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Katalin Székely:
White-collar corruption in international business
1. Introduction
In this case study we would like to present an example of
corruption, which had been discussed for nearly a decade at
the different judicial forums of Hungarian jurisdiction. The
case, which was finished with a non-appealable decision not
long ago, is a sad story about the forces that the global
business world is ready to use in order to gain fictitious
advantage.
In our example the gaining of fictitious advantage was realised
by using fictitious right, more precisely abusing right. The
abuse (or infringement) of right and corruption are synonym
concepts. The legislator and the applier of law are both interested
in determining the borderline between "fictitious" and "actual"
right. If a right is abused, applier of the law denies protection
of the "right" that exists only literally, but which is not
an actual right in a deeper context. Law punishes the abuse
of rights. Abuse of right takes place if the right is practised
so that it opposes the social designation of the right… or
if it would result in gaining unlawful advantage.
2. Fictitious contracts to gain unlawful
advantage
A large Hungarian company (hereinafter: the Parent Company)
- which was not involved in the suit, but started the fictitious
business chain - was a 94.8% founder and owner of the Hungarian
corporation (company limited by shares - hereinafter: Corporation).
The Corporation was the plaintiff in the legal proceeding
and through the personal interrelations, the two companies
were aware of each other's business decisions. The Parent
Company endeavoured to appropriate the profits made at the
Corporation. In order to increase the profit, they wanted
to be eligible for corporate tax allowance. They wanted to
gain the advantages provided by point 1 in Section 14 in Act
IX. of 1988: a business association may withhold the corporate
tax and thus gain tax allowance, if
- more than half of its sales revenue is the result of product
sale,
- the founder's assets go beyond HUF 25.000 million,
- its foreign ownership is at least 30%.
The plaintiff Corporation met the first two requirements.
However, the prescribed foreign stake could be attained only
if a foreign financial investor was involved. Neither the
Parent Company, nor the Corporation could involve a foreign
investor without the help of a third party thus there was
a need for intermediation. A personal relationship was the
solution: some time ago a senior official at the Parent Company
was a colleague of the deputy CEO (Chief Executive Officer)
of the defendant Hungarian Bank (hereinafter: Bank). They
agreed that - with the involvement of the Bank - the Parent
Company would sell some Corporation shares to one of the foreign
resident partners of the Bank. On December the 29th, 1989,
the Seller Parent Company and the Buyer defendant Bank undersigned
the first contract. The parties agreed that the Hungarian
Bank bought 30% of the shares exclusively owned by the Parent
Company. The purchase price for the shares was US$ 2.500.000
as agreed by the parties, to be paid in HUF at the official
exchange rate of the National Bank of Hungary as of the date
of the contract.
In point 4 of the contract, the Seller understood that the
Buyer would intend to sell the acquired shares in 1989 to
the London-based financial institution (not involved in the
suit).
In point 5 of the contract, the Seller obliged herself to
buy back the shares immediately - within one year of the agreement
if the Buyer would request so. The repurchase price was set
at the HUF price of the US$ 2.500.000 plus the LIBID+1% interest
for the time interval between the date of the agreement and
the repurchase. Point 5 also stipulated that this HUF price
would be determined so that for the US$ 2.500.000 the same
HUF/US$ exchange rate would be applied as for the purchase
price.
In point 6 of the contract parties agreed that the Buyer
would not pay the purchase price to the Seller, but the purchase
price (and its interests) would be included as advance payment
in Seller's repurchase obligation. If the repurchase price
was not covered by this advance payment, the Seller would
pay the difference for Buyer at first notice. For the advance
payment the Buyer would pay the same interest to the Seller
as what had been applied for the repurchase price.
In point 7 parties agreed that for the time interval between
the sale and the repurchase of the shares, the Seller could
practice the ownership rights on behalf of the Buyer.
In point 8 parties declared that as of the undersigning Buyer
took over the shares from the Seller and put them in her own
safe custody even if the selling stipulated in point 4 came
to reality. Was there a repurchase, the Buyer would hand over
the shares to the Seller.
On the 28th of December 1989, the defendant and the British
financial institution concluded an English language "Purchase
and Repurchase Facility" credit agreement. As the document
stipulated, the British Bank bought the disputed 1050 shares
and the parties also agreed in respect of the repurchase.
The purchase price was US$ 2.500.000, the repurchase price
was the same plus accrued interests, LIBID + 1%. The parties
stipulated that the defendant would pay US$ 2.500.000 as advance
payment to the British Bank. They also set that on the repurchase
day, the British Bank would pay back the advance payment and
the accrued interests less her fee. During the credit period,
the British Bank also considered herself the shareholder.
The defendant Hungarian Bank had to keep the shares in safe
custody.
Upon the agreement with the London-based financial institution,
the defendant endorsed all the shares to the British Bank,
which was then registered in the share-ledger as owner of
the sold shares.
In a letter dated the 16th of February 1990, the defendant
Hungarian Bank confirmed upon the Parent Company's request
that 1050 plaintiff Corporation shares had been sold to a
London-based bank, and that the purchase price of the shares
- US$ 1.944.000 - had been collected as of the date of purchase.
The Parent Company sent the letter to the plaintiff Corporation
in order to take the tax allowance booked in the 1989 balance
sheet. Having understood the letter, the plaintiff Corporation
elaborated her 1989 balance sheet and sent to the Hungarian
Tax and Financial Control Administration (hereinafter: APEH,
as always referred to in Hungarian).
The APEH County Office supervised the plaintiff Corporation's
financial and accounting system between the 4th of September
and 1st of October 1990. As APEH stated, the plaintiff corporation
did not have the right to take the corporate tax allowance
facility provided by point 1/c in Section 14 in Act IX. of
1988, with respect to the founder's foreign ownership. In
a resolution of first instance the APEH County Office, in
a resolution of second instance the APEH Supervision Department
determined the missing corporate tax to be HUF 58.697.000.
The additional tax was HUF 4.720.000 and a HUF 32.341.000
fine was also imposed.
As an act of equity, the APEH County Office reduced the plaintiff's
default penalty to HUF 31.751.448. This way the plaintiff's
payment obligation totalled HUF 124.410.945: HUF 58.697.000
corporate tax, HUF 32.341.000 fine, HUF 31.751.444 default
penalty, HUF 2.225.997 other tax.
The tax authority stated that in the report of the 3rd of
December 1990 that the share transactions did not imply money
transfer, so there was no foreign investment. The transaction
meant no risk for the parties, because the counter values
were kept at the Buyer as collateral for the repurchase. From
the sale of shares, foreign currency was not available for
Hungary even for a temporary period of time. According to
the APEH resolution, the Hungarian Bank's 1989 balance sheet
did not include neither her deposit at the British Bank, nor
the deposit by the Parent Company. As the resolution explained,
there was a definite purpose of selling 30% of the plaintiff
Corporation shares to a foreigner: to be legally eligible
for corporate tax allowance. The Parent Company still held
the ownership rights as the representative of the Buyer. The
resolution stated that selling the shares to a foreign company
was a risk-free transaction, done on paper only to evade the
tax rules. APEH did not accept the transaction as foreign
acquisition of the founder's assets according to point 1/c
in Section 14 in Act IX. of 1988, because the actual, usual
way of purchasing shares did not take place.
The plaintiff appealed and the resolution of second instance
by the Industrial Department of APEH increased the corporate
tax imposed on the plaintiff Corporation to HUF 63.650.000,
the additional taxes also increased. The plaintiff appealed
against the resolution and brought the case to court. The
court's decision nullified the second APEH resolution, and
obliged the tax authority to take a new procedure. The County
Court of second instance did not change the appealed part
in the first court decision.
After the repeated procedure the new APEH resolution also
concluded that not enough corporate tax and other taxes were
paid.
The plaintiff sued against the new resolution too, and argued
that for 1989 the Corporation did not have to pay neither
the corporate tax, nor other taxes. The court of first instance
refused the plaintiff's claim regarding the administrative
resolution for 1989. After the plaintiff's appeal, the County
Court of second instance did not change the appealed part
in the first court decision. Subsequently, the plaintiff submitted
an application for review to the Supreme Court of Hungary.
After the review, the Supreme Court kept the County Court
decision of second instance in force.
The explanation included the following:
"To decide
the lawsuit, the most important question is whether the
plaintiff Corporation was operating with foreign participation
in 1989 and Q1 1990, or not. We also had to make clear if
the foreign party's pecuniary contribution should have been
there at the Corporation's foundation, or the later performed
contribution may also be eligible for corporate tax allowance.
Explanation
of the court of first instance correctly showed that the
total foreign participation (stake) must be taken into account
in order to determine the extent of foreign share prescribed
by law. From the point of pecuniary contribution it is not
decisive if the contribution was provided as founders' asset
or during the operation of the business. The judicial practice
reveals that tax allowance is also provided for those business
associations that meet the requirements prescribed by law
during their operation.
Nonetheless,
the available data showed that the plaintiff Corporation
was not operating with foreign participation in 1989 and
Q1 1990. Most of the plaintiff Corporation shares were sold
to a foreign party only in a fictitious transaction. The
Supreme Court also argues the decisive point is that in
the transaction of selling the shares to a foreign party
there was a repurchase obligation of the Hungarian party
and the foreign party did not pay the purchase price and
kept it as a collateral for performing the repurchase transaction.
The fictitious transaction was null and void, and the plaintiff
Corporation was not eligible for the allowances prescribed
by law. Taking all the circumstances into account, this
was a fictitious legal transaction.
The plaintiff
was arguing that if a Hungarian company credibly verifies
that at least 30% of its registered capital is owned by
foreigners and the other requirements prescribed by law
also apply, the tax authority has no right to investigate
the content of the transaction by which the foreign party
acquired the shares. As opposing this argumentation, the
Supreme Court refers to the codifier's intention namely
that those companies should take corporate tax allowance
which are classified as business associations operating
with foreign participation. From this viewpoint, obviously
it is important if the foreign party did in fact acquire
stake in the Corporation or her ownership exists on paper
only. The illegal eligibility for tax allowance should be
fought by the tax authority as well, so the tax authority
can investigate whether the transaction pertaining to the
foreign acquisition of shares or quotas is lawful or not.
If this license was missing, the administration would open
space for the abuse of law. The fictitious transaction of
selling the shares makes obstacle to be eligible for tax
allowance, so the tax authority's decision was correct for
the 1989 year. The Supreme Court denotes, that the stipulation
of obligatory repurchase and the agreement pertaining to
it themselves verify the fictitious nature of the transaction."
After the Supreme Court's decision, the APEH County Office
ordered distraint at the plaintiff. All the plaintiff's production
equipment was put under distraint at a HUF 173.749.000 value.
The plaintiff turned to the APEH County Directorate and as
a special equity the Directorate reduced the plaintiff's pecuniary
debt from HUF 63.502.896 to 31.751.444. Therefore APEH let
the plaintiff pay her HUF 124.420.945 debt in 12 months instalments
but with default penalty. The plaintiff appealed again, and
APEH's Liquidation and Distraint Department let the plaintiff
pay monthly and without the default penalty.
Afterwards the plaintiff claimed damages from the defendant
Bank. The Bank declared that she did not consider the agreement
of December the 29th 1989 unlawful. The Bank accepted that
the agreement is more than a simple document of purchasing
shares, however, the stipulations in the agreement were not
prohibited by law. Thus the parties' objectives were determinant
including the Parent Company's intentions.
In the plaintiff's claim the unlawful and accountable conduct
of the defendant Hungarian Bank was the following: the defendant
concluded a contract with the British Bank so that the foreign
party did not pay for the shares, the defendant obliged herself
to repurchase the shares and at the same time the Hungarian
Bank certified on the 16th of February 1990 to present to
APEH that the shares had been sold and the purchase price
had been collected on the transaction day. On the basis of
this certification the plaintiff took the tax allowance disputed
by APEH. The plaintiff could believe the content of the certification,
however, the Corporation had neither the reason nor the opportunity
to control whether the foreign currency had actually been
transferred.
Secondly, the plaintiff referred to that as a result of the
fictitious sales transaction, the plaintiff Corporation, which
in good faith trusted the existence of the void contract,
can claim compensation from the parties for the damages incurred
as a result of concluding a fictitious contract. The plaintiff
determined the damages incurred as HUF 124.420.945 and its
incidents: HUF 58.697.000 as lucrum cessans - the tax allowance
- and HUF 65.723.945 as damnum emergens.
In the petition, the plaintiff described the conduct of
the defendant so that the defendant concluded a contract with
the British Bank according to which the Buyer foreign party
did not pay for the shares but the Seller defendant gave advance
payment to the Buyer. The British party did not pay the purchase
price but the defendant even transferred some money to London.
So in fact the defendant was undertaking a credit deal, for
which the shareholder Parent Company paid fee to the defendant.
This fee exceeded the sum transferred to the British party
and the difference was the defendant's profit. Nevertheless,
the defendant declared in writing to her Hungarian contractual
partner (the Parent Company) on the 16th of February 1990
that the shares had been sold, and the purchase price was
collected the same day. The plaintiff acted in a manner that
can be generally expected in the given situation since the
plaintiff endorsed the shares according to the rules of the
Bill of Exchange then took the tax allowance upon the certificate
issued by the defendant Bank on the collection of foreign
exchange. Since the foreign exchange had to be transferred
to the defendant Bank, the plaintiff had neither the right,
nor a practical reason to check the actual money transfer.
In case of a business transaction combined with endorsement
of shares and a credit deal the defendant Bank was expected
to be aware of and to behave according to the Hungarian laws
in force at the time - e.g. Act XXIV of 1988 on Foreign Investments
in Hungary, Act IX of 1988 on Corporate Tax, Act XVIII of
1988 on Supplementary Tax, or the Civil Code of Hungary. The
defendant was also expected to be aware and also to emphasise
that the transaction did not contradict the laws and in any
situation the defendant must not have initiated anyone to
infringe these laws.
The plaintiff described the damage so that the Corporation
could not apply tax allowance in form of withheld tax due
to the accountable conduct of the defendant.
The defendant requested the court to reject the statement
of claim. In his reply the defendant argued that the plaintiff's
accountable conduct resulted in the use of tax allowance with
no legal basis. The defendant said that the plaintiff should
have concluded a separate agreement with the British Bank
to agree how long the foreign ownership existed. Share is
a negotiable paper and the defendant had nothing to do with
the transactions between the shareholders. Taking the tax
allowance based on foreign ownership could take place only
at the risk of the plaintiff. The defendant presented that
it was exclusively the Bank's business how it accounted with
the clients and deal with no money transfer was bank secret.
The defendant also asked the court to examine her written
declaration in view of these, and to take into account that
the plaintiff was not the addressee. All in all, the defendant
denied to have acted in an unlawful conduct.
The court of first instance came to a midway verdict in the
lawsuit for damage compensation. The court of second instance
(the Supreme Court of Hungary) left the decision of the first
court unchanged as far as the refused HUF 58.697.000 and its
interests are concerned. In the explanation the Supreme Court
referred to that the claim for HUF 58.697.000 as the missing
corporate tax was without legal basis. The plaintiff declared
this claim lucrum cessans. The plaintiff's obligation to pay
business profit tax (later: corporate tax) was based on paragraph
1 in Section 1 of Act IX of 1988, which had been in force
at the time of the suit. According to the cited paragraph,
the enterprising taxpayer had to pay the corporate tax except
if it is eligible for tax allowance as prescribed in points
a-c of Section 14 in the cited Act. In our case the eligibility
of the plaintiff for tax allowance in form of withheld tax
depended on the fact if the plaintiff Corporation had a foreign
shareholder. The cited verdict of the Supreme Court - as court
of review - bound the court of the new lawsuit so that the
plaintiff had no right to tax allowance, the corporate tax
and its incidents had to be paid afterwards. The court decision
in this question was an interlocutory question to the lawsuit.
The acting court of the lawsuit had to decide whether the
defendant had to compensate for this sum as damage. From the
documents it could be seen that between the plaintiff and
the defendant there was no such legal relationship based on
which the defendant had been obliged to sell the shares to
a foreign individual or company. Therefore the defendant had
not been obliged to make the plaintiff eligible for tax allowance.
In point 4 of the contract concluded with the shareholder
Parent Company on the 29th of December 1989, the defendant
only referred to the intention of selling the acquired shares
to a foreign party. If the defendant acquired the shares in
a contract of sale, the shares were in the defendant's free
possession. The defendant could not have been forced to resell
the shares. If the defendant had obliged herself in the contract
of sale concluded with the Parent Company to sell the acquired
shares to a foreign party, then the claim regarding an unperformed
selling could have only come from the Parent Company. Thus
the plaintiff could not ask for the compensation of damage
caused by that a third party's shares had not been sold in
such a form that the plaintiff became eligible for tax allowance.
Otherwise the plaintiff's damage did not incur because the
Corporation had to pay tax, but because the plaintiff Corporation
did not have the profit to pay the corporate tax as the owners
appropriated it as dividend. Thus the plaintiff had to pay
at the cost of the assets.
Actual damage (damnum emergens) of the plaintiff was that
in addition to the HUF 58.697.000 corporate tax, the plaintiff
had to pay incidents of HUF 65.723.945 because of taking the
tax allowance with no authorisation. These latter costs meant
the loss of some of the Corporation's existing assets and
if the conditions of damage held, the plaintiff can ask for
compensation. If it could be proved that the plaintiff as
a taxpayer in good faith was initiated to take tax allowance
by the deceiving conduct of the defendant, the plaintiff can
claim from the defendant compensation for the incurred damage.
In the written documents there was information showing that
the tax allowance could have been taken by the plaintiff as
a consequence of the conduct by the defendant. In the letter
dated on the 16th of February 1990, the defendant confirmed
that the shares in the suit had been sold to a foreign party
and the purchase price had been collected in US$. In the letter
the defendant explicitly declared that the certificate had
been issued for use towards the tax authority to be eligible
for tax allowance. The defendant's reasoning that the letter
had not been posted to the plaintiff so the plaintiff could
not use it for tax allowance was groundless. The defendant
was also aware of the conditions of eligibility for tax allowance
prescribed by point 1/c in Section 14 in Act IX. of 1988 on
Corporate Tax. According to this rule, if the shares were
sold to a foreign party not the shareholder, but the corporation
in which the foreign party acquired the prescribed proportion
became eligible for tax allowance. Endorsement of the shares
and registration of the foreign owner in the share-ledger
could convince the plaintiff that based on the contract of
sale the plaintiff Corporation was owned by a foreign Buyer
in the prescribed proportion.
Nevertheless, the circumstances may also imply that the plaintiff
was aware of the defendant's method of selling the shares.
The plaintiff and her majority owner Parent Company were both
separate legal entities, however, the will of legal entities
is also determined and realised by natural persons. In the
court procedure of first instance information emerged regarding
the personal interrelation in the management of the plaintiff
Corporation and the Parent Company. The executive officers
of the Parent Company and the plaintiff Corporation were the
same managers; considering that in 1989 the Parent Company
was the 94.8% owner of the plaintiff Corporation. The personal
interrelation between the two business association is of key
importance, because the contract of selling the shares concluded
by the Parent Corporation and the defendant as of the 29th
of December 1989 was business-wise pointless on the Seller's
side: the shares were sold upon the conditions that the Buyer
did not pay the purchase price (point 6 in the contract) and
the Seller obliged herself to buy back the shares within one
year of concluding the contract. The Seller gave a so-called
advance payment to the Buyer, but the Buyer did not pay interest
for using this money. The above stipulations of the contract
may be concerned business-wise rational only if the contract
of sale definitely targeted to be eligible for tax allowance.
Similarly, the fact that the new shareholders (the plaintiff
and the foreign Buyer) did not use their property rights provided
by the ownership of the shares was also business-wise unreasonable.
Taking into account that contracts of sale were not concluded
between the plaintiff and the defendant or between the plaintiff
and the foreign party, the extent to which the plaintiff had
been aware of the above circumstances had to be investigated.
If it could be proven that the shares were sold this way for
the above mentioned aim, the plaintiff should have born the
remaining HUF 65.723.945 damage as self-damage. If this was
the situation, the defendant could not be liable for the damage
or part of the damage even if the defendant obviously provided
help for the unlawful obtaining of tax allowance, because
taking the tax allowance was decided in the plaintiff's will.
The decision of the majority owner also proved to be the plaintiff's
decision. In order to investigate all the circumstances, the
Supreme Court ordered the court of first instance to launch
a new procedure in respect of the HUF 65.723.945 and its interests.
In the new procedure the court of first instance requested
certified public accountant to state whether the purchase
price of the shares had been transferred to Hungary as a result
of the contract concluded by the defendant and the British
Bank on the 28th of December 1989. The accountant's investigation
justified that there was no data of booking the purchase price
at the defendant Hungarian Bank. Based on the accountant's
report, the verdict of first instance stated that the purchase
price of the shares had not been transferred to Hungary. The
court heard many witnesses in wide-scale procedure of producing
evidence. The court concluded: the intersection between the
chief officers of the plaintiff and the Parent Company meant
that a manager of the Parent Company participated in the plaintiff
Corporation's board. The chief executive officer was mandated
to represent the owner in the general meeting, because he
was incompatible to be executive officer or to undertake membership
in the board or the supervisory committee. Some of the Corporation's
chief officers were chief officers at the Parent Corporation.
This meant that the Parent Company also received information
on the Corporation's situation based on the general meetings.
The witnesses testified that on the general meeting the joint
venture status was discussed in relation with the eligibility
for tax allowance. Using tax allowance was the competence
of the general meeting based on the proposal by the board.
The financial manager of the plaintiff presented the alternatives
of compiling the balance sheet in such ways. They even requested
the statement of APEH to support the balance sheet.
One of the witnesses said that there had also been another
transaction in which the defendant was involved. In general
the Parent Company made efforts to involve foreign partners.
In the witness's opinion, the chief executive officer must
have known that the defendant was sought in connection with
selling the shares. The witness also said that the profit
of the plaintiff Corporation dropped sharply in 1989. Notwithstanding,
the shares in the procedure were the first, which were bought
by a financial and not an institutional/professional investor.
Based on the above mentioned, the court dismissed the claim.
After the plaintiff's appeal the Supreme Court approved the
verdict. The second instance decision stated again that the
Hungarian Bank and the British Bank concluded a fictitious
contract, so the plaintiff Corporation was not a business
association operating with foreign capital at the end of 1989
and Q1 1990. Thus the Corporation was not eligible for tax
allowance. The Supreme Court did not accept that the plaintiff
acted in good faith when the tax allowance was used. The starting
point of the Supreme Court was that sale of shares took place
between the Parent Company and the defendant, and between
the defendant and the British Bank. Shares are securities
embodying membership rights as the Act on Business Associations
declare. The registered shares are negotiable according to
the rules concerning the bill of exchange so that the sale
is in force if the new owner was also registered in the share-ledger.
According to the act on bills, shares are negotiated by endorsement.
One may act as shareholder if the uninterrupted chain of endorsements
verify his/her legitimate owner entity. It could be shown
that the shares in question were endorsed by the owner from
the Parent Company to the defendant and from the defendant
to the British Bank. The owners were also registered in the
share-ledger of the plaintiff Corporation. From this fact
the plaintiff could conclude that it became a business association
operating with foreign capital, and the defendant certified
that the purchase price of the shares was transferred.
However, there were circumstances, which contradict the
plaintiff's presentation that the Corporation acted in good
faith. The Parent Company's deputy CEO was one of the signatory
parties of the contract concluded by the Parent Company and
the defendant on the 29th of December 1989, and he was the
president in the plaintiff's board as well. Through him the
plaintiff was obviously aware of the way the shares were negotiated.
The plaintiff must have also known that the sale technique
was elaborated with the purpose of gaining eligibility for
tax allowance. The plaintiff's claim itself for corporate
tax allowance was not unlawful, but the way to get eligible
for it was the infringement of law. The tax allowance pertained
to an actual sale of shares to a foreign party. The fact that
the contract of sale of shares concluded with a foreign party
was a fictitious transaction cannot be disputed in this legal
procedure anymore. The Parent Company - and so the plaintiff
Corporation - cannot declare that they were not aware of the
infringement. The agreement signed on the 29th of December
1989 by the defendant and the Parent Company was also a fictitious
legal transaction. Section 365 in the Civil Code of Hungary
says "by concluding a sale contract, a Seller shall be obliged
to transfer ownership and cede possession of a thing to a
Buyer, and the Buyer shall be obliged to pay the purchase
price and take possession of the thing". The transfer of ownership
means that the ownership rights prescribed in sections 98-112
of the Civil Code, i.e. the right of possession, use and disposition,
are transferred. The stipulations of the contract verify that
the Parent Company did not want to transfer the ownership
right of the shares. In point 5 of the contract concluded
with the defendant the Parent Company stipulated obligation
(and not right) to repurchase the shares within one year.
Point 7 showed that the ownership (membership) rights embodied
in the shares were still possessed by the Parent Company,
the Buyer had no rights pertaining to the shares. According
to point 8 in the contract, the defendant took possession
of the shares but the defendant could not transfer the shares
out of her control, in fact the shares were in safe custody
for the Parent Company.
The defendant did not want to take the obligation prescribed
in Section 365 of the Civil Code; the defendant did not intend
to pay the purchase price and take ownership right of the
shares. As point 6 of the contract revealed the Buyer was
not obliged to pay the purchase price; it was considered advance
payment of the Parent Company from the repurchase price. Theoretically
the Buyer kept the purchase price in deposit, however, there
was no deposit (or escrow) agreement.
Logically, if the Buyer performs advance payment, it implies
interest. In this case the purchase price and the interests
were calculated so that no money transfer could follow the
transaction neither at the purchase nor at the repurchase.
The defendant undertook to try to sell the obtained shares
to a foreign party, for which the defendant received remuneration
as point 9 of the contract described. This is commission fee
as far as the content of the agreement is concerned. This
is the only interpretation for point 9 of the contract, according
to which the Seller should pay fee to the Buyer for concluding
and performing the given contract. Such stipulation is unknown
to a contract of sale.
Taking the above mentioned into account the agreement between
the Parent Company and the defendant was a null and void contract
as a contract of sale according to paragraph 4 in Section
207 of the Civil Code (which was in force at the time of concluding
the contract - today paragraph 5 applies), the contract of
the parties should be judged according to the rules of the
hidden commission agreement.
The stipulations of a contract with a potential foreign Buyer
were determined by the terms in the contract concluded with
the Parent Company, because should the defendant abandon point
7-8 in the future contract with the foreign party, the contract
with the Parent Company would not be performed.
The defendant had no business interest that would justify
on her part the conclusion of a contract with "turpis causa".
There was no evidence either that the Parent Company started
a lawsuit against the defendant for breaching the commission
agreement or not performing it according to the commission.
Nothing proves the circumstance that the defendant was not
concluding the fictitious contract according to the will of
the Parent Company. In their contract, the defendant and the
Parent Company did not elaborate a legal way of including
a foreign investor. Through the personal interrelations, the
plaintiff must have known that the defendant was concluding
a contract with the foreign investor according to the content
of the commission; so the contract with the foreign party
was not targeting the actual transfer of ownership rights.
The damage incurred, as a self-damage, should be born by the
plaintiff.
3. Concluding remarks
With this case, there are two more circumstances to be mentioned.
These did not influence the legal standpoint of the courts
conducting the legal procedures, but they are important as
far as corruption is concerned:
- The international preparation was so careless and absurd
that the second fictitious transaction took place one day
before the first fictitious transaction.
- A credit agreement was also concluded between the Hungarian
and the British Bank.
In our opinion the above statements do not change the assessment
of the legal transactions. In a commission fee both banks
received their "share" from the tax allowance of the plaintiff.
It was not the parties' mistake that the tax authority discovered
the abuse and deprived the unlawful advantage from the plaintiff.
The inflow of foreign capital did not take place anyway. The
money was transferred out from Hungary, and profit was made
only for the British Bank that gave only her name to the transaction.
Can anyone show the Hungarian interest behind this transaction?
(GKI Economic Research Co., 2000)
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