Hungarian LawOne of the greatest conceptual changes and innovations of the currently effective new Civil Code (Act V of 2013 on the Civil Code) was the permissive regulation of the corporate rules, which is more flexible than the former binding approach.

Members and founders of a legal entity can now – in the deed of association – prescribe alternative rules regarding their relations with each other and the company or regarding the organization of the company. This flexibility allows a legal entity to implement custom-made rules that best serve its day-to-day operations.

However, there are limits to this freedom. Members and founders of a legal entity cannot derogate from the new Civil Code’s provisions if law prohibits it; it violates the interests of its creditors, employees and minority members; or it prevents the effective supervision of the legal entity. When the new Civil Code was enforced, it was widely agreed that the judicature would have a highly important role related to interpretation and clarification of the flexibility of the permissive regulation.

Non-binding Rules

According to recent court practice, the inclusion of “shall” and “must not” in the wording of the new Civil Code does not mean that a legal entity cannot deviate from the given rule. Accordingly, even though the sole regulation of the new Civil Code prescribes that employees of a company cannot be part of the supervisory board, the members or founders of the company may decide alternatively in the deed of association.

One of the most awaited innovations of the new regulation was the implementation of management bodies in limited liability companies, which replaced the former binding rules regarding single person management of such companies. Further corporate bodies can now be established in a company in addition to those listed in the new Civil Code.

Further, the additional payment option (which was only available to limited liability companies) is now available to members of a private limited company.

Binding Rules

It may be directly derived from the general rule that any deviations cannot violate the interests of a legal entity’s creditors, but the courts have stated that if a managing director breaches its contractual obligations, its liability may not be excluded by the deed of association of the company.

Some of the binding regulations affect the main administrative rules related to corporate forms. According to the relevant court practice, each member of a limited liability company can have only one primary stake, of which the lowest amount should be HUF 100,000 (approximately €325).

It also clarifies that the characteristics of the various types of legal entities cannot be combined freely; therefore, limited liability companies are strictly forbidden from issuing shares. In addition, such regulations are prohibited from being implemented into the deed of association of a limited liability company or to a private or public limited company that would not limit the members’ or shareholders’ liability for the company’s obligations.

Recent practice also shows that some non-binding rules are not connected to real and practical content, as although the new Civil Code provides a non-exhaustive list of the types of shares that can be issued by a limited company, no additional primary share classes have been implemented.

Further Uncertainties

Although the courts have clarified many issues over the last four years, further questions remain open – e.g. share quotas owned by a company itself and number of shares issued in one type – which may affect the day-to-day operation of a business entity.