;
– After expiry of the statutory time limit — 60 days following deletion of the legal entity — there is no possibility whatsoever to establish unlimited liability;
– Not even a criminal offence committed by the executive officer is capable of establishing a non-contractual damages relationship;
– Any other court decision / opinion, including the relevant part of the position taken by the Szeged Court of Appeal, violates the principle of separation of powers, since the courts would be creating an independent case of liability instead of the legislature;
– Any previous decisions to the contrary, including parallel judgments delivered in the present matter, must therefore be disregarded, since in this respect the court was not applying the law but attempted to create law.