The new Civil Code, Act V of 2013 effective from 15 March 2014, (hereinafter: Civil Code) integrates in a uniform structure and transforms the entire general system of rules of common law relationships. The Civil Code contains a code regulation of the following common law matters:
- General principles of civil law
- Regulation applicable to natural persons
- Regulation of legal persons (including the detailed rules of business associations)
- Family law
- Substantive law and property registration
- Contract law, types of contracts and liability for damages
In general, the Civil Code entered into force on 15 March 2014, and unless provided otherwise in the act regulating the putting into force of the Civil Code, it is applicable to the facts arising, the legal relationships established and the legal declarations made after this date.
The general rule for contracts (obligations) is that the provisions of the legal regulations in force before the entry into force of the Civil Code (i.e. those of the former Civil Code) shall be applied to the facts arising and the legal declarations made after the entry into force of the Civil Code in relation to contracts in effect at the time of entry into force of the Civil Code. However, the parties may agree to submit their contract concluded before 15 March 2014, entirely to the Civil Code.
The provisions on liability for torts shall apply to tort actions following the entry into force of the Civil Code but the former regulation shall apply in the case of continuous tort actions started before the entry into force.
The Act on the Entry into Force and Transitional Provisions of the Civil Code also contains further detailed rules regarding entry into force and application for specific books of the Civil Code. For the details of the entry into force of the rules on companies, see section 2.3.1.
According to the principle of the freedom of contract, the parties may enter into a contract freely, selecting freely the other party and determining freely the content of the contract, i.e. they may diverge from the rules of the Civil Code unless prohibited by legal regulations. Specific conditions of the contract shall be interpreted with a view to the whole contract.
The parties may make contractual declarations orally, in writing or implied. A legal regulation or the agreement of the parties may prescribe a certain form for making contractual and other legal declarations in which case, the legal regulation will only be valid in this form. Based on the parties’ specific agreement, silence may also qualify as a legal declaration. In the case of a person who does not understand the language in which the document containing the written declaration was drafted, the legal declaration will only be valid if the document states that the content of the declaration was explained to the person signing it by one of the witnesses or the person attesting the document.
Unless provided otherwise in the Civil Code, legal declarations may also be made through a representative. A right of transactional representation may be provided in an authorization. A general permanent authorization not relating to a specific group of affairs must be included in a private deed of full conclusive force or a public deed.
The parties are obliged to co-operate with each other and to inform each other of all material circumstances concerning the contract not only during the term of the contract but also during the negotiations leading to the conclusion of the contract, the conclusion of the contract itself and during the termination of the contract. If the contract is concluded based on the negotiations, the party breaching this obligation must indemnify the other party for its relating damages in accordance with the rules relating to damages caused by breach of contract. No indemnification liability applies to the failure of conclusion of the contract, however, the breaching party is liable for damages under the rules of liability for torts for the breach of the co-operation and information obligation.
The contract is concluded by a mutual and unanimous expression of the parties’ intention and it requires an agreement of the parties in all material matters and all matters qualified material by either of them. The matters the parties regard material and the fact that they do not wish to enter into the contract if an agreement regarding these is not reached must be expressed clearly.
Unless agreed otherwise by the parties, the customs agreed and the practice established between the parties during their prior business relationship becomes part of the content of the contract. In addition, unless provided otherwise, the customs widely known and regularly applied in the given industry in relation to contracts of similar kind also becomes part of the contract unless their application would not be justified between the parties.
The expression of contractual content and the offer covering material matters is binding on the party making the offer but he may determine the term of validity. Withdrawal is not possible if the offer was classified as irrevocable or within the relevant deadline if a deadline was set until which the offer may be accepted. An acceptance of different content to that of the offer qualifies as a new offer unless the supplementary or diverging condition is non-material. Such conditions shall not become part of the contract if they were precluded in the offer or if the other party objects against such condition without fail.
The court will establish the contract if the parties fail to conclude a contract despite a statutory obligation to do so or if, abusing its economic superiority, either of the parties rejects entering into or maintaining a contract without cause. If, despite agreeing on the conclusion of a future contact determining material conditions (pre-contract),the parties fail to conclude the contract, the contract shall be established by the court upon the request of either of the parties.
If the party requesting the offer requests offers from a two or more of persons with the intention of entering into a contract with the party making the most favourable offer (tender procedure),such party has a contracting obligation. The contracting obligation may be precluded in the offer or the call for offers may be withdrawn until the deadline specified in the invitation.
In the case of contracts concluded electronically, the party providing the electronic means must provide the other party with information on the technical steps of conclusion of the contract before making his legal declaration for the conclusion of the contract. Such information must include whether the contract is a written contract or not and whether it will be accessible later or not and it must specify the means of correcting errors, the language of the contract, potential codes of conduct applicable and the accessibility of such codes of conduct. The contractual declaration made electronically shall become effective when accessible to the other party.
General contract terms are contractual terms and conditions defined unilaterally by the party applying such terms for the purpose of concluding a number of contracts and which are not discussed specifically by the parties. The burden of proof as to the discussion of a specific condition by the parties lies with the party applying the general contract terms.
General contract terms become part of the contract if the party applying such terms gave the other party the opportunity to get familiar with such terms before the conclusion of the contract and they were accepted by the other party. If any condition is substantially different from the terms prescribed by legal regulations, usual contract practices or the terms previously applied between the parties, information must be provided in this regard and such terms shall only become part of the contract if accepted based on the special information provided.
An invalid contract may be void or contestable. Void contracts are invalid from the date of conclusion. Voidness is examined by the court ex officio. Voidness may be claimed and a relating procedure may be filed by the party which has a legal interest in this regard or who is entitled by law to do so.
A contestable contract becomes invalid as a result of successful contesting as of the date of conclusion. The contract may be contested by the party suffering damage or the party who has a legal interest in this regard. A contract may be contested within one year of conclusion but the right of contest may be exercised later also subject to an excuse.
The contract is void if it violates any legal regulation, if it was concluded with evasion of a legal regulation or in deviation from the mandatory form, if it offends against good morals, infringes consumer rights or is aimed at an impossible service. A contract is also void if, taking advantage of the situation of one of the parties, it provides for a disproportionate benefit (usury contract) and, subject to certain exemptions, a provision is void if it is aimed at the transfer of ownership or other material right as security for money receivable.
A contract may be contested in the case of an error relating to a material circumstance, a mutual incorrect assumption, misleading, an illegitimate threat, an apparent disproportion of value or an unfair general condition.
Unless the Civil Code provides otherwise, the risk of damages transfers to the other party upon performance. The contractual service must be suitable for its intended purpose, in particular, its specified purpose and any purpose for which other, similar purpose services are used and must have proper quality and attributes (as agreed, expected, specified in a public communication or prescribed by a legal regulation). The obligee must check compliance of performance in terms of quality and quantity at his own expense.
Unless the Civil Code provides otherwise, the risk of damages transfers to the other party upon performance. The contractual service must be suitable for its intended purpose, in particular, its specified purpose and any purpose for which other, similar purpose services are used and must have proper quality and attributes (as agreed, expected, specified in a public communication or prescribed by a legal regulation). A breach of contract means failure of the contractual performance of any obligation, in particular, default, defective performance, rejection of performance or performance becoming impossible.
Irrespective of the breach of contract, the obligee has the right to claim performance or to withhold the proportionate part of his due service until the other party performs or until appropriate security is provided. The party entitled to withhold service may withdraw from the contract or terminate it if the other party fails to remedy the breach or provide proper security within the agreed deadline.
The obligee has the right to withdraw from the contract (subject to the restoration of the original condition) or to terminate the contract for the future if his interest in the performance of the contract ceased. The termination declaration is only valid if it specifies the cause of the withdrawal or termination.
The party causing damage to the other party by a breach of contract must reimburse such damage. He is only released from his liability if he proves that the breach of contract was caused by a circumstance beyond his control unforeseeable at the time of conclusion of the contract and his avoidance of this circumstance or his prevention of the damage could not be expected reasonably. The indemnification must cover the damage caused to the subject matter of the service and other damages and unrealized financial advantages (if the obligee proves that these were foreseeable at the time of conclusion of the contract). Full indemnification obligation applies in the case of an intentional breach of contract.
The aggrieved party is obliged to prove the damage and the extent thereof, which may pose a difficulty in a number of cases. The parties may provide for a penalty in writing for a breach of contract that is attributable to the obligor. The penalty may be enforced irrespective of whether or not the obligee actually incurred damages due to the breach of contract, however, the court may reduce any excessive penalty at the obligee's request.
The agreement between the parties may limit or exclude liability for breach of contract, provided that liability may not be excluded or limited in the case of deliberate breaches or breaches harming human life, physical integrity or health.
he obligee must check compliance of performance in terms of quality and quantity at his own expense.
The parties may modify their contract by mutual agreement. Also, any party may request the modification of the contract from the court if, during a long-term legal relationship between the parties, a circumstance occurs after the conclusion of the contract as a result of which the performance of the contract under unchanged conditions would be against the material legal interest of the party. This is subject to the conditions that the possibility of the change of circumstances must not be foreseeable at the time of conclusion of the contract, it must not be caused by the given party and it must not fall in the category of normal business risks.
The contract may be terminated by a unilateral legal declaration by way of withdrawal with retroactive effect to the date of conclusion (ex tunc) or by way of termination for the future (ex nunc) by the party who is entitled to exercise these rights based on the contract or legal regulations. The parties may terminate the contract by mutual agreement or may withdraw from it with retroactive effect to the date of conclusion. The contract may also be terminated by court subject to these conditions.
The regulation of Hungarian economic associations is included in Part 3 (Economic Associations) of Book 3 (Legal Persons) of the Civil Code. The rules relating to the co-operation company form of association (Association) are included in Part 5 of Book 3 of the Civil Code. Accordingly, the Civil Code replaced the former separate Act on Business Associations, Act VI of 2006 (the Company Act.
The main types of business associations under Part 3 of Book 3 of the Civil Code are identical to those regulated in EU countries. However, there are some others under EU law, such as the European Economic Interest Grouping (EEIG) regulated in Act XLIX of 2003 on the basis of Council Decree no. 2137/85/EEC, and the European Company (Latin original: Societas Europaea) regulated on the basis of Council Decree no. 2157/2001/EEC. The procedures on founding, implementing changes in data and winding up of Hungarian associations are primarily governed by Act V of 2006 on Public Company Information, Company Registration and Winding-up Proceedings (hereinafter: Company Procedures Act.
The Civil Code applies so-called dispositive regulation, i.e. it allows for deviations, regarding the rights of business associations based on which the members (shareholders) of companies may deviate from the rules of the Civil Code in respect of the regulation of the relationship between members (shareholders) and their relationship to the company as well as the organization and operation of the company. The Civil Code prescribes a general restriction regarding such deviations according to which deviations are allowed unless prohibited by the Civil Code and the deviation may not violate the rights of creditors, employees or infringe minority rights of members and may not prevent the supervision of the legitimacy of operation. Case law is continuously outlining the scope of cases that are subject to the above restriction and from which companies may not deviate.
Business associations have to apply the provisions of the Civil Code, replacing Act IV of 2006 on Business Associations (the Company Act),the former special act regulating corporate law before 15 March 2014, based on the following rules:
- The companies that were already listed in the trade register on 15 March 2014 must comply with the rules of the Company Act.
- The companies registered after this date are obliged to make a decision, simultaneously with the first amendment of their articles of association after the entry into force of the Civil Code, on continuing their operation in accordance with the provisions of the Civil Code and to file this decision with the court of registration.
- Certain business associations were obliged to make the decision on continuing their operation in accordance with the rules of the Civil Code until the following dates at the latest, provided that their articles of association had not been otherwise amended:
- 15 March 2015 for general partnerships and limited partnerships;
- 15 March 2016 for limited liability companies, companies limited by shares and associations.
- However, limited liability companies not having the minimum registered capital of 3 million forints prescribed in the Civil Code may decide in the case of a potential amendment of their articles of association not to increase their capital and not to continue their operation based on the rules of the Civil Code but to operate under the former rules stated in the Company Act (until 15 March 2017 at the latest.
The articles of association do not have to be modified in relation to the Civil Code if such a modification would only be necessary due to references to the Company Act containing the former regulation. If the modification is only necessary in order to conform to the provisions of the Civil Code or to apply the rules of the Civil Code allowing for deviations, the company procedure may be administered free of company procedure fee and publication fee.
Business associations are enterprises with legal personality created with the financial contribution of the members for pursuing joint economic activity in a businesslike manner and in which the members share profits and bear losses jointly.
Although the Civil Code does not specify the persons who may establish a business association, it is basically foreign and domestic natural and legal persons who may do so. Hungarian acts do not provide an exhaustive list of legal persons but, based on Book 3 of the Civil Code, legal persons include associations, business associations and foundations as well as the state when acting as a legal person in civil law relationships.
A legal person may pursue any activity which is not prohibited or restricted by legal regulations. If a legal regulation prescribes an authority license for carrying out a specific business activity (as in the case of insurance, financial service or capital market activities which may only be carried out with a license from the National Bank of Hungary as the financial supervisory organization),the company may only commence such activity on the basis of an effective authority permit. The business association may only pursue activities for which legal regulations require a specific qualification if the company’s member(s) involved personally in such activity or at least one person in a civil law or labour law work relationship with the company satisfies this qualification requirement.
Business associations can be founded in the following company forms:
- General partnership (Kkt.) a business association whose members jointly undertake to provide the company with financial contributions for the purpose of the company’s business activity and assume unlimited, joint and several liability for the obligations of the company not covered by company assets.
- Limited Partnership (Bt.) a limited partnership is a company whose members jointly undertake to provide the company with financial contributions for the purpose of the company’s business activity and at least one member of which (the general partner) undertakes liability (joint and several liability with other general members, if any) for the obligations of the company not covered by company assets while the other members but at least one other member (the limited partner) has no liability for the obligations of the company (unless provided otherwise in the Civil Code.
- Limited Liability Companies (Kft.) are business associations founded with an initial capital consisting of capital contributions of a pre-determined amount, in the case of which the liability of members to the company extends to the provision of their capital contributions, and to other possible services of pecuniary value as set forth in the articles of association. Unless provided otherwise in the new Civil Code, members are not liable for the liabilities of the company.
- Companies limited by shares (Rt.) are business associations operating with a share capital consisting of shares of a pre-determined number and face value, in the case of which the obligation of shareholders to the limited company extends to the provision of the face value or the issue price of shares. Unless provided otherwise in the new Civil Code, shareholders shall not bear liability for the obligations of a limited company. The company limited by shares whose shares are not listed on the stock exchange qualifies as a private limited company (Zrt.) while the company limited by shares whose shares are listed on the stock exchange qualifies as a public limited company (Nyrt.). However, those public limited companies (Nyrt.) that were founded under the Company Act (and had already been registered or had been under registration in the trade register at the time of entry into force of the Civil Code and were registered since then) the shares of which were not listed on the stock exchange were obliged to list their shares until 15 March 2016 or to adopt a resolution on changing their form of operation or on transformation.
The common rules governing business associations shall also be applied to associations, as appropriate, in addition to the four basic company forms described above. A grouping is a co-operative society vested with legal personality, founded by members in order to facilitate the success of their business activities and to co-ordinate such business activities, as well as to represent their professional interests. The purpose of a grouping is not to make a profit for itself; its members shall bear unlimited, joint and several liability for debts in excess of the grouping’s assets.
A business association is founded by all founding members signing the articles of association (statutes for companies limited by shares, deed of foundation for sole member companies),which is drawn up in a notarial deed, or in a private document countersigned by a lawyer or the legal counsel of one of the founders.
The foundation of a business association must be announced to the registering court within 30 days of the date of incorporation of the deed of foundation in a notarial deed or the date of countersigning of the deed of foundation by a lawyer or legal counsel. If an authority permit is required for the foundation of the business association, this announcement must take place within 15 days of the receipt of the effective permit.
General partnerships, limited partnerships, limited liability companies, private limited companies or single member companies may be founded in a simplified procedure by articles of association drawn up on the basis of a template in the minister’s decree. The deed of foundation is required to be prepared in a notary deed or countersigned in this case as well. In the case of this simplified procedure, the business association is registered by the court of registration within one working day of the receipt of the notice of the tax authority regarding the establishment of the tax number. The tax authority shall establish the tax number in the tax registration proceedings within one working day. If, as a result of the examination conducted on the basis of the tax identification number(s) disclosed by the court of registration it can be assumed that the establishment of the tax number has an impediment specified in the act, the tax authority shall pass its decision regarding the establishment or refusal of the tax number within a period of 8 working days. In the event the establishment of the tax number is refused in a non-appealable manner the court of registration shall reject the application for registration.
The articles of association must include (in addition to an expression of the founders’ will to establish a legal person) the following for all business associations:
- the name of the business association;
- the registered office of the business association;
- the business association’s purpose or main activity;
- the name and address or seat of the person or persons establishing the business association;
- the financial contributions to be provided to the business association, their value, and how and when the contributions are made available;
- the business association’s first executive officer.
The wealth provided by the members (shareholders) to the business association may consist of financial contributions and contributions in kind. As contribution in kind, the members (shareholders) may transfer the ownership of things or rights of pecuniary value to the company. A receivable may also be provided as contribution in kind if the transfer of the receivable was acknowledged by the debtor or if it is based on an effective court decision. If the value of the contribution in kind does not reach the value specified in the articles of association at the time of the transfer, the business association may claim the payment of the difference within 5 years of the transfer from the person providing the contribution in kind.
Agent for service of process
In accordance with the provisions of the Company Procedures Act, the foreign legal person or organization with legal personality and the foreign natural person without domestic residence recorded in the trade register (typically as the owner) shall appoint an agent for service of process. Any organization or natural person having its residence or seat in Hungary may act as the agent for service of process with the exception of the members, senior officers and members of the supervisory board of the company. The agent for service of process is responsible for receiving and forwarding to the foreign person any documents relating to the operation of the company addressed by courts and authorities to the foreign person. Receipt of the documents by the agent for service of process shall be deemed as receipt by the person represented by the agent.
From the date of counter-signing of the articles of association by a lawyer or legal counsel or the date of incorporation of the articles of association in a notarial deed, the company may operate as the pre-company of the company to be established. The pre-company may obtain rights and responsibilities but can only carry out business activities after filing its registration request with the court of registration. With certain limitations (e.g. shares / business quotas may not be transferred),the same rules apply to pre-companies as to registered business associations. The pre-company period ends when the business association is registered in the company register and all legal transactions signed in the pre-company phase become the legal transactions of the business association. Under the effective regulations, business associations are required to file a separate report and tax return for the pre-company period provided that the company started its business activity in the pre-company period or the company is registered in the business year of its establishment.
In most cases, the decision-making body of the members of the company, the highest body of business associations is the meeting of the members, which has different names for specific forms of business associations (e.g. members’ meeting, general meeting). In the case of sole member companies, the only member has the powers otherwise vested in the supreme bodies of other business associations. The supreme body is responsible for making decisions in fundamental business and personal matters of the company. The competence of the supreme body of business associations extends, in particular but not exclusively, to the approval of the financial statements prepared in accordance with the Act on Accounting, decision making regarding the distribution of profit and decision making regarding the enforcement of indemnification claims against members, executive officers, members of the supervisory board and the company’s auditor.
In most cases, members (shareholders) attend the meeting of the supreme body in person but they can also delegate proxies. Instead of personal attendance, the articles of association may allow members to exercise their member rights at meetings of the supreme body using means of electronic communication (e.g. conference call) or the passing of decisions without holding a meeting. Decision making of this kind is initiated by the management by sending the draft decision to the members. Written decisions provide foreign owners with flexibility in exercising their rights.
One or more executive officers or a board made up of executive officers has the right to make decisions regarding the management of the company not falling in the competence of the members pursuant to the provisions governing the specific forms of business associations.
In the case of general partnerships (kkt.) and limited partnerships (bt.) management is conducted by one or more managing directors appointed or elected from the members. If no such appointment or election is made in the case of general partnerships, all members are managing directors, however, the general partner of limited partnerships may only act as the company's managing director if specifically provided by the articles of association. Management of business associations is the responsibility of the general manager(s) in the case of limited liability companies (kft.) and the management or a board of directors in the case of companies limited by shares (nyrt. and zrt.),except for private limited companies where management is performed by a single person, the chief executive officer. However, due to the dispositive regulation of the Civil Code, the forms of management bodies may be established flexibly at companies.
Any person of legal age whose capacity was not limited within the sphere necessary for pursuing this activity may be an executive officer. If the executive officer is a legal person, such legal person must appoint a natural person who will fulfil the executive officer’s tasks in the legal person’s name.
The executive officer must perform his management tasks personally, representation is not possible. The executive officer may perform the management of the company under a service or employment relationship.
The executive officer manages of the company independently with the priority of the company’s interest and, in this capacity, the executive officer is superseded by legal regulations, the articles of association, and the resolution of the company’s supreme body and, with the exception of sole member companies, may not be instructed by the members of the business association. The general rule is that the company’s supreme body may not take over any competence of the executive officer.
Providing they are not subject to disqualifying factors, executive officers may be appointed for an indefinite term, or definite period no longer than 5 years, and may be recalled at any time. No person may be an executive officer of a business association
- who has been sentenced to imprisonment by final verdict for the commission of a crime until relieved from the detrimental consequences related to his criminal record,
- who was effectively banned from this occupation or who was banned in an effective court verdict from an occupation carried out by the legal person in question during the term of such ban,
- who has been banned from performing executive office activities until the term of the banning verdict.
In addition, if a new company is founded, or there is a change in the owners or the position of executive officers, it is considered an excluding factor if the executive officer or majority owner has long-term outstanding taxes, or if he is or used to be the executive officer or member of another business association that has accumulated or failed to settle significant amounts of long-term outstanding taxes, or if the tax number of the business association has been deleted. In such a case the tax authority shall refuse the establishment of the tax number of the company, thus the performance of the economic activity may not be commenced or pursued with the participation of such a member or executive officer.
The responsibility of executive officers primarily covers the following:
- company foundation, announcement of the data of the business association prescribed by legal regulations to the court of registration and submittal of the annual report to the court of registration;
- providing of information to the members regarding the business association and providing members with access to documents and registers relating to the business association;
- legal representation of the business association.
Liability of executive officers
Executive officers are liable to the company based on the rules pertaining to damage caused by breach of contract. Based on these rules, the executive officer is released from liability if he proves that the breach of contract was caused by a circumstance beyond his control unforeseeable at the time of conclusion of the contract and avoidance of this circumstance or prevention of the damage could not be reasonably expected from him. This liability of executive officers is limited relative to general liability as it only extends to the damage caused to the subject matter of the service and other damages and lost profit is only reimbursable if the company proves that the damage was foreseeable at the time of conclusion of the contract as a potential consequence of the breach of contract.
Upon the executive officer’s request, at the time of accepting the annual financial statements the supreme body of the company may provide a release from liability establishing compliance of the executive officer’s management activity performed in the previous year. In this case the company may only place a claim for indemnification based on non-compliance with the executive officer’s obligations if the facts or data serving as the basis for the release are untrue or incomprehensive.
If the executive officer causes damage to a third person in relation to his executive officer relationship, he will have joint and several liability towards such person with the company (the legal person).
If the business association ceases without legal succession, the creditors may enforce claims for indemnification up to the value of their unsettled receivables against the executive officers of the company based on the rules of tort liability if the executive officer did not consider the creditor’s interests after the emergence of the situation representing a threat of insolvency of the company. This provision does not apply if the company ceased by voluntary dissolution under which creditors were satisfied in a specific order.
Company managers, employees having right of representation
In addition to the executive officers, the supreme body of the company may appoint employees of the company as company managers to assist the work of executive officers. The management may grant the company manager a general right of representation.
Also, the management may grant employees of the company the right to represent the company in respect of specific affairs in a written declaration. By the main rule, such right of representation may be exercised by the employee jointly with another person having the right of representation specified in the management’s written declaration but deviation from this rule is possible.
The members or the founder may prescribe the setting up of a supervisory board in the articles of association for the task of exercising control over the management in order to protect the interests of the legal person. The supervisory board is made up of three members. The setting up of a supervisory board is an option in certain cases but an obligation in others. Members of the first supervisory board must be named in the articles of association. Subsequent members are elected by the supreme body. Supervisory board membership commences upon acceptance. The supreme body of a business association that is supervised by a supervisory board may adopt a decision concerning the annual report only if in possession of the written report of the supervisory board.
Pursuant to the Civil Code, the establishment of a supervisory board is mandatory:
- if the number of full time employees of the company exceeds 200 on an annual average and the worker’s council did not waive the right of participation of the employees’ representative in the supervisory board in which case one-third of the supervisory board shall be made up of representatives of the employees (employee participation);
- in the case of a private limited company if this is requested by shareholders holding, on an aggregate basis, at least 5 percent of the voting rights;
- in the case of a public limited company if the company does not operate under a one-tier system.
The auditor shall be responsible for the proper performance of the audit and, based on the audit performed, for expressing an opinion in the independent auditor’s report as to whether the annual report of the business association is in conformity with legal requirements, and whether it provides a true and fair view of the company’s assets and liabilities, earnings, financial position and business profit or loss.
All undertakings keeping double-entry books must select an auditor, save for the cases specified in Act C of 2000 on Accounting (hereinafter Accounting Act) and in other legal regulations. According to the Accounting Act the auditing of books shall not be compulsory for the undertakings if the following two conditions are jointly met:
- The annual net sales (calculated for the period of one year) did not exceed HUF 300 million on the average of the two financial years preceding the financial year under review, and
- the average number of people employed by the undertaking did not exceed 50 people on the average of the two financial years preceding the financial year under review.
However, exemption based on the above value limits does not apply to the companies the audit of which is prescribed by law (for example: credit institutions),savings banks, consolidated enterprises, Hungarian branch offices of enterprises having their seat abroad and companies which have diverged from the provisions of the Accounting Act using the option provided in the Accounting Act in order to ascertain the provision of a reliable, true and fair view of their operation.
If the business association is not obliged by any legal regulation to select an auditor it may still do so at any time. If the company selects an auditor, it is the supreme body of the company that defines the essential content of the contract to be concluded with the auditor. The first auditor must be included in the Memorandum of Association. Subsequent auditors do not need to be included in the Memorandum of Association but they need to be registered with the court of registration. The auditor may not create such rapport with the management of the company that could jeopardize the impartiality of the audit.
Members (shareholders) having at least 5 percent of the votes have certain minority rights. These minority rights include the option of these members (shareholders) at any time to request the management to call a meeting of the supreme body of the business association or to make a decision without calling a meeting and to request the registering court to order the audit of the last annual report or any business event or undertaking relating to the management’s activity in the last two years if such request has been refused by the supreme body of the business association or no decision has been adopted in the matter.
If the supreme body of the business association rejected or refused to put forward for decision making a proposal for the enforcement of any claim the company may have against any member, executive officer, supervisory board member or the auditor, the members having minority rights may enforce such claim to the benefit of the company themselves as representatives of the business association.
In a certain regard, the Civil Code breaks the limited liability of members (shareholders). If a member or founder of the legal person abuses its limited liability as a result of which unsettled creditor claims remain after the cessation of the legal person without legal succession, the member or founder will have unlimited liability for such debts.
If a member of a limited liability company or private limited company holds (directly or indirectly) at least three quarters of the votes, he must announce this to the registering court within 15 days of acquiring such qualified majority. Within sixty days of the publication of the acquisition of qualified majority , after which deadline this right lapses, any member (shareholder) of the company may request the member having qualified majority to purchase his share in the company at market value but at least at the value of the company’s equity proportionate to the offered shareholding.
In the event that any member acquires over 50 percent of the votes, has the right to designate or dismiss the majority of the executive officers of the other company or has the right or the actual ability (direct management) to assert major influence over the decisions of the other company by merger or acquisition, this member is deemed to fall under the scope of Act LVII of 1996 on the Prohibition of Unfair Trading Practices and Unfair Competition (hereinafter: the Competition Act) and in certain cases may need to request permission from the competent competition authority for such mergers.
In order to protect shareholder’s equity and creditors, if the company’s equity does not reach the mandatory registered capital prescribed for the given company form in two successive business years and the members fail to provide the required equity within 3 months of the acceptance of the financial statements of the second year, the company must decide on transformation, termination without legal succession or combination with another company within 60 days of the expiry of this deadline.
Furthermore, if (a) the company's equity decreases to half (two thirds for companies limited by shares) of its registered capital due to its losses; (b) the company's equity decreases below the statutory minimum amount of the registered capital; (c) the company is threatened by insolvency or has ceased to make payments; or (d) the company's assets do not cover its liabilities, members are required to (i) prescribe the supply of additional capital by members, (ii) make sure that the equity reaches the level of the registered capital otherwise or (iii) reduce the registered capital. In the absence of the above, members are required to resolve the company's transformation, merger, separation or termination without legal succession.
Business associations may be terminated with or without a legal successor. Cases of termination without a legal successor:
- the company was established for a definite period and this period expired,
- the termination of the company is subject to a specific condition and this condition is fulfilled,
- the members or founders declare the termination of the company,
- the body having this right terminates the company,
provided in each case that the court cancels the company from the register after completion of the relevant procedure for closing the financial relationships of the company.
If the business association is terminated by liquidation, the provisions of Act XLIX of 1991 on Bankruptcy and Liquidation Proceedings shall apply.
In the case of transformation of a legal person into another type of legal person, the transforming legal person ceases to exist and its rights and obligations transfer to the legal person established by the transformation as its general successor in title.
A legal person may combine with another legal person by merger or acquisition. In the case of a merger, the merging legal persons cease to exist and a new legal person is created subject to a general succession in title. In the case of an acquisition, the acquired legal person ceases to exist and its general successor in title will be the other legal person participating in the combination.
A legal person may be divided into two or more legal persons by de-merger or separation. In the case of de-merger, the legal person ceases to exist and its assets transfer to the legal persons established by the de-merger as successors in title. In the case of separation, the legal person continues to exist and a part of its assets is transferred to the legal person created by the separation as successor in title.
In addition, a business association may also transform to a business association, association or co-operative of another company form.
General rules of transformation are included in the Civil Code while detailed rules are included in Act CLXXVI of 2013 on the Transformation, Combination and Separation of Legal persons also effective from 15 March 2014 and the Act on Accounting. A business association created by transformation has no pre-company period, as the legal successor business association may start its activities after being registered by the court of registration. Until the changes are registered, the predecessor company continues its activity unchanged.
The business association established by way of transformation is the universal successor of the business association transformed. The rights and obligations of the predecessor business association shall be transferred upon the successor business association. In the event of a division, the demerger agreement has to divide the rights and responsibilities of the business association being transformed; however, the successor business associations will bear joint and several liability for the obligations that have not been divided.
In the event of a transformation, draft statements of assets and liabilities and draft inventories of holdings will be prepared for the company undergoing transformation and its successor company. The draft statements of assets and liabilities and the draft inventories of holdings will be approved by an independent auditor, who may not be the auditor of the business association undergoing transformation.
In the event of a merger, the provisions of the Competition Act also have to be observed, and in accordance with this, in certain cases permits from the competent competition authority and the European Commission also have to be requested.
In accordance with Act CXL of 2007 on cross-border mergers of limited liability companies, limited liability companies and companies limited by shares may pass decisions about cross-border mergers with a business association established in the European Union. The abovementioned act is designed to help compliance with Directive 2005/56/EC, supports flexible merger of business associations within the European Union and provides an opportunity for planning finances and taxes.
As a result of its limited liability and simple formal requirements, the limited liability company (kft.) is the most widely used form of business association in Hungary.
Performance of capital contributions and other services
The capital contribution is the member’s financial contribution while the total amount of capital contributions is the initial capital, which may not be less than HUF 3 000 000 (approximately EUR 10 000).
The capital contributions of the members may be different but the amount of individual capital contributions may not be less than HUF 100 000. Subject to an express provision in the articles of association, a member may have more than one capital contributions and the members may provide that two or more of them may hold one capital contribution based on the rules of joint ownership.
A member may co-operate in the company’s activity personally in the absence of a separate legal relationship for this purpose (supplementary service). A member may claim consideration for his personal service provided to the company in a member’s capacity and the company may enforce a claim against the member due to failure to provide personal co-operation if this is allowed and regulated in the articles of association.
The articles of association may authorize the members’ meeting to prescribe the provision of additional contributions by the members to cover losses. The articles of association must define the highest amount which may be demanded from a member and the frequency of demanding additional contributions. The method and schedule of and the deadline for providing additional contributions must be defined in the decision of the members’ meeting (founders) prescribing the provision of additional contributions. The amount of the additional contribution will not increase the member’s capital contribution and must be recognized in the books of the company as tied-up reserve. Additional contribution may also be provided in the form of a contribution in kind satisfying the requirements relating to contributions in kind. The additional contributions not use for loss compensation must be repaid to the members included in the members’ list at the time of repayment.
Business quota and transfer of business quotas
A business quota is the whole of the member rights and obligations relating to a capital contribution. The business quota is created by registration of the company. The rate of the business quota corresponds to the member’s capital contribution. The same member rights relate to a business quota of the same rate but the members may also provide to assign different member rights to specific business quotas. Accordingly, business quotas with different rights may grant rights to more favourable dividends or voting rights.
Business quotas may be transferred by written agreement, but may only be transferred to outsiders if the member concerned has paid his capital contribution in full unless the transfer takes place because the membership of the member ceases due to his failure to provide his capital contribution or additional contribution or because the member was excluded. The other members, the company or the person nominated by the members’ meeting (in this order) are entitled, based on the rules relating to the right of pre-emption, before others to acquire the business quota to be transferred against money but the members of the company may also diverge from this rule. The transfer of a right for the acquisition of a business quota before others is void.
The articles of association may prescribe the company’s consent for the transfer of business quotas to outsiders which consent is granted by the members’ meeting. By the main rule, a business quota may also be transferred by inheritance, as a gift but the transfer of business quota against money to outsiders cannot be excluded validly.
Payments by the company
The company may make payments to members with regard to their membership from its equity (with the exception of a case of capital reduction) in accordance with the provisions of the Civil Code from its unassigned profit reserve supplemented by the previous business year's after tax profit. No such payment may be made if the company’s adjusted shareholder’s equity does not reach (or would not reach as a result of the payment) the company’s initial capital and if such a payment would threaten the company’s solvency.
From the equity of the company available for division and ordered by the members’ meeting to be divided for the purpose of payment to the members, each member is entitled to an amount determined in proportion to such member’s capital contribution (dividend). However, the company's articles of association may provide that dividend is to be paid in a proportion different from the capital contributions.
During the business year (in the period between the acceptance by the members’ meeting of two successive annual reports),the member’s meeting may decide to pay dividend advance if
- it can be established based on the interim balance sheet that the company has sufficient funds for the payment of dividend,
- the amount of the payment does not exceed the profit, as established and as supplemented by unassigned profit reserve, generated since the closing of the books of the business year of the last annual report and
- the adjusted shareholders’ equity of the company will not decrease below the initial capital as a result of the payment.
If the annual report prepared after the payment of the dividend advance shows that payment of dividend is not possible, the members are obliged to repay the dividend advance.
Scope and operation of the members’ meeting
The members’ meeting is the supreme body of the limited liability company.
The Civil Code does not provide a comprehensive summary of the competence of the members’ meeting. However, the exclusive competence of the members’ meeting extends, in particular, to the approval of the financial statements, the decision on the payment of dividend, the appointment and dismissal of executive officers and the determination of their remuneration, the approval of the division of business quotas, the acquisition of own quotas, the approval of the conclusion of contracts with members, supervisory board members or the elected auditor of the company or the close relatives of these persons. By the main rule, the managing director convenes members’ meetings to the seat of the company. Members’ meetings may also be held using means of electronic communication.
A limited liability company may be founded by one person and such a company may also be created by the acquisition of the entire business quota of an existing company of two or more members by the same member. In the case of a single-member company, the powers of the members’ meeting are exercised by the founder or the single member. An important rule of form is that contracts between the single-member company and its member must be concluded in a public deed or in a private deed of full conclusive force. The rules pertaining to qualifying majority influence govern the liability of the member of a single-member limited liability company.
Foreign entrepreneurs may conduct their business in Hungary by opening a branch office in the country. Such a branch office is a separate organisation unit of the foreign business association without legal personality registered by the Hungarian court of registration. Through their branch offices, foreign business associations are entitled to carry out business activities in Hungary and are represented towards the authorities and third parties by their branch offices. The branch office has full legal capacity, it acquires rights to the benefit of and assumes liabilities for the foreign enterprise under its own company name.
Each branch office shall be registered to the company registry. Branch offices may be represented by (a) natural persons employed at or assigned to the branch office or (b) with a permanent contract of employment and a domestic place of residence. Representatives of branch offices and their close relatives may only conclude transactions within the activities of the branch office if the deed of foundation of the branch office or the foreign business association approves it. The foreign company’s written approval is needed if the person authorised to represent the branch office intends to acquire shares in another business association conducting the same business activities as the branch office, excluding the buying of shares in public limited companies.
The laws applicable to companies with domestic registered offices apply to the business activities and the domestic business behaviour of branch offices, and its books shall be kept in accordance with the Hungarian laws on accounting. Special rules apply to the branch offices of foreign businesses conducting financial activities. The employees of the branch office are in employment relationship with the foreign business association and employer rights are exercised by the foreign business association through its branch office.
The foreign business association shall continuously provide the assets necessary for the operation of the branch office and the settlement of its debts. No permit is required for a business association registered in an EEA member state to purchase real estate required for the business operations of its Hungarian branch office. In all other cases a permit is required unless otherwise specified by an international agreement or no such property may be purchased based on the principle of reciprocity.
The foreign company and the branch office bear joint and several liability for debts incurred during the activity of the branch office. When judicial enforcement to collect debts is initiated against the foreign company, all its assets in Hungary become subject to enforcement. Enforcement procedure may also be initiated directly against the branch office, or creditors can enforce their claims even in a liquidation procedure initiated against the foreign business.
The branch office is terminated by being deleted from the company register. Deleting a branch office does not in all cases require its being free from public debt, the publication of an announcement about the termination, or verification that there are no authority or court procedures in progress against the foreign company in Hungary with regards to its activities conducted through the branch office. If the country of registration of the foreign company and Hungary have signed an international agreement on the competences of courts, the enforcement of court rulings and the collection of public debts for civil and commercial cases, or in the event such issues are governed by EU community laws.
Commercial representative office is an organisational unit of a foreign company without a legal personality, which can operate from the time it is registered in the company register. The scope of activities of commercial representation offices are limited to mediating and preparing contracts and carrying out information, advertising and propaganda activities on behalf of the foreign company.
In their own names, commercial representative offices may not conduct business activities that yield profits or other proceeds; however, they can conclude contracts related to their operation in the name and for the benefit of the foreign company.
The same employment rules apply to commercial representative offices as to branch offices.
Staring from 1 July 2012, the rules of labour law are regulated in Act I of 2012 (hereinafter Labour Code),however, certain provisions of the Civil Code (as underlying law) also apply.
The establishment of an employment relationship
Employment contracts, any modification thereof, and the termination of employment must be incorporated in writing. The employment contract and all employment related documents may be inspected by the tax and labour authorities at any time.
Hungarian labour laws only provide for minimum requirements as to the content of employment contracts, however, the employer is obliged to disclose information to the employee in respect of a number of circumstances.
Employment contracts are usually concluded for an indefinite period of time. At the beginning of the employment relationship, the parties may specify a probationary period for a maximum of 3 months or in case of a collective bargaining agreement for a maximum of 6 months. Employment contracts may also be established for definite terms but the extension thereof requires the existence of the legitimate economic interest of the employer, and the period thereof may not exceed 5 years together with the extension of the contract. A definite-term employment relationship may only be established again within 6 months of the termination of another definite-term relationship in the case of a legitimate interest of the employer. In the event that a definite-term employment contract is extended for an additional definite term, the competent labour court may declare it an employment contract for an indefinite term.
The standard general daily working hours of employees is 8 hours to be scheduled from Monday through Friday under the general rules. The law regulates breaks during work, daily and weekly rest periods as well as weekly rest days and it also defines the length thereof by specifying the minimum periods due to employees.
Work outside of the schedule qualifies as overtime in respect of which the employee is entitled to a wage supplement, however, the maximum duration of overtime may not be exceeded even if the proportionate wage supplement is paid.
If it can be foreseen that the employer's operations require an uneven work schedule, the working hours may be determined flexibly, subject to the rules applicable to the working time banking period and the settlement period, within the statutory framework.
The employee's wages are mutually agreed by the parties, however, the applicable laws provide for the mandatory minimum wage amount as well as the guaranteed minimum wage amount payable to employees employed in job positions that require a secondary level school certificate or a secondary level vocational school certificate. In addition to the base wage, employees are also entitled to wage supplements in certain cases, such as overtime, night shift, stand-by or on-call duty. Deductions from the employee's wages are only allowed under certain circumstances.
The annual paid holiday is 20 workdays, which increases with the age of the employee in categories with the maximum being 30 days. Expectant women and women giving birth are entitled to 24 weeks of maternity leave. By the main rule (i.e. in the case of one healthy child),childcare benefit is available until the child reaches the age of 3. The labour law protects women on maternity leave and those receiving childcare benefit against regular termination of their employment. The age limit for the full old-age pension is 65 years.
During the employment relationship, both the employee and the employer shall be liable vis-à-vis the other for damages caused, however, the employee's liability shall be limited to four months' of absentee pay for damage caused by gross negligence.
According to the law different rules apply to certain groups. For example, in general, young employees enjoy broader labour protection while the protection of executive employees is narrower.
Termination of the employment relationship
Termination of employment is usually based on mutual agreement of the parties or a unilateral notice given by one of the parties. The employer is required to provide a reason for the termination of the employee’s contract that is realistic, clear and rational. Expectant women continue to be subject to a termination ban, however, the incapacity for work only postpones the beginning of the notice period until the end of the incapacity for work but does not, in itself, prevent termination. Employees may terminate their employment by notice without the obligation to provide a reason. If the employer terminates the employment relationship or is dissolved without legal succession, the employee shall be entitled to severance pay, provided that the employment relationship lasted for at least three years and the employee does not qualify as a pensioner yet, and the reason for termination is not the employee's conduct in relation to the employment relationship or the worker’s capacity related to medical reasons. The maximum extent of severance pay shall be limited to six months' absentee pay, however, employees of pre-retirement age shall be entitled to a higher amount.
In the case of termination, the notice period shall be 30 days that may be prolonged depending on the duration of employment with the employer, provided that the employment relationship is terminated by the employer. The notice period shall reach the maximum of 90 days after 20 years of service, however, the parties may agree on a longer notice period which may not exceed 6 months.
Termination without notice shall be subject to certain strict conditions where a material obligation arising out of the employment relationship is breached intentionally or with gross negligence or if the employee's conduct makes the continuation of the employment relationship impossible. Both the employer and the employee are required to state their reasons for termination without notice.
Employees have a 30-day forfeit period for legal remedies if the termination with notice or with immediate effect is contrary to the law.
The Labour Code provides for various forms of communication between the employer and the employee.
Works councils shall monitor compliance with the provisions of employment regulations. To the extent required for their responsibilities, works councils shall be entitled to request information and to initiate negotiations. It is not mandatory to set up a works council, however, in view of the general cooperation and information obligation, the employer is advised to inform employees about the possibility of electing a works council or a shop steward, where the conditions therefor are met. The employment relationship of the chairman of the works council may only be terminated with the consent of the works council. Among other things, the works council shall be entitled to conclude a works agreement.
Trade unions are designed to protect and represent employees’ rights and interests provided under the law. Trade unions may request information on all issues related to the economic interests and social welfare of employees in connection with their employment, may initiate talks in connection with the employer's actions and, most importantly, may conclude the collective agreement, regulating the rights and obligations associated with the employment relationship.
The collective agreement may derogate from the rules pertaining to the statutory rights and obligations even to the disadvantage of the employee, which would otherwise not be possible.
Where the relevant statutory conditions are met, trade union officers are entitled to protection against termination and the consent of the immediate superior trade union body is required for the termination of their employment relationship. These unions are only strong in the public sector: national railway, public transport companies, healthcare professionals, etc.
Other forms of employment
Even though the law has provisions for part-time employment and teleworking (home office),these methods are not yet widely used. In addition, the Labour Code contains detailed rules concerning temporary agency work and other forms of employment offering more flexible working time and other arrangements.
With a few exceptions, foreigners need work permits to work in Hungary. The first question to answer is whether the employee is a citizen of an EU country or a third country.
Employment of foreigners from third countries (non-EU citizens)
Pursuant to the provisions in force from 1 January 2014, with a few special exemptions, the residence permit necessary for the employment of third country nationals is issued in a consolidated permit procedure and no separate work permit must be applied for if the residence is aimed at establishing an employment relationship. If the employment is not subject to the relevant provision, the employee may be employed based on a work permit.
Individual work permits and consolidated permits are usually valid for a maximum of 2 years with the option of extension for another 2 years. Officially, the employee applies for the consolidated permit, but first the employer must document that they had already tried to fill the position with a Hungarian citizen with the help of the employment centre. Next, the employer submits an application for the permit using certified copies of documents verifying the personal data and qualifications of the employee. Employers have to comply with strict registration regulations regarding the employment of foreign employees.
In certain cases, the law allows for the issue of a permit for third country citizens without any investigation of the job market. These special cases include, but are not limited to the employment of a foreign national in a key position at a foreign interest company established in Hungary or when the majority of a business association is owned by foreign nationals or the percentage of foreign employees in the previous quarter does not exceed 5 percent of the total headcount.
In other cases, third country citizens may be employed simply by making a formal announcement without the need for a work permit. These positions include, for example, the managers of branch offices and representations of foreign companies or senior officers, members of the supervisory board of business associations with foreign shareholding. The employer is responsible for making the appropriate announcement and issuing accurate documentation verifying the conditions of employment of foreign nationals without a work permit.
On the basis of their appropriate visas, foreign nationals are required to apply for a residency permit from the Office of Immigration and Nationality if they do not file applications under a consolidated permit procedure.
Non-EU citizens may only begin their employment in Hungary after they have obtained all permits and documents necessary for their employment.
Employment of citizens of EU member states
In general, since 1 January 2009, citizens of EU member states and their family members may be employed in Hungary without a work permit. The employer is required to report the employment data of EU citizens to the employment centre according to the general regulations. The employment centre registers this reported data for statistical purposes.
However, the scope of the regulation providing for the above reporting obligation does not include the employment in Hungary of persons benefiting from the freedom of movement and residence, provided that an employer established in an EEA member state sends such employees to a Hungarian employer to provide services under a secondment, assignment or temporary agency work arrangement.
No residence permit is necessary for EU citizens who plan to spend more than 3 months in the country for employment purposes. Nevertheless, they are required to report the details of their extended stay to the Office of Immigration and Nationality and to apply for a residence card.