Up Again Hungary: Governance

Corporate

1. What are the key topics that boards should focus on to ensure proper discharge of their duties as directors, as their businesses return to work following a lockdown?

Act LVIII of 2020, which came into force on 18 June 2020, on the interim rules relating to the termination of the emergency situation (Interim Act) maintained the various corporate changes introduced due to COVID-19 until the end of 2020. Directors therefore shall ensure that in respect of the following areas, the interim rules should be followed, as set out below.

The original submission deadlines for filing annual reports and holding the related AGMs (i.e. annual reports need to be passed and submitted to the Court of Registration within 150 days from the end of the company's business year) remains extended until the end of September. Boards shall ensure reporting obligations are complied with by this deadline.

The changed rules on holding board meetings shall remain in effect so, provided that the decisionmakers are not able to perform their tasks because of the restrictions imposed due to the emergency situation, the decisions can be made either via electronic communication or in writing by way of circular voting, even if the relevant constitutional documents do not allow for such an alternative decision-making process.

Where these alternative decision-making methods cannot be used, the management is entitled to approve the annual report and decide on dividend payments, provided that at least 51% of shareholder/members having more than 25% of the votes in the company or the shareholder/member having a majority/controlling interest in the company does not object to the decision as proposed by the management.

The management is also entitled to decide on all matters proposed at the shareholders' meeting (and the relevant publications were made accordingly), including any decision required to handle COVID-19-related issues. Similar to the approval of the budget and dividend distribution, at least 1% of the shareholders can request holding a shareholders’ meeting to approve the decisions of the management.

The legislator also maintained the relaxed provisions on the shareholders’/members’ meeting's obligation to adopt decisions connected to the company's insolvency or threat of insolvency.

Directors therefore shall ensure compliance with such interim rules, the purpose of which shall be to give time for the board to prepare proper return-to-work policies.

Additional rules were also introduced, and are now maintained, in respect of listed companies.

The management of a listed company is entitled to approve the annual budget and the payment of dividends instead of the general meeting, provided that certain publication requirements are met (e.g. all proposals and draft decisions were published on the company's website eight days before the date of the proposed general meeting, and the supervisory board of the listed company approved the proposed annual budget).

The Hungarian government also aims to help businesses through various relief programmes and facilities (e.g. the facilities granted to small and medium enterprises, and the legal moratorium on loan repayments), which boards should consider. In this regard, please see the Government Relief and Tax section of these FAQ.

Also, the board should also take into account the changed labour and social environment (e.g. home office arrangements, changes introduced to working conditions), which is analysed in detail in the People section of these FAQ.

2. Should boards adopt particular governance practices in this context?

If boards have already adopted new corporate rules due to the lockdown, these rules should be kept until the end of 2020, and a return to previous corporate governance practices should only be done once the termination of the interim corporate governance rules has been announced.

To comply with social distancing rules and ensure business continuity, boards should prefer meeting options that do not require the physical presence of board members and shareholders. Similarly, boards are encouraged to apply remote contracting techniques (e.g. executing documents with e-signature).

3. To what extent are boards being encouraged to take into account corporate purpose and values in the context of COVID-19 and a return to work?

The board should review and assess the effects of COVID-19 and ensure compliance with social distancing and a safe return of work, while also ensuring business continuity.

Restructuring

4. Your company is facing liquidity issues as a result of COVID-19:

a. What are the repercussions for continuing to operate your company?

No duty to file for insolvency applies in Hungary, but the shareholders' meeting has an obligation to assess the situation of a possible insolvency, and directors are advised to make only those payments that serve to sustain or restore solvency. Disregarding this rule may result in the direct liability of the directors.

b. Do you have to file for insolvency if your company cannot pay all its debts as they fall due?

The directors have no explicit duty to file for insolvency, but the shareholders' meeting must address the situation and as a last resort may be required to make a decision on dissolution.

c. Are there any steps that should be taken to minimise the risk of your actions as director being challenged?

It is advisable to seek professional advice, as there are many legal tests that determine the lawfulness of director’s actions. Basically, directors are allowed to take actions that serve to sustain or restore solvency and that are not detrimental to the general body of creditors.

d. Will your company be wound up if you fail to make payments when due?

As was the case before the pandemic, if the company is insolvent, the debtor company may file for reorganisation (which, if unsuccessful, transforms into liquidation) and both the debtor and creditor may file for liquidation. The potential initiation of liquidation by the creditor can be a real threat, as even before the pandemic liquidation was already one of the main instruments of debt collection.

Until the end of 2020 (in cases initiated after 28 May 2020), creditors may only file for liquidation if the debtor did not pay for or contest its debts within 75 days from the due date set by the creditor's payment notice.