CAN THE SHAREHOLDER SUE THIRD-PARTIES FOR DEPRECIATION OF COMPANY VALUE IN HUNGARY?

29 June 2021

Can the shareholder of a company assert claim on its own right against a third-party causing damage to the company, by contending that the damage suffered by the company has also decreased the value of its share? To what extent can the right to access to court limited in the name of the sound administration of justice? We address these questions by analysing a recent judgment of the Hungarian Supreme Court.

1. Facts

A company (“Company”), owned by a foreign investor concluded an agreement (“Agreement”) with the first defendant, responsible for the maintenance of public roads in Hungary (“First Defendant”), for the installation of optical safety pipe networks (“Facilities”) along the M1 motorway and one another highway in Hungary.

According to the Agreement, the Company has become the owner of 14 (fourteen) Facilities, while 2 (two) of the Facilities had been transferred to the Firs Defendant, as owner. In addition, Contractor had to obtain the administrative permit, necessary for the operation of all of the Facilities.

The Facilities had been installed in 2003, and the Company transferred all of its rights and obligations under the Agreement to a project company, established by the owner of the Company as sole shareholder (“Project Company”).

The Project Company applied for the permit in respect for the Facilities in 2010. The second defendant (“Second Defendant”), acting as administrative authority in the permit procedure, issued the permit, however the First Defendant appealed the decision, and the permit became final and enforceable only after a lengthy, 5 years’ administrative procedure, in January of 2015.

In the meantime, claimant (“Claimant”) acquired the 100% business share of the Project Company, in addition, by virtue of an assignment agreement, the former owner of the Project Company assigned its damage claim, arisen upon the delay of the permit procedure vis-á-vis the First and Second Defendants, to Claimant.

2. First procedure

The Claimant sued the First and Second Defendant for damages, on the basis of the delay of the administrative permit procedure. To substantiate its claim, Claimant submitted a private expert report in the litigation (“Private Expert Report”).

According to the Private Expert Report, the company value of the Project Company has decreased with 4.04 Million EUR, so the value of the 100% business share of the Claimant in the Project Company has also decreased with the same amount. In the litigation, the Claimant has asserted a damage claim of 4.04 Million EUR, arisen upon the depreciation of its business share, against the co-defendants.

In the first procedure, the courts of first- and second instance have dismissed the action of Claimant on various grounds, but the Supreme Court has established that the First Defendant has appealed in the permit procedure abusively, and the Second Defendant has committed a serious legal error, when it had denied the issuance of the permit.

After having established that both defendants have acted illegally, the Supreme Court sent back the case to the second instance court, to decide upon the existence and the extent of the damage, and on other issues in a new procedure.

3. The second procedure

In the new procedure, the Second Instance Court has dismissed again the action of the Claimant, by highlighting that the Claimant has not suffered an actual, real damage. In the opinion of the Second Instance Court the damage of 4,04 Million EUR, reportedly arisen upon the depreciation of the company share of the Claimant, is only a putative damage, since the real damage has been suffered by the Project Company itself.

The Second Instance Court held that the damage contended by Claimant shall not be considered as a damage which was suffered by the Claimant directly, irrespectively to the business activity of the Project Company. For this reason, Claimant as shareholder cannot assert the same damage that was suffered by the Company, under the legal title of the depreciation of its company share, by invoking the liability for torts.

4. Judgment of Supreme Court

The Supreme Court was also of the opinion that the Claimant, relying on the Private Expert Opinion, identified the damage suffered by the Project Company by reason of the long delay of the permit procedure with the damage suffered by himself because of the depreciation of its company share.

The Supreme Court held that, in case a third party causes a damage to the company by breach of contract, or in another manner, the shareholder of the company cannot assert damage claim against that third party on the basis of the depreciation of the company assets, referring also to the depreciation of its company share as a damage, if it identifies its own damage with the damage suffered by the company itself.

The Supreme Court held that the Claimant and the Project company are two distinct legal entities, which precludes the “dual assertion” of the damage suffered by the Project company, in separate manner, by the two distinct legal entities.

The Supreme Court admitted that under exceptional circumstances, the shareholder’s right to access to court can overwrite the above principle.

Such an exceptional case occurred in the Rózsa contra Hungary case[1] in front of the European Court of Human Rights (“ECtHR”), where a company has been adjudicated insolvent by the courts unlawfully, however, the company could not assert its damage claim on this basis, by reason of the liquidation procedure.

According to the judgment of the ECtHR, it would be unreasonable to expect the liquidator of the company to start action for damages against the court appointing him. However, in the view of the Supreme Court, there were no such exceptional circumstances in the case at hand.

Furthermore, the Supreme Court upheld its earlier standpoint according to which in exceptional cases, the shareholder of the company may suffer damage, distinctively from the damage of the company, in case when he is the contracting party, or his rights are concerned by the damage, or the illegal behaviour was committed directly vis-á-vis the shareholder, or in case when the obligation directly concerns his status as shareholder.

However, in the latter cases, the damage cannot be identical with the damage arising in the context of the business activity of the company, because the depreciation or loss of the capital invested by the shareholder is a business risks of creating a company, which has legal personality, a distinct from its founders.

When it comes to the “putative damage”, the Supreme Court highlighted that no real damage could have been shown by the Claimant in this case, because the Project Company has not even tried to restore the loss of assets, since it failed to assert its own damage claim vis-á-vis de co-defendants.

Based on the opinion of the Supreme Court, in the absence of asserting any damage claim directly by the Project Company vis-á-vis de co-defendants, the existence and extent of the damage of the Claimant and shareholder cannot be established.

5. Analysis – right to access to court vs. sound administration of justice

The main issue of the present case is the extent of the locus standi of a company shareholder, i.e. the capacity of the shareholder to assert damage claim in court on its own right against a third party causing damage to the company.

According to the position of the Hungarian Supreme Court taken in this case, the shareholder is not entitled to assert the “indirect damage” suffered by him against the tortfeasor, in case this damage is identical to the “direct damage” suffered by the company itself. In case the “direct damage” and the “indirect damage” is identical, then the company shall sue the tortfeasor at the first place, while the shareholder generally cannot act in front of the court against the tortfeasor.

Yet, the shareholder has locus standi exceptionally, in cases, where the company cannot assert the damage claim by reason of a serious cause, for example like in the Rózsa contra Hungary case in front of the ECtHR, cited above, where the company was under liquidation procedure.

Earlier the Hungarian Supreme Court interpreted the locus standi of company shareholders broadly, by generally allowing them to assert damage claim on the basis of depreciation of their company share against third party, who caused damage to the company. [2]

The broad interpretation of the right to access to court, which gives locus standi for shareholders in several situations, increases the possibility that various persons start litigation based on the same or similar factual background by invoking different legal titles, which can be an extra burden for the court system.

By its recent ruling the Hungarian Supreme Court has departed from this broad interpretation of the right to access to court.

At the same time, it must be highlighted that the Supreme Court has already tried to limit “parallel proceedings” initiated by shareholders, by disregarding even such a basic procedural principle, like the res judicata.

For example, in a particular case, the Supreme Court held that the judgment rendered in a litigation between a bank and a company, establishing the lawfulness of the termination of the loan contract, precludes that the shareholder of the company can later start an action for damages against the bank on the basis of the unlawfulness of the termination.[3] This latter decision practically extended the res judicata effect of a judgment to a party, who had not participated in the litigation.

The recent ruling fits in the ambition of the Supreme Court, that tries to limit the possibility of parallel proceedings for damages initiated by shareholders, in order to use the financial and human resources of the courts more efficiently.

In summary, the recent ruling gave priority to the sound administration of justice over the right to access to court.

While in general the above ambition can be accepted, the narrow interpretation of locus standi of shareholders creates a delicate situation for single-shareholder companies, where the damage suffered by the shareholder and the company is not easy to be differentiated.