Corporate / M&A

Hungary: Shadow Directors in the Spotlight

Under Hungarian law, not only an officially appointed director but also a “shadow director” may be held liable towards the creditors of an insolvent company.

In sum­mer 2012, the Hun­gar­i­an tax author­i­ty proud­ly spread the news that an appeal court had found an indi­vid­ual who was not an offi­cial­ly appoint­ed direc­tor but a “shad­ow direc­tor” liable towards the cred­i­tors for an insol­vent company’s unsat­is­fied debts. This news made the lia­bil­i­ty of shad­ow direc­tors (ie, per­sons exer­cis­ing real influ­ence over a company’s affairs with­out being offi­cial­ly named and reg­is­tered as a direc­tor) a pop­u­lar top­ic. Who might be at risk of being regard­ed as a shad­ow direc­tor and the legal back­ground of their lia­bil­i­ty is dis­cussed below.

Who can be a shadow director?

In the above case, the hus­band of the man­ag­ing direc­tor direct­ed the company’s affairs from the back­ground. It would be a mis­take, though, to con­clude that this “shad­ow direc­tor issue” may come up only in small fam­i­ly com­pa­nies, affect­ing hus­bands, fathers or oth­er rel­a­tives. The only cri­te­ri­on for a per­son to be deemed a “shad­ow direc­tor” is that he or she exer­cis­es real influ­ence over the company’s affairs. It is not nec­es­sar­i­ly some­one who “lurks in the shad­ow”. It could be some­one who speaks or acts instead of the offi­cial­ly appoint­ed direc­tor. It could also be a per­son who is known to the pub­lic as some­one hav­ing a say in the company’s affairs, such as some­one who attends busi­ness meet­ings with the offi­cial­ly appoint­ed direc­tor.

Search­ing for exam­ples in the world of multi­na­tion­al com­pa­nies, such per­son could be an employ­ee involved in the man­age­ment of the com­pa­ny with­out an offi­cial appoint­ment. The rel­e­vant acts use sim­ply the word “per­son” with­out fur­ther spec­i­fi­ca­tion, so a legal enti­ty could also fall under the def­i­n­i­tion. Fol­low­ing this log­ic, a par­ent com­pa­ny that gives instruc­tions to the direc­tor of its sub­sidiary, or a share­hold­er or a pri­vate equi­ty investor that gives instruc­tions to its nom­i­nat­ed direc­tor in the board of direc­tors of the joint ven­ture com­pa­ny could be at risk as well. (Sep­a­rate rules deal express­ly with the lia­bil­i­ty of share­hold­ers.) More­over, even a direc­tor, offi­cer or employ­ee of the par­ent com­pa­ny, or a share­hold­er or pri­vate equi­ty investor can be con­sid­ered a shad­ow direc­tors if he or she exer­cis­es real influ­ence over the deci­sions of the Hun­gar­i­an com­pa­ny.

How does the shadow director’s personal liability arise?

A shad­ow direc­tor is liable in the same way as an offi­cial­ly appoint­ed direc­tor. Thus, we must analyse under what cir­cum­stances a direc­tor may be held per­son­al­ly liable for the company’s debts. Gen­er­al­ly, the direc­tor of a Hun­gar­i­an com­pa­ny must give pri­or­i­ty to the inter­ests of the com­pa­ny. This rule changes, how­ev­er, in the event of an immi­nent threat of insol­ven­cy. Then direc­tors must give pri­or­i­ty to the inter­ests of the company’s cred­i­tors. If a direc­tor breach­es this oblig­a­tion, the direc­tor will be per­son­al­ly liable for the unsat­is­fied claims that the ter­mi­nat­ed com­pa­ny leaves behind at the end of the insol­ven­cy process.

In prac­tice, two law­suits are need­ed to require the direc­tor to pay instead of the com­pa­ny. The pur­pose of the first law­suit (to be start­ed dur­ing the insol­ven­cy process) is to estab­lish that a per­son who act­ed as a direc­tor or shad­ow direc­tor any time in the three years pre­ced­ing the start of the insol­ven­cy process failed to give the inter­ests of cred­i­tors pri­or­i­ty when insol­ven­cy was threat­en­ing. It also has the aim of stat­ing that such breach of duty caused a decrease in the company’s assets. Then, if there are unsat­is­fied cred­i­tors’ claims at the end of the insol­ven­cy process, cred­i­tors may file anoth­er claim based on the first court deci­sion and ask the court to require the direc­tor to set­tle debts from his or her own assets.

Direc­tors (includ­ing shad­ow direc­tors) may also be held liable if the com­pa­ny is ex offi­cio delet­ed from the Com­pa­nies’ Reg­is­ter with­out a for­mal insol­ven­cy pro­ce­dure. This occurs if the com­pa­ny can­not be found at its reg­is­tered seat and there are not enough assets to cov­er even the costs of the insol­ven­cy pro­ce­dure. If the claim is filed against the direc­tor of an ex offi­cio delet­ed com­pa­ny, it is pos­si­ble to obtain a pay­ment order against the direc­tor in one court pro­ce­dure.

The only criterion for a person to be deemed a “shadow director” is that he or she exercises real influence over the company's affairs. It is not necessarily someone who "lurks in the shadow".