The Hungarian legal system undergoes significant changes in 2012. Apart from a new constitution effective as of 1 January, 2012 which is caught in the crossfire of the European Parliament, fundamental acts on the election system, the Constitutional Court, data protection and a new labour code will be introduced during this year.
However, in this article, we would like to focus on issues that may affect the everyday life of business investors in a more specific way: changes to Act no. 4 of 2006 on Business Associations, and Act no. 5 of 2006 on Public Company Information, Company Registration and Winding-up Proceedings will enter into force on 1 March, 2012. These changes basically make the rules on the foundation and registration of companies stricter in order to achieve a higher level of protection for creditors.
Such changes seemed to be necessary, since the number of companies terminated by liquidation procedures set a new record year by year, while the number of newly founded companies increased at almost the same rate. This tendency justified the theory that shareholders of terminated companies restarted their businesses under newly founded entities, whereas a large proportion of claims against the terminated companies remained unsettled.
The stricter approach towards the registration of shareholders and company executives manifested itself on many levels: for instance the court of registry will have access to the criminal records in order to verify whether a newly appointed managing director is subject to causes for prohibition or exclusion (e.g. commitment of a crime).
The protection of creditors is supported by stricter rules on the liability of shareholders and executives: managing directors or shareholders of companies terminated by liquidation, who are held liable for the unsettled debts of the company, shall face prohibitions pertaining to their positions in a newly founded company – if they do not indemnify creditors for their unsettled claims. Moreover, the scope of liability of these persons infringing their limited liability and causing damage thereby will be broadened. Also, in the case of M&A transactions, creditors will be entitled to request securities from the merging/demerging companies as coverage for any outstanding debts under the more creditor-friendly rules.
All in all, it can be stated that there is a clear intention to create a more transparent atmosphere in order to reduce the number of companies pursuing business in bad faith; however, some might argue whether or not the rather formal changes will be able to reverse the rather unfair tendencies described above.