CAN MANAGING DIRECTOR BE LIABLE FOR UNPAID COMPANY DEBTS IN HUNGARY

14 June 2023

Limited liability companies are a popular form of business in Hungary, often because of the limited liability of the members, the founders and owners of the company. In the course of their business activities, their private assets and the assets of the company are separated, so that they are not, as a rule, liable for the debts of the company. The liability of the members is therefore limited, but how and why is the managing director (CEO) of the limited liability company liable? In this article we will look at this question.

In case of (compulsory) liquidation the CEO of the company will be held liable if the creditor can prove that the CEO failed to take the creditors’ interests into account in the event of an imminent threat to the company’s solvency.

On the basis of the above, the liability of a CEO towards third parties can be established if the following three conditions are met:

• the company is dissolved without legal succession, except in the case of dissolution by winding-up, and
• the creditors have outstanding claims, provided that
• the interests of the creditors were not taken into account by the CEO after the company became threatened with insolvency.

The dissolution of a company without legal succession and the existence of outstanding claims are objective conditions, so they are not usually particularly difficult to establish.

However, proving the third condition can be difficult.

One of these essential conditions is the existence of a threat of insolvency. This arises where the directors of the company could foresee, or with due care should have foreseen, that the company would not be able to meet its debts as they fall due. The standard of care required is not that of the average person, but a different standard for managing directors.

However, the liability cannot be established only for deliberate, bad faith conduct specifically aimed at the misappropriation of assets. The liability of a CEO also arises where he continues the company's activities with unreasonable and unjustified risk taking in a situation of threatened insolvency.

There is a special presumption linked to the threat of insolvency, in which case the managing director must excuse himself. According to this presumption, if a CEO fails, through no fault of his own, to fulfil his obligation to file and publish the annual accounts of the company, or fails to do so properly, he will be exempted from liability only if he proves that no situation of imminent insolvency has arisen during his term of office or, if such a situation has arisen, that he has taken the interests of creditors into account in the performance of his management duties.

Furthermore, in case of liquidation there is a presumption that the CEO failed to take the creditors’ interests into account if he failed to comply with his cooperation obligations with the liquidator.

The court prohibits from being CEO in a Hungarian company for 5 years the CEO and of the company which has been deleted from the company register in a compulsory liquidation procedure or “normal” liquidation procedure if the liability of this person for the unpaid claims has been declared and the payment obligation could not be enforced.