The new Civil Code (Act V of 2013) entered into force on March 15 2014 and has made significant changes to corporate law. Some of these concern the capital requirements for one of the most popular form of association – the limited liability company (LLC).
With the aim of protecting creditors' interests, the new Civil Code raises LLCs' required minimum registered capital from Ft500,000 to Ft3 million. As a general rule, the final deadline for LLCs to comply with the new Civil Code – including the increased capital requirements – is March 15 2016. According to Section 13 of the transitional act (Act CLXXVII of 2013), LLCs may not take decisions on their continued operation in compliance with the new Civil Code until their registered capital is raised to the required level. LLCs must reorganise, merge with another entity or terminate operations without legal succession if they cannot meet the minimum registered capital requirement by the March 15 2016 deadline. Until full compliance with the new rules, LLCs shall operate under the previous Companies Act (Act IV of 2006 on business associations).
The new requirements will put a significant burden on the 150,000-plus LLCs with registered capital of less than Ft3 million that were registered before the new Civil Code entered into force. However, certain provisions were included in the transitional act with the aim of helping LLCs to fulfil these stricter requirements. According to both the transitional act and the new Civil Code itself, LLCs may increase their capital in compliance with the relevant regulations of the new Civil Code – that is, they may use the capital increase rules of the new Civil Code even if they are not yet operating under the new Civil Code. Consequently, LLCs may set a timeframe in their articles of association of more than one year in which to raise all or part of the shareholders' cash contribution to the company. In such case, the LLC cannot pay dividends to shareholders, but must count the dividends realised by the shareholders from continued business activity towards their outstanding capital contribution. This accounting method may continue until the unpaid dividends and the shareholders' initial capital contribution reach the amount of the shareholders' total capital contribution. As an additional guarantee rule, shareholders shall bear liability for the LLC's debts up to the unpaid part of their cash contribution.
In practice, this regulation creates the possibility to establish an LLC or increase its registered capital with no capital contribution. However, whether such rules will ultimately serve creditors' interests has triggered much debate. Certain questions have also been raised in connection with the interpretation of this regulation. For instance, what happens if the LLC has multiple shareholders and one does not pay the required contribution? Is it allowed to pay dividends to the other shareholders? How is the dividend payment counted towards registered capital? What happens if the dividend is more than the unpaid part of the capital? Can the dividend amount be split? These questions have yet to be tested in the courts. A number of relevant cases will likely be initiated following the March 15 2016 compliance deadline.
For further information on this topic please contact Balázs Baranyai at Nagy és Trócsányi by telephone (+36 1 487 8700) or email (firstname.lastname@example.org). The Nagy és Trócsányi website can be accessed at www.nt.hu.
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