Wolf Theiss

THE NEW CIVIL CODE – BALANCE OF THE FIRST YEAR

Budapest, 11 March, 2015 – The year which has lapsed since the entry into force of the new Civil Code offers the opportunity to consider the experiences gathered so far. From the specific point of view of the players of the business world, it may be established on the basis of the first year that the problematic fields identified by legal professionals prior to the entry into force of the new Civil Code have given rise to most of the practical questions. Dr János Tóth, Partner of Faludi Wolf Theiss Attorneys at Law in Budapest, has surveyed what can be considered perhaps the three most significant questions in terms of business law.

 The most important change to corporate law, now included in the new Civil Code, was bought about by the explicit, literal introduction of the freedom to establish a company. In everyday practice, this has caused the least excitement to this day, even though the fact is that by authorizing the owners to freely depart from the governing law in respect of their internal personal and organizational and operational relations in the articles of association of their company, the new Civil Code has provided considerable freedom to them. This was, of course, absolutely necessary, for example, in the case of Hungarian joint ventures established with the participation of foreigners or in the case of venture capital or private equity investments. It was typically in such legal relationships that the often unreasonably restrictive provisions of the old Companies Act, allowing for no alteration, proved to be cumbersome. The new Civil Code only sets some basic limitation in the way of such freedom: in the event where departure is explicitly forbidden by the new Civil Code (that is, where it expressly considers as null and void a provision of the articles of association) or where departure obviously infringes the rights of the creditors, employees or a minority of the owners of the legal person or where it hinders the enforcement of the supervision of the State over the lawful operation of the Company.

Legal professionals expected that such limitations of the new Civil Code would, in all probability, generate a number of disputes as to how to enforce the law. For example, in the absence of established legal practice, it is by no means easy to decide whether or not a specific provision of the articles of association obviously infringes the rights of a single minority shareholder. However, apparently the time for such disputes has not come yet, partly because such legal disputes have not been brought before court and partly because business owners have not started to enforce this freedom in a great number of cases as yet. In fact, in the SME sector it appears that the introduction of the freedom triggered an opposite effect: the application of such articles of association as are in accordance with the legislative model is beginning to become almost exclusive in part due to its clarity and in part due to its low cost. Generally speaking, it is the legal profession which may make a change to this practice, explaining to business owners that, with some care and expense, the internal rules of the company may be tailor-made and adjusted to the sophisticated needs of the owners with engineering precision.

The liability of executive officers may be mentioned as a counter-example to the above, which has given rise to some serious discussion since the entry into force of the new Civil Code, albeit, as it appears, somewhat prematurely. It should be noted that the new Civil Code brought about several important changes in this regard as well. Perhaps the most significant such change is that, as of March, liability for damages caused to the company by an executive officer falls under the radically more stringent rules of liability for damages caused by a breach of contract under the new Civil Code. This form of liability is now almost on an objective basis, which means that an executive officer causing damages to the company may be exempted only under extremely limited circumstances. In order to be exempted, the executive officer must prove that the breach of contract was caused by a circumstance beyond his or her control, it was unforeseeable and he or she was not expected to avoid it. It is understandable that increased care and diligence may be expected of a person contracted by a conscious decision to direct a company, so, in the light of this, to be exempted is almost impossible in practice. It is only partial recompense that, as the main rule, in such cases the executive officer is required to pay indirect and foreseeable damages instead of full compensation. Although owners show a growing interest in this matter, we still have to wait for a sharp increase in the number of relevant lawsuits.

In the course of the professional disputes of the past year in this area, it has been found that in the case of damages caused to third persons by the executive officer in connection with his or her legal relationship, which are not attributable to the company, an important change has set in from the point of view of the injured parties. In such cases, in view of the more stringent expectations set against executive officers and in order to be able to enforce full compensation successfully, such third person may, in addition to the executive officer, sue the company as well on the basis of its joint and several liability. In other words, the injured party may expect reimbursement for his or her damages from the property of the company and the personal property of the executive officer as well. Although such lawsuits have not overwhelmed the courts yet, he opportunity brought about by the new Civil Code will certainly bring changes in this area as well.

Thirdly, extending beyond the scope of corporate law, the new Civil Code also brought a comprehensive change for players of the business world by means of the renewed regulation of credit guarantees. On the one hand, along with triggering a lot of professional disputes, a brand new credit guarantee registration system was established. The whole legal profession could experience the related practical difficulties a year ago, when the decree on the detailed rules of registration, heavily criticised ever since regarding its form and operation, was created only two days prior to the entry into force of the new Civil Code. Today professional opinions are getting stronger and stronger in favour of a fundamental change in the registration system, possibly the complete cancellation of its current form, because, among other things, the new system does not have the feature of the former lien registration system kept by notary publics credibly certifying registered rights with authenticity. The new credit guarantee registry only testifies with authenticity that that a given person making a statement has made a credit guarantee statement at a given time with the contents specified in the registry, which, however, is not suitable for checking the existence of the credit guarantee legal relationship with authenticity.

It is the uniform lien regulation, transformed at a number of points and becoming extremely detailed, and the complete statutory prohibition, introduced in relation to it, of the application of so called fiduciary credit guarantees, which have brought about a perhaps more lasting change in the regulation of credit guarantees. The latter meant that the parties concerned expressly used the institution of ownership to guarantee a financial claim: for example, ownership or a claim was transferred (or assigned), or a purchase right was established. The credit profession, still recovering from the global financial crisis, charged with special taxes, had to completely transform its previous practice in this regard, which, in light of the above-mentioned anomalies of the credit guarantee registration system, was very challenging. At the same time, where it was possible to be exempted from the ban on "fiducia", new legal institutions were identified in the new Civil Code, although these had been known to and applied by the financial sector previously as well: factoring and financial lease. As far as the latter is concerned, players of the profession have formulated some questions of categorization and delimitation, however, it has been reassured in the past year that, in addition to financial lease, which primarily serves the objective of financing, both operative lease and long-term lease could survive and continue to exist.

For further information please contact

Barbara Fürchtegott
Barbara
Fürchtegott
Public Relations & Communications Manager
T. +43 1 51510 3808
Schubertring 6
1010 Vienna
Austria

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