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Keeping Business Ventures Alive: The Role of Directors and Risks of Recovery Plans

Over the last several weeks, the coronavirus outbreak has had a damaging effect on various businesses throughout the global economy. Certain sectors are hit in a massive way (e.g. tourism, automotive); however, almost every business has felt the harsh economic consequences which necessitate immediate answers and steps. We expect that the trends will be similar to those of the financial crisis of 2007-2008 despite the different triggering factors. The lesson was learnt the hard way at that time, but the experience gained can serve as a basis for future business decisions.

Ákos Mátés-Lányi, Counsel, Corporate/M&A, Noerr and Partners Law Firm

In spite of the measures put in place by the government, the regulators and the financial sector, it is not a wild guess to state that some business ventures in Hungary will have to make hard decisions as to their future operation that may entail various steps ranging from the (i) optimization and reshuffling of the current organization to (ii) the termination of the business in its entirety.

Role of Directors

As the persons responsible for day-to-day operations, the directors will be the ones who will face the financial difficulties first; therefore, they must carefully consider the available (and often conflicting) options to (i) ensure the operation of their companies; and (ii) avoid (personal) liability issues. It is important to outline that the rules set out in the Hungarian Insolvency Act do not make a director liable for the occurrence of the insolvency itself. Instead, what may trigger a director’s liability are the actions of the director that disregard the creditor’s interests after the threat of insolvency arose.

For the purpose of the Hungarian Insolvency Act, the “point in time when the threat of the company’s insolvency occurred” shall be the date when the directors either were aware, or should have been aware on the basis of the enhanced level of duty and care applicable to the persons holding such positions, that the company would not be able to settle its debts as they become due. The “point in time when the threat of the company’s insolvency occurred” shall be analyzed on a case-by-case basis and we believe that this is key in terms of directors’ liability since, after this date, no decisions can be made which would harm the creditors’ interests (e.g. repayment of intercompany loans, or taking up “luxury” expenses which are not connected to the essential operation of the business).

Measures to be Taken

After the occurrence of the insolvency situation, the directors are under the obligation to take the following steps:

(i)    assess the situation without delay and stop making any payments contrary to the Hungarian Insolvency Act;

(ii)    convene a company shareholders’ meeting without delay in order to allow the shareholders to decide on how to secure the future financing of the company; and

(iii)    notify the relevant authorities as per the applicable rules, if the company is operating in a regulated market.

If the directors proceed as outlined above and if they do not carry out any fraudulent transactions (for example, the undervalued sale of assets), then the liability of the directors would not arise in relation to the insolvency of their company.

Risks of Recovery Plans

Based on information received from the directors, the decision as to the business venture’s future operation will ultimately be made by the shareholders. In order to safeguard their businesses built for long years, business owners may consider alternative options to restructure their companies. Nevertheless, any alternative option requires careful and thorough tax and legal planning in order to (i) mitigate the associated risks (including potential asset stripping); and (ii) handle the potential claims of creditors and competent authorities. We also note that, in addition to the civil law consequences, lawmakers are protecting the creditors’ interests by criminal law measures as well; therefore, it is in the best interests of the owners and the directors to prepare recovery plans in full compliance with the applicable laws.

Ákos Bajorfi, Counsel,Corporate/M&A, Noerr and Partners Law Firm