Employment law aspects of a managing director’s recall

The Hungarian Civil Code defines several forms of termination of a managing director’s mandate, among which “recall” can be a common source of legal disputes in Hungary. The termination of a managing director’s mandate through recall is unique as it immediately ends the mandate without the need for justification. This stands in contrast to the termination of the employment relationship, which cannot be immediately terminated without cause.

In Hungary, as in most European countries, the duties of a managing director may be performed via an employment relationship or a mandate relationship, with assignments for a fixed or indefinite term. The Civil Code allows the termination of the managing director’s mandate by recall at any time, even before the expiry of the fixed term, without any notice period, condition, or obligation for reasoning. The consequence of this is that if a company's decision to recall the managing director has been taken in accordance with due company process, its legality cannot be challenged. 

However, if the position is performed within the framework of an employment relationship, compliance with the Labour Code is necessary for termination. In general, labour law does not allow the termination of an employment relationship with immediate effect without providing grounds.

The Labour Code outlines three ways to terminate employment: (i) mutual agreement, (ii) ordinary notice, or (iii) immediate dismissal. This also applies to executive employees, with the difference that the managing director’s mandate can be terminated without stating reasons when using ordinary notice, which doesn’t have an immediate effect; but in case of immediate dismissal the employer is obliged to give reasons for the termination.

This apparent contradiction in provisions poses challenges for business owners, creating situations where the recall may be lawful, but the termination of employment is deemed unlawful.

To our knowledge it is contrary to European jurisprudence that Hungarian judicial practice allows the termination of a managing director’s employment through recall beyond the three mentioned methods. However, the recall in this sense must comply with labour law provisions for the termination. Recall without grounds is legally possible only if the measure meets the requirement of an ordinary notice, as no reasons need to be stated in such cases.

If the employer intends to terminate the employment relationship with immediate effect, either by termination or recall, the employer must provide grounds. A provision in the employment contract which does not require the employer to give grounds for an immediate termination of an employment is therefore contrary to the provisions of the Labour Code.

The situation in Hungary, contrary to European practice, allows for the managing director’s employment to be ended by a recall stated in the shareholder’s resolution, but labour law rules must also be taken into account in order to ensure that the recall is lawful not only under company law but also under labour law.

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Dr Vanda Halasi graduated from the Faculty of Law in Budapest in 2003, then in Amsterdam she studied law in English in a Master programme. After working as trainee lawyer she passed the bar exam in 2009. Her main areas of practice are corporate and commercial law, labour law, liquidation and real estate law.