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The managing director’s liability, particularly in relation to the annual financial statements, and possible ways to limit liability

Corporate law, News / / , , , , , ,

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

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Special rules in case of foreign founder(s) and/or managing director(s)

Corporate law, News / / , , , ,

Reading time: 4 minutes

Introduction

In the following article, we have compiled the most important topics that inevitably arise in the life of companies with foreign members or executives. Regardless of the type of foreign person, if he plays a role in the company’s life from a company law viewpoint, there are a few additional matters that will certainly arise during the company establishment or change procedure.

Company extract of the foreign member

If a foreign legal person becomes a member of a company, either at the time of incorporation or later, or if there is a change in its data (e.g., the foreign member’s registered seat changes), the foreign company’s company extract or other document with identical content (e.g., a notarial statement), and its certified Hungarian translation must be submitted to the Court of Registry. The purpose of this is to certify the

registration of the foreign company under its own law,

data of the foreign company, and

person(s) authorized to represent the foreign company.

In this case, the foreign company member must request its company extract from its own court of registry/registry authority, which must then be prepared in a certified Hungarian translation by a qualified translator.

Delivery agent

If a foreign legal person or a foreign natural person, who has no address in Hungary holds a position in the company (e.g., member or managing director of the company, member of the supervisory board, etc.), he/she must designate a person to be his/her delivery agent.

A delivery agent can be an organization with its registered seat located in Hungary or a natural person with a permanent residence in Hungary. This is a frequently asked question, thus it is important to clarify that members of the company, its management and supervisory board members are not allowed to perform such a function. This means that if the only member of the company is a foreign entity, its delivery agent cannot be the company’s managing director, even if he or she has Hungarian nationality and residence.

The function of the delivery agent is to receive and deliver certain documents (e.g., court/authority documents) addressed to the foreign person. The reason for this is obviously the difficulty and cost of delivering documents abroad, which the authorities/courts do not want to bear. In the case of a delivery agent, the law provides for a presumption as to the date of delivery: the foreign person is presumed to have knowledge of the document on the 15th day following the day on which it was duly delivered to the delivery agent.

It can therefore be seen that the task of the delivery agent is important and crucial, as he/she often has to forward notices, requests to foreign addressees with tight deadlines, the failure to comply with which may entail serious legal consequences.

Tax identification number

Although few people are aware of it, since 2018, the executive officer of the company, or in certain cases its member or shareholder, who does not have a tax identification number, is required to request one from the National Tax and Customs Office.

It is often the case, for example, that the foreign managing director performs his/her position on the basis of a free-of-charge mandate agreement, in which case no taxable income is generated in Hungary. In such cases, the absence of a tax identification number does not necessarily arise from a tax viewpoint. However, companies are obliged to use electronic communication, via Company Gate. The managing director(s) can register a Company Gate on the basis of their existing Client Gate access, which requires the Hungarian tax identification number.

The prominent role of e-signatures

There is no doubt that with the increasing use of electronic signatures processes are becoming faster, more convenient and more efficient for all of us. This is even more true in case of companies with a foreign person(s). If, for example, the company has foreign members and managing directors, even from different countries, signing certain documents can take weeks and incur unnecessary costs (e.g., courier services, travel, notarization). With e-signatures, however, this time can be reduced to minutes or even seconds, as it takes just a few clicks to place 1 signature and there are no associated costs beyond providing the e-signature.

In legal procedures, such as company proceedings, it is also possible for the legal representative to identify the signatories online, also within a few minutes, saving additional time and costs.

It is therefore worth considering the use of electronic signatures, which can be a convenient, time- and cost-effective solution, and can have the same legal effect as a physical signature.

Photo source: pexels.com, Kampus Production

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Amendment of the Civil Code – managing directors

Company groups, Corporate law, Employment, labour law, Medium-sized companies, News, Start-ups / / , , , ,

Until now, the company and the managing director were jointly and severally liable towards third persons for non-contractual damages caused by the managing director in his executive capacity. Pursuant to the new provisions, only then will the managing director be jointly and severally liable with the company against third persons, if he has caused the damages wilfully in his capacity as managing director.

Furthermore, the amendment clarifies that the managing director’s liability for wilfully caused damage extends not only to non-contractual damages but also to contractual damages (until now contractual damages could only be claimed from the company, and not from the managing director).

 

Amendment of the Civil Code – managing directors Read More »

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