Many people could be in for a nasty surprise when trying to set up a company: the company court refuses to register the majority owner or managing director on grounds that the person is subject to a ban. While the banned persons sometimes know that they have “been up to no good”, in other cases they are baffled as to the reasons for the ban. A lot is at stake: a person who is banned could end up on the “black list” for up to 7-8 years.

Anyone who is irresponsible, acts in bad faith or is negligent should not be a manager or majority shareholder of a company – this sums up the message of the laws on creating and maintaining blacklists. These rules, however, are somewhat multifarious, and it seems that they are sometimes stricter than is desirable. This can lead to some very unpleasant situations.

Bans can be imposed in various circumstances:

1. Tax debts

The managing director or majority owner of a company will be blacklisted by the tax authority (NAV) if the company has a tax debt in excess of HUF 5 million for more than 180 days, or if the company goes into liquidation and, at the end of the procedure, leaves behind a tax debt of more than HUF 5 million. In the former case the ban lasts for as long as the tax debt is outstanding, but in the latter case it remains in effect for 5 years from the closure of the liquidation procedure.

It is by no means unusual for NAV to declare tax arrears in the case of companies that act prudently, and it is also not uncommon for a company to go into liquidation due to these tax arrears. Besides potentially losing the results of maybe several decades of work, in such cases the owner or managing director can also expect to be blacklisted for up to another 7-8 years. What is more, there is no opportunity to request leniency, for example, on the grounds that the director acted with the appropriate degree of diligence and care.

Even more dangerous is the fact that the ban also applies to those who were managing directors or majority owners during the one-year period preceding the event giving grounds for the ban. Accordingly, if somebody sells its company in September 2016, entirely in good faith, and the company is liquidated one year later due to a tax debt, the unsuspecting seller could also end up on the blacklist.

2. Deletion procedures

The company court conducts a forced deletion procedure if it detects a serious breach of the law relating to the company’s operation (for example, if the company’s managing director has resigned and a request for the situation to be remedied can not be delivered at the company’s registered office). Similarly, NAV may also exercise its right to delete a company’s tax number in the event of certain deficiencies (for example if there is no company sign outside the firm’s registered office, and the entity does not remedy this shortage).

To deter entrepreneurs from abandoning their companies, in these cases both NAV and the company court put, or may put, the managing director or majority owner of the deleted company on the blacklist. If the ban is imposed by the company court, such sanction will not only apply to future managing director positions, but the person concerned will also be deleted from the records of all registered companies where it holds the post of managing director.

The rule carries a number of risks that even companies whose operations are totally above-board need to take into consideration. The threat of deletion of the tax number, and with it a ban, can arise even as the result of a relatively minor irregularity. Also, the one-year retroactive effect applies in these procedures as well: if the deletion of a company, sold in September 2016, starts in August 2017, the seller of the company will also be blacklisted regardless of whether or not he knew of the buyer’s dishonest intentions.

3. Liquidation

A ban can also be a possibility in the event of a liquidation procedure. If the executive officer of a company under liquidation is held to account for a breach of the rules on the protection of creditors, then – in addition to liability for indemnification – he also faces a ban: for 5 years following the liquidation procedure he may not be an executive officer or majority owner of a company. The ban, similarly to the sanction applied in the event of a forced deletion, may also affect existing management positions, as the company court will also delete the banned person’s status as executive officer at other companies.

In order to impose the ban, in this case, it is also necessary to establish the manager’s personal liability, arguing that it did not take the best interests of the creditors into account. But how the executive officer of a company under threat of insolvency can act correctly and take the best interests of creditors into account, while being squeezed from several sides at once by a number of creditors, is another question altogether.

What should we do to avoid a ban?

The simple answer to this question is, obviously, to avoid allowing the company to accumulate a tax debt or to come under a forced deletion or a liquidation procedure. Life, however, is never that simple, and the tax authority may penalise even the most careful company, while even a relatively minor act of carelessness can be sufficient to result in the deletion of a company’s tax number.

The situation is even more difficult if the individual sells its company: it has no control over what the new owner will do with it. In such cases, even a contractual commitment by the buyer with sanctions for non-compliance, is not enough because it is difficult to quantify the damages that may result from an inability to manage or own a company for several years. In cases of this type, it is especially important to choose a buyer who can be relied on to continue running the sold company as before.