Potential liability for wrongful trading

In Hungary the Act no. XLIX of 1991 on the insolvency and compulsory winding up procedure (hereinafter referred to as “Insolvency Act”) established the term “wrongful trading”. Under section 33/A of the Insolvency Act a manager of a company shall be personally liable if after the occurrence of threatening insolvency (i.e. when the company is unable to settle its liabilities when due) the director’s duties have not been fulfilled based on the priority of the company’s creditors’ interest.

Recent decision

In a recent decision of the Hungarian Supreme Court (“Curia”) it was pointed out that "threatening insolvency" does not require the actual insolvent status of the company. The main question in that matter was whether the company was able to settle its debt in due time or not. If the answer is no due to the financial status of the company or due to the company being unable to agree with its creditors on different payment terms then it was considered that the insolvency shall be deemed as threatening regardless of the question whether the assets of the company potentially covered the amount of the overdue debt.

Importance

In order to avoid the risks of liability posed by a threatening insolvency the managing director is obliged to permanently monitor the company’s obligations and cash flow. The importance of the threatening insolvency is that during such situation the managing director is required to grant priority to the creditor’s interests in comparison to the interests of the company’s shareholders. This principle is applicable as long as the insolvency threatens until the company is able to settle its debts when due again.

In the light of the clarifying Curia decision each managing directors should constantly keep an eye on the relevant financial figures of the company and maintain a respective monitoring in order to avoid his personal liability for wrongful trading.