Approval of the Annual Financial Statements and Year-End Closing: A Comprehensive Legal Guide for Corporate Executives

Author: Dr. István Herdon LL.M.

Managing Partner, Attorney-at-Law, Specialist in Economic Law (Herdon Law Firm – Debrecen, Hungary)

For Hungarian companies, the approval of the financial statements under the Accounting Act is the most significant legal and financial event of the year. This process is not merely about recording past figures; it involves critical decisions such as dividend payments, capital settlement, and the discharge of liability for management. Precise execution is essential, as negligence can lead to severe consequences ranging from tax authority sanctions to the unlimited personal liability of executive officers.

1. Competencies and the Preparatory Process

Under the cogent rules of Hungarian corporate law, the approval of the financial statements and the distribution of profits (dividend payments) fall under the exclusive competence of the company’s supreme body (Members’ Meeting or General Meeting).

• Management’s Responsibility: While the final decision rests with the owners, the preparation is the responsibility of the management. Executives are required to prepare the draft financial statements and a proposal for the use of after-tax profits (e.g., allocation to retained earnings or dividend payment).

• Shareholders’ Right to Information: Transparency is fundamental but not unlimited. Members (shareholders) have the right to review the draft statements, but it is important to clarify that they do not have an inherent right to receive copies of all supporting vouchers and documents in writing. The right of inspection is, by default, exercised at the company’s registered office.

• Public Limited Companies (Nyrt.): In their case, the essential data of the financial statements must be made available to shareholders at least 15 days before the General Meeting.

2. Four Forms of Decision-Making: Flexibility and Legality

The Civil Code (Ptk.) and accounting regulations provide several ways to pass resolutions, taking into account modern technological solutions:

Conventional Meeting

This is the classic form requiring personal presence. The management convenes the members by providing the specific agenda through an invitation containing all legally required elements. The venue is typically the registered office, unless the Articles of Association state otherwise.

Decision-Making Without a Meeting (Written Resolution)

This form is faster and more cost-effective but requires authorization in the Articles of Association. If the company wishes to utilize this option, the Articles must first be amended during a conventional meeting. The management sends the draft resolution and the statements, and members have at least 8 days to vote. If any member requests it, a meeting must be convened. (Not applicable for Nyrt.).

Conference Meeting

A meeting held via electronic communication tools (e.g., video call). It requires the Articles of Association to define the method of identification and the communication tools used, ensuring interaction between members and the recordability of decisions.

Sole Shareholder Companies (Relevant for Kft. and Zrt.)

In this special case, there is no classic meeting; the sole member or founder makes the decision in writing, which becomes effective upon communication to the management.

Professional Warning on “Sham Decision-Making”: A common bad practice is when an accountant or manager simply drafts a “Resolution Extract” without a factual meeting, written vote, or electronic session. This is unlawful from a corporate law perspective and may result in the invalidity of the resolution. If such a document is used in official proceedings, it may also entail criminal consequences.

3. External and Internal Audit: The Mandatory Power of Reports

In several cases, the involvement of control bodies is an essential condition for the valid approval of the statements:

• Supervisory Board: If such a body operates at the company, the supreme body can only pass a valid decision if it possesses the written report of the Supervisory Board. The absence of this report may render the resolution unlawful.

• Auditor: If an audit is mandatory by law or by the Articles of Association, an independent auditor must provide an opinion on whether the financial statements comply with the law and provide a true and fair view of the company’s financial position.

4. Capital Protection and Financial Decisions: Dividends and Supplementary Capital

The closing of the business year determines the direction of capital movements, governed by strict guarantee rules.

Conditions for Dividend Payment

The decision on dividends can be made simultaneously with the approval of the financial statements. The limit is clear: after payment, the company’s equity must not fall below its share capital, and the amount paid cannot exceed the net profit of the previous year or the available retained earnings.

Supplementary Capital (Pótbefizetés) as an Emergency Measure

In the event of loss-making operations, supplementary capital serves to settle the equity position, but only if the Articles of Association provide authorization (specifying the maximum amount and frequency). The resolution must record the method and schedule of payment. Once the loss is covered, unnecessary amounts must be repaid to the members.

Mandatory Decisions on Capital Loss: If the equity falls below half of the share capital (or the statutory minimum), management must convene the supreme body to decide on capital settlement, transformation, or dissolution without a legal successor.

5. Discharge of Liability (Felmentvény): Settling Executive Responsibility

For an executive officer, the approval of the statements is also the time to clarify liability issues. By granting a discharge of liability, the supreme body certifies that the executive acted in the best interests of the company during the previous year.

• Legal Effects: The discharge limits the company’s compensation claims against the executive. It can only be challenged later if the data serving as the basis for the discharge was false or incomplete.

• Procedural Rule: The decision must be placed on the agenda, and if there are multiple executives, a separate resolution must be passed for each person.

Important Court Practice: The decision on the discharge of liability must be made at the same meeting as the approval of the financial statements, but not in a single resolution. Joint voting violates the members’ participation rights (Budapest Court of Appeal 13.Gf.40.022/2023/5-II.).

6. Publication and the Multi-Stage Sanction System

The final, critical step is the filing and publication of the financial statements.

• Deadline: For a business year matching the calendar year, the deadline is May 31st.

• Method: Exclusively electronic, through the Government Portal to the Company Information Service. The process has been free of charge since 2016.

The National Tax and Customs Administration (NAV) Sanction Process:

1. First Notice: A 30-day deadline is set to rectify the default.

2. Fine: If the default persists, NAV imposes a default fine of HUF 200,000 and grants another 30 days.

3. Cancellation of Tax Number: Following an unsuccessful second notice, NAV irrevocably cancels the company’s tax number.

4. Involuntary Liquidation: NAV notifies the Court of Registration to initiate the dissolution of the company.

Personal Consequences for Executives:

• Tax Registration Obstacle: Due to the cancelled tax number, the affected executive may be barred from founding new companies for 5 years.

• Financial Liability: Executives are held unlimitedly and jointly liable for damages resulting from the failure to fulfill asset or document transfer obligations.

• Criminal Context: Violating the order of accounting or using forged private documents can lead to criminal prosecution.

7. Strategic Opportunities: Transformation and Corporate Structuring

The approval of the annual statements can also serve as the foundation for future corporate structures.

• Mandatory Capital Settlement: If capital loss persists for two consecutive years, members must restore the equity position within 3 months (via supplementary capital, debt waiver, or capital increase).

• Benefits for Transformation: If owners plan a change in corporate form, a merger, or a demerger, the balance sheet of the annual statement (if no revaluation occurs) can be used for 6 months as a draft statement of assets and liabilities. This results in significant administrative and cost savings by avoiding the preparation of a separate technical inventory.

8. Amendment of the Articles of Association

Under Section 3:4 of the Civil Code, members may deviate from statutory provisions, but such deviations are only valid if explicitly recorded in the Articles of Association. Tacit practice is not legally binding.

Examples of Permitted Deviations:

• Organization: Implementing a board of directors instead of a single manager, or appointing a legal entity as an executive officer.

• Decision-Making: Introducing written resolutions or conference meetings, or modifying voting ratios.

• Financial Matters: Dividend distribution differing from capital contributions or unique supplementary capital rules.

• Liability: Limiting the executive officer’s liability for damages caused to the company in cases of non-intentional negligence.

9. The Role of Legal Counsel in the Year-End Closing

The complexity of the annual closing highlights that a successful year-end goes beyond the mere recording of accounting data. The involvement of an expert legal representative primarily serves risk management and provides internal guarantees for lawful operation. The lawyer’s task is the professional supervision of the entire corporate decision-making process, ensuring that owner decisions are not only substantively sound but also formally compliant with cogent legal frameworks. This prevents procedural errors that could later lead to the invalidity of resolutions or internal corporate disputes.

Legal support is particularly valuable when settling liability relationships and applying capital protection regulations. Expert advice helps align the company’s current economic situation with long-term strategic goals, whether regarding internal liability documents or necessary fine-tuning of the organizational framework.

10. How Can Herdon Law Firm Support Your Business?

Navigating the complexities of year-end closing requires precise legal synchronization. Herdon Law Firm provides targeted legal solutions to ensure your company remains compliant and protected throughout the financial reporting season. Our firm offers concrete support in the following key areas:

• Corporate Governance and Meeting Management: We manage the entire lifecycle of the decision-making process, from drafting legally compliant invitations and organizing conference-call meetings to documenting resolutions that stand up to judicial scrutiny.

• Liability Protection for Executives: Our team specializes in drafting discharge of liability (felmentvény) documents tailored to current court practices, effectively mitigating the personal financial risks of executive officers.

• Capital Settlement and Restructuring: We provide strategic advice on mandatory capital restoration, including the legal implementation of supplementary capital (pótbefizetés), debt waivers, and capital increases to maintain a healthy equity position.

• Articles of Association Modernization: We update your governing documents to enable modern decision-making forms—such as written resolutions or electronic sessions—ensuring your company’s internal regulations align with the latest provisions of the Civil Code.

• Crisis Prevention and Compliance: We act as a proactive barrier against regulatory risks, preventing the cancellation of tax numbers and involuntary liquidation procedures through timely publication management and legal auditing.

By partnering with Herdon Law Firm, corporate leaders in Debrecen and across Hungary gain the security of a transparent, legally sound business structure that fosters long-term growth and creditor confidence.