This country-specific Q&A provides an overview of the legal framework and key issues surrounding restructuring and insolvency in Hungary.
This Q&A is part of the global guide to Restructuring & Insolvency.
For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/restructuring-insolvency/
What forms of security can be granted over immovable and movable property? What formalities are required and what is the impact if such formalities are not complied with?
Liens, mortgages and other forms of securities
In Hungary liens can be considered as the main forms of security. A lien may be established (i) as a mortgage (jelzálog), including charges determined by description (körülírással meghatározott zálogtárgyat terhelő zálogjog), (ii) as a possessory lien (kézizálog), or (iii) in the form of a security deposit (óvadék). As a general rule under Hungarian law, any asset of value (i.e. properties, rights and claims) can be pledged as security, with the following restrictions:
- only movable properties may be the subject matter of a possessory lien;
- immovable properties in general and movables or rights recorded in a separate public register (lajstrom) other than the Collateral Register (please see “Establishment of securities” below) may not be the subject matter of a charge determined by description. These types of assets can only be pledged on an individual basis (i.e. the pledge agreement or the consent for registration must uniquely identify the pledged property).
In case of unregistered movables and rights not registered in a separate public register, the charge determined by description pertains to – at all times – those assets identified by detailed description, over which the chargor has the right of disposition.
In addition to liens, fiduciary collaterals (fiduciárius hitelbiztosítékok) may also be considered as securities granted over immovable or movable property. From the entry into force of the new Hungarian Civil Code (15 March 2014), fiduciary collateral arrangements should have been considered as null and void, however, due to a recent amendment to the Civil Code it became available for parties [restricted to business-to-business (B2B) relationships] to agree upon the transfer of ownership, the transfer (assignment) of other rights or receivables by way of security, or the establishment of an option right by way of security.
In a broader sense, and from a functional point of view, the following arrangements and structures also contain security-like elements:
- retention of title clauses;
- financial leasing; and
Security over immovable property
In line with the above, mortgages (ingatlan jelzálog) are the main form of security over immovable property. However, due to the recent amendment of the Civil Code, option rights established by way of security can also be considered as securities (collaterals) granted over immovables, with the restriction that consumers shall not undertake such commitment (i.e. only B2B parties are entitled to provide such fiduciary collateral).
Security over movable property
The main forms of security over movable assets are (i) mortgages on moveables (ingó jelzálog), including charges determined by description (körülírással meghatározott zálogtárgyat terhelő jelzálog) and (ii) possessory liens (kézizálog). Registered movables may not be the subject matter of a charge determined by description. These types of assets can only be pledged on an individual basis (i.e. the pledge agreement or the consent for registration must uniquely identify the pledged property).
Regarding the circle of fiduciary collaterals, (i) transfer of ownership of movable assets, and (ii) option rights established by way of security may also qualify as securities (collaterals) granted over movable properties. Consumers shall also not undertake such commitments (i.e. only B2B parties are entitled to provide such fiduciary collaterals).
Security over rights and receivables
The main forms of security over rights and receivables are mortgages (jogokon ill. követeléseken alapított jelzálog), including charges determined by description (körülírással meghatározott zálogtárgyat terhelő zálogjog). Registered rights may not be the subject matter of a charge determined by description; they can only be pledged on an individual basis (i.e. the pledge agreement or the consent for registration must uniquely identify the given right to be pledged).
As regards fiduciary collaterals, (i) assignment of rights and receivables by way of security and (ii) option rights established by way of security may also qualify as securities (collaterals) granted over rights and receivables. Consumers shall also not undertake such commitments (i.e. only B2B parties are entitled to enter into such fiduciary collateral agreements).
Security deposit (óvadék) can be considered as a special form of liens. The two main characteristics which distinguishes security deposits from other forms of liens are (i) their partially distinct subject matter, and (ii) the right to direct satisfaction provided to the holder of the security deposit. Regarding the right to direct satisfaction please refer to Question 2.
Security deposits can be provided in the form of money, securities, payment account balances and other assets defined by law as eligible subject matter of a security deposit (e.g. financial instruments).
Establishment of securities, formal requirements
To be established, and in order to comply with the requirement of publicity, (i) the lien shall be registered in the relevant register (in case of mortgages, including charges determined by description), or (ii) the possession of, or the right of disposition over, the pledged property shall be transferred from the pledgor to the pledgee (in case of possessory liens and security deposits), with respect to the pledge agreement concluded between the lienor and the lien holder. To duly effect the establishment of a lien, the lienor must have the right of disposition over the pledged property. As a formal requirement, pledge agreements must be executed in writing. Notarization is not required, however, in the context of the enforceability of the given security, having the pledge agreement notarized is recommended (in this regard please refer to Question 2).
For the registration of a lien to the relevant register the pledgor has to grant approval for the registration. In case of immovable properties the relevant register is the Land Register (ingatlan-nyilvántartás), and in case of immovable properties, the Collateral Register (hitelbiztosítéki nyilvántartás). Where ownership of a movable property or a right is recorded in a separate public register (lajstrom), such as in case of aircrafts, vessels, IP rights, quotas of private limited-liability companies, etc. the pledge must be registered in that particular register in accordance with special legislation pertaining to the register.
The Collateral Register contains the relevant statements made in connection with:
- pledges established on unregistered movables, unregistered rights and claims (separately for each chargor);
- other security rights arising out of fiduciary collateral arrangements;
- retention of title clauses;
- financial leasing; and
Contrary to liens, fiduciary collaterals – in order to be duly established – do not have to be registered in the relevant register. Without the registration, however, they will not be enforceable in insolvency proceedings.
Registration fees are based on the registration proceeding and the rules applicable to the relevant registry. In most cases there is a flat fee, which is multiplied by the number of assets to be encumbered. Notarial fees will apply if the pledge agreement is incorporated into a notarial deed to effect simplified enforceability under Act LIII of 1994 on Judicial Enforcement (please refer to Question 2).
What practical issues do secured creditors face in enforcing their security (e.g. timing issues, requirement for court involvement)?
Enforcement of liens
The creditor may exercise its right to satisfaction either by way of judicial enforcement or by means other than judicial enforcement. As regards the relation between enforcement proceedings and liquidation proceedings, if enforcement is pending against the debtor at the time of opening liquidation proceedings, the enforcement proceedings will be terminated by the court, and the assets concerned and the funds remaining after deducting the costs of the enforcement proceedings will be transferred to the appointed liquidator. In this case the creditor will only be able to enforce its security during the course of the subsequent liquidation proceedings, under the rules applicable to the normal procedure.
Right to satisfaction by way of judicial enforcement
In enforcement proceedings – besides the normal procedure – the creditor may also enforce its security trough a fast-track or simplified procedure, provided that the creditor, as pledgee, and the pledgor have previously agreed (before the right to satisfaction would have been opened) on the lowest sale price (or on the formula for calculating the sale price) of the pledged assets. The agreement shall be executed in writing and shall be notarized.
Right to satisfaction by means other than judicial enforcement
The right to satisfaction by means other than judicial enforcement may be exercised, at the lien holder's discretion: (i) through the sale of the pledged property by the lien holder; (ii) through the acquisition of the pledged property by the lien holder (without prejudice to the prohibition of lex commissoria); or (iii) through the enforcement of a hypothecated right or claim. The pledgee is entitled to switch between the above [(i)-(ii)] enforcement methods. As an exception from the general rule, liens on payment account balances can only be enforced by way of judicial enforcement.
Security deposits – right to direct satisfaction
The holder of a security deposit is entitled to acquire ownership – by way of a unilateral statement addressed to the lienor – of the pledged property up to the amount of the secured claim at the effective date of his right to satisfaction, or, if it was acquired previously, may terminate his obligation to transfer assets of the same type and amount as the collateral security received to the lienor.
In liquidation proceedings, holders of security deposits provided before the time of opening liquidation proceedings are entitled to exercise their right to direct satisfaction, irrespective of whether liquidation is opened or not, and shall refund any excess collateral to, and settle accounts with, the liquidator. If the holder of the security deposit fails to exercise his right to direct satisfaction within three months following publication of the opening of liquidation, he may seek satisfaction as a lien holder.
Enforcement of fiduciary collaterals
Fiduciary collateral holders may enforce their security according to the general rules on judicial enforcement if the debtor fails to comply with its duties under the fiduciary collateral arrangement. In liquidation proceedings, fiduciary collateral holders may enforce their claims according to the rules applicable to lien holders, provided that:
- the statement of acquisition in relation to the transfer / assignment of the relevant right or claim by way of security has been entered into the Collateral Register before the time of opening liquidation proceedings;
- the option right established by way of security has been registered in the Land Register or in the Collateral Register before the time of opening liquidation proceedings.
The holder of an option right established by way of security has 60 days from the time of opening liquidation proceedings to declare his intention to buy the asset in question. In that case, the procedure for the exercise of the right of pre-emption also applies if the asset is sold during the course of the liquidation proceedings.
What is the test for insolvency? Is there any obligation on directors or officers of the debtor to open insolvency procedures upon the debtor becoming distressed or insolvent? Are there any consequences for failure to do so?
Before opening liquidation, the court investigates the debtor's financial position. Upon the request of the debtor the court may allow a maximum period of 45 days for the debtor to settle its debts. The court orders liquidation within 60 days of receiving the petition for liquidation if it finds that the debtor is insolvent. The court will declare the debtor insolvent in the following cases:
- upon the debtor’s failure to settle or contest its previously uncontested and acknowledged contractual debts within 20 days of the due date, and failure to satisfy such debt upon receipt of the creditor’s written payment notice;
- upon the debtor’s failure to settle its debt within the deadline specified in a final court decision or an order for payment;
- if an enforcement procedure against the debtor was unsuccessful;
- if the debtor did not fulfil its payment obligation as stipulated in the debt restructuring agreement concluded in bankruptcy or liquidation proceedings;
- if the court has declared the previous bankruptcy proceedings terminated; or
- if − in proceedings initiated by the debtor or the receiver (appointed in case of the solvent winding-up of the company) − the debtor’s liabilities exceed the debtor’s assets, or the debtor was unable, and presumably will not be able, to settle its debt on the date on which they are due, and − in proceedings initiated by the receiver − the members (shareholders) of the debtor fail to provide a statement of commitment, following due notice, to guarantee the funds necessary to cover such debts when due.
In the first two cases, liquidation proceedings may not be initiated if the amount of the claim against a debtor (not including interest and other similar charges) does not exceed HUF 200,000 [approx. EUR 658 / USD 785 based on the official daily exchange rates of the Central Bank of Hungary (CBH) as of 28 August 2017].
The debtor shall not be liquidated in connection with any claim that the creditor failed to register in previous bankruptcy proceedings.
Executive officers are not under the duty to commence liquidation proceedings upon the debtor becoming distressed or insolvent, however, they shall without delay convene the debtor’s supreme body, or initiate its decision-making process without having to hold a meeting in order to provide for the necessary measures whenever it comes to their attention that, inter alia:
- the debtor is on the brink of insolvency or has stopped making payments; or
- the debtor’s assets do not cover its debts.
Regarding their liability for failure to do so, please refer to Question 11.
Furthermore, executives can only file for bankruptcy or liquidation if they are in possession of the prior consent of the supreme body of the debtor.
What insolvency procedures are available in the jurisdiction? Does management continue to operate the business and / or is the debtor subject to supervision? What roles do the court and other stakeholders play? How long does the process usually take to complete?
There are two types of insolvency proceedings under Hungarian law: bankruptcy proceedings and liquidation proceedings. In a bankruptcy proceeding (csődeljárás) the debtor is granted a moratorium (stay of payment) to negotiate and to attempt to enter into a debt restructuring agreement with its creditors. Liquidation (felszámolási eljárás) is aimed at providing satisfaction to the creditors of an insolvent debtor upon its dissolution without succession, however, debt restructuring agreements may also be concluded within the framework of liquidation proceedings. Regarding bankruptcy proceedings and the conditions of debt restructuring in liquidation proceedings, please refer to Questions 7–8.
In liquidation proceedings the court appoints a liquidator (felszámoló) simultaneously with issuing the ruling on opening liquidation. Before the time of opening liquidation proceedings a temporary administrator (ideiglenes vagyonfelügyelő) may also be appointed upon request, whose mandate lasts until the commencement of the proceedings.
With the appointment of the temporary administrator, the debtor will be subject to supervision. The temporary administrator – with a view to protecting the creditor’s interests – monitors the debtor’s business activities, reviews the debtor’s financial position, has powers to inspect the debtor’s books, cash holdings, securities holdings and inventories of goods, contracts and current accounts, and may also request information from the directors of the debtor. The debtor is restricted from entering into any contract or any other commitment exceeding the scope of normal operations without the prior consent of the temporary administrator. The executives of the debtor company are required to cooperate with the temporary administrator.
From the start of the liquidation proceedings, the liquidator takes control of the debtor, and only the liquidator is authorised to make legal statements in connection with any asset of the company. The liquidator has the power (with limited exceptions, e.g. tenancy agreements of natural persons) to terminate, with immediate effect, the contracts concluded by the debtor or, if none of the parties rendered any services, the liquidator may rescind the contract. Liquidators have the power to investigate the affairs of the company and to take appropriate legal action against directors or third parties to recover certain assets or undo certain transactions for the purpose of increasing the estate available for distribution to creditors. Creditors also have the right to file a legal action before the court to contest certain contracts concluded by the debtor company for the purpose of increasing the insolvency estate (please refer to “Actio Pauliana” in Question 6).
Liquidation proceedings are conducted by the court. The court may open liquidation, inter alia:
- on an ex officio basis, and without actually examining the debtor’s financial position:
(i) if the parties concerned are unable to reach a debt restructuring agreement in the context of the bankruptcy proceedings, or if the agreement fails to comply with the relevant regulations. In this case the court automatically declares the debtor insolvent without any discretion, terminates the previous bankruptcy proceedings and orders the debtor’s liquidation;
(ii) if the court of registry has ordered the liquidation of the company;
(iii) upon receipt of notice from a criminal court (if an enforcement procedure in connection with the collection of a fine imposed upon the company by the criminal court has failed);
- upon the request of the debtor;
- upon the request of one or more of the creditors;
- upon the request of the debtor’s receiver – appointed in case of the solvent winding-up of the debtor, if it turns out during the winding-up proceedings that the debtor’s liabilities exceed the debtor’s assets, or the debtor was unable, and presumably will not be able, to settle its debt(s) on the date on which they became or will become due.
Debtors may request the opening of liquidation proceedings if they are unable or unwilling to enter into bankruptcy.
The court has 60 days from the receipt of the petition to order the debtor’s liquidation. The court’s ruling shall be published in the Company Gazette, together with its ruling on the appointment of a liquidator. The publication also has to contain, inter alia, a notice sent to the creditors, including:
- lien holders;
- subordinated lien holders;
- lien holders' agents – even if a lien holders’ agent itself is not entitled or not exclusively entitled to hold the specific claim concerned;
- the holders of an option right established by way of security – provided that the option right has been registered in the Land Register or the Collateral Register;
- the holders of rights and claims transferred by way of security – provided that the debtor’s statement which is required for the transfer of the relevant right or claim has been registered in the Collateral Register.
to report their known claims – other than the ones already notified and registered during bankruptcy proceedings conducted immediately before the liquidation proceedings – within 40 days of the publication of the ruling ordering liquidation.
Creditors may form a creditors’ select committee (hitelezői választmány) to protect their interests, to provide representation and, furthermore, to monitor the activities of the liquidator. The select committee represents the founding creditors in court and during the consultations with the temporary administrator and the liquidator.
Conclusion of liquidation proceedings
Based on the final liquidation balance sheet and the proposal for the distribution of assets, the court rules on the bearing of costs, on the satisfaction of the claims of the creditors, and on the closing of current accounts, etc. Furthermore, it orders the liquidator to take those measures which are required in connection with the conclusion of the proceedings. Simultaneously with the above and with rendering its decision on the conclusion of liquidation, the court decides on the dissolution of the debtor, and on the dissolution of any subsidiary of the debtor, where applicable.
If a debt restructuring agreement has been concluded between the parties, the court confirms the agreement by way of a ruling, provides for the conclusion of liquidation, decides on the bearing of costs, and decides on the satisfaction of the claims of creditors excluded from the agreement.
In both cases, the court’s final rulings shall be published in the Company Gazette.
Liquidation proceedings can take from a couple of months (in case of simplified proceedings) to years to complete. Simplified liquidation proceedings may be ordered by the court if the debtor’s available assets are insufficient to cover the foreseeable costs of the normal procedure, or the liquidation proceedings are technically non-executable according to the general provisions due to discrepancies and deficiencies in the records and / or in the books of the debtor.
- on an ex officio basis, and without actually examining the debtor’s financial position:
How do creditors and other stakeholders rank on an insolvency of a debtor? Do any stakeholders enjoy particular priority (e.g. employees, pension liabilities)? Could the claims of any class of creditor be subordinated (e.g. equitable subordination)?
Priority of secured creditors
Claims secured by security deposits (collateral securities)
Holders of collateral securities arranged before the time of opening liquidation proceedings are entitled to exercise their right to direct satisfaction, irrespective of whether liquidation is opened or not, and shall refund any excess collateral to, and settle accounts with, the liquidator. If the collateral holder fails to exercise his right to direct satisfaction within three months following publication of the opening of liquidation, he may seek satisfaction as a lien holder as set out in the following paragraph.
Claims secured by liens, mortgages and fiduciary collaterals
Lien holders and following the most recent amendment of Act XLIX of 1991 on Bankruptcy Proceedings and Liquidation Proceedings (the “Insolvency Act”) holders of fiduciary collaterals (an option right on a specific asset of the debtor established by way of security, the transfer / assignment of ownership, other right or claim by way of security – please refer to Question 1) may enforce their claims in priority in accordance with the following scenario. Where a lien was established, or a fiduciary collateral was arranged prior to the time of opening of liquidation proceedings, the liquidator deducts from the proceeds of the sale of the pledged property (or from the proceeds from the enforcement of a claim) the following costs (in the following statutory sequence):
(i) costs of works ordered by administrative decision required for fixing up the pledged property where it is considered to endanger lives and property;
(ii) the costs of keeping it in good repair, maintenance, costs of the sale of the pledged property;
(iii) taxes and public administrative fees which became due and payable following the opening of the liquidation proceedings;
(iv) costs of the enforcement of the claim;
(v) 1% of the net purchase price as liquidation expenses;
(vi) 7.5% of the net purchase price (proceeds from the enforcement of the claim),
and uses the remainder to satisfy the claims (principal, interest and other charges) for which such property or claim was pledged, in the sequence provided for in the Civil Code, if there is more than one lien (general ranking based on the establishment of the lien).
General order of satisfaction
The company’s debt is satisfied from the funds realised in the course of the liquidation in the following statutory order:
(i) liquidation costs;
(ii) the parts of a claim secured by a pledge that were not satisfied in priority before the time of opening liquidation proceedings up to the amount of the proceeds from the sale of the pledged property, exclusive of value added tax, shall also be used for satisfying claims secured by pledge; if there is more than one lien on the pledged property they shall be satisfied according to general rules under the Civil Code pertaining to the ranking of liens;
(iii) alimony and life-annuity payments, compensation benefits, income supplement to miners, which are payable by the debtor and, furthermore, monetary aid granted to members of agricultural cooperatives in lieu of household land or produce, to which the beneficiary is entitled over his / her lifetime;
(iv) with the exception of claims based on bonds, other claims of private individuals not originating from economic activities (in particular claims resulting from insufficient performance, compensation for damages or restitution, also including the amount of the guarantee obligations ordinarily expected in the given trade, as calculated by the liquidator), claims of small and micro companies and small-scale agricultural producers, and the receivables of the Common Capital Fund of Cooperative Credit Institutions, etc.;
(v) debts owed to social security funds, taxes and outstanding public dues enforced as taxes, sums payable to the State established in criminal proceedings, repayable State aid and financial aids from the European Union and other international resources by virtue of international agreements, as well as public utility charges and condominium maintenance fees, etc.;
(vi) other claims;
(vii) irrespective of the time and grounds of occurrence, default interests and late charges, as well as surcharges and penalty and similar debts;
(viii) claims, other than wages and other similar benefits if below double of the prevailing minimum wage or, in case of employees whose wages are paid on the basis of performance only, double the guaranteed salary specified in the Labor Code, and if it does not exceed six months’ average earnings held by:
(a) any member (shareholder) of such economic operator with majority control;
(b) any executive officer of the economic operator;
(c) any executive employee referred to in the Labor Code;
(d) the close relatives and domestic partners of the persons mentioned in subparagraphs (a)-(c);
(e) an economic operator under the debtor’s majority control;
(f) a body (person) benefiting from the debtor’s gratuitous commitments.
Based on the above statutory sequence and on the rules applicable to the enforcement of secured claims in liquidation proceedings, secured creditors have priority of payment over all other creditors, subject to the exception of enforcement costs and to the extent of their security.
Annuity-like claims [(iii)], claims of private individuals not originating from economic activities [(iv)] and debts owed to social security funds, taxes, outstanding public dues enforced as taxes and other sums payable to the State [(v)] rank ahead of all other claims [(vi)-(viii)].
Claims arising out of default interests and late charges, as well as surcharges, penalties and similar debts [(vii)], claims of members / shareholders (equity claims), claims of the debtor’s executive officers and other executive employees, claims of the debtor’s subsidiaries, and claims of anyone benefiting from the debtor’s gratuitous commitments, are subordinated compared to general claims [(vi)].
Hungarian insolvency law does not recognise the concept of contractual subordination, the statutory sequence set out above may not be altered by the parties. We note, that according to Section 404 of the Criminal Code any person who has powers to control the assets, or any part thereof, of the debtor, or has the opportunity to do so, following the order of liquidation, provides preferential treatment to any creditor in violation of the sequence of satisfaction specified in the Insolvency Act shall be found guilty of a misdemeanor punishable by imprisonment not exceeding two years (please refer to Question 11).
In order to ensure the priority ranking, the security holder must report its claim within 40 days from the time of opening liquidation proceedings. If the security holder fails to report its claim within 40 days, this does not prevent the sale of the pledged property; however, the proceeds must be handled separately and the security holder will be satisfied only if there are sufficient funds remaining after settlement is made according to the general rules of the order of satisfaction.
Unsecured claims shall also be reported within 40 days. The liquidator must register those unsecured claims against the debtor which are reported after 40 days, but within 180 days of the publication of the opening of liquidation proceedings. These claims must be satisfied if there are sufficient funds remaining following the settlement of the debts according to the general rules of the order of satisfaction. Failure to observe the time limit of 180 days constitutes a waiver of rights.
Can a debtor’s pre-insolvency transactions be challenged? If so, by whom, when and on what grounds? What is the effect of a successful challenge and how are the rights of third parties impacted?
Hungarian insolvency law entitles the creditor, and on behalf the debtor, the liquidator, to challenge the following transactions made and agreements entered into by the debtor prior to the liquidation, within 120 days from the time of gaining knowledge of the opening of liquidation proceedings, but not later than one year from the date of publication of the notice on the opening of liquidation (Actio Pauliana lawsuits):
(i) Contracts concluded by the debtor or its other commitments made within the five years preceding the date on which the court received the petition for opening liquidation proceedings or thereafter, if intended to conceal the debtor’s assets or to defraud any one creditor or the creditors, and the other party had or should have had knowledge of such intent;
(ii) Contracts concluded by the debtor or its other commitments made within the three years preceding the date on which the court received the petition for opening liquidation proceedings or thereafter, if intended to transfer the debtor’s assets without any compensation or to undertake any commitment for the encumbrance of any part of the debtor’s assets, or if the stipulated consideration constitutes unreasonable and extensive benefits to a third party;
(iii) Contracts concluded by the debtor or its other commitments made within the 90 days preceding the date on which the court received the petition for opening liquidation proceedings or thereafter, if intended to give preference and privileges to any one creditor, such as the amendment of an existing contract to the benefit of a creditor, or to provide financial collateral to a creditor that does not have any; or
(iv) Contracts concluded by the debtor or its other commitments made within the three years preceding the date on which the court received the petition for opening liquidation proceedings or thereafter, if intended to transfer ownership by way of security, transfer rights or claims by way of security or exercise an option right provided that the holder of that right or claim did not (or not adequately) comply with its clearing obligation or did not pay out the remaining coverage exceeding its secured claim; if the acquisition of the relevant right or claim has not been registered in the Collateral Register or in the Real Estate Register the requirements of avoidance shall be deemed to be met.
If the contest is successful, the provisions of the Civil Code pertaining to invalid contracts will apply.
If the debtor enters into an agreement with a company that is under its majority control, or with a shareholder or executive officer of such subsidiary, or with their relatives, in the application of paras. (i) and (ii), bad faith and / or gratuitous promise shall be presumed. Furthermore, bad faith and / or gratuitous promise shall also be presumed when a contract is concluded between companies that are not directly or indirectly connected by way of affiliation, but are controlled by the same person or the same parent company.
The liquidator, on behalf of the debtor, is also entitled to reclaim any service the debtor provided within a 60-day period preceding the date when the court received the petition to open liquidation proceedings or thereafter, if it was provided to give preference to any one creditor and if such service is not usually provided under normal circumstances. Prepayment of a debt is, in particular, considered as giving preference or privileges to any one creditor.
The liquidator also has powers (with few exceptions, e.g. tenancy agreements with natural persons) to terminate, with immediate effect, the contracts concluded by the debtor, or to rescind from the contract if neither of the parties rendered any services.
What restructuring and rescue procedures are available in the jurisdiction, what are the entry requirements and how is a restructuring plan approved and implemented? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play?
Under Hungarian law, bankruptcy proceedings can be considered as the sole regulated restructuring procedure. Sui generis rescue procedures are not expressly regulated. However, each of the two insolvency proceedings, bankruptcy and liquidation, offers the debtor a chance of survival trough the conclusion of a debt restructuring agreement (composition agreement) with the creditors; in line with one of the main objectives of Hungary’s insolvency law: to reverse the company’s financial position to one of solvency if possible.
Debt restructuring in bankruptcy proceedings
Debt restructuring means the debtor’s agreement with the creditors laying down the conditions for debt settlement. In particular, this means: (i) any allowances and payment facilities relating to the debt; (ii) the remission or assumption of certain claims; (iii) the receipt of shares in the debtor company in exchange for a debt; (iv) guarantees for the satisfaction of claims and other similar securities; (v) the approval of the debtor’s programme for restructuring and for cutting losses; (vi) and all other actions deemed necessary to restore or preserve the debtor’s solvency, including the term of the debt restructuring agreement and the procedures to monitor the implementation of the debt restructuring arrangements.
A debt restructuring agreement may be concluded if the debtor is able to secure in all creditor groups (i.e. in groups of secured and unsecured creditors; see the definition of "secured creditors" below) a majority of votes in favour of the agreement. The debt restructuring agreement shall be concluded under the principle of good faith, and it may not contain provisions and conditions which are clearly and manifestly unfavourable or unreasonable from the point of view of all or certain groups of creditors.
A debt restructuring arrangement applies to all creditors who registered their claims within 30 days after the start of the bankruptcy proceedings, even if those creditors are non-consenting creditors who are otherwise entitled to participate in the debt restructuring agreement, and even if those creditors have failed to take part in the conclusion of the debt restructuring agreement.
Creditors who fail to register their claims within the 30-day deadline are not entitled to participate in the debt restructuring, and if the parties conclude a debt restructuring agreement, then the provisions of the agreement will not apply to such creditors. Furthermore, said creditors will no longer be entitled to enforce those claims against the debtor that were not registered within the above-mentioned deadline.
As a formal requirement, debt restructuring agreements must be executed in writing and shall be countersigned by the administrator and by the creditor’s select committee. The restructuring agreement shall contain in particular:
(i) a list of the creditors participating in the debt restructuring, their classification, the amounts of their registered claims recognized or uncontested, and the number of their voting rights;
(ii) the debt settlement and restructuring programme approved by the creditors, and the method of execution and oversight;
(iii) any modification in the time limits and deadlines of performance, the remission or assumption of the claims of creditors, and any other factors that are deemed essential by the debtor and the creditors for the purpose of restoring or preserving the debtor’s solvency;
(iv) the name and mailing address of each creditor, their representatives or agents for service and, in connection with select committees, an indication of the creditors they represent.
As a consequence of the recent amendment of the Civil Code (please refer to Question 1) in connection with the nullity of fiduciary collateral arrangements, the Insolvency Act has also been amended, causing a significant change in the circle of secured claims and secured creditors. Within the meaning of the amendment to the Insolvency Act, holders of fiduciary collaterals – as of 1 July 2017 – shall also be considered as secured creditors.
Following the amendment, “secured claim” means a claim:
(1) up to the value of the property pledged in security, the payment of which has been secured by:
(i) a pledge established before the commencement of the bankruptcy proceedings on an asset of the debtor, acting as lienor in the form of a lien or a subordinated lien – and in case of the designation of a lien holder’s agent even if the lien holder’s agent itself is not entitled or not exclusively entitled to hold that specific claim;
(ii) a pledge established before the commencement of the bankruptcy proceedings on an asset of the debtor in the form of a security deposit;
(iii) an option right on a specific asset of the debtor established by way of security before the commencement of the bankruptcy proceedings, provided that the option right has been registered in the Land Register or the Collateral Register and the holder of the option right is able to demonstrate that the option right has been established by way of security; or
(iv) the transfer of a right or a claim assigned by way of security before the commencement of the bankruptcy proceedings, provided that the debtor’s statement which is required for the transfer of the relevant right or claim has been registered in the Collateral Register;
(2) for which a right of enforcement relating to the debtor’s asset has been registered before the commencement of the bankruptcy proceedings, or the debtor’s asset was seized in the process of enforcement.
Role of other parties involved in bankruptcy proceedings
In bankruptcy proceedings the management may continue to operate the business, however, subject to supervision of the administrator appointed by the court in its ruling on the opening of bankruptcy proceedings. The administrator monitors the debtor’s business activities with a view to protecting the creditors’ interests and preparing for the debt restructuring agreement with the creditors. Accordingly, the administrator has powers, inter alia:
- to review the debtor’s financial standing;
- to inspect the debtor’s books, assets and liabilities, contracts and current accounts;
- to request information from the debtor’s executives, supreme body, supervisory board and the auditor;
- to approve and endorse any new financial commitment of the debtor after the time of opening bankruptcy proceedings;
- to contest, at its discretion, any contract or legal statement the debtor has made in the absence of his approval or endorsement.
The administrator may only grant approval for a commitment, or for a payment, if it serves the debtor’s interests in terms of operations (i.e. reduces losses) and for the purposes of preparing for the restructuring agreement, and may provide guarantees for such commitments only if agreed by the creditors representing the majority of the claims held by creditors with voting rights.
As in the case of liquidation proceedings, creditors in bankruptcy proceedings are also entitled to form a creditors’ select committee (hitelezői választmány) for the protection of their interests and to provide representation, as well as to monitor the activities of the administrator. The select committee represents the founding creditors in court and during consultations with the administrator.
Debt restructuring in liquidation proceedings
Following a period of 40 days subsequent to the publication of the opening of liquidation proceedings, the creditors and the debtor may, at any time, conclude a debt restructuring agreement before the final liquidation balance sheet is submitted.
Similar to bankruptcy proceedings, a debt restructuring agreement is deemed valid if supported by the votes of at least half of the creditors with proper entitlement to conclude a debt restructuring agreement in all creditor groups (i.e. in groups of secured and unsecured creditors) − until their claims are satisfied − provided that the claims of these creditors account for two-thirds of the total claims of those entitled to conclude the debt restructuring agreement.
If the company’s solvency is restored through debt restructuring, and the debt restructuring is in conformity with applicable laws and regulations, the court confirms the debt restructuring agreement; otherwise it issues an order of rejection and proceeds with the debtor’s liquidation.
Can a debtor in restructuring proceedings obtain new financing and are any special priorities afforded to such financing (if available)?
Availability of and special priorities concerning new financing are not expressly regulated in the Insolvency Act, however, in principle, a debt restructuring agreement may provide for any action deemed necessary to restore or preserve the debtor’s solvency (please refer to Question 7). In accordance with the general provisions pertaining to the conclusion of restructuring agreements, and to the approval of any new financial commitment of the debtor, the terms and conditions of such financing shall be approved by the administrator, by the creditors and subsequently by the court.
How are existing contracts treated in restructuring and insolvency processes? Are the parties obliged to continue to perform their obligations? Will termination, retention of title and set-off provisions in these contracts remain enforceable? Is there any an ability for either party to disclaim the contract?
Retention of title provisions remain enforceable in both proceedings, since assets in the debtor’s possession, in respect of which the seller, as creditor, reserves the right of ownership until the purchase price is paid in full, do not form part of the debtor’s insolvency estate.
Existing contracts are affected by the moratorium (stay of payment) and the temporary moratorium granted to the debtor. From the date on which the debtor’s request for opening bankruptcy proceedings is published in the Company Gazette, the debtor becomes automatically entitled to a temporary moratorium. The moratorium is effective from the commencement of bankruptcy proceedings. The objective of the temporary moratorium and moratorium (hereinafter referred to collectively as the “moratorium”) is to preserve the assets under bankruptcy protection with a view to reaching a compromise with the creditors. During the moratorium the debtor, administrator, financial institutions maintaining the accounts and creditors must refrain from taking any measure contrary to the objective of the moratorium.
- enforcement of money claims against the debtor – with a limited number of exceptions – are suspended, and the enforcement of such claims may not be ordered;
- no satisfaction may be sought on the basis of a lien on the debtor’s asset – not including collateral agreements between the bodies specified in the Insolvency Act – moreover, the debtor may not be called to honour any security pledged before the time of opening bankruptcy proceedings;
- with a limited number of exceptions, the debtor cannot effect any payment for claims existing at the time of opening bankruptcy proceedings, and the creditor may not demand such payments, apart from claiming satisfaction from the pledged property referred to in the previous paragraph;
- set-off provisions are not enforceable against the debtor;
- existing contracts concluded with the debtor may not be avoided, and may not be terminated on the grounds of the debtor’s failure to settle – during the term of the moratorium – its debts incurred before the term of the temporary moratorium.
The moratorium expires at 00:00 hours on the second working day after a 120-day period following publication in the Company Gazette, unless the court delivers a ruling on the extension of the moratorium. However, the total length of the moratorium, including the extension, may not exceed 365 days from the commencement of the bankruptcy proceedings.
From the time of opening liquidation proceedings, any claim against the debtor in connection with the assets realized in liquidation may only be enforced in the framework of the liquidation proceedings.
The liquidator has the power (with limited exceptions, e.g. tenancy agreements of natural persons) to terminate, with immediate effect, the contracts concluded by the debtor and, if none of the parties rendered any services, the liquidator may rescind the contract. Any claim due to the other party that arises out of the rescission or termination may be enforced by notifying the liquidator within 40 days from the date when the rescission or termination was communicated.
In liquidation proceedings, with regard to the debtor’s claims, right of set-off may be exercised only with respect to such creditor’s claims which have been registered by the liquidator as acknowledged and have not been assigned subsequent to the date when the court received the petition for opening liquidation proceedings, or, if the claim has occurred at a later date, subsequent to its occurrence.
What conditions apply to the sale of assets/the entire business in a restructuring or insolvency process? Does the purchaser acquire the assets “free and clear” of claims and liabilities? Can security be released without creditor consent? Is credit bidding permitted?
The liquidator disposes of the debtor’s assets through public sales (by way of tender or auction) at the highest price that can be obtained on the market. The liquidator may forego the application of a tender or auction only upon the prior consent of the select committee, or if the asset in question is liable to deteriorate rapidly or the proceeds expected from the tender procedure or from the auction are insufficient to cover the costs of sale, or if the difference between the prospective proceeds and estimated costs is less than HUF 100,000. In this case the liquidator may apply other public forms of sale for the purpose of achieving a more favourable result [e.g. the liquidator may invest – in possession of the creditors’ prior consent – the debtor’s assets into private limited liability companies, limited companies or cooperatives societies as asset contribution (apport) if it promises to draw a better price this way].
The sales procedure shall begin within 100 days from the time of opening liquidation proceedings. The liquidator notifies those persons and organizations who (that) have any right registered in a public register on the debtor’s particular asset offered for sale (e.g. mortgage, right of pre-emption etc.) on the start of the sales procedure.
The liquidator, the administrator (temporary administrator), the owner (member, shareholder, founder) or the executive officer, director, supervisory board member, auditor or any employee of the said bodies, or the receiver, and their close relatives, and the economic operator holding majority control in the aforementioned may not acquire any ownership or any other rights of value in the sales procedure.
During the sales procedure, the ownership right may not be acquired by any person or organization who controls the debtor exclusively or by way of majority, with the exception of exercising a statutory right of pre-emption, or by any other legal person that is the member of a recognized or de facto group of companies together with the debtor.
The purchaser acquires the asset concerned to be “free and clear”, since any lien over the debtor’s assets ceases upon the sale of the given asset. Where a pledged asset remains unsold at the end of the liquidation proceedings, the lien will be terminated when the ruling on the distribution of assets among the creditors becomes final.
What duties and liabilities should directors and officers be mindful of when managing a distressed debtor? What are the consequences of breach of duty?
Pursuant to the Civil Code, executive officers of business associations must act in the best interest of the company they are managing, and in due compliance with the relevant legislation, the instrument of constitution and the resolutions of the company’s supreme body. However, they must also ensure the protection of creditors’ interests when managing a distressed debtor.
In the event of a business association’s dissolution without succession, creditors may bring action for damages up to their claims outstanding against the company’s executive officers on the grounds of non-contractual liability, if the executive officer have failed to take the creditors’ interests into account in the event of an imminent threat to the business association’s solvency.
Executive officers, inter alia, must comply with the following creditor protection rules:
In case of private limited liability companies (kft.), the managing director shall without delay convene the members’ meeting, or initiate its decision-making process without having to hold a meeting in order to provide for the necessary measures, whenever it comes to his attention that:
- the company’s equity dropped to half of the initial capital due to losses;
- the company’s equity dropped below the statutory minimum amount of the initial capital;
- the company is on the brink of insolvency or has stopped making payments; or
- the company’s assets do not cover its debts.
In case of limited companies (rt.) the management board shall, with simultaneous notice to the supervisory board, call a general meeting within a period of eight days in order to provide for the necessary measures, or initiate a decision-making process without having to hold a meeting, whenever it comes to the notice of any member that:
- the limited company’s equity has dropped to two-thirds of the share capital due to losses;
- the limited company’s equity dropped below statutory minimum amount of the share capital;
- the limited company is on the brink of insolvency or has stopped making payments; or
- the limited company’s assets do not cover its debts.
Further provisions related to liquidation proceedings
Pursuant to the Insolvency Act, any creditor or on behalf the debtor, the liquidator, may bring an action during the liquidation proceedings before the court to establish that the former executives of the debtor failed to exercise their management functions in the interests of creditors in the three years prior to opening liquidation proceedings in the wake of any situation carrying potential danger of insolvency, in direct consequence of which the debtor’s assets have diminished, or providing full satisfaction for the creditors’ claims may be frustrated for other reasons. If damage is caused by several executives together, their liability shall be joint and several.
Any person with power to influence the decision-making mechanisms of the debtor shall also be considered as a manager of the debtor (shadow directors).
A situation is considered to carry potential danger of insolvency as of the day when the executives of the debtor were able to foresee, or a person in such position should have foreseen, that the debtor will not be able to satisfy its liabilities when due.
The executive officer shall not be held responsible if he can prove that he has not undertaken any business risk that may be considered unreasonable in light of the debtor’s financial position. Similarly, he shall not be held responsible if he proves that he has taken all measures, within reason, that are expected of persons in such positions, upon the occurrence of a situation carrying potential danger of insolvency, so as to prevent and mitigate the losses of creditors, and to prompt the supreme body (decision-making body) of the debtor economic operator to take action.
Where an executive failed to perform or improperly performed – for reasons within his control – the requirement, prior to opening liquidation proceedings, of having to deposit and publish the economic operator’s annual accounts (consolidated annual accounts), or failed to comply with the obligations to draw up the reports and accounts in the Insolvency Act [e.g. the final statement of accounts (tevékenységet lezáró mérleg)], and to have the relevant documents and assets delivered, and – furthermore – to provide information, the burden of proof that no situation carrying potential danger of insolvency has occurred during his tenure as an executive, or if such situation has in fact occurred, he has performed his management functions in due consideration of the interests of creditors, lies with such executive.
If the court establishes the liability of a former executive, any creditor may bring an action within a 90-day forfeit deadline following the publication of the resolution on the final conclusion of liquidation proceedings. The court will order the debtor’s former executive to satisfy the creditor’s registered claims, which were not recovered in such proceedings, up to the extent of loss suffered.
In addition to duties arising out of creditor protection provisions, the Insolvency Act imposes further obligations on executive officers in connection with the proper conduct of the liquidation proceedings. The executive officer may be subject to a fine of up to 50% of his income received from the company in the year preceding the time of opening liquidation proceedings, or up to HUF 2,000,000 [approx. EUR 6,576 / USD 7,846 based on the official daily exchange rates of the Central Bank of Hungary (CBH) as of 28 August 2017] if his income cannot be determined:
- for any breach of such obligations;
- for any failure to comply with such obligations in due time;
- for providing any false information; or
- for his failure to cooperate with the appointed liquidator.
The executive officer shall also cover the costs arising out of his non-compliance with the above duties.
According to Section 404 of the Act C of 2012 on the Criminal Code (the “Criminal Code”) any person who has powers to control the assets, or any part thereof, of the debtor, or has the opportunity to do so, and who, in connection with the imminent insolvency of the debtor covered by the Insolvency Act, actually or fictitiously, diminishes the debtor’s assets:
- by concealing, disguising, damaging, deteriorating or destroying, or by making unusable such assets or any part thereof;
- by concluding a fictitious transaction, or recognizing a doubtful claim; or
- by other means, in contradiction to the requirements of prudent management;
and thereby prevents the satisfaction of his creditor or creditors in part or in whole shall be found guilty of a felony punishable by imprisonment between one to five years.
Any person who, in connection with a debtor covered by the Insolvency Act:
- engages in either of the conducts referred to in the previous paragraph to artificially induce the debtor’s insolvency, or to cause the perception of insolvency; or
- in the case of the debtor’s insolvency, engages in either of the conducts referred to in previous paragraph;
with intent to prevent the satisfaction of his creditor or creditors in part or in whole is punishable in accordance with the previous paragraph (i.e. by imprisonment between one to five years).
The penalty may be imprisonment between two to eight years in qualified cases, based on the debtor’s preferential status for strategic considerations (please refer to Question 18), or if the dimunition of assets, actually or fictitiously, is particularly substantial:
Any person who, following the order of liquidation, provides preferential treatment to any creditor in violation of the sequence of satisfaction specified in the Insolvency Act (please refer to Question 5) shall be found guilty of a misdemeanor punishable by imprisonment not exceeding two years.
Is there any scope for other parties (e.g. director, partner, parent entity, lender) to incur liability for the debts of an insolvent debtor?
As a general rule under the Insolvency Act, any person with the power to influence the decision-making mechanism of the company will also be considered as executive of the company, meaning that he / she could be held liable on the same ground as an executive (liability of shadow directors) (please refer to Question 11).
Liability of dominant members of corporate groups
In case of groups of corporations, if any controlled member of the group is undergoing liquidation, the dominant member is to be held liable for any debt the member may have outstanding (please refer to Question 16). However, the dominant member may be relieved of liability if able to verify that the controlled member’s insolvency did not arise as a consequence of the group’s common business strategy.
Veil piercing rules in liquidation proceedings
In respect of the liquidation of a company under control by a qualified majority (75%), a sole member company or a sole proprietorship, the controlling party or the sole member (shareholder) is responsible, without limitation, for the company’s liabilities not covered by the debtor’s assets during the liquidation proceedings. However, the court must establish the unlimited and full responsibility of such controlling party or member (shareholder) for the company’s liabilities pursuant to a claim filed by the creditor during the liquidation proceedings or within a 90-day limitation period following the final conclusion of liquidation proceedings, on account of such controlling party or member (shareholder) having had a history of making unfavourable business decisions from the standpoint of the debtor company.
Liability for transfer of shares done in bad faith
If, according to the interim financial statement approved by the court (or the proposal for the distribution of assets approved by the court in simplified liquidation proceedings), the debtor has accumulated debts in excess of 50% of its equity, upon the request lodged by a creditor (within a 90-day limitation period following the opening date of the liquidation procedure) the court is bound to establish that a former member (shareholder) with majority control (50%), who transferred his share within three years before the opening date of the liquidation procedure, is subject to unlimited liability for the debtor’s outstanding liabilities. The former member transferring his share may be relieved of liability, if he is able to prove that the debtor was solvent at the time of transferring such share, and that threat of insolvency or insolvency occurred subsequently, or that he has acted in good faith bearing the interests of creditors in mind in transferring his share, even though the debtor was in a situation considered to carry potential danger of insolvency, or was insolvent. The liquidator shall inform the creditors’ select committee, the creditors’ representative or the registered creditors seeking information concerning such transfers of shares underlying the liability of the former member (shareholder).
Do restructuring or insolvency proceedings have the effect of releasing directors and other stakeholders from liability for previous actions and decisions?
No. Neither bankruptcy proceedings nor liquidation proceedings have this effect. In this regard please refer to Question 11.
Will a local court recognise concurrent foreign restructuring or insolvency proceedings over a local debtor? What is the process and test for achieving such recognition?
Insolvency proceedings opened in another EU Member State
Insolvency proceedings opened in another EU Member State shall be recognised under the regime of Regulation (EU) 2015/848 on insolveny proceedings (the “EIR”) replacing Regulation (EC) 1346/2000, provided that the given court had jurisdiction to open such proceedings according to Art. 3 of the EIR (Question 15). Pursuant to Art. 19 of the EIR, judgments concerning the opening of insolvency proceedings shall be automatically recognised with no further formalities, except where recognition or enforcement would be manifestly contrary to that Member State's public policy; in particular its fundamental principles or the constitutional rights and liberties of the individual (Art. 33 of the EIR). The recognition of such proceedings does not preclude the opening of secondary insolvency proceedings in another Member State. Pursuant to Art. 32 of the EIR, judgments concerning the course and closure of insolvency proceedings, including judgments approving debt restructuring agreements and judgments deriving directly from the insolvency proceedings, shall also be recognised with no further formalities and be enforced under the regime of the Brussels I Regulation [Regulation (EU) No 1215/2012].
Insolvency proceedings opened in non-EU jurisdictions
Insolvency proceedings opened in third countries are recognised under the regime of the former and the New Hungarian Private International Law Act (Act XXVIII of 2017 on Private International Law, the “New PIL Act”) which will enter into force on 1 January 2018. According to the New PIL Act, a judgment adopted by a foreign court shall be recognized if:
- the jurisdiction of the foreign court is considered legitimate under this New PIL Act;
- the judgment is construed as definitive by the law of the State in which it was adopted, or equivalent; or
- neither of the grounds for denial apply.
Additionally, the recognition of judgments in insolvency proceedings is subject to reciprocity between Hungary and the State of the court which delivered that judgment [Section 114 of the New PIL Act].
Grounds for denial are the following:
- the recognition would be contrary to Hungary’s public policy;
- the party against whom the decision was made did not attend the proceeding either in person or by proxy because the subpoena, statement of claim, or other document on the basis of which the proceeding was initiated was not served at its place of residence or habitual residence properly or in a timely fashion in order to allow adequate time to prepare its defence;
- proceedings involving the same cause of action and between the same parties are brought in Hungarian courts before opening foreign proceedings;
- a Hungarian court has already adopted a definitive substantive decision in an action involving the same cause of action and between the same parties; or
- the court of a foreign state, other than the State of the court that has already adopted a judgment in an action involving the same cause of action and between the same parties, has adopted a definitive substantive decision that is found to be in compliance with the requirements for recognition in Hungary
Can debtors incorporated elsewhere enter into restructuring or insolvency proceedings in the jurisdiction?
The Hungarian courts have jurisdiction to open “main insolvency proceedings” in accordance with Article 3(1) of the EIR replacing Regulation (EC) 1346/2000 if the debtor’s centre of main interests (COMI) is situated in, or has been moved to, Hungary. According to the EIR, the COMI is the place where the debtor conducts the administration of its interests on a regular basis and which is ascertainable by third parties. In case of a company or legal person, the place of the registered office shall be presumed to be its COMI in the absence of proof to the contrary. That presumption – in order to avoid forum shopping in insolvency proceedings – shall only apply if the registered office has not been moved to Hungary within the three-month period prior to the request for opening insolvency proceedings.
The Hungarian courts also have jurisdiction to open “secondary insolvency proceedings” against a debtor whose COMI is situated in another EU Member State, but only if that debtor possesses an establishment within the territory of Hungary. According to Article 3(2) of the EIR, the effects of secondary insolvency proceedings are restricted to the assets of the debtor situated in the territory of Hungary.
Similarly, Hungarian courts have jurisdiction to open insolvency proceedings in respect of a debtor incorporated outside the EU if it has a place of business (branch or other establishment) in Hungary where it carries out a non-transitory economic activity [Section 114 of the New PIL Act]. In this case the Hungarian court also has jurisdiction for actions deriving directly from insolvency proceedings and closely linked with them.
How are groups of companies treated on the restructuring or insolvency of one of more members of that group? Is there scope for cooperation between office holders?
Under Hungarian company law, (regulated) groups of companies may take the form of recognized groups of corporations and de facto groups of corporations.
Recognized group of corporations
A recognized group of corporations is a form of cooperation featuring a common business strategy between at least one dominant member, which is required to draw up consolidated annual accounts, and at least three members controlled by the dominant member under a control contract.
A group of corporations may only consist of public limited companies (nyrt.), private limited companies (zrt.), private limited liability companies (kft.), groupings and cooperative societies.
De facto groups of corporations
If the conditions for the control contract prevail for at least three consecutive years, at the request of either of the parties with legal interest, the court may order the de facto dominant member and the controlled companies to conclude the control contract and to apply to the court of registry for the registration of the group of corporations.
If a group of corporations de facto operates for at least three consecutive years, the court – at the request of either of the parties with legal interest – shall have authority to apply the regulations governing the relations between the managements of the dominant member and the controlled member, even in the absence of a control contract and without being registered as a group of corporations.
Restructuring and insolvency of groups of companies
The Insolvency Act does not differentiate between debtors belonging to a group of corporations and those standing alone. If two or more members of a company group are becoming distressed or insolvent, they will be reorganized or liquidated in separate proceedings. There are no joint insolvency proceedings under Hungarian law, however, the dominant member of the group may be involved in the given bankruptcy or liquidation proceedings (e.g. the dominant member is entitled to participate in the debt restructuring negotiations and the subsequent conclusion of the debt restructuring agreement).
As regards voting rights, group members, as creditors, have only ¼ vote instead of one ordinary vote (creditors in principle have one vote for each HUF 50,000 of their acknowledged or uncontested claim; each creditor holding a claim below the HUF 50,000 threshold also has one vote), except if the group member provides a loan to the debtor for the purpose of reorganizing of an amount up to at least the debtor’s subscribed capital. In the latter case the group member will also have – according to the general rule – one ordinary vote for each HUF 50,000 of their acknowledged or uncontested claim.
Companies that are members of a recognized or de facto group of corporations together with the debtor may not acquire ownership rights in the course of the sales procedure of the debtor’s assets.
Liability of the dominant member
If any controlled member of a group is undergoing liquidation, the dominant member is to be held liable for any debt the member may have outstanding. However, the dominant member can be relieved of liability if able to verify that the controlled member’s insolvency did not arise as a consequence of the group’s common business strategy.
The dominant member shall remain liable to honour the commitments undertaken during the life of the recognized group of corporations also after the group ceases to exist.
Is it a debtor or creditor friendly jurisdiction?
Hungary is generally perceived as a secured creditor friendly jurisdiction. However, Hungarian insolvency law intensely promotes the rescue of economically viable but distressed companies by offering them a second chance to settle their debts in the form of a debt restructuring agreement available in bankruptcy proceedings and in liquidation proceedings as well. This principle is also in line with the main goals of the EIR. A distressed debtor is generally entitled to file for bankruptcy proceedings as long as liquidation proceedings haven’t been opened against it (relative primacy of bankruptcy over liquidation) but if it fails to reach a debt restructuring agreement with its creditors, the competent court will declare it insolvent and will order its liquidation on an ex officio basis (Question 3).
Do sociopolitical factors give additional influence to certain stakeholders in restructurings or insolvencies in the jurisdiction (e.g. pressure around employees or pensions)? What role does the state play in relation to a distressed business (e.g. availability of state support)?
The State (primarily trough the National Tax and Customs Administration) is one of the preferred creditors, therefore it could have a significant role in restructuring and insolvency proceedings.
Special regulatory regime
A special regulatory regime concerning particular companies has been implemented into the Insolvency Act. These particular companies comprise two groups:
- The first group consists of companies (i) whose settlement of debt, debt restructuring or reorganisation assumes a strong national economical interest or privileged common interest or (ii) whose termination without a successor in a quick and transparent method assumes privileged national economic interests. The new regulatory regime implemented a detailed guideline upon which a company will be declared as a company of preferential status for strategic consideration by the government in the applicable governmental decree. Special provisions, as compared to the more general rules detailed above, apply to these companies, including, inter alia, (a) shorter deadlines for exercising rights and obligations under the Insolvency Act and (b) that administration of the liquidation process be undertaken only by a non-profit, state-owned entity appointed in the governmental decree.
- The second group consists of companies of preferential status for strategic consideration which also comply with additional requirements, i.e. they are secured by national security protection or they provide public services with international or national significance from a national security, law enforcement, military technology or energy supply perspective. Those companies will also be specifically appointed in a governmental decree by the government of Hungary. The provisions applicable with respect to the first group of particular companies apply to those companies, and the following special provisions also apply.
The court will make an extraordinary moratorium available to these companies from the date the procedure begins until it decides on the insolvency of the debtor company, which moratorium will ensure the provisional ongoing operation of those companies. During the sale of the assets of the debtor company the common economic interest will be taken into account, and the state liquidator will sell the assets (including movables, real estate and intellectual property) as a working unit. Furthermore, it is not obligatory to organise a public procurement process; the assets of these companies may be sold via closed offering procedures at the discretion of the state liquidator.
State support and related subventions are restricted by applicable EU law.
What are the greatest barriers to efficient and effective restructurings and insolvencies in the jurisdiction? Are there any proposals for reform to counter any such barriers?
Although the recent amendment of the New Hungarian Civil Code dated 1 July 2016 seemed to settle the issue of the validity of fiduciary collateral arrangements (within the meaning of the amendment they became valid in B2B relationships – please refer to Question 1), the Insolvency Act has only been amended in this regard a year later, on 1 July 2017, raising questions concerning the enforceability of fiduciary collaterals in insolvency proceedings. Within the meaning of the long-awaited amendment of the Insolvency Act, recognition of fiduciary collaterals in bankruptcy proceedings and liquidation proceedings became apparent (e.g. fiduciary collateral holders may qualify as secured creditors; in liquidation proceedings fiduciary collateral holders may enforce their claims according to the rules applicable to lien holders etc.), however, as a consequence of the amendment of the Civil Code it became also necessary to adjust the relevant laws and regulations pertaining to the Collateral Register. The amendment of Act CCXXI of 2013 on the Collateral Register and of the Decree No. 18/2014. (III. 13.) of the Minister of Public Administration and Justice on the Detailed Rules of the Collateral Register is currently in the pipeline.