financial accounts

Reading time: 7 minutes

Introduction

A key figure in Hungarian company law is that the executive officer responsible for the operational management of business associations—typically the managing director in the case of a limited liability company. Act V of 2013 on the Civil Code (“Civil Code”) sets out in detail the fundamental rules applicable to them, including their liability, which extends not only to day-to-day operational decisions but also, in particular, to the company’s financial and sustainability reporting. This becomes particularly important as the general reporting period approaches. For companies operating on a financial year identical to the calendar year, May is of particular importance: major tax returns must be submitted by May 20, and the annual financial statements must be formally approved and published by May 31. In light of these upcoming deadlines, it is important for our clients to be aware of the key rules governing the managing director’s duties and responsibilities in this context.

In this article, we examine the liability of managing directors primarily in relation to the annual financial statements. Within this framework, we outline the boundaries of this liability and how these risks can be consciously mitigated by establishing appropriate safeguards.

General overview of the managing director’s liability

The Civil Code clearly establishes the fundamental principles of executive management. The managing director is responsible for the operational management of the company and must perform this activity with the company’s interests as a priority.

The most important expectation imposed on the managing director is the so-called “prudent businessperson” standard. This objective standard requires that the executive officer make decisions in all cases based on adequate information, in good faith, after assessing potential business and legal risks, and exclusively with the company’s interests in mind.

In practice, this means that the managing director may not make decisions that prioritize their own interests or those of third parties (including members) over the company’s financial stability. The Civil Code makes it clear that limited liability protects only the members; the managing director’s underlying personal liability for breaches of duty and unlawful conduct remains independent of this.

Liability related to the preparation and approval of financial statements

One of the managing director’s key responsibilities is the preparation, approval, and publication of the annual financial statements in accordance with accounting law.

Although bookkeeping and the preparation of tax returns are often carried out by internal or external accountants and financial professionals, the liability and legal responsibility for the proper keeping of accounts and the accuracy of the financial statements rests with the managing director.

The approval of the financial statements and the decision on the use of after-tax profit fall within the exclusive competence of the company’s supreme body. In this context, the managing director’s obligation is to prepare the draft, submit it to the supreme body, and provide a written proposal regarding the use of profits.

Furthermore, if the managing director detects that the company’s capital position is inadequate, they are obliged to convene the general meeting and initiate prompt remedial measures.

 

Mitigating managing director liability – practical options

Granting of discharge

The Civil Code itself provides a tool for limiting the liability of managing directors: the so-called discharge. The essence of discharge is that the supreme body confirms that the managing director’s activities in the previous financial year were appropriate. If granted, the company generally cannot subsequently enforce claims for damages against the managing director for breaches of duty during the given period.

However, it is important to note that discharge does not provide absolute protection. If it is later proven that the facts or data underlying the discharge were false or incomplete, the company may still assert claims for damages against the managing director.

Establishing internal procedures

Liability can also be mitigated by implementing appropriate internal procedures for significant decision-making within the company. This can take various forms, such as introducing joint signature systems or approval processes based on specific areas of responsibility.

Decisions subject to approval by the supreme body

It is common for companies to require prior approval by the supreme body for certain decisions that would otherwise fall within the managing director’s competence. These may be defined in various ways (e.g., based on subject matter or financial thresholds). It is also possible for the managing director to seek approval from the general meeting even in matters where it is not legally required. In such cases, if approval is granted, the managing director’s liability is naturally reduced.

Involvement of external experts

As noted above, the managing director is fundamentally responsible for all operational decisions. However, they are often required to make decisions on specialized matters that may fall outside their expertise. In such cases, it is strongly recommended to assess potential risks and decision options with the involvement of experts in advance. This can lead to more well-founded decisions and may also reduce the extent of the managing director’s potential liability.

Directors’ and Officers’ (D&O) liability insurance

The liability of managing directors is extremely broad, as their decisions affect nearly all aspects of the company’s operations—from financial management and legal compliance to obligations toward employees and business partners. Moreover, in certain cases, they may be held liable with their personal assets for damages they cause, representing a significant personal risk. In an increasingly complex and strictly regulated economic environment, it is easier than ever to make inadvertent mistakes with serious legal and financial consequences. D&O liability insurance offers a solution to mitigate these risks by providing coverage for claims brought against executive officers. Typically, such insurance covers legal defense costs and, subject to contractual terms, awarded damages, thereby enabling managing directors to make responsible decisions with greater security.

Conclusion

It is clear that the scope of duties for managing directors is extremely wide-ranging, while their responsibilities are also particularly strict, often involving significant personal risk. In this complex and constantly evolving environment, conscious preparation and the establishment of appropriate safeguards are essential. These include, among others, well-designed and documented decision-making processes, strengthened internal control systems, and, where appropriate, adequate insurance coverage. Together, these measures help ensure that managing directors can perform their duties within transparent, lawful, and secure frameworks, reducing the risk of errors and the associated liability. Since the way companies operate is constantly changing, it is advisable to conduct periodic reviews of management procedures established years ago to ensure that they comply with updated protocols and that management responsibilities are aligned accordingly.

Photo source: Pexels.com, Vlada Karpovich