Refusal to Cooperate with the Liquidator May Give Rise to the Unlimited Liability of a Hungarian Managing Director

In Hungary, holding executive officers of legal entities liable is a frequent issue in legal practice. In the past, the courts were not always consistent in this respect. Recently, however, our firm obtained a decision of fundamental importance, which established that a court may find an executive officer to have unlimited liability not by relying on general principles of law or the general rules of damages, but only in cases of piercing the corporate veil expressly permitted by statute.

Such an express provision is contained in Section 33/A of the Hungarian Bankruptcy Act. Under this provision, executive officers, such as managing directors or members of the board of directors, may be held liable if, during the three years preceding the commencement date of liquidation and after the occurrence of a situation threatening insolvency, they failed to perform their management duties with due regard to the interests of creditors, and, in causal connection with this, the assets of the economic operator decreased or the full satisfaction of creditors’ claims may be frustrated for another reason.

What does this mean in practice?

In Hungary, unlike for example in Germany, there is generally no absolute obligation to file for insolvency. However, if an executive officer identifies a situation threatening insolvency, there are two ways to avoid later civil liability: either the company files for insolvency, or the executive officer acts as a quasi-insolvency administrator and gives priority to creditors’ interests over general business priorities.
Section 33/A(5) of the Bankruptcy Act sets out various rebuttable presumptions regarding the liability of an executive officer in cases where he or she fails to cooperate with the liquidator in a subsequent liquidation procedure.

In a case recently won by our firm, the court held that where the claimant creditor argues not only that a situation threatening insolvency existed during the executive officer’s term of office, but also that circumstances existed on the basis of which the court would otherwise establish actual insolvency under Section 27(2) of the Bankruptcy Act, the former executive officer has no real opportunity to prove that no situation threatening insolvency existed and that he or she was therefore not required either to file for insolvency or to continue operating the company in accordance with creditors’ interests. Consequently, the court may establish the unlimited liability of the former executive officer, in the case at hand the managing director of a limited liability company, without further examination. Ultimately, enforcement proceedings may therefore be initiated against the former executive officer’s private assets even if the assets of the company under liquidation would otherwise be insufficient to satisfy creditors’ claims.

It is therefore not true that, as is often mistakenly believed, it is impossible or nearly impossible in Hungary to hold a managing director personally liable. Piercing the corporate veil is possible if the appropriate procedural route is followed. In our view, the problem lies in the fact that the parties concerned often do not turn to the right professional, who then attempts to enforce the claims in the wrong type of procedure.