These days, it is difficult to scroll through the news without coming across the recurring trio of criminal proceedings, public funds and breach of fiduciary duties. Breach of fiduciary duties has once again come into the spotlight recently, with the proceedings launched in connection with grants awarded by the National Cultural Fund (NKA) giving the issue considerable momentum. However, this offence is by no means confined to public funds and public figures: it can also arise in the management of a company's assets, the assets of a state institution or even those of a local authority. But what does breach of fiduciary duties actually mean, where is the line between a bad decision and a criminal offence, and what should anyone entrusted with managing another party's assets be aware of?
What is breach of fiduciary duties?
The Hungarian Criminal Code provides a relatively concise definition: a person commits breach of fiduciary duties if they have been entrusted with the management of another party's assets and cause a financial loss by breaching their obligations arising from that responsibility. For the offence to be committed, merely making a poor decision or a mistake is not sufficient. The person concerned must be aware that they are acting contrary to their obligations relating to the management of the assets entrusted to them, and must also be aware that this may result in financial loss.
Who manages assets belonging to someone else?
Such obligations may arise from legislation, a contract or even the nature of a person's job. Examples include an employee responsible for handling cash or a company director who makes decisions concerning the company's assets. The same applies to those entrusted with managing public funds or state or local authority assets, for example at a state institution, a local authority or another organisation performing public functions. The NKA provides a good example: the power to dispose of the Fund's resources is exercised by the minister responsible for culture, who bears primary responsibility for their use.
The underlying principle is the same in every case: we are not making decisions about our own money. A company's assets do not belong personally to its managing director or owner. Consequently, a director may commit breach of fiduciary duties to the detriment of the company even if they are also one of its owners. The same applies to public funds: anyone making decisions about their use is likewise not disposing of their own money.
What constitutes a breach of duty?
Anyone managing another party's assets must preserve them, manage them properly and, where justified, take steps to prevent their value from being reduced unnecessarily. In the private sector, this may involve supervising employees, monitoring the performance of contracts, recovering debts, making use of available measures to protect assets and keeping owners adequately informed. In the case of state or local authority assets, it is equally important to consider whether the decision-maker complies with the rules governing the use of those assets, checks that payments are justified and contracts are properly performed, and ensures that the money is actually spent on its intended purpose.
In the proceedings launched in connection with the NKA, the key question will probably be whether these public funds were used on justifiable grounds, in a professionally appropriate manner and in accordance with the purposes for which the funding was intended. However, the fact that a grant decision subsequently proves open to challenge or turns out to have been mistaken does not, in itself, determine whether breach of fiduciary duties has occurred.
And what counts as financial loss?
Financial loss may arise where a poor decision reduces the value of an asset, money is paid out without proper justification or income that could otherwise have been earned is lost. Examples include someone waiving a debt without adequate justification, failing to recover a claim, failing to enforce an available security or failing to pursue a claim for damages.
The same principle applies to public funds. Financial loss may arise, for example, where an unjustified payment is made from state or local authority assets, or public assets are put to use on terms less favourable than their actual value would warrant.
The key question, therefore, is not whether someone has profited from the situation, but whether the assets entrusted to them have been reduced without justification or a financial benefit that could have been obtained has been lost.
The potential penalty can be up to ten years' imprisonment
When it comes to breach of fiduciary duties, the calculation is straightforward: the greater the financial loss, the more severe the potential penalty. Where larger sums are involved, matters can quickly become serious: in the most severe cases, a sentence of up to ten years' imprisonment may be imposed.
Why might someone be remanded in custody at the outset of a case?
Pre-trial detention is not a punishment imposed in advance. It may serve to prevent a suspect from absconding or going into hiding, influencing witnesses, destroying or tampering with evidence or, where there is a genuine risk of this, committing a similar offence. These risks may likely arise in cases involving multiple parties or substantial sums of money.
Restricting a person's liberty is not the only measure that may be taken before a judgment is delivered: the authorities may also target their assets. To secure a potential future confiscation of assets, restrictions may be imposed during the investigation on the right to dispose of certain assets.
What can we do to avoid problems?
First of all: know where the money is going. We must also check whether the money is actually being used for its intended purpose, whether the other party is genuinely fulfilling its obligations and whether we are receiving what we paid for.
Secondly: if we have the opportunity to protect the assets entrusted to us, we should take it. Not every claim needs to be pursued at all costs, but if we leave money on the table, there should be a reasonable and defensible explanation for doing so.
Thirdly: we should be able to answer the simple question: “Why did we pay this much?” It looks particularly bad if we pay a substantial sum several times for the same work or for overlapping tasks, or if it is unclear exactly what services or performance we received in return for the amount paid.
And perhaps most importantly: there should be a record of why we made the decision we did. It can make a considerable difference if the records show, even in retrospect, what information was available, what risks were considered, what checks were carried out and what justified the decision.
The point is not to avoid taking risks altogether or to ensure that we never make a bad decision. When making decisions about someone else's money – whether it belongs to a company or consists of public funds – the priority should instead be to know what we are spending money on, check what we receive in return and ensure that there is a defensible reason for the decision we make.