Hungary: Strengthening of creditors’ interests means stricter liability for executive officers under the New Civil Code
Strengthening of creditors’ interests means stricter liability for executive officers under the New Civil Code
Following 15 years of preparation, the new Civil Code entering into force on 15 March 2014 has absorbed the provisions on businesses. The changes are not merely structural: business regulation is significantly modified to include provisions on executive officers and their liability.
On entry into force of the new Civil Code, executive officers will bear strict liability not only “inwards” towards the company but also “outwards” towards third parties.
Under the new regulations, executive officers will be liable under the rules of breach of contract for damage caused to the company in connection with management activities. Stricter liability is manifest in the fact that an executive officer is only exempt from liability to the company for damage caused by a circumstance beyond his control which could not be foreseen when performing the act concerned and he could not have been expected to prevent damage.
Under current legislation, businesses bear financial liability for damage caused to third parties by an executive officer when acting in an official capacity. Under the new regulations the possibilities of a third party are doubled: for any damage caused to a third party the executive officer will be jointly and severally liable to the third party together with the company. Thus, the third party can claim the whole compensation for damage not only from the company but also from the executive officer, so that executive officers will be liable with their private assets for damage caused by their decision.
However, predictability of the causal relation between damage and wrongful conduct by the executive officer is a must. In practice, it will be more difficult for a third party to prove that an executive officer foresaw or should have foreseen the consequences of their behaviour in advance. In these cases the executive officer can "escape" liability.
Hopefully the new provisions establishing personal liability of executives will lead to more prudent and careful decision making but at the same time this caution can slow down the management process. Presumably the new legislation will affect the liability insurance of D&O’s as well.
Source: Act V of 2013 on the Civil Code of Hungary, act IV of 2006 on Business Associations.