In this next article on the liability of limited liability company management board members, we address the issue of liability in the context of the conditions described in Article 116 of the Tax Ordinance. The liability of a management board member, as defined in Article 299 of the Commercial Companies Code, applies to both civil and public law liabilities, unless the basis for liability arises from specific provisions. With respect to tax liabilities and those specified in Article 2 of the Tax Ordinance and Articles 31–32 of the Act on the Social Security System and Other Public Levy, Article 116 § 1 and 2 of the Tax Ordinance is such a provision.
The purpose of introducing the regulation
The purpose of the regulation introduced in the Tax Ordinance is to introduce sanctions regulating the liability of management board members for improper management of company affairs, which led to the inability of the State Treasury to satisfy its claims from the company's assets during enforcement proceedings. Management board members must therefore be mindful of the consequences of improper company management. This provision is also intended to motivate management board members and shareholders in their selection.
Subject and scope of responsibility
Article 116 of the Tax Ordinance clearly states that the members of the management board are jointly and severally liable for the tax arrears of a limited liability company, a limited liability company in organization, a joint-stock company, or a joint-stock company in organization with all their assets. This liability is joint and several with the company, modeled on Article 299 of the Commercial Companies Code. Failure to satisfy a creditor in enforcement proceedings for even a portion of the company's tax arrears may result in the tax liability of the company's management board members, but the creditor must demonstrate that enforcement measures have been applied to the debtor's entire assets. The ineffectiveness of enforcement against a company should be understood broadly. It must apply to all the company's assets, and the creditor must exhaust all avenues related to enforcement proceedings. Therefore, the enforcement authority must take action against all assets belonging to the company. Otherwise, the decision on the liability of a management board member for tax liabilities will be invalid. A member of the management board of a capital company is liable with all of their assets for tax arrears incurred while they were serving in that capacity, in accordance with the Commercial Companies Code. Pursuant to Article 116 § 2 of the Tax Code, a management board member's liability includes tax arrears arising from the company's obligations, the payment deadlines of which expired while they were serving as a management board member. In proceedings concerning the tax liability of management board members for the company's tax arrears, the amount of the tax liability for which the management board member is liable is not determined. This amount has already been determined in the tax proceedings.
Freeing yourself from responsibility
However, a management board member is not left without instruments that allow them to effectively protect themselves against liability transfer. The above-mentioned provision of Article 116 of the Tax Ordinance provides that in certain situations, a management board member's liability is excluded.
Any member of the management board may file a bankruptcy petition independently, regardless of the company's representation rules. A declaration of bankruptcy is not necessary for a management board member's liability to be excluded, as the provision only requires the petition to be effectively filed. The Supreme Administrative Court expressed a similar view in its judgment of November 13, 2020, in case file reference SA/Sz 1856/00.
A member of the management board may also be released from liability under Article 116 of the Bankruptcy Code if he or she filed a bankruptcy petition in due time or if restructuring proceedings were initiated within the meaning of the Act of 15 May 2015 – Restructuring Law.
Furthermore, a management board member may also be exempt from liability if the failure to file a bankruptcy petition was not through their fault. A management board member's liability is based on fault, and demonstrating the absence of fault is one of the prerequisites for releasing a management board member from liability for the company's obligations. Liability will be excluded if the member demonstrates that the failure to file a bankruptcy petition was not through their fault – in accordance with Article 116 § 1 item 1 letter b of the Tax Ordinance. Examples of lack of fault include failing to timely file a bankruptcy petition despite the existence of the prerequisites, if the management board member influenced the steps taken to declare the company's bankruptcy because they were no longer a management board member, or if they were unable to become familiar with the company's financial situation. Therefore, lack of fault should be understood as factual circumstances in which the management board member had no objective opportunity to file a bankruptcy petition. However, it should be remembered that, as a rule, ignorance of the company's financial condition is considered a dereliction of duty by a management board member.
A management board member may also be exempt from liability if they identify company assets from which enforcement would enable a significant portion of the company's tax arrears to be satisfied. Therefore, the management board member must identify assets from which enforcement can be effectively conducted. The management board member must therefore present actual company assets against which the tax authority has not initiated enforcement proceedings at an earlier stage.
Summary
The liability of management board members for tax liabilities in companies is very broad, but proper management of the company's affairs allows for avoiding this liability. The company's financial situation should be considered, as well as the potential decision to file for bankruptcy. The evolving Fiscal Penal Code, which sanctions the criminal liability of management board members for non-compliance with tax regulations, should also be taken into account.
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