News

Hungary: The Liability of Managers and The New Civil Code

The new Civil Code which entered into force on 15 March 2014 introduces substantial changes into the liability rules applicable to the senior managers of business organisations. According to the new rule, senior managers shall have joint and several liability with their companies for damage caused to external parties in relation to their office. Based on joint and several liability, managers can be called to task even before the company. Earlier our clients sought our law office in relation to the liability of senior managers primarily with questions related to the secondary liability of the active partners of deposit companies. With the entry into force of the new regulation, however, this type of liability will affect all senior managers even more severely at all business organisations.

The new Civil Code substantially increases the severity of the liability rules governing senior managers and defines the leader of every legal entity uniformly as senior manager, which also constitutes a special liability status. In contrast to the earlier approach of the law, pursuant to the new Civil Code, the liability of the senior managers for damage caused to external parties, referred to as third parties, in relation to their office will in the future be joint and several with their company.

In addition to the new joint and several liability as described above, the new Civil Code – similarly to the earlier regulation – also confirms that a senior manager shall be answerable for any damage caused to the company in the course of his management activity in accordance with the rules governing liability for damage caused by breach of contract vis-à-vis the company. In this case, a senior manager may be exempted from liability for compensation only if he proves that the damage was caused by a circumstance outside his scope of authority which was not foreseeable at the time of concluding the contract and avoidance of the circumstance or prevention of the damage could not be expected of him. The use of the so-called discharge statement, which we have developed for the companies represented by us in accordance with the requirements of our clients for years, and which is already incorporated in the new Civil Code, provides additional and substantial partial exemption for the senior managers. The discharge statement means that the supreme body of the company attests that the senior manager accomplished his tasks adequately either simultaneously with the adoption of the company’s annual report or in this interim period if the legal relationship with the senior manager ceases between the adoption of two reports. The supreme body of the company may claim damages from the manager only if subsequently it is revealed that the facts or data serving as the basis for issuing the discharge statement were untrue or incomplete. Our law office has been recommending and successfully applying the discharge statement within our clientele based on the effective regulations of other European countries to the mutual satisfaction of all those concerned for a long time now.

The further analysis of the liability of senior managers reveals that, in the event of wilfully causing damage to a third party, the liability of the representative is joint and several with the legal entity vis-à-vis the injured party. It is an additional guarantee for third parties when the senior manager is himself liable for damage caused to third parties through his management activities jointly with the company and in the same way, moreover, in a sense he can be called to task even before enforcing the liability of the company in view of the joint and several liability.

It is the experience of our law office obtained in the affairs of our principals turning to us with similar issues that preparations, prior regulation by contract can provide effective help against the severe rules and legal consequences of joint and several liability; a detailed explanation of this, however, would substantially go beyond the framework of this paper.

If the damage has already taken place, the senior manager may be exempted from liability for compensation based on the rules governing liability for tort. For this he has to prove that his behaviour was not actionable, that is, he acted in a manner as is generally expected in the given situation. The “behaviour generally expected in a given situation” is a “subjectively objective” specific form of behaviour under civil law. This means that the extent of liability is examined not primarily relative to the individual, instead, we analyse in general with what degree of due diligence senior managers are required to act. Consideration and evaluation of individual aspects may be affected only here. Another possibility for a senior manager to be exempted from liability is to prove that he did not foresee the damage and he did not have to foresee it. In such a case, no causal relationship can be established between the behaviour causing the damage and the damage, which is one of the conditions of the enforcement of compensation in addition to the damage, being contrary to the law and actionability already referred to.

Based on the above explanation, pursuant to the new rule, not only the company will be actionable for damage caused by the company to a third party but its senior managers as well. If it is established in an enforceable deed (e.g., valid payment warrant or judgement) that the damage was caused to the external parties by the senior managers, the injured parties may launch a distraint procedure not only against the company but also against the private assets of the senior managers. This, however, requires that the senior managers must be sued together with the company; if this is omitted, no distraint procedure can be initiated against the assets of the senior managers. The new liability rule substantially increases the liability of senior managers.

Until now, fundamentally, only the company could be sued for damage caused by the company and not its managers or its Board of Directors. Only the owners of the company or its liquidator could call the senior manager to account for any omission or for causing damage; this, however, rarely took place in practice. The new regulation, however, has created a totally new situation.

Dr. Tamás BALÁZS, BALÁZS & KOVÁTSITS Legal Partnership

balazs kovatsits