Piercing the Corporate Veil in Hungary

In the recent years international legal community has been widely discussing the need for, and the limits of, application of the piercing the corporate veil doctrine. Having its origins in common law countries, first and foremost the USA and the UK, the doctrine allows disregarding corporate shield of legal entities and is now quite familiar to many civil law jurisdictions, among which are China, France, Germany, Switzerland, and others.

It has been reported that Hungary was one of the civil law jurisdictions where a shareholder might be held liable for the debts of its company. According to Hungarian law one of the grounds for piercing the corporate veil is a so-called ‘long-term detrimental business policy’, being a series of unreasonable decisions made by the controlling shareholder concerning the controlled company that ultimately ruin the latter. Previously, however, only the majority shareholder that owned shares at the moment of commencing involuntary liquidation proceedings could be subject to a liability claim.

At the end of 2012 Hungarian Supreme Court reconsidered statutory provisions of Hungarian company law extending the scope of the piercing the corporate veil provision and allowing holding former majority shareholders liable for the debts of the bankrupt company resulting from the above mentioned long-term detrimental business policy. In particular, the Supreme Court held that parent company’s liability based on long-term detrimental business policy is similar to tort liability and, if the claimant showed that the parent company’s misconduct led to the liquidation of the subsidiary, liability might be established. Therefore, only causation determines whether a one-off shareholder may be held liable, irrespective of when such a shareholder held shares.

The Supreme Court judgment has already been named landmark for Hungarian company law. Despite the fact that the Court’s conclusion raises a number of practical issues connected, inter alia, with consecutive shareholders’ engagement in a conduct that qualifies as long-term detrimental business policy and further allocation of liability upon each of them, in our view, the dramatic change in the approach of Hungarian courts to the piercing of the corporate veil issue testifies the objective need for deviation from principle of distinct personality of legal entity from its owner, so firmly established in Ukraine, Russian Federation and other post-Soviet states.

Eugene Blinov, Ievgen Boiarskyi