Directors’ Liability in Hungary

Civil liability is primarily regulated by the Civil Code, the Companies Act, the Act on the Rules of Taxation, the Bankruptcy Act, and the Labor Code.

The civil liability of the director consists of two aspects: the director is liable to the company (so-called internal liability) and is also liable to third parties in legal relationships (so-called external liability).

In the case of “external liability”, the company shall be liable for any damage caused to a third party by the director acting in his own competence, with the provision that the company may subsequently claim damages from the director under the rules of internal liability (below). Exceptions are intentional damages caused by the director and liability for unlawful management, in which cases the director is liable.

In the case of “external liability”, the legal relationship in which the director performs his duties should be examined. In the case of an employment relationship, the rules of liability are regulated by the Labor Code. According to the Labor Code, the employee is obliged to compensate the company for any damages caused by a breach of obligations arising from the employment relationship, if he has not acted reasonably. The company bears the burden of proving that the breach was imputable and that it was causally linked to the occurrence of the damages. In principle, an employed director is liable for damages in full if such were caused intentionally or through gross negligence.

In the case of a personal service contract, the rules of liability are regulated by the Civil Code. The director shall be relieved of liability if able to prove that (i) the damages occurred in consequence of unforeseen circumstances beyond his control, (ii) the damages were caused by circumstances unforeseeable at the time of the conclusion of the contract, and (iii) there had been no reasonable cause to take action for preventing or mitigating the damages.

It is important to emphasize that the parties (both, the company and executive officer) may deviate from the above rules in favor of the executive director: Section 3:24, 3:117, and 3:118 of the Civil Code and Section 179 of the Labor Code.

The Hungarian Bankruptcy Act also contains special provisions. Any creditor or the liquidator may–in the debtor’s name–bring action during the liquidation proceedings for the court to establish that the former executives of the economic operator failed to properly represent the preferential rights of creditors in the three years prior to the opening of the liquidation proceedings and in the wake of any situation carrying potential danger of insolvency, in consequence of which the economic operator’s assets have diminished or that they prevented to provide full satisfaction for the creditors’ claims. Section 33/A of the Bankruptcy Act.

As a general rule, the company, the liquidator, and the company's creditors or, in certain cases, the damaged party may sue the executive officer.

The main source of criminal liability for directors is the Penal Code. At the same time, other rules of law, such as tax law, may appear in the statement of facts used for various offenses.

Typical crimes committed by directors include active corruption, misappropriation, bankruptcy fraud, economic fraud, and concealment of assets.

The initiation of criminal proceedings is regulated by the Criminal Procedure Act. Criminal proceedings are usually initiated against directors by the victim of the crime by filing a report. The victim of a crime may typically be a creditor of the company (concealment of assets) or a member of the company, but public authorities or, in the case of certain crimes, the liquidator is also entitled to file a report, such as the tax authority.

Two types of limitation of civil liability can be distinguished in Hungary: the limitation by passage of time, such as statute of limitations and the limitation regarding imputability.

Claims shall lapse after five years, but it is important to highlight that in the case of damages caused by crimes, the claim does not become time-barred until the crime itself is lapsed.

In the case of personal service contract, the director shall be relieved of liability if able to prove that (i) the damages occurred in consequence of unforeseen circumstances beyond his control, (ii) the damages were caused by circumstances unforeseeable at the time of the conclusion of the contract, and (iii) there had been no reasonable cause to take action for preventing or mitigating the damages.

An additional limitation of civil liability may be the institution of a special financial report. If the company’s supreme body provides a hold-harmless warrant to an executive officer at the time of approval of the financial report, thus acknowledging the executive officer’s management activities during the previous financial year, the company may bring action against the executive officer on the grounds of breaching management obligations in a claim for damages if the facts and information underlying the hold-harmless warrant proved to be false or incomplete.

Under the limitation by passage of time, any creditor of the company terminated in liquidation proceedings may bring civil action during the liquidation proceedings for the court to establish that the former executives of the economic operator failed to properly represent the preferential rights of creditors in the span of three years prior to the opening of liquidation proceedings.

The limitation of the initiation of criminal proceedings may be the statute of limitations, which is the time equal to the maximum penalty prescribed, but not less than five years. Criminal proceedings may also be affected by the value of the offense. For example, misappropriation where the value concerned is less than HUF 50,000 (approximately EUR 140) does not constitute a criminal offense, only an infraction.

With regard to the activities of a director, companies may take out liability insurance. It is important to mention that liability insurance can also take the form of a general policy valid only for the director in office, but it can be taken out for a specific officer. In the latter case, in the event of a change in the executive officer, the insurer shall be notified immediately about the change in the person of the executive director. The liability insurance should include, in addition to the rules of general indemnification, the other costs related to damages (e.g. legal fees).

In terms of liability, Hungarian legislation does not differentiate between executive directors and non-executive directors. The liability of directors is determined by the legal relationship in which they perform their duties. Directors perform their duties either as part of an employment relationship or in a personal service contract. There are two kind of directors, the “general” and the “special” directors, the so-called managers. The “general” director manages the operations of the business association under a personal service contract or under a contract of employment, as agreed with the company. Companies may also have other executives who also perform their tasks in employment relationships.

In case of an employment relationship, the rules of liability are regulated by the Labor Code. According to this regulation, the employee is obliged to compensate the company for any damages caused by a breach of obligation arising from his employment relationship, if he has not acted reasonably. The company must prove that the breach was imputable and that it was causally linked to the occurrence of the damages. An employed director is liable for full damages if those were caused intentionally or through gross negligence.

In the case of personal service contract, the liability rules are regulated by the Civil Code. The director shall be relieved of liability if able to prove that (i) the damages occurred in consequence of unforeseen circumstances beyond his control, (ii) the damages were caused by an circumstances unforeseeable at the time of the conclusion of the contract, and (iii) there had been no reasonable cause to take action for preventing or mitigating the damages.

As a general rule, responsibility lies primarily with the company and the director; the member may be held liable in exceptional cases only. In principle, the member does not have the right to instruct the company’s executive officer, which is only possible in the case of sole-member companies. Given that the company and the director are generally liable, it is advisable to request instructions in writing from the sole member of the company.