Civil liability of executive officers

Within the scope of their management activities, executive officers (senior management) are liable to both the legal entity they manage and others (third parties) for decisions made in connection with the management of that legal entity.

Kulcsszavak: executive officer, senior management, civil liability, winding up, liquidation, legal proceedings, procedure, creditor, courts

Within the scope of their management activities, executive officers shall also manage and act as the legal representatives of the legal entity.

They shall carry out their management activities in the interests of the legal entity and perform their duties as may be expected from a person holding such a position.

 

1. Liability of executive officers vis-à-vis the legal entity

If executive officers breach their management obligations and thereby cause harm or damage to the legal entity, they are required to redress such harm. It is for the legal entity to demonstrate that the executive officer has breached his or her obligation and that there is a causal link with the harm suffered by the legal entity. Executive officers may, in some circumstances, be exempted from their liability if they are able to prove that they have acted with due diligence. In order to benefit from such an exemption, the executive officer must prove that a number of conditions are met.

 

2. Liability of executive officers vis-à-vis third parties

As a general rule, liability for harm caused to a third party by executive officers in the course of their management activities lies not with the executive officers but with the legal entity. The legal entity and the executive officer shall be jointly and severally liable for any harm wilfully caused by the executive officer. This means that a claim for damages may be brought against both the legal entity and the executive officer.

 

3. Liability of executive officers of insolvent legal entities

If a legal entity encounters an imminent insolvency situation or becomes insolvent, executive officers shall also take into consideration the interests of creditors and not assume any unjustified commercial risk in relation to the legal entity’s financial situation. They shall take any measures that may be expected of them to prevent or reduce losses to creditors and to propose actions by the owners or the supreme decision-making body of the legal entity.

If a legal entity becomes insolvent and is wound up in the involuntary de-registration procedure or liquidation procedure, leaving debts, the injured creditors may bring an action against the executive officer(s) on the grounds that they did not consider the reasonable interests of the creditors bearing in mind the risk of insolvency. For example, as a result of their wrongful act, unjustified business risks were taken or the assets of the legal entity were reduced. In such cases, the court will order the executive officers to pay damages if, as a consequence, the creditors are unable to enforce their claim in whole or in part in the involuntary de-registration procedure or liquidation procedure.

Compensation shall be due from the date on which the damage occurred.

 

It is for the injured party to prove that the executive officer has breached his or her obligation and that the former has suffered harm as a result. The key issue in the case of such infringements is what the executive officer’s responsibilities are, i.e. what exactly falls within the scope of the executive officer’s management. Management means the performance of the management functions of the legal entity, except for management decisions falling under the decision-making competence of the members. This is to be determined on a case-by-case basis for each individual legal entity.

In order to establish the liability of executive officers, it is not sufficient to assume that the harmful conduct fell within the scope of their management activities; it must also be demonstrated that the executive officer has breached his or her management obligation(s). In fact, as part of their management duties, executive officers commonly take business decisions which entail a risk. The fact that a legal entity suffers damage or harm as a result of such business risks does not necessarily mean that the executive officer has breached his or her obligations.

In the case of liability arising from the damage, the injured party must demonstrate the existence of three elements: unlawful conduct, that damage actually occurred and the causal link between the two.

An action for damages against executive officers may be brought within the time limit of the general limitation period laid down in the Civil Code, i.e. five years. The time period begins from the time the damage occurs.

Where creditors enforce a claim for damages against executive officers in connection with an involuntary de-registration procedure or liquidation procedure, the limitation period for bringing the claim shall be 90 days starting from the date of the final and enforceable conclusion of that procedure.

Claims for damages must be submitted primarily to the executive officer or to the legal entity. If there is no agreement between the person causing the damage and the injured party, the injured party may take legal action by bringing his or her claim to court or by pursuing an order for payment procedure. For damage not exceeding the amount of HUF 3 million, only order for payment procedure may be brought. The order for payment procedure may be brought before a notary.

In order to bring legal proceedings, the claim must be submitted using the standard forms (https://birosag.hu/eljarasok-nyomtatvanyai/polgari-kozigazgatasi-papir-alapu-nyomtatvanyok) published on the website of the National Office for the Judiciary. Parties acting with a legal representative shall submit their claim electronically without using a standard form.

In order for payment procedure, the court fee shall be 3% of the fee basis, which is calculated from the value of the monetary claim at the time proceedings are brought, excluding any interest and incidental costs.

Court fees for bringing legal proceedings: such fees correspond to the value of a claim or other rights enforced by an action or, if the subject matter of the action is the establishment of civil liability, a fixed fee shall be paid.

In court proceedings, the court fee rate is 6%, with a minimum amount of HUF 15 000 and a maximum amount of HUF 1 500 000.

Court fee for appeals: this is aligned with the fee paid to the court of first instance.

The notary in the order for payment procedure and the courts of law in contentious proceedings. Applications for order for payment procedures may be filed with any notary. The jurisdiction of the court depends on the extent of the damage or harm. The district court has jurisdiction if the damage is under HUF 30 million and the regional court has jurisdiction if the damage exceeds HUF 30 million.

The general principle is that legal action may be brought in the court with jurisdiction over the area where the executive officer is resident, but there may be some exceptions.

If, in order for payment procedures, the executive officer contests the claim, he or she may lodge a statement of opposition with the notary. As a result, the orders for payment procedure then become court proceedings.

In the case of such litigation, the court of second instance shall hear the appeal.

Date of the description of procedure: 30 April 2020

 

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Act V of 2013 on the Civil Code (Sections 3:21, 3:24, 3:86, 3:117, 3:118 and 3:347)

Act V of 2006  on company information, court registration and winding-up (Sections 9/B to 9/E, 118/B to 188/D)

Act IL of 1991 on bankruptcy proceedings and winding-up proceedings (Section 33/A)

Act XCIII of 1990 on duties (Sections 39, 42 and 46)

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