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The amendments to the Hungarian Civil Code[1] – which became effective on 1 January 2022 – probably got less attention, due to the pandemic. In this article, we briefly present the changes of Civil Code that we think are the most important to business associations.

The amendment does not introduce radical changes to the rules for business associations, but rather clarifies the text, simplifies the rules and is for the most part more permissive than the previous regulation.

1. Changes for legal persons

Although the amendment does not only affect companies, in this article we have examined the changes specifically from the perspective of business associations. Foreword, it is important that the Civil Code regulation has three level: (i) rules for legal persons (these also cover business associations); (ii) the rules common to all business associations and (iii) the rules applicable to each type of companies.

Termination of executive officers

One of the most important changes is the termination reason of executive officers, which affects all legal persons. Unlike the previous regulations, the occurrence of a cause to conflict of interest[2] now does not terminate the mandate by operation of law.

This rule now applies the permissive approach, which is the characteristic of the Civil Code, to the conflict of interest of the executive officers, given that the instrument of constitution of a company may deviate from the grounds for conflict of interest set out in the Civil Code and thus the legislator leaves the determination of the legal consequence applicable to the conflict of interest to the members. This rule will be beneficial for companies which carry out their activities in a coordinated manner and have the same main field of activity, because the appointment of a new director does not automatically mean the termination of the directors’ mandates. The amendment may also help natural persons owning several single-member companies with the same principal activity, as they will not need to appoint a person outside the company and will be able to act as a director in all companies. Until now, they have been able to do so if they have stated in their instrument of constitution that they do not consider it as conflict of interest to hold several directorships.

Rules for members of the supervisory board

Companies with a supervisory board will now have the possibility to appoint legal persons as a member of the supervisory board[3]. As with the rules on the appointment of auditors, a natural person, who acts on behalf of the supervisory board member, will have to be appointed. It is also very important that the provisions applicable to supervisory board members should also apply to the person acting on behalf of the legal person.

In our view, this change is particularly beneficial for larger companies and groups of companies, and it also could lead to appearance of companies providing expertise in supervising, which could help companies to operate legally.

2. Common rules for business associations

Amendment of the instrument of constitution

The legislator also clarified the rules of the amendment of the instrument of constitution and of the powers of the supreme body. Usually the amendment of the articles of association does not require the signature of all members in case of a resolution adopted by the company’s supreme body (e.g., members meeting), but all members are required to sign the instrument of constitution if the amendment is made by contract[4].

This change clarifies the rule regarding the amendment of the instrument of constitution in the contract, so it is important to pay attention to this not so small detail when making a change in the instrument of constitution, because a missing signature will cause the refusal of the registration of the change.

Decisions of the supreme body adversely affecting a member

Compared to the previous rules, it is easier and more practical to have an unanimous decision of the supreme body instead of an unanimous decision of all members of the company[5] for decisions that adversely affect the rights of a member.

In our opinion, this change will make life much easier for companies, since it has been almost impossible to take a decision that would adversely affect a member at a meeting of the supreme body, especially in the case of larger companies with lower member participation, but now this is possible. At the same time, there is a risk that members may make it impossible for other members to participate in the operation of the company or even exclude each other as members of the company.

Rules of companies’ transformation

Companies established at the end of the calendar year will benefit from the clarification of the mandatory conversions in case of insufficient subscribed capital. From now on, two complete consecutive financial years[6] will be the reference period for assessing the relationship between equity and subscribed capital. Previously, this was also defined as two years, but it did not matter whether the financial year was closed or not.

Thus, in our view, it is now easier to avoid the mandatory conversions for new companies established with less money.

However, as we see it, this change is unfavourable for creditors, as it makes debt recovery more difficult in the case of private limited liability companies and limited companies, where the obligations of the members for the debts of the company is limited and the company does not have the funds to pay the debts due to the lack of capital.

It is also easier that from now on only the transformation notice shall be published twice in the Company Gazette, not the whole transformation plan[7].

Supplementary capital contributions

The supplementary capital contributions[8] previously found in the rules applicable to personal limited liability companies and limited companies now also applicable to all business associations except for public limited companies[9]. The addition to the general rules has made it possible for all companies, except for public limited companies, to require supplementary capital contributions.

Thus, even general partnerships and a limited partnerships may decide to impose a supplementary contribution on their members if the possibility is in the instrument of constitution.

The legislator has also introduced an easing in supplementary contributions: in case of single-member companies[10], the instrument of constitution does not have to contain the possibility of the supplementary contribution, the founder’s resolution is sufficient to order contribution. The reason for this may be that the founder establishes an obligation on himself, so it is clearly unnecessary to amend the instrument of incorporation merely to make a supplementary contribution.

3. General partnerships, limited partnerships

In the case of general partnerships, the conflict of interest as a reason for terminating the membership of the company is no longer in the Civil Code, firstly because of the amendment indicated in Section 1 of this article, and secondly because the Civil Code itself did not list the reasons of conflict of interest for these companies. In addition, the rules on the settlement of accounts for the termination of membership have been considerably relaxed. In this case, the members are free to agree on the settlement of accounts and the section of the Civil Code on settlement is no longer mandatory[11].

In case of limited partnerships, a limited partner may also be the executive officer of the company, if he or she is appointed or elected[12]. Under the previous legislation, only the general partner could be the executive officer of the company. This is a particularly important advancement because of the unifying nature of the persons involved, as smaller limited partnerships often operate in a circle of family or friends due to their fiduciary nature, and the operation and existence of the partnership could be jeopardised in the event of the loss of the executive officer of the general member (e.g. death, permanent incapacity), but now it is possible for the limited member to be the executive officer of the limited partnership as well as the general member, and the day-to-day operation of the limited partnership can be continued in the event of the loss of one of them.

4. Private limited liability companies

Rules for business share

So far, a member of a private limited liability company could only have one business share, so in the case of a sale of business share between members, the individual shares had to be combined. The current change has incorporated the court case law, according to which, it is not necessary to combine the business shares owned by one member[13].

This change increases the marketability of temporarily acquired business shares because it is not necessary to combine and then reallocate the business shares for a new sale if the sale only affects the newly acquired business share. Of course, the Civil Code does not restrict the members of selling their business shares or what proportion of the ordinary business shares they sell, so it is also possible to combine or reallocate them.

With the possibility of dividing business shares without any restrictions – previously generally, business shares could not be divided – the list of special cases of division of business shares has been repealed by the legislator. However, one provision has been retained from the previous rules on the division of business shares: unless otherwise provided in the instrument of association, the division still requires the consent of the supreme body[14].

Rules on the provision of capital contribution in cash

For personal limited liability companies, perhaps the most important change is that members now can make their capital contribution in cash out of their dividends. Whereas previously it was not possible to decide on dividends until all members made their capital contribution in cash, it is now possible to decide on dividends and only members who have not yet made their capital contribution in cash can be excluded from dividends, with their share of the dividend being charged to their unpaid capital contribution in cash.

As far as we see it, this rule helps start-up companies that are promising and quickly become successful, where members do not have a large financial contribution at the establishing stage but can overcome the initial disadvantage through good management. It should be stressed, however, that the rule that members who have not yet made their full capital contribution in cash are liable for the company’s debts up to the amount of the unpaid contribution remains in force[15]. The Civil Code sets an implicit time limit for the payment of the capital contribution. If the company contract allows for a period of more than three years for the payment of the capital contribution in cash, the member is not entitled to limited liability until he or she has paid his contribution totally to the company. In practical terms, this means that, at the latest by the deadline for making the asset contribution available, the capital contribution in cash shall also be paid to the company[16].

However, in our view, this change may result in increasing number of companies with no real corporate assets and with members without any assets.

Payment to the benefit of members

The changes include a stricter amendment, allowing non-membership-based payments to members, as in the case of limited companies, only if they comply with the requirement of prudent management[17]. Thus, for example, in the case of a company with an IT profile, the contract for office renovation and the related contractor’s fee concluded with the member does not constitute a payment arising from the member’s membership, so the new rule applies and the payment may only be made if it does not jeopardise the company’s solvency and is compatible with the company’s prudent management, otherwise the payment is unlawful and the members may take legal action against the company’s management and the member who got the payment.

5. Summary

The changes listed in this article show that the latest amendment of the Civil Code basically sets out more favourable rules for business associations and has also taken into account the development of court case law. At the time of publishing this article, however, several amendments to company law, which have become necessary because of this Civil Code-amendment, are still pending.

Due to the amendment of the Civil Code, it may be time to review and, if necessary, amend the company documents, for which we strongly recommend choosing a lawyer who is experienced in corporate law and has up-to-date information. Of course, we remain at the disposal of our existing and prospective clients in relation to company establishment and change registration.

Dr. Renáta Szücs

Photo credit: www.pexels.com

This article contains general information and is not intended for use as legal advice or legal opinion. Although we have made every effort to provide accurate, up-to-date information in this article, it is possible that the article may not contain the most recent legal or other information due to any changes in the legal environment. The information provided here does not create a client-lawyer relationship between the website visitor / article reader and Tivadar Law Firm. If you would like to ask for our assistance in a specific case, we are at your disposal via the contact details below.

 

 

[1] Act V of 2013 on the Civil Code (hereinafter: Civil Code)

[2] Civil Code Section 3:25 Article 1

[3] Civil Code Section 3:26 Article 2

[4] Civil Code Section 3:102

[5] Civil Code Section 3:102 Article 3

[6] Civil Code Section 3:133 Article 2

[7] Civil Code Section 3:43 Article 2

[8] Civil Code Section 3:99/A

[9] Civil Code Section 3:99/A Article 8

[10] Civil Code Section 3:99/A Article 7

[11] Civil Code Section 3:150

[12] Civil Code Section 3:156

[13] Civil Code Section 3:161 Article 2

[14] Civil Code Section 3:173

[15] Civil Code Section 3:162 Article 4

[16] Summary of Budapest Bar Association on the amendement of the Civil Code

[17] Civil Code Section 3:184