Hungary: "Lex Kaya Ibrahim" increases transparency and liability in corporate law

Shareholders and other members of Hungarian companies now face the possibility of extended liability under a recent amendment to company and insolvency law. The changes, which have implications for all future M&A transactions, are intended to prevent companies from being ‘phantomised’.

The changes are known as ‘Lex Kaya Ibrahim’, after an infamous corporate and political scandal in which a person identifying himself as Kaya Ibrahim acquired a company, used it to run up vast debts and then vanished leaving the debts behind.

The key changes are:

• New obligations for the Hungarian Court of Registration to notify the commercial chamber, the tax authority and the Central Statistical Office as soon as there is any change in the registered ownership of a company.
• When neither a company nor its executive officers can be located, the Hungarian Court of Registration can require shareholders controlling over 25% of the voting rights to restore the lawful operations of the company before a set deadline (and fine the company or the executives between HUF 100,000 and HUF 10,000,000).
• If the deadline is not met, the Court starts the deletion process. First, it makes an announcement in the Company Gazette asking for information about the company (its location, operation, assets etc) within 30 days.
• If no information is forthcoming, the Court will seek information about the company’s assets from official sources such as the land registry, tax authority, department of motor vehicles, association of public notaries etc.
• If the company has assets, the Court will put the company into liquidation. In the absence of any information about assets, it will be deleted from the register.
• In both cases, the Court issues an order recording whether the claims of creditors are of significantly higher value than the company’s assets, or that the company has no assets.
• Creditors can then ask for any shareholder who sold his stake within the last 5 years to have unlimited liability for the company’s debts.
• The former shareholder can prevent this by showing that, when he sold up, the company was solvent and the loss of assets took place subsequently or that he sold his shares in good faith even though the company was insolvent.
• In liquidation proceedings against an insolvent company, creditors can also ask for any shareholder who sold his stake within the last 5 years to have unlimited liability for the company’s debts. As above, the former shareholder can prevent this by showing that, when he sold up, the company was solvent and the loss of assets took place subsequently or that he sold his shares in good faith even though the company was insolvent. Even though the changes aim to make Hungarian corporate law more transparent, an application is understood to have been made to the Hungarian Constitutional Court to declare them unconstitutional (and therefore null and void) because they are not consistent with a free market economy. We will provide more details of this development as soon as they become available.Until the changes are in effect, in case of M&A transactions the relevant documents should be drafted in consideration of the liability provisions above.

Law: Act LXIX of 2005, amending the Insolvency Act and the Company Registration Act.

For more information, please contact Dr. Anikó Kircsi at: [email protected] or on +361 483 4827.