Hungary Dispenses with Corporate Veil of Protection for Directors

Hungary-Budapest

Every now and then a country which hasn’t historically featured strongly (or at all) on the D&O liability risk register emerges blinking into the hot sunshine. Last month it was the turn of Hungary, which on March 15th 2014  introduced a radically new civil code – in effect, a new Companies Act regime. It applies to companies domiciled in Hungary, and for such companies it seems to drive a coach and horses through the corporate veil. That’s sounds dramatic but read on!

Generally, in developed and developing economies the concept of protection from third-party liability for a company’s directors and officers who comply with their duties vis-a-viz the companies on whose boards they sit is universally respected.

Special rules often apply in the case of insolvency or in the dangerous twilight zone when a company is teetering on the brink of insolvency. So for example in the UK we have the Wrongful Trading laws under the Insolvency Act. But with that important exception the corporate veil is a well-recognised concept.

New Hungarian Civil Code

Under the new Hungarian Civil Code, if a third party can prove damage as a result of corporate activity, the directors are jointly and severally liable for that damage  alongside the company itself. In other words, the third party can elect to sue the directors either with the company or even instead of the company if they can establish damage in a non-contract based scenario.

The only statutory defence to the claim for directors appears to be that they have taken all steps to avoid or eliminate the possibility of loss arising in the first place or that it was otherwise unforeseeable.

The previous Civil Code regime in Hungary was much closer to the developed economies norm under which directors would only be liable to third parties in exceptional cases.

Although I do not know this for certain I would be surprised if this new law was not a reflection of the severe economic difficulties with which Hungary along with many other countries has had to grapple over recent years.

Does Any of this Make a Difference?

So does any of this make a difference to the type of D&O insurance needed for Hungarian companies and their directors?

On the face the answer is no. After all, if a claim is made by a third party it would seem to fall squarely within the scope of cover. Here are a couple of thoughts though:

  • The first and most obvious point is that it may increase the appetite for this type of protection in terms both of breadth of cover and limits.
  • Secondly, given that directors are now likely to feature far more frequently as co-defendants with the company, interesting questions of allocation are likely to arise. In other words carriers are likely to argue that they should only be liable to pay a percentage of the loss and defence costs on the basis that the company is not an insured under the D&O policy for this purpose.
  • In light of the increased risk of mixed entity and individual claims, perhaps it would be wise to consider either broadening out the entity cover or providing 100% pre-determined allocation at least in respect of defence costs.

It will be interesting to see how quickly litigants avail themselves of these new rights to sue individual directors.

About Francis Kean

Francis is an Executive Director in Willis Towers Watson's FINEX Global, where he specializes in insurance for Dir…
Categories: Directors & Officers, Europe, Executive Risk | Tags: , ,

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