Shareholders who fail to intervene to stem the losses in a company they control may be held personally liable for the company’s debts if it is subsequently liquidated, according to the Supreme Court.

Under Hungarian law, a shareholder’s liability (in a limited liability company) is usually limited to their capital contribution. The corporate ‘veil’ can only be pierced (making the shareholder personally liable for the company’s debts) in special circumstances.

One such circumstance occurs in liquidation proceedings where a creditor can satisfy the court that the shareholder has pursued a ‘permanently disadvantageous business policy’. Until now, the courts have only interpreted this as occurring when the shareholder knowingly and permanently jeopardises repayment of the company’s debts by a series of loss-making decisions that led to its liquidation.

The Supreme Court has now ruled that ‘permanently disadvantageous business policy’ also includes a controlling shareholder’s passive failure to take necessary measures to combat the company’s long-term loss-making.

Shareholders are generally required to intervene when a company is at risk of becoming insolvent, suspends payments or has a significant decline in its equity capital. They are expected to take action to reduce losses, restructure or liquidate the company. The court’s ruling effectively means that failure to do this may expose the shareholder to the risk of personal liability for the company’s debts on a subsequent liquidation.