This article has also been published in the Book of Lists
2011-2012 of Budapest Business Journal in December 2011.
The Hungarian Companies Act ("CA") and others
have long contained provisions to protect creditors. One provision
prohibits a limited liability company from paying dividends to its
shareholders if it does not have sufficient funds.
The prohibition against the payment of excessive dividends is
obvious, and also non-lawyers will easily recognise when such a
prohibited payment occurs (or is about to occur). The payment of a
dividend can, however, also be made in a hidden manner, for example
under a rental or a consultancy agreement, or by granting other
advantage to a shareholder, for example in the form of a security
provided by the company to secure an obligation of the shareholder.
In these cases it is much more difficult to judge whether or not
the the hidden benefit or advantage granted to the shareholder
constitutes a prohibited payment.Therefore, the relevant statutory
provisions set forth the conditions under which a company is
allowed to make payments to its shareholders and require that any
contract that a company and its shareholders enter into must comply
with the "responsible corporate trading" principle. This
means that a company may enter into a contract with its own
shareholder if it also did so with an independent third party under
the same terms and conditions. There is a similar concept in the
Anglo-Saxon business world called the "arm's length
A transaction can be classified as non-compliant with the
principle of "responsible corporate trading" if the
company concludes it with one of its shareholders under terms and
conditions that are less favourable than those which the company
could achieve on the market. This could occur if the company leases
property from its shareholder for a much higher rent, or obtains
consultancy services for a higher fee than it could from an
independent third-party lessor or consultant, or if the company
would not even buy these services from an independent third
The CA clearly states that non-monetary benefits, in addition to
payments in the form of money, may also fall under this
prohibition. It is questionable therefore whether the granting of a
security for an obligation of the shareholder, such as the
repayment of a bank loan, could also qualify as a prohibited
benefit. The granting of a security does not immediately
materialise as a benefit to the shareholder, since it is uncertain
whether it will be used or not. When assessing whether a
transaction complies with the principle of "responsible
corporate trading", it must be examined whether the company
receives any consideration for the payment or the benefit. If the
bank loan taken out by the shareholder is meant to finance the
continuous operation of the entire group of companies, the
assessment will probably find that the company does receive
sufficient compensation for providing security. The transaction
will therefore comply with the principle of "responsible
If a transaction does not comply with this principle, the
shareholder must repay the sum or return the benefit. The managing
director of the company who concluded the transaction with the
shareholder may also be liable. The obligation to repay only
applies if the company can prove that the shareholder acted in bad
faith, which will depend on the amount of information that the
shareholder had about the company's financial situation and the
consequences of the transaction for the company. This information
will, however, be in the hands of the managing director, whose
liability also arises. Under the CA, the managing director is
liable only towards the shareholders' meeting. Therefore, when
looking at the repayment obligation of the shareholder and the
liability of the managing director, these two players are mutually
dependent. The Bankruptcy Act contains an exception from this
mutual responsibility and allows creditors to sue the managing
director directly. But this depends on other conditions due to
which creditors' claims and equity protection provisions are
ineffective and rarely enforced.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
A recent Court of Appeal decision approved the decision in Mopani Copper Mines plc v Millennium Underwriting Ltd that the court may take into account deleted words which have been removed by modification.
The English law of damages for breach of contract is founded upon the compensatory principle: that damages should place the claimant in the same situation with respect to damages as if the contract had been performed.
Whilst there were factors pointing against such an intention, the judge held that the terms of the document in question and the conduct of the parties viewed objectively lead to the conclusion that the term sheet was valid and enforceable.
An assignment of rights under a contract is normally restricted to the benefit of the contract. Where a party wishes to transfer both the benefit and burden of the contract this generally needs to be done by way of a novation.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”