Why Is Equity Protection Ineffective In Hungary?

This article has also been published in the Book of Lists 2011-2012 of Budapest Business Journal in December 2011.

The Hungarian Companies Act ("CA") and others have long contained provisions to protect creditors. One provision prohibits a limited liability company from paying dividends to its shareholders if it does not have sufficient funds.

The prohibition against the payment of excessive dividends is obvious, and also non-lawyers will easily recognise when such a prohibited payment occurs (or is about to occur). The payment of a dividend can, however, also be made in a hidden manner, for example under a rental or a consultancy agreement, or by granting other advantage to a shareholder, for example in the form of a security provided by the company to secure an obligation of the shareholder. In these cases it is much more difficult to judge whether or not the the hidden benefit or advantage granted to the shareholder constitutes a prohibited payment.Therefore, the