Legal guide for company directors and CEOs in Hungary

Because environmental, social and governance (ESG) is such an increasing focal point of good corporate governance, we address ESG duties and responsibilities first. For more general duties and responsibilities of directors and CEOs, please scroll down the page or use the navigator to jump to the relevant section. 

The ESG Act (as defined later) sets out specific ESG related tasks for the relevant organisations and their directors:

Risk management: Directors of relevant organisations must establish an adequate and effective risk management system to ensure compliance with the sustainability due diligence obligations. The risk management system shall identify and manage sustainability risks with significant adverse impacts, and to prevent, eliminate or minimise the extent of sustainability risks where the enterprise has caused or contributed to such non-compliance within the supply chain. The risk management system shall be designed in way so as to take into account the interests of the organisation’s employees, employees within its supply chains and persons in an otherwise protected legal position who may be directly affected by the operation of the organisation or the economic activity of an undertaking in its supply chains. Organisations must designate at least one of its employees to be responsible for risk management. The person responsible for risk management shall regularly, and at least once a year, inform the management of the organisation of the tasks they have  performed in the course of risk management.

Risk analysis: As part of its risk analysis, the directors of the relevant organisation must carry out a regular full risk analysis to identify material social and environmental risks in its business scope and in its direct supplier activities. Such organisations shall carry out the risk analysis by 30 June each year and on an ad hoc basis when the organisations are faced with a significantly changed or significantly increased risk situation in the supply chain, including in particular the introduction of new products, projects or participation in new business.

Preventive measures: Directors of relevant organisations must also prepare a social responsibility strategy, which shall be published on the organisation’s website in a publicly accessible manner. If, in the course of the risk analysis, the organisation identifies a social or environmental risk that has a significant and substantial likelihood of occurrence, it shall take appropriate preventive measures without undue delay. Directors shall assess the effectiveness of the preventive measures a) at least once a year and (b) on a case-by-case basis, where the undertaking is faced with a significantly changed or significantly increased risk situation in its own business or in that of its immediate supplier, including in particular the introduction of new products, projects or participation in new business review it on an ad hoc basis. As a preventive measure, the organisation shall ensure, in respect of its direct suppliers and subsidiaries, that a) social responsibility and environmental protection requirements are taken into account when selecting its direct suppliers, (b) its direct supplier declares that it complies with the human rights and environmental standards required by the management of the undertaking and that it manages them appropriately along the supply chain.

Corrective measures: If the directors of the relevant organisations become aware that a breach of a social or environmental obligation has occurred or is likely to occur in its own business, in its subsidiaries or in the business of its direct suppliers, it will immediately take the corrective measures necessary to prevent or remedy the breach or to minimise the extent of the breach. If a breach of a corporate responsibility or environmental obligation by the organisation’s direct supplier is not corrected by the direct supplier within 90 days of the undertaking becoming aware of it, the undertaking shall immediately develop and implement a concept for correcting or minimising the breach. The effectiveness of the corrective measures should be reviewed at least once a year before the ESG report is submitted, and on a case-by-case basis if the company has to take into account a significantly changed or significantly expanded risk situation in its business scope or at its direct supplier.

Establishing a complaint management system: Directors of relevant organisations must ensure that an internal or external complaints handling system is in place to enable any person to report corporate social responsibility and environmental risks and breaches of arising from its own economic activities or those of its subsidiaries or direct suppliers. The complaint handling system shall allow for the reporting of social responsibility or environmental risks and of breaches, even if they are caused by the economic activities of an indirect supplier of the undertaking and in case the organisation becomes aware that its indirect supplier has committed a breach, it shall without delay carry out a risk analysis and take appropriate preventive action.

There are also certain employment-related issues that directors of Hungarian companies should take into consideration from an ESG perspective. For instance, the Hungarian Labour Code explicitly indicates the general principle of equitable assessment regarding employees’ interests. As directors are typically the persons exercising the employer’s rights over the employees of a company, and the directors are responsible for the management of the company, specific attention shall be paid to compliance with this general principle during all employment relations for the purpose of ensuring employees’ welfare in the company.

Furthermore, as the persons typically exercising the employer’s rights in the name of a company, directors have an obligation towards the works council of companies, where applicable, to provide information regarding the economic situation and employment conditions of employees. In this respect, it is also important to ensure that the works council can exercise its consultation right prior to decisions regarding matters relating to the interests of employees such as the determination of the order of work, principles relating to the calculation of wages, etc.

The ESG Act (as defined later) sets out certain principles and general obligation for directors of relevant organisations. As a general rule, the directors shall ensure that the organisation acts in accordance with the requirements of good faith and fairness in fulfilling its due diligence obligations and exercising its rights for sustainability purposes.  In addition, the directors must take into account long-term sustainability opportunities in its business activities and ensure that they are implemented in its business strategy in order to implement the principle of environmental sustainability. In the course of its business activities, the directors must ensure the organisation examines and manages the social and environmental impacts of its operations in accordance with the principle of social responsibility and shall play a role in promoting the values laid down in the Constitution, in particular family-friendly operations. In the framework of its corporate social responsibility, the directors shall ensure that the organization pays special attention to the support of families, the nation and culture. The director must also ensure that the relevant organisations conduct due diligence in its supply chains in accordance with corporate social responsibility and environmental due diligence requirements, with the aim of preventing or minimising corporate social responsibility or environmental risks or eliminating breaches of corporate social responsibility or environmental obligations.

The provisions of the Hungarian Equal Treatment Act apply to both employment and agency relationships, therefore it is the directors’ responsibility to prevent the occurrence of any discrimination of employees on the grounds of any features or characteristics. The provisions of the Equal Treatment Act shall also be applied in relation to offers for the conclusion of contracts addressed to third persons not specified in advance, as well as to the provision of services/sale of goods in a place accessible to the public.

It is also important to note that under the Hungarian Labour Protection Act, it is the employer’s obligation to provide safe and healthy working conditions for employees, the performance of which pertains to the responsibility of the person exercising the employer’s rights, i.e. in most cases the executive officers (directors) of a company. In addition, the Labour Protection Act includes further obligations of directors that relate to ESG considerations, such as the performance of preliminary risk assessments, appointment of an employee who has appropriate professional knowledge regarding employee protection rules, information obligations, etc.

On 1 January 2024, Act CVIII of 2023 on the Rules of Environmentally Conscious and Societally and Socially Responsive Corporate Social Responsibility Reporting Promoting Sustainable Finance and Unified Corporate Responsibility (ESG Act) became effective in Hungary. The ESG Act has been further amended with effect of 25 April 2024 to introduce the concept of the ESG questionnaire to be used in Hungary for ESG data requests. The ESG Act transposes the Corporate Sustainability Reporting Directive 2022/2464 (CSRD) into national law and establishes a national Environmental, Social and Governance (ESG) framework to comply with EU obligations. In addition, as from 1 January 2024, the detailed provisions on the content of the sustainability report, the publication of the report, the publication of the consolidated sustainability report and the relevant assurance report were introduced into the Hungarian legal system as an amendment to Act C of 2000 on Accounting (Accounting Act).

In effect, this means that by the adoption of the ESG Act two parallel sets of regulations came into force, with partly overlapping content, namely the

• regulations related to corporate sustainability due diligence; and
• regulations related to CSRD – corporate sustainability reporting.

Therefore, it is essential that directors of companies affected by the ESG Act exercise due diligence to ensure legal compliance with both CSRD and corporate sustainability due diligence with the former being included in the Accounting Act, as amended by the ESG Act, and contains the CSRD sustainability reporting requirements; and the latter being contained in the body of the ESG Act and contains the corporate sustainability due diligence and related regulatory oversight and sanction rules. It should be noted that the provisions of the ESG Act relating to corporate sustainability due diligence do not result from the implementation of the EU CSDDD, , but the ESG Act incorporates certain concepts and principles of the EU CSDDD.

Certain detailed rules on this subject will be set out in regulations/decrees to be issued by the Government, the Minister for Economic Development or the Supervisory Authority of Regulatory Affairs and published in 2024-2025.

Pursuant to the Accounting Act, the directors of the below organisations must prepare a sustainability report as part of their annual report (in Hungarian: üzleti jelentés) if any two of the following three indicators of the undertaking exceeded the following thresholds at the balance sheet date in the preceding in the preceding two consecutive financial years:

1. a balance sheet total of HUF 10 billion,
2. an annual net turnover of HUF 20 billion,
3. an average number of employees during the financial year of 250; or

any undertaking (apart from a micro enterprise) whose transferable securities are admitted to trading on a regulated market in a State of the European Economic Area (EEA). The corporate sustainability reporting requirements will be phased in, with certain large companies that qualify as public interest entities required to publish their sustainability reports in 2025 in respect of the 2024 financial year.

The sustainability report shall be prepared in accordance with the European Sustainability Reporting Standards and includes (among other things): (i) a brief description of the company’s business model and strategy; (ii) a description of the deadline-based targets for the sustainability issues identified by the company; (iii) a description of the role of the administrative, management and supervisory bodies in relation to sustainability issues; (iv) a  description of the company’s policies on sustainability issues; (v) information on the existence of incentive schemes offered to members of the administrative, management and supervisory bodies relating to sustainability issues; (vi) the due diligence process undertaken by the operator in relation to sustainability issues; (vii) the main actual or potential adverse impacts related to the undertaking’s own operations and value chain and the measures taken to identify and monitor these impacts; (viii) the measures taken by the company to prevent, mitigate, remedy or eliminate actual or potential adverse impacts and the results thereof; (ix) a description of the main risks to the undertaking in relation to sustainability issues; and (x) indicators relevant to the above disclosures.

The undertaking shall publish its annual report including the sustainability report also on its website. If the undertaking does not have a website, it shall provide a hard or electronic copy of the annual report free of charge upon request.

Furthermore, directors of organisations shall also annually publish a report related to the corporate sustainability due diligence obligations set forth in the ESG Act. The ESG Act refers to this report as “ESG report”, however should not be confused with the corporate sustainability reporting obligations set out in the Accounting Act as the “ESG report” included in the main body of the ESG Act is a report related to the corporate sustainability due diligence related obligations. As a result, organisations are required to produce an annual ESG report in Hungarian in electronic format on the fulfilment of their sustainability due diligence obligations for the previous financial year and to make it publicly available on their website free of charge within six months of the end of the financial year. Such ESG report shall include (i) a description of the sustainability due diligence process carried out in relation to sustainability issues, (ii) the company's findings as to whether and which CSR and environmental risks or breaches of human rights or environmental obligations have been identified, (iii) the measures taken by the enterprise to prevent, mitigate or remedy actual or potential adverse sustainability impacts and their results, (iv) a description of how the enterprise assesses the impact and effectiveness of these measures, and (v) a description of the conclusions the enterprise draws for future measures. The undertaking shall publish its “ESG report” on its website and also submit it to the ESG management platform operated by the competent authority.

Under Hungarian law, the management of limited liability companies, the most common company form in Hungary, is performed by one or more managing directors. If more managing directors are appointed, they do not form a board and do not act as a decision-making body; all of them are entitled to manage the company individually. However, due to recent court practices, it is now possible to establish a board of directors in the constitutional document as a management body of limited liability companies.

In the case of private companies limited by shares, the management is performed either by a chief executive officer as a sole director or a board of directors composed of at least three members. The board of directors operates as a decision-making body and passes its resolutions with the simple majority of the votes of its members. The board of directors and the supervisory board are two separate and independent organs in the company’s internal structure.

In the case of public joint stock companies, the company may be directed either by a board of directors being responsible only for management duties, or by a unitary board which performs both management and supervisory board duties. A unitary board shall comprise at least five members and the majority of its members shall be independent persons.

Hungarian law does not distinguish between executive and non-executive directors.

Both natural and legal persons may be appointed as a director. If the company appoints a legal person, the legal person must designate a natural person to discharge the functions of executive officer in their name and on their behalf. The rules pertaining to directors also apply to the designated person. Both members and non-members of the company may be appointed as a director. The person elected must inform the company in writing if he/she already holds a similar position within fifteen days after his/her acceptance of the new position.

Any natural person being of legal age whose legal capacity is free of any restrictions that would hamper the performance of management duties may be appointed as a director of a Hungarian company. Residency in Hungary is not a requirement: a Hungarian or a foreign individual can be appointed as a director.

However, a person who has been sentenced to imprisonment by a final judgment for committing a crime, until being released from the negative legal consequences relating to his/her criminal record, or who has been barred by a final judgment from being a senior officer, cannot be appointed as a director during the effective period of such ban. In addition, a person who has been banned by a final court verdict from any profession may not be appointed as a director during the effective period of such a ban in a company which pursues such a profession as its business activity.

In addition, the Court of Registration may ban such person from holding an executive office for a period of five years (i) who has been found liable by a final court decision for any claims that remained unsatisfied in the proceedings leading to the termination of a company without legal succession (by way of liquidation or forced dissolution) and if this person has failed to effect the payment obligations in compliance with the final court decision, (ii) who had unlimited liability for the debts of the company and failed to perform his payment obligation or (iii) against whom the Court of Registration imposed a fine and he/she failed to fulfil his/her payment obligation under the final court decision. In addition, if the company cannot be found at its registered seat or the tax authority deletes the company’s tax number, and therefore the company terminates without legal succession in a forced dissolution procedure, the Court of Registration bans such person from holding an executive office who was the executive officer, a member with unlimited liability, or a member having majority control at the time of the commencement of the forced dissolution procedure.

A director is required to disclose the following personal details: (i) his/her full name, (ii) full name of his/her mother, (iii) date of birth, (iv) home address, (v) tax number and (vi) in the case of a foreign tax number, the country where such tax number was issued. This information will also appear in the publicly available Companies’ Register.

A director is appointed by the members’ meeting or, in the case of a single-member company, by the sole member. The appointment may last for a definite period which cannot exceed five years or, if the constitutional document so permits, for an indefinite period. The appointment becomes effective when the director accepts the  position. Companies may have one or more directors; the number of the directors appointed is not limited.

A director may resign at any time by giving notice to the company. If so required for the operation of the company, any resignation will only take effect when a new director has been appointed or alternatively, on the 60^th day after the announcement of the resignation.

The members’ meeting may remove the director at any time by means of a resolution passed by way of a simple  majority vote (higher voting requirements may be stipulated in the constitutional document). Appointments and removals of directors must be registered with the Court of Registration. When a director who has an employment contract with the company is removed, the terms of the employment contract must also be observed in the course of the removal.

The mandate of a director terminates also in the case of (i) expiration of the mandate if the director is elected for a definite period, or if his/her mandate is subject to a condition for termination; (ii) restriction of his/her legal capacity which is necessary to carry out his/her duties, (iii) occurrence of a reason for exclusion or (iv) the director’s decease.

A director is authorised by law to represent the company vis à vis third parties and before the court and other authorities and to sign for and on its behalf. The method of representation is determined by the constitutional document of the company which can be either individual or joint. Representation capacity may be restricted (e.g. by internal company regulations); however, such limitation is not effective vis à vis third parties.

Directors may authorise any employees of the company with representation and signing right in a specific scope of matters (e.g. HR matters, finance issues). Such authorisation must also be registered with the Court of Registration.

By law, the managing directors of a limited liability company, the most common company form in Hungary, do not form a board. This means that a managing director’s right to represent the company may only be restricted by stipulating a requirement for joint signatures. Although it is possible for the constitutional document to provide for a division of responsibilities between different directors, this division would not be effective vis à vis third parties (i.e. if a managing director signed a document outside his/her authority, the signature would still bind the company). Similarly, the constitutional document may require the prior approval of the members’ meeting or the supervisory board to enter into certain agreements. However, any agreement entered into in breach of this requirement would nonetheless bind the company.

In the case of private companies limited by shares and public joint stock companies, the directors form a board which performs its management duties as a body. The board shall elect a chairman from among its members and shall pass its decisions with the simple majority of the votes. The board shall prepare a report on the management, financial situation and business policy of the company at least once a year for shareholders and at least once every three months for the supervisory board of the company. Hungarian law does not provide detailed rules concerning the competence, operation and meetings of the board; this is usually regulated by the constitutional document or by the by-laws adopted by the board of the company.

A director may perform his/her management duties on the basis of a service agreement or an employment agreement. If the director has a service agreement, he/she may, but need not, be remunerated by the company. In the case of an employment agreement, remuneration needs to be provided on a statutory basis. It is also possible to engage the director under a service contract for his/her duties as a director and at the same time employ him/her under an employment agreement for tasks different to those carried out as a director. Further, a  director may also have a contractual relationship with the company as a consultant providing services under a consultancy agreement.

The structure chosen is mainly a tax-driven decision. Termination of a directorship does not automatically terminate the employment/consultancy contractual relationship and vice versa. However, an agreement may provide that it terminates forthwith upon the individual concerned ceasing to be a director of the company.

To avoid possible conflicts of interest, directors may not acquire ownership (except for the acquisition of shares in a public joint stock limited liability company) and may not accept an executive office in any company whose main business activity is similar to that of the company where he/she already serves as a director, unless the constitutional document of the relevant company so permits. The constitutional document may specify that such a restriction applies to companies pursuing the same activity (i.e. not the same main activity).

Directors and their relatives (including spouse, children, parents, and relatives like the parents and children of his/her spouse etc.) may not conclude contracts on their own behalf (or for their own benefit) that fall into the main scope of activity of the company, unless the constitutional document permits this or unless they are considered to be everyday transactions. The director or his/her relatives may not be elected as a member of the supervisory board at the same company.

Generally, directors conduct the management of the company, represent the company vis à vis third parties and perform other obligations imposed upon them by law or by the constitutional document of the company. All matters relating to the management of a company that do not fall within the exclusive scope of the members’ meeting or other company organs on a statutory basis or pursuant to the constitutional document of the company are generally within the power of the directors.

The general management tasks of the directors include, for instance (i) the development and management of the working organisation and business of the company, (ii) preparation of the company’s annual financial report and proposal for the distribution of profits, and submission of the aforementioned for approval to the members’ meeting, (iii) the maintenance of the company’s financial records in accordance with applicable regulations and (iv) the determination of the company’s internal procedures.

In addition to directors being generally authorised to exercise the company’s rights as an employer over the employees of the company, they are responsible for reporting to the Court of Registration amendments to the constitutional document and the changing of any of the rights, facts and data entered in the Companies’ Register as well as any other data required by law. Directors are responsible for the keeping of the members’ list in the case of limited liability companies and the book of shares in the case of private companies limited by shares and public joint stock companies. In addition, if it comes to the attention of the directors that the company has financial problems (i.e. its equity has dropped below the registered capital or the statutory capital minimum, it is threatened with insolvency, it has stopped making payments and its assets do not cover its debts), he/she shall initiate the holding of a members’ meeting to provide for the necessary measures.

Directors shall perform their management duties individually by giving priority to the interests of the company subject to the legal provisions, the constitutional document and the resolutions of the members’ meeting of the company.

Generally, directors may not be instructed by other organs of the company; however, as an exception, in the case of single-member companies, the sole member may instruct the directors and the directors must follow such instruction (i.e. execute or implement the decision of the sole member).

Generally, directors must conduct the management of the company by giving priority to the interests of the company. However, if a situation occurs that threatens the company with insolvency, the directors must perform their management tasks by taking into consideration the interests of the company’s creditors. The occurrence of the threat of insolvency is the date and time from which the directors were or should have been able to foresee that the company would not be able to satisfy its liabilities when due.

In the case that the directors do not comply with the above obligation and the company eventually becomes subject to a liquidation procedure, then the directors shall have joint and several liability vis à vis the creditors of the company. The directors are exempted from their above liabilities if they can prove that following the occurrence of the threat of insolvency, they have taken all measures that could be expected in such situation in order to reduce the losses of creditors and in order to initiate the decision-making of the members.

Liability towards the company: 

in general, directors must conduct the management of the company by giving priority to the interests of the company. Directors are liable towards the company for damages caused to the company by violation of the law or breach of the company’s constitutional document or resolutions of the members in the course of the management of the company in accordance with the general rules of liability for the breach of a contractual obligation. A director may be exempted from liability against the company if the director proves that the damage occurred in consequence of (i) unforeseen circumstances, (ii) beyond his/her control and (iii) he/she could not have been expected to take action to prevent or mitigate the damage. These circumstances can only be identified in a given situation; the expectable level of control naturally varies depending on the specific size of the company, its structure, organisation, number of executive officers, how the work is divided between them, etc.

In the case of single member companies, the sole member is entitled to instruct the directors and the directors must follow such instructions. However, if the director executes the instruction of the sole member, and as a result of such instruction a damage is caused to the company, the director is exempted from liability towards the company since he/she was required to follow the instructions of the sole member on a statutory basis. It may, however, be expected of directors to call attention to the fact if the execution of a certain resolution is likely to result in damage or loss to the company.

Liability towards third persons: 

as a general rule, if a director causes a damage to a third person in relation to his/her position as a director, the company shall be held liable for such damages. However, as an exception, the director and the company are liable for these damages on a joint and several basis if the damage was intentionally caused by the director.

Liability when the company is threatened with insolvency:

 if the company is threatened with insolvency, the directors must perform their management tasks by taking into consideration the interests of the creditors. In the case that the directors do not comply with this obligation and the company eventually becomes subject to a liquidation procedure and, in consequence, the company’s assets have diminished or the fulfilment of the creditors’ claims otherwise fails, then the directors shall have joint and several liability vis à vis the creditors of the company. This rule applies to the directors serving as such at the time of the initiation of the liquidation procedure and also during a period of three years preceding that date. It also applies to persons exercising de facto dominant powers in the decision-making process of the company (i.e. shadow management).

The directors are exempted from their above liability if they are able to prove that following the occurrence of the  threat of insolvency, they have not undertaken any unreasonable business risk when compared to the financial situation of the company, they have taken all measures that could be expected in such a situation in order to reduce the losses of creditors and in order to initiate the decision-making of the members.

Directors may request the members’ meeting to evaluate their performance in the previous financial year and to decide on granting a discharge of liability. Granting a discharge of liability constitutes the members’ verification that the directors have performed their tasks during the period under review by giving priority to the interests of the company. Such discharge can be granted upon the request of the managing director at certain times: (i) either when the members approve the company’s annual financial statements or (ii) when the director’s appointment is terminated.

If the members’ meeting grants a discharge of liability to a director, then this exempts the director from liability against the company retroactively. If the discharge is granted, the company may only bring an action against the director if the facts and data based on which the exemption was granted were incomplete or untrue. The discharge of liability does not provide an exemption from the liability of directors towards third parties.

Within their internal relationship, the company and the director may agree on a limitation of the director’s liability. With respect to external relationships (i.e. the liability of the director towards third parties), it is possible for the company to grant an indemnity to the director by which the company undertakes to compensate the director for certain damages or losses. A company is also permitted to purchase directors’ and officers’ insurance on behalf of its directors.