Applicable Penalties in Case of Non-compliance with Registration Rules

Applicable Penalties in Case of Non-compliance with Registration Rules

Contributed by Gárdos, Füredi, Mosonyi, Tomori

June 15 2005

In a significant case (Gfv. X. 31.521/2003) the Supreme Court has ruled that:

• the submission of an application for registration of the acquisition of a controlled company by the company itself does not release the controlling entity from its obligation to report the acquisition of its majority or controlling interest;

• the increased liability of the controlling entity begins on the last day of submission for registration and runs until the time of reporting; and

• pursuant to this increased liability, the acquiring entity bears full and unlimited liability for the debts of the controlled company incurred between the last day for lawfully submitting notification of the change and the date of reporting.

Under Section 292 of the Company Act 1997, an acquiring company that is in the process of acquiring more than 50% or 75% of the voting interest must report the acquisition to the registration court and place a notice in the Official Gazette within 30 days of the acquisition. The acquiring company is subject to unlimited liability in the event of a delay and if, in the course of the liquidation of the controlled entity, its assets fail to cover its liabilities towards its creditors. This provision was included in order to ensure that creditors and minority shareholders are informed of any change in control.
In the case, the claimant purchased bonds issued by one of the defendants. The defendant became insolvent and the new owner increased the entity's capital in a bid to save it. The acquisition of almost 100% interest was filed for registration by the controlled entity itself and not the new owner.

The claimant claimed the value of the bonds from the new owner on the basis of Section 292 of the Company Act. The acquiring entity argued that the purpose of the reporting obligation was achieved by the filing for registration of the acquisition by the controlled entity, and therefore there was no reason to establish unlimited liability, as the creditors had been informed about the company's new owners. Moreover, even if the reporting obligation was not met, the acquiring entity could not be held liable for a debt incurred before the last date allowed by the Company Act for meeting the reporting obligation.

The Supreme Court established that due to the mandatory application of the provisions of the Company Act, the acquring entity faces increased liability if it does not meet its reporting obligations, even if the information is available to creditors pursuant to its own reporting obligation. However, the court also established that liability is limited to debts incurred during the period when the reporting should have been made but was not, thereby clarifying that the acquisition of an entity does not trigger increased liability for debts incurred prior to acquisition.

For further information on this topic please contact Dr Katalin Füredi or Dr István Gárdos at Gárdos, Füredi, Mosonyi, Tomori by telephone (+36 1 327 7560) or by fax (+36 1 327 7561) or by email

(furedikatalin@gfmt.hu or gardos@gfmt.hu).

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