Begegnungen
Schriftenreihe des Europa Institutes Budapest, Band 25:31–40.
TAMÁS SÁRKÖZY
The Law of the Institutional System of Market Economy in Hungary and the European Union
It is primarily economic law that is supposed to reflect the law of the institutional system of market economy, which can be called trade law by a somewhat dated expression. This sphere includes the status rights of business organisations, meaning primarily the law on economic (commercial) associations, including the law on co-operatives, and the law on concerns and company procedures and registration that has evolved in the second part of the 20th century. Law on bankruptcy (the law on insolvency), on securities and the stock exchange, on banking and insurance, and on competition also belong to this group, and the institutional system of the law on consumer protection and advertising is also included in the latter one. Finally, this sphere covers the law on commercial transactions and economic contracts, on industrial protection and the law on intellectual property in general, the latter one increasingly comprising the law related to information revolution (law on the internet, etc.).
The topic defined in the title can be approached from two sides, from the economic law of the European Union and from that of Hungary acceding to the Union.
The “economic law” of the Union
As far as the European Union is concerned, the Community has not come forward with the claim of developing a uniform economic law, extending over everything, above the economic law of the Member States, making them void, ever since the Treaty of Rome. In keeping with its liberal economic policy, the Union has been satisfied with:
a) Building supranational institutions in some key areas. An institution of this kind was the European Economic Interest Grouping approved in 1985, as a legal entity of coordination and co-operation, the European Company approved in 2001, which is in fact a European Company Incorporated, and the European Cooperative Society, approved in 2003. They are supranational associations, directly regulated by the Union (as far as its content is concerned this regulation is directly operational in the Member States, it only has to be technically incorporated into the countries’ law), and such associations can be set up if legal subjects of at least two Member States found them, or participate in them;
b) The European Union tries to orient the legislation of Member States also in key areas, primarily in the field of big business (major companies incorporated, stock exchanges, banks, insurance companies, etc.) by guidelines, they have to be aligned to and approximated. For instance, the most important data of the companies incorporated that are operating publicly, in keeping with the No. 1 Union company-law guideline – that is the guideline of publicity – have to be made public in an authorised registration, which, in a broad sense, is a guideline for the protection of consumers and investments. The Union, however, does not regulate whether this public registration is kept by public-law chambers (as in France), or by the administrative judiciary (as in Austria or in Germany), and it allows for the assertion of national legal tradition.
The guidelines therefore need not be copied word by word; they have to be adapted meaningfully by national law. The No. 2 guideline on company law, that has enhanced requirements for the safety of capital in the publicly operating companies incorporated, let us say, regarding their own shares or rapport, was included into the Polish, Czech, or Hungarian (Act XLIX of 2003) legislation, into the national company law by different techniques prior to accession, and this was a correct procedure, no uniformity is expedient. Union legal alignment therefore does not wear away national laws and does not violate national legal traditions. It is all the more impossible since the Union guidelines pertain only to a rather small segment of economic life, and do not require relatively uniform regulation in the field of the so-called big business. Remaining with the example of company law, the Union does not have a guideline, let alone any regulation for individual enterprises, for unlimited partnerships or deposit companies, and there is only a single guideline that can be identified for companies limited (Company Law Guideline No. 12, regulating the single-member companies). One may say that the Union wishes to encourage the Member States by the European Charter for small companies to dismantle obstacles in the way of micro- and small enterprises so as to grant them access to the market, but the European Union does not at all regulate individual and company small enterprises and it exclusively deals with the publicly (on the stock exchange) operating large companies incorporated.
Due to this attitude no development of a uniform European economic law can be expected within a foreseeable future. There are differences of a certain extent among the stylistic elements of the economic law of countries belonging to the British, Scandinavian, French and German types of law, thus uniformity would simply be impossible to achieve. The acceptance of the European company incorporated was only possible because the Union regulation equally allowed for the implementation of the uniform management of the British Board-type as well as the German divided managerial system (Dreiecksystem – Vorstand, Aufsichtsrat, Buchprüfer) for the associates. Hungarian economic law belongs to the group of German law, and essentially we have to stay within this framework in the future too.
At the same time, and this is primarily valid for the acceding former socialist countries, the legitimacy criterion of market economy is asserted in the Union; in other words, the Member States have to have the basic carrier laws of a market economy. Therefore a former socialist country can become a Member State of the Union only if privatisation progresses to an extent that private ownership acquires a decisive majority in the ownership structure of the given country. Further on, the economy of the Member States has to be an economy with law on competition that ensures the four basic Union freedoms, the free flow of goods, capital, services and people. Essentially this is what is studied by the White Papers of the Union in relation to the readiness of the acceding countries. In Hungary privatisation began with the 1988 Company Act, prior to the system, change and massive privatisation was essentially completed by 1998; our first Act on competition was passed in 1990. Thus we have met the criteria of legitimacy much before accession.
Two mistakes may be made when the legal requirements of the Union are realised:
a) One of them is delay in the adoption of European legal institutions promoting modernisation. A case in this line is the state block of shares, always running counter to the principles of our company law which was introduced into Hungarian company law by the modification of the Act on privatisation in 1997, and we were ready to repeal only moments before our accession to the Union, under pressure by the Union, but with legal regulations that try to smuggle back as much as possible of the additional rights of the state. This is, however, wrong. If the state may operate commercial companies, it cannot exercise additional shareholders’ rights by law, not even in the case of the privatised former state-owned ones.
b) The other one is unjustified running forward. For instance, the publicity guideline of the Union is valid only for companies incorporated that operate publicly, but we have already excluded those sheltered companies from the Hungarian company law in the mid-90s that still continue to operate in Austria or Germany undisturbed. Or, though no Union act whatsoever obliged us to do so, yet, as contrasted to German law, we introduced the penal responsibility of legal entities three years ago, and this institution is profoundly alien to the Hungarian legal setup and presumably it would be inoperative.
The task is to remain on the middle road, and to preserve the positive elements of the traditions of Hungarian economic law, while we adapt the law of the European Union, at the same time modernising our own, for only this can develop Hungarian economic law. Lessons may be learned from the law of the other Member States, too, naturally taking over only those legal elements that can be organically incorporated into our set of institutions. For instance, though there were doubts, yet we incorporated the procedure of public take-over of companies based on the British City Code, into the Hungarian company law in 1996. Therefore currently our company law allows for the parallel operation of the German-type law on concerns for the companies incorporated that function as closed ones, as well as the law on taking over companies that apply to publicly operating (on the stock exchange) companies incorporated that are regulated by the Act on the capital market. At present these legal areas of different outlook exist side by side each other, and the future will show whether their organic merger would succeed.
The incorporation of the economic legal institutions of the European Union into Hungarian law raises two more problems:
a) Our technical underdevelopment, the lack of economic strength. For instance, we would like to have an early introduction of electronic company procedure, but we are unable to proceed faster without the financial and technical assistance of the European Union.
b) The protection of our national interests deriving from our economic condition. For instance, we are lagging behind legal alignment in agricultural economy. Its reason, however, was the protection of Hungarian agriculture as long as it was possible. There are separate interests of Member States in the Union, every state would protect them and if we do the same, one should not be ashamed of it. All this, however, cannot question our commitment to the Union.
The condition of Hungarian economic law
Historical factors
Regarding Hungarian economic law, as in the case of every institution, for the proper assessment of the present situation the historical aspect of development plays a significant role when the situation is being assessed, since law has an element of stability, tradition has always been of fundamental importance in legal development.
a) As far as the stylistic features of the Hungarian economic law are concerned, it belongs to German commercial law, and it did not lag in anything behind the Austrian law in its state of development, taken as an example, prior to 1945. The 1875 Code of Commerce summarised the legal corpus that had a continuous development up to World War II. In 1930, for instance, we incorporated the limited company into our law, single-member companies could be founded, and the institution of co-operatives was strong. Parallel to company law the law on competition was fully regulated (unfair acts of competition + cartel law), we acceded to the European international agreements related to intellectual property (copyright, protection of industrial rights). In Hungary a comprehensive commercial legal culture also evolved with the help of the implementation of law and legal literature, and it facilitated full return to the market economy after 1990.
b) “Naturally” the Soviet-type law of the command economy was adopted in Hungary, too, after 1945. At the same time it has to be said that the “classical Soviet model” was asserted for a short period of time, essentially between 1949 and 1959, and compared only moderately to the Soviet Union; the Commercial Code was not repelled (though it was not implemented), nationalisation did not extend over arable land, and company and civic rights were from the very beginning less restricted right than in the Soviet Union.
c) The disintegration of the law of the classical socialist command economy essentially began with the Civil Code of 1959. The openness of that Code is indicated by the fact that it is still in force, though with several modifications, and it has proved to be useable even after the change of the system. The Hungarian system, based on the Civil Code, has been developing subsequently on monist bases as well: the civic legal institutions of commercial law, and the commercial contracts in particular have been incorporated into the Civil Code and remain there to this day, and though company law, co-operative law, and the law of intellectual products have been regulated by separate Acts, they are linked to the Civil Code as a base. In the decade between 1960 and 1970 the administrative laws of the Hungarian economy were also born besides the Civil Code (Acts on building, water management, mines, and railways). Thus Hungary has never been characterised by the nihilism of Soviet law or that of the Balkan, the economy had been functioning on legal basis even during the decades of socialism.
d) The ‘goulash communism’ and ‘soft dictatorship’ character of the Kádár system unfolded fully after the economic reform of 1968. That reform wished to create a so-called socialist market economy, based on the autonomy of state-owned companies and co-operatives. The relative independence of state-owned companies from public administration was stipulated by Act VI of 1977 on State-Owned Companies, and the autonomy of co-operatives was guaranteed by Act I of 1971 on Co-operatives, and company autonomy became complete by the creation of the self-governing (company council, general assembly, assembly of delegates) type of state-owned companies. Act VII of 1972 on Planning the people’s economy ended the compulsory plan indices, and Act IV of 1977 deleted the institution of plan contract from the Civil Code, whereas Act III of 1974 established the direct authorisation of companies to foreign trade. The latter Act terminated the isolation of Hungarian companies from world trade. Inter-company legal disputes were transferred from arbitration committees of the nature of public administration to the judiciary.
In this quarter, or half of a market economy (neither plan nor market – as the famous formula of Tamás Bauer defined it) the institutions of company and competition law quietly and slowly evolved (revolved). After the first attempts of 1967 Law No. 4 of 1978 regulated the economic associations of state-owned companies and co-operatives (we used the term association instead of company due to ideological considerations), two of which, the joint venture and the merger survived after the change of the system, too. The possibility of joint ventures with Western companies was open to the Hungarian economic organisations since 1972. At the turn of the 1970s and 1980s citizens’ right to association was added to it, once again revived under cover due to ideological reasons, and obtained the form of various economic groupings, civic rights associations, small co-operatives, professional panels, etc. The partial new regulation of the 1967 Law on Competition was placed on a legal basis by Act IV of 1984 on the prohibition of unfair economic activity.
Summing up this curious course of development it can be stated that the development of Hungarian law did not prove the possibility of some kind of a third way of socialist market economy, different from the Soviet model (as it was thought of by the Polish Brus, the Czechoslovak Ota Sik, or the Hungarian Rezső Nyers), but even if in a subdued manner and lopsidedly yet the institutions of market economy did operate under legal regulation in socialist Hungary, too, and it significantly facilitated transfer to the bourgeois market economy in the process of system change when its international conditions became ripe by the 90s. In Hungary one may speak also about the evolution of a state quasi based on the rule of law for economics, as a result of legal regulation and of the relatively independent juridical law enforcement, despite the party state and the one-party system. Two decisive developments resulted from it in view of the Hungarian institutions of market economy. On the one hand, the shift to a bourgeois market economy could take place two years before the change of the political system in the Hungarian law on economics, with Act VI of 1988 on economic associations, even on the ruins of the collapsing socialist society, and on the other hand, as contrasted to the majority of the former socialist countries (mostly to the successor states of the Soviet Union, and the former socialist states of the Balkan), the development of Hungarian economic law could be an evaluative one, it could be built on the antecedents, it did not mean a revolutionary change, and gradual development could ensue in economic law.
The advantage of Hungarian economic law derived from advantages in time and continuity as against several of our neighbours: the basic carrier laws of the market economy were passed between 1988 and 1995 in Hungary, more over, their first revision could be conducted on the basis of practical experience prior to our accession to the Union. These Acts were made already in the process of European legal alignment; a basic requirement was to adjust to the European legal principles and to the Union directives already from the late 80s on. In addition, the Hungarian Acts on the economy did not remain only on paper, and during the fifteen years since 1988 the implementation of law could relatively adjust itself to the not at all minor change that it was not supposed to realise semi-market requirements based on majority social ownership suppressed by ideological reasons, but a real bourgeois competitive market economy has been in operation, dominated by private ownership and open to the global world trade, and that too in observance of the requirements of the economic constitutionality of a real civic state based on the rule of law.
The basic Euro-conform Acts of the market economy in Hungary
The basic Acts of the civic market economy of the system change were made between 1988 and 1995 in Hungary, in two waves.
The first wave took place between 1988 and 1991. First of all Act VI of 1988 on economic associations was passed, setting out irreversible processes towards Hungarian capitalism and a new and specific original accumulation of capital. The Act on transformation (Act XIII of 1989) was added to it, allowing for the transition of the former socialist organisational formations to commercial companies; the Act XXIV of 1988 on foreigners’ investments, and legal Order No. 23 of 1989 regulated company procedure (the right of public administration to supervise companies was abolished at that time and juridical company procedure was introduced); next came Act V of 1990 on individual enterprises, the first Act on securities and the stock exchange, that is Act VI of 1990 (as a result the stock exchange started to operate in Budapest in the spring of 1990), and the first Act on competition, Act LXXXVI of 1990, prohibiting unfair market behaviour.
The second wave took place between 1991 and 1995. On the one hand basic fiscal laws (Act XVIII of 1991 on accounting, Act IL of 1991 on bankruptcy, liquidation and final settlement procedures, Act XXXVIII of 1992 on the state fiscal administration, the Acts on banks such as Act LXIX of 1991 and Act XV of 1991 on the bank of issue, finally Act LXIII of 1991 on investment funds) were passed. Special attention should be accorded to the 1991 Act on accounting that introduced Western principles of accountancy without which massive privatisation (difficulties of assessing assets) could not have been implemented. On the other hand, basic laws on status were passed, such as Acts LII–LIV and LV on the forced transformation of state-owned companies into economic associations, and subsequently Act XXXIX of 1995 on privatisation was passed with the help of which massive institutional privatisation was implemented in Hungary and the proportion of private ownership reached 85% of the national assets. An important ‘organisational’ piece of legislation was Act I of 1992 on the transformation of co-operatives into commercial companies, and Act XXII of 1992, the Labour Code of a new market nature that summarised the law of individual labour contracts as well as collective labour law and the collective contract (the Hungarian law on strikes was passed as early as 1989).
The primary codification of the basic laws related to market economy was completed around 1995. Subsequently three basic legislative processes began in Hungary.
1. The revision and new codification of the basic laws of the market economy on the basis of the requirements of European legal alignment and practical experiences in every 6 to 8 years, that is also aimed at the unity of the legal system of the economy, at the elimination of contradictions among Acts passed at different points in time, and of the technical mistakes committed during the legislative rush (the main aim of legal policy became to accord priority to qualitative legislation instead of the quantitative one). This happens for instance, in law on competition: a new Act LVII of 1996 was passed to replace the one of 1990, and yet another novella, the Act CXXXVIII of 2000. The repeated codification for economic associations together with company law was done by Acts CXLIV and CXLV of 1997. A further modernisation of association and company law is envisaged for the end of 2005. A similar modernisation by phases took place in the law on securities and stock exchange by Act CXI of 1996 and by Act CXX of 2001 respectively, containing the uniform legal regulation of the capital market, also in the law on insurance (Act XCVI of 1995, and Act LX of 2003), or in the law on accounting (Act C of 2000).
2. The tendency, beginning in the middle of the 90s, was the process of supplementing the basic Acts on market economy with the so-called secondary (special branches, etc.) legislation which was more or less completed by the early 2000s (Acts on the railways, mines, water management, postal services, telecommunications, and then, in 2003 Acts on communications, electrical energy, fishing, plant protection, waste management, etc.). Laws containing technical progress, such as the new requirements of the information society belong to this legislation, such as Act XXXV of 2001 on electronic signing, Act CVIII of 2001 on electronic trade. The law on intellectual work was also newly codified: in 1995 the law on inventions, in 1999 on copyrights, and in 1997 the law on trademarks were modernised, the commercial advertisements were regulated by Act LVIII of 1997, and the commercial media by Act I of 1996. Act CLV of 1997 on consumer protection was expressly the result of European Union requirements, together with Act CXVIII of 2000 on commercial agents, or Act XXXIV of 1998 on risk capital investments.
3. Legislation ensuring the infrastructure of the fundamental laws of the market economy was also practically completed. The following Acts, among others, fall under this category: Act X of 1993 on responsibility for products, the evolution of the law on public procurement (its first legal regulation was contained in Act XL of 1995), or Act VI of 1993 on the order of the agricultural market and the law on statistics (Act XLVI of 1993); on the other hand there was the Act XLI of 1991 on public notaries, Act XI of 1998 on lawyers, Act LV of 1997 on auditing activities, or the law on arbitral tribunals (Act LXXI of 1994), or legislation on the economic chambers (Act XVI of 1994, Act CXXI of 1999). In fact the Hungarian laws on customs and currency that underwent profound deregulation because of our accession to the Union, the legal regulation of non-profit organisations (Act CLVI of 1997), and the social law (Act III of 1993), the law on labour safety (Act XCII of 1993), and the law on environmental protection (Act LIII of 1995) should also be considered as pieces of infrastructural legislation.
As a result of the joint effects of these three processes it can be stated that the legislative establishment of the legal institutes of market economy was completed in Hungary before its accession to the Union. This legal material is aligned to the acquis, and our economic law corresponds to the average of the level of legal technology of the fifteen Member States, and it belongs to the most advanced ones, together with the Czech and Polish laws, among the ten countries acceding.
The following areas are still deficient in legislation:
a) A new and modern regulation of commercial contracts. This is going to be the task of the new Hungarian Civil Code the preparation of which has been in progress since 1998, and the concept of which was approved in early 2003. Presumably the new Hungarian Civil Code, replacing Act IV of 1959, would be submitted to parliament in the governmental term of 2006 to 2010, and will comprehensively regulate the rights of individuals, ownership rights, treaties, family law and that of inheritance, taking in consideration the more recent European legal development. In keeping with the monist view, no new Commercial Code would be drawn up besides the Civil Code, for the legal institutes of commerce would be linked to the Civil Code.
b) A new law on state fiscal administration would replace the outdated Act of 1992, and the new one would establish the modern legal status of public property and the budgetary organs handling it, including the establishment of a modern state treasury (fiscals) that has so far not come into being.
c) The restoration of the Austro-Hungarian system of cadastral land register, operating under juridical supervision, after the anomalies of the current system of property registration are eliminated, naturally with the utilisation of the achievements of technical modernisation. (The relatively unsettled legal status of property is a serious hindrance to investment in Hungary.)
d) As contrasted to the highly developed law on companies, the consolidation of co-operative law failed, basically because of political reasons. Currently two laws on co-operatives of different concept are in force, which is contradictory in itself (Act I of 1992, and Act XCLI of 2000). Hopefully the Union order on European co-operatives, vigorously approximating co-operatives to companies incorporated, would make it clear in Hungary too that modern co-operatives are not social non-profit forms approximating associations, but specific commercial companies, and a uniform and modern law on co-operatives may be born in Hungary at last.
e) So far sharp political party struggles have hindered the creation of a new Constitution in Hungary, and constitutionality has been basically developed by the practice of the Constitutional Court after 1990. This, however, is not without contradictions. It would be the task of a new Constitution to unfold the principles of economic constitutionality, such as the protection of ownership, of competition, etc., which is a rather backward area of the current Constitution.
f) The establishment of the law of the system change has inevitably caused over-regulation in economic life. Therefore deregulation is a basic task, unjustified state intervention should be stopped, the economic laws should be vigorously depoliticised, the still existing administrative obstacles to the entrepreneurs wishing to enter the market should be dismantled, and the cost burden on entrepreneurs should be mitigated.
The centre of gravity should now be shifted from economic legislation increasingly to the implementation of economic law. It is understandable that the internalisation of new laws, and particularly the new market-economy outlook required time for the judiciary, for the lawyers, etc. For the time being legal practice is uncertain and slow, but, for instance, in company lawsuits as well as in cases of liquidation adequate routine is evolving, and practice in concern and cartel law is being consolidated as well. A new stratum of lawyers, specialising in commercial cases has emerged, private notaries and auditing companies have appeared, and proceedings of distaining have been modernised. Slowly the personal and objective bases of special economic jurisdiction are being created, and the Hungarian companies are also increasingly availing themselves of the opportunities of arbitral tribunals; the authenticity of company registration has greatly improved. Periodicals specialising in economic law have been established, and the culture of a modern economic law is on the spread. There is every hope, therefore, for catching up with the West in the field of economic law within one or two decades, and to eliminate the disadvantage caused by almost half a century after World War II.
After a forced interval between 1998 and 2002, the Courts of Appeal were established in 2003. Thus the Supreme Court, relieved of concrete cases, has a better opportunity to ensure the uniformity of economic legal practice by its decisions on legal unity. This way legal uncertainty, fundamentally affecting business risk, can be significantly reduced. The preparation of judges for the adoption of the legal practice of the European Court has been in progress for years, but the relative lack of the knowledge of foreign languages is a significant drawback in this circle. Obviously some time is needed to the Hungarian law courts to become able to follow the legal practice of the European Court, but it was the same in the case of other countries that had acceded earlier. The basic conditions, however, could be secured for the law courts up to accession.