This country-specific Q&A provides an overview to restructuring and insolvency laws and regulations that may occur in Hungary.
This Q&A is part of the global guide to Restructuring & Insolvency (3rd edition). For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/restructuring-and-insolvency-3rd-edition/
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?
(a) Immovable Property
The security instruments in respect of immovable property are:
(i) mortgage over real estate;
(ii) call option over real estate; and
(iii) prohibition of alienation and encumbrance.
All the above security instruments need to be registered in the Land Registry and for such registration they need to be either in the form of a notarial deed or a document countersigned by an attorney-at-law.
(b) Movable Property
The security instruments in respect of movable property is the pledge which has the following sub-categories
(i) pledge (registered in the security instrument register) over assets identified individually (specifying the relevant asset);
(ii) pledge (registered in the security instrument register) over assets identified by circumscription (pledge over group of assets similar to floating charge or enterprise charge used in other jurisdictions); and
(iii) possessory charge (whereby the pledgee has possession over the relevant asset).
The movable pledge agreement must be made in writing.
What practical issues do secured creditors face in enforcing their security (e.g. timing issues, requirement for court involvement)?
(a) If the pledge agreement is incorporated into a notarial deed, the pledge agreement is directly enforceable in Hungary as well as in the EU.
(b) If the pledge agreement is not incorporated into notarial deed, the creditor shall initiate a civil procedure before the court. Following the judgement (in favor of the creditor), the creditor can commence an enforcement proceeding against the debtor. Because of the long civil procedure, enforcing the claim is time consuming.
(c) Further, the mortgage and the pledge agreements may provide for an out of court sale of the secured asset which may expedite the enforcement.
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?
(a) Insolvency is defined by the Act XLIX of 1991 on Bankruptcy Proceedings and Liquidation Proceedings (the “Insolvency Act”). According to the Insolvency Act the court shall declare the debtor insolvent:
- if the debtor fails to settle or contest his previously uncontested and acknowledged contractual debts within 20 days of the due date, and fails to satisfy such debt upon receipt of the creditor’s written payment notice;
- if the debtor fails to settle his debt within the deadline specified in a final court decision or order for payment;
- if the enforcement procedure against the debtor was unsuccessful;
- if the debtor did not fulfil his payment obligation as stipulated in the agreement concluded in bankruptcy or liquidation proceedings;
- if it has declared the previous bankruptcy proceedings terminated; or
- if the debtor's liabilities in proceedings initiated by the debtor or by the receiver exceed the debtor’s assets, or the debtor is unable and presumably will not be able to settle its debts on the date they are due and, in proceedings opened by the receiver, the members (shareholders) of the debtor economic operator fail to provide a statement of commitment following due notice, in order to guarantee the funds necessary to cover such debts when due.
(b) If the statutory auditor detects any changes in the legal person’s assets that are likely to jeopardise its ability to satisfy any claims filed against the legal person, or learns of any circumstance that entails the liability of the executive officers or supervisory board members with respect to their activities performed in that capacity, he shall forthwith request management to take immediate action to the extent required for enabling the members – or the persons exercising founders' rights in the case of non-membership legal persons – to take the necessary decisions. In the event of non-compliance with his request, the auditor shall inform the court of registry that is exercising judicial oversight over the legal person concerning the situation at hand. The court of registry has a right to commence liquidation proceedings.
(c) The management of a company has the obligation to monitor the solvency of the company managed by it. If the management becomes aware of a situation which is threatening to lead to the insolvency of the company it shall act in the interest of the creditors. If the insolvency of the company can be foreseen by the management, the management shall initiate liquidation of the company. Failure by the management to observe these provisions may lead to claims for damages by the creditors or even in extreme situations to criminal liability on the side of the management.
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, bankruptcy and liquidation.
(a) Liquidation proceeding is the proceeding whereby the company is being compulsorily wound-up, and the creditors’ claims are satisfied from the sale of assets. The business is taken over by the liquidator appointed by the court.
(b) The bankruptcy proceeding’s aim is to restore the solvency and liquidity of the relevant company by restructuring its debts during a moratorium period granted by the court. Bankruptcy proceedings may only be commenced by the debtor company. A Bankruptcy Administrator is appointed to supervise the operation of the company whereby the approval of the administrator is required for any action of the company.
Following the announcement of the bankruptcy all creditors are required to report their claims to the company which shall prepare a list of creditors. The stakeholders are free to negotiate the bankruptcy plan and shall vote on the plan, which shall be approved finally by the meeting of the creditors.
The bankruptcy plan is only effective is it is approved by the court. The court shall ensure that the bankruptcy plan complies with the law and does not discriminate creditors.
(c) In order to initiate such proceeding, prior consent is required from the supreme body of the debtor company exercising a founder’s right. If the company wishes to continue its economic operation, it can commence bankruptcy proceedings against itself, or when it is obvious that the company will not able to continue to operate after a restructuring, liquidation proceedings can be initiated by the consent of the decision-making body
An unsuccessful bankruptcy proceeding can also lead to liquidation proceedings: if no composition is arranged, or if the arrangement fails to comply with the relevant regulations, the court shall dismiss the bankruptcy proceedings and consequently declare the debtor insolvent ex officio, and order the liquidation of the debtor.
In bankruptcy proceedings, the payment moratorium shall expire at 00:00 hour on the second working day after a 120-day period following the time of publication. The debtor shall be granted an extension of the stay of payment for a total of no more than 365 days from the time of the opening of bankruptcy proceedings if they are able to secure two-thirds of the votes from the creditors with voting rights, in respect of secured and unsecured claims alike, separately for the claims in question. Therefore, the debtor and the creditors have 120 days to make an arrangement, or all in all no more than 365.
(d) According to the Hungarian Courts’ Statistical Yearbook of 2017 on insolvency proceedings, most of the liquidation proceedings in 2017 lasted between one and two years.
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)?
In liquidation proceedings, secured creditors are in a more favourable position than other creditors, since their claim ranks at the second place right after the liquidator fee.
In summary, the company’s debts shall be satisfied from its assets that are subject to liquidation in the following order:
- liquidation fees;
- secured claims;
- alimony and life-annuity payments, compensation benefits, restitutions;
- other claims of private individuals, with the exception of bonds;
- debts owed to social security funds, taxes;
- other claims;
- default interests and late charges, penalties; and
- claims of people who have a closer relationship with the debtor company.
Contractual subordination is not recognized by the liquidator or by the court.
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?
The creditor and the liquidator – on behalf of the debtor – may file for legal action before the court within 120 days of gaining knowledge, or within a one-year limitation period from the date of publication of the notice of liquidation to contest:
- contracts concluded by the debtor within five years preceding the date when the court received the petition for opening liquidation proceedings or thereafter, or his other commitments, 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;
- contracts concluded by the debtor within two years preceding the date when the court received the petition for opening liquidation proceedings or thereafter, or his other commitments, 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;
- contracts concluded by the debtor within 90 days preceding the date when the court received the petition for opening liquidation proceedings or thereafter, or his other commitments, 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; and
- contracts concluded by the debtor within three years before the date when the court received the petition for opening liquidation proceedings or thereafter, or his other commitments, if made for the purpose of transfer of ownership by way of guarantee, or the assignment of a right or claim by way of a guarantee or exercising a collateralized option to buy, where the beneficiary exercised such acquired right by failing to fulfill his obligation of accounting toward the debtor, or did so improperly, and/or failed to pay the amount remaining after the secured claim is satisfied; if the right-holder did not have the acquisition of ownership, or the assignment of a right or claim by way of a guarantee registered in the collateral register, or his buy option in the real estate register, the conditions for lodging a contest shall be presumed to exist.
If the contest is successful, the provisions of the Act V of 2013 on the Civil Code (the “Civil Code”) pertaining to invalid contracts shall apply. The liquidator and the creditor may request to have the original state restored on the grounds of invalidity, and to have any right registered in a public register on the asset after the alienation of the asset struck from the records.
The liquidator has the powers 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. Any claim that is due to the other party owing to the above may be enforced by notifying the liquidator within forty days from the date when the rescission or termination was communicated.
What form of stay or moratorium applies in insolvency proceedings against the continuation of legal proceedings or the enforcement of creditors’ claims? Does that stay or moratorium have extraterritorial effect? In what circumstances may creditors benefit from any exceptions to such stay or moratorium?
The debtor is allowed a stay of payment from the time when the court order was published on bankruptcy proceeding with respect to the pecuniary claims which were due before the starting date of the stay of payment or becoming due thereafter.
The stay of payment has extraterritorial effect.
The stay of payment shall not apply:
- to claims for wages and other similar benefits existing at the time of submission of the petition for the opening of bankruptcy proceedings and those arising thereafter, as well as the related taxes and other similar charges (including membership payments made to private pension funds), severance pay, maintenance payments, life-annuities, compensation contributions, restitution and miners’ income supplement benefits, benefits and allowances of vocational students, furthermore, fees charged for electricity and natural gas (including network access fees) and all other fees charged for utilities due on the basis of compulsory services defined in the relevant legislation, account maintenance fees charged by payment service providers as well as the costs and expenses of the administrator, which are not covered by the registration fees; and
- to any value added tax, excise tax and products charges charged to the debtor after the time of the opening of bankruptcy proceedings as invoiced or incurred during the debtor’s transactions; furthermore
- to refunds of sums transferred to debtor’s account by mistake,
- to the payment assumed with a view to carrying on the economic activity, as endorsed by the administrator.
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?
The aim of the bankruptcy procedure is to reach an agreement, whereby the debtor and the creditors lay down the conditions for debt settlement, such as particular allowances and payment facilities relating to the debt, the remission or assumption of certain claims, receiving shares in the debtor economic operator in exchange for a debt, guarantees for the satisfaction of claims and other similar securities, the approval of the debtor’s programme for restructuring and for cutting losses, and any and all other action deemed necessary to restore or preserve the debtor’s solvency, including the duration of and the procedures for monitoring the implementation of the composition arrangement.
An agreement may be concluded if the debtor was able to secure the majority of the votes for the agreement from the creditors regarding both secured and unsecured claims. Only the debtor company can initiate a bankruptcy proceeding in Hungary. The procedure starts when the director of the debtor economic operator files for bankruptcy at the court of law.
If the parties do not reach an agreement, or if the arrangement fails to comply with the relevant regulations, the court shall dismiss the bankruptcy proceedings and consequently declare the debtor insolvent ex officio, and shall order the liquidation of the debtor.
The court shall, ex officio, refuse the debtor’s petition for the option of bankruptcy proceeding if the debtor is undergoing liquidation proceedings, and if a decision to declare insolvency and order the debtor’s liquidation has already been adopted.
The directors of the debtor company may file for bankruptcy at the court. Legal representation in the procedure is mandatory. In order to initiate a proceeding, prior consent is required from the supreme body of the debtor company exercising a founder’s right. The company cannot initiate a bankruptcy proceeding in the two years following the publication of the financial and definitive conclusion of the previous bankruptcy proceedings or the debtor being adjudicated in bankruptcy in another court, and if the debtor has submitted another such request within one year before the petition, which was refused by the court ex officio. A bankruptcy proceeding can also not be initiated if an insolvency proceeding was opened in another Member State of the European Union under Council Regulation 1346/2000/EC on insolvency proceedings, and a resolution for the opening of main proceedings was published in the Cégközlöny (means Company Gazette).
In a bankruptcy proceeding, the debtor is granted a stay of payment with a view to seeking an arrangement with creditors, or to attempt to enter into a composition arrangement with creditors.
Bankruptcy proceedings are non-contentious proceedings conducted by the general court of competence and jurisdiction by reference to the debtor’s registered office.
The opening of bankruptcy proceedings commences with a court ruling that is consequently published in the Cégközlöny, and with the indication "cs. a." being entered in the register of companies next to the company’s name. Publication in the Cégközlöny shall take place in the form of a display posted on the official website of the Cégközlöny at 00:00 hours, updated on a daily basis. The court shall ex officio appoint an administrator from the register of liquidators in its ruling on the bankruptcy proceedings. The ruling may not be appealed.
The bankruptcy proceedings are opened on the day the court ruling is published, at which time the name of the debtor company is appended by the words “csődeljárás alatt" (means under bankruptcy) or in the abbreviated form “cs. a.”.
Creditors may register their existing claims within 30 days following the publication of the ruling ordering the opening of bankruptcy proceedings or within eight working days for claims arising after the time of the opening of bankruptcy proceedings.
The debtor shall call a meeting of creditors within a 60-day period following the time of the opening of bankruptcy proceedings for a composition conference, inviting the administrator and all creditors. The invitation and its enclosures shall be sent to the persons invited at least eight working days before the scheduled time of the conference. Unknown creditors shall be invited by way of a public notice published in two nationally circulated daily newspapers within eight working days of the publication of the stay of payment and also on the debtor economic operator’s website (if available).
The stay of payment under shall expire at 00:00 hours on the second working day after a 120-day period following the time of publication, unless the court delivers a ruling for the extension of the stay of payment, endorsed by the administrator, and provides for the publication in the Cégközlöny of the fact that the stay of payment has been extended until the deadline specified in the protocol.
In the course of negotiations with creditors, the debtor may request the creditors’ consent for the extension of the stay of payment, but the total length of the period of the stay of payment, including the extension, may not exceed 365 days from the time of the opening of bankruptcy proceedings. The stay of payment may be extended up to a maximum period of 240 days from the time of the opening of bankruptcy proceedings, if the debtor was able to secure the majority of the affirmative votes from the creditors with voting rights, in respect of secured and unsecured claims alike, separately for the claims in question.
In the composition conference, voting rights are held by any creditor who registered their claim by the deadline and paid the registration fee, and whose claim is shown under recognised or uncontested claims.
Creditors shall have voting rights in proportion to the value of their recognised or uncontested claims where one full vote is granted per HUF 50,000. There are no fractional votes. Creditors holding claims below the HUF 50,000 threshold have one vote. The assignment of creditors’ claims upon other creditors within 180 days prior to the submission of the petition for the opening of bankruptcy proceedings, or upon the submission of a claim for bankruptcy, shall have no effect on the counting of votes. Interest accrued during the term of the stay of payment shall not be taken into consideration with respect to voting rights. Any creditor who fails to participate in person or by way of proxy on a composition conference shall be counted to have voted no.
The arrangement shall also apply to non-consenting creditors who are otherwise entitled to participate in the agreement, or who failed to take part in the conclusion of the agreement in spite of having been properly notified; it shall also apply to the creditors whose contested claims had to be secured by provisions or by way of guarantee (judicial arrangements). The agreement, however, may not stipulate less favourable conditions for these creditors than for the creditors granting consent to the agreement in the given categories, or for the creditors whose vote is calculated at a rate of one quarter.
Payments may be effected from the said provisions to provide satisfaction for a contested claim (or a part of such claim) to the beneficiary of such contested claim if the said beneficiary filed charges against the debtor, and the court’s final ruling declared the creditor’s claim substantiated and awarded the amount of the claim, or if the creditor recovered its claim from the debtor by way of an administrative procedure. If the debtor fails to observe the deadline, they are not able to participate in the agreement and, consequently, will not be covered by the agreement.
Where a creditor’s claim is not registered within the time limit prescribed for notifying such claims, the beneficiary shall not be able to demand satisfaction from the debtor; however, he will be able to notify those claims that have not yet become time-barred in liquidation proceedings initiated by others.
The main stages of the procedure shall be published in the Cégközlöny, such as opening and termination of the procedure and extension of the stay of payment.
An appeal against the ex officio ruling for the refusal of the petition for the opening of bankruptcy proceedings must be lodged within five days. The appeal shall be heard without delay, within a maximum period of eight working days.
The debtor and creditors shall be informed without delay of the classification of claims and the amount registered and shall be given an opportunity to present their views within no less than five working days. Such comments shall be decided by the administrator within three working days, and the creditor and debtor shall be notified immediately of such decision; they then have five working days to submit any objection to the court concerning the administrator’s action pertaining to the classification process, including if the administrator registered a claim in an amount other than that notified by the creditor. The court shall adopt a decision relating to such objections in priority proceedings, within no more than eight working days. The ruling may not be appealed separately. Where a claim is listed under uncontested claims on the strength of the court’s decision, it shall not be construed as an admission of debt and shall not prevent enforcement vis-à-vis the creditor.
The head of the debtor economic operator shall notify the court concerning the outcome of the composition conference within five working days and at least 45 days before the expiry of an extended stay of payment and shall enclose a copy of the agreement where applicable, as well as the reports, agreements and statements verifying compliance.
The court shall deliver its decision on the approval of the composition arrangements within 15 working days of receiving the notification from the head of the debtor economic operator. The court may return the request for the approval of the composition arrangements on one occasion, for remedying any deficiencies within a deadline of three working days. If the composition arrangement conforms with the relevant legislation, the court shall grant approval by way of a ruling and declare the bankruptcy proceedings dismissed.
Can a debtor in restructuring proceedings obtain new financing and are any special priorities afforded to such financing (if available)?
While senior secured claims are not supported by Hungarian law, in practice parties can conclude an agreement on injecting new money into the debtor company. In such contracts, the claims of a senior creditor have priority over the other creditors. Such an agreement involves substantial risks, since the intercreditors – who are not parties to the agreement – have the right to challenge a senior agreement. Consequently, legal protection is not guaranteed for these agreements.
Can a restructuring proceeding release claims against non-debtor parties (e.g. guarantees granted by parent entities, claims against directors of the debtor), and, if so, in what circumstances?
A restructuring proceeding may release the underlying principal obligation of the debtor which as a consequence will extend to ancillary obligations (e.g. guarantees of third parties granted as security for the principal obligation), with the exception if the ancillary obligation (e.g. guarantee) has been enforced by the creditor prior to the final and binding approval of the agreement by the court.
Is it common for creditor committees to be formed in restructuring proceedings and what powers or responsibilities to they have? Are they permitted to retain advisers and, if so, how are they funded?
It is common to form creditor committees. Creditors may form a creditors’ committee for the protection of their interests and to provide representation, and to monitor the activities of the administrator and the liquidator. The committee shall represent the founding creditors in court and during consultations with the administrator, temporary administrator and the liquidator, and shall exercise the rights and entitlements conferred by the Insolvency Act.
Only one committee can be appointed in respect of any one economic operator in debt. In the event that more than one committee is established at an economic operator, according to the conditions set out in the Insolvency Act, the one that first notified the court of its existence shall be recognized as the creditors’ committee. If more than one committee simultaneously announces its existence, the one representing more creditors shall be considered the creditors’ committee. Other creditors may subsequently join in the operation of the creditors’ committee. Joining may not be refused if the creditors wishing to join undertake to comply with the requirements set out below.
In liquidation proceedings, a committee shall be deemed legitimate if it comprises at least one-third of the notified creditors of record, and if these creditors hold at least one-third of all claims of creditors entitled to participate in the agreement. If the number of creditors operating the committee is later reduced so that the rate of participation no longer reaches the percentage required, the committee shall cease to exist on the 30th day after the occurrence of the said circumstance, unless other creditors have joined up within the time limit, thereby reaching the required rate of participation.
The committee’s powers, representation of the creditors operating the committee, the provision of funding and the rules for the advancing and accounting of costs and expenses shall be laid down by agreement concluded by the creditors inter se. The committee shall consist of a minimum of three and a maximum of seven members; the creditors operating the committee may elect a chairperson. The committee shall inform the insolvent debtor affected, the court and the administrator or the liquidator concerning the participating creditors, the powers conferred upon the committee, of the representation of the said participating creditors within three working days of the time of its inception, with the relevant minutes and agreement attached. The committee shall adopt its rules of procedure within five working days. The rules of procedure shall govern the committee’s decision-making mechanism, as well as the procedures for requesting the opinion of the creditors operating the committee relating to the decisions and actions of the committee.
Creditors may appoint a creditors’ representative in lieu of the creditors’ committee, in accordance with the relevant provisions written above, as regards the election and rights of such representative, covering expenses, disqualification, term of mandate, notification of appointment to the court, joining the group of appointment of the representative, termination of the appointment, and the extension of the representative’s mandate in liquidation proceedings. The creditors’ representative shall carry out the duties specified in the Insolvency Act within the framework of the contract of assignment.
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 ability for either party to disclaim the contract?
As about bankruptcy proceedings, there is no particular provision under the Hungarian law. Some of the provisions only forbid the enforcement of creditors' rights arising from such arrangements during bankruptcy proceedings. Liens and security arrangements may be released during the negotiations of agreements if the parties wish to do such settlements. There are no specific provisions on releasing non-debtor parties from liabilities.
Under the duration of the stay of payment, set-off may not be applied against the debtor. However, a set-off claim may be heard in judicial proceedings initiated by the debtor and still in progress, if submitted before the time of the opening of bankruptcy proceedings.
The executive officers and senior management of the debtor economic operator, their close relatives and their domestic partners may not set off their claims against the debtor, nor may any member (shareholder) of the economic operator with majority control over the debtor or the economic operator in which the debtor has majority control (or the member in the case of single-member companies, the owner in the case of sole proprietorships, or the foreign-registered company in the case of Hungarian branches).
The liquidator shall be allowed to lease or authorise the use of any of the debtor’s assets only upon the consent of the creditors’ committee or the representative of creditors to a person or organisation who was the debtor’s executive officer at the time the liquidation was ordered, or within one year previously, or who controlled the debtor exclusively or by way of majority. The permission of the court is not required under the applicable law.
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? Are pre-packaged sales possible?
What duties and liabilities should directors and officers be mindful of when managing a distressed debtor? What are the consequences of breach of duty? Is there any scope for other parties (e.g. director, partner, shareholder, lender) to incur liability for the debts of an insolvent debtor?
The directors shall manage the company in a way to protect the interests of the company, however, in case of threatening insolvency situation the directors shall primarily protect the interests of the creditors. If the insolvency cannot be avoided the directors shall file for insolvency.
In the event of abuse of limited liability on the part of any member or founder of a legal person, on account of which any outstanding creditors’ claims remain unsatisfied at the time of the legal person’s dissolution without succession, the member or founder in question shall be subject to unlimited liability for such debts.
The liability of the owners and shareholders mostly depends on the legal type of the company. Members of a general partnership shall undertake joint and several liability for the partnership’s obligations that are not covered by the assets of the partnership. What is more, the liability of a new member for the obligations originating prior to his admission to the partnership shall be identical to that of all other members. Any agreement of the members to the contrary shall be null and void with respect to third parties.
In a limited partnership (betéti társaság or bt.), the members of the partnership agree to make available to the partnership the capital contribution necessary for its activities, and at least one of the partners ("general partner”) undertakes joint and several liability together with the other general partners for the partnership’s obligations not covered by the assets of the partnership, while at least one other partner ("limited partner”) is only liable for the obligations of the partnership limited to its interest therein. There is only one exception to this provision: if the partnership’s general partner becomes a limited partner, he shall remain liable in accordance with the provisions applicable to the general partner within a preclusive period of five years from the date of becoming a limited partner for the partnership’s debts arising before the change.
The liability of members of private limited liability companies extends only to the provision of their initial contributions, and to other contributions set out in the memorandum of association. Generally, the members shall not bear liability for the company’s obligations. If, upon an order of liquidation, the initial capital of the company has not yet been paid up in full, the liquidator has the right to make outstanding payments due with immediate effect, and to order the performance thereof by the members, if this is necessary in order to satisfy the debts of the company.
In a limited company, the obligation of shareholders to the limited company extends to the provision of funds covering the nominal value or the accounting par value of shares. Generally, the shareholders shall not be held liable for the limited company’s obligations.
Do restructuring or insolvency proceedings have the effect of releasing directors and other stakeholders from liability for previous actions and decisions?
Successful bankruptcy and insolvency proceedings do not mean that the directors or stakeholders are released from liability for previous actions and decisions.
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? Has the UNCITRAL Model Law on Cross Border Insolvency or the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments been adopted or is it under consideration in your country?
As a member of the European Union, Hungary also applies the 2015/848 Regulation of the Council on insolvency proceedings (the “Regulation”). If the centre of the debtor's main interests is situated within the territory of a Member State, the courts of another Member State shall have jurisdiction to open insolvency proceedings against that debtor only if it possesses an establishment within the territory of that other Member State. The effects of those proceedings shall be restricted to the assets of the debtor situated in the territory of the latter Member State. Where main insolvency proceedings have been opened by a court of a Member State and recognised in another Member State, a court of that other Member State which has jurisdiction may open secondary insolvency proceedings in accordance with the provisions set out in this Chapter. Where the main insolvency proceedings require that the debtor be insolvent, the debtor's insolvency shall not be re-examined in the Member State in which secondary insolvency proceedings may be opened. The effects of secondary insolvency proceedings shall be restricted to the assets of the debtor situated within the territory of the Member State in which those proceedings have been opened.
Can debtors incorporated elsewhere enter into restructuring or insolvency proceedings in the jurisdiction?
Yes, pursuant to the Insolvency Act, the Fővárosi Törvényszék (Budapest Metropolitan Court) shall have competence and exclusive jurisdiction for opening and determining proceedings opened in the form of territorial insolvency proceedings – territorial proceedings whose purpose is reorganization or liquidation – or for the conversion of other types of proceedings into territorial proceedings, against economic operators falling under the scope of the Regulation such that have their center of main interests in another Member State of the European Union.
How are groups of companies treated on the restructuring or insolvency of one or more members of that group? Is there scope for cooperation between office holders?
Under the Hungarian law each liquidation proceeding shall be commenced separately against the legal entity. Besides, Section 3:59 of the Civil Code establishes underlying liability of the dominant member of the group of corporations. If any controlled member of the group is undergoing liquidation, the dominant member shall be held liable for any outstanding debt the member may have. The dominant member shall be relieved of liability if it is able to verify that the controlled member’s insolvency did not arise as a consequence of the group’s common business strategy.
Under Hungarian law each bankruptcy proceeding shall be commenced separately against the legal entity, hence there is no automatic group insolvency proceeding.
Is it a debtor or creditor friendly jurisdiction?
Hungary is still rather a debtor friendly jurisdiction, as the rights and interests of debtors are more dominant than the rights and interests of creditors to recover their claims.
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)?
In principle, state aid is prohibited by EU rules. Obviously in case where the insolvent company has an impact on the local or national economy or society (e.g. major employer in a region) certain sociopolitical factors may apply. In particular the Insolvency Act provides specific rules for the insolvency of companies running a business of strategical or national interest. The Government may classify - by means of a decree - as major economic operators of preferential status for strategic considerations. The liquidation of such companies shall be carried out in a simplified, transparent and standardized procedure where the liquidator is vested with more powers than in ordinary insolvency proceedings to be able to control and mitigate macroeconomic consequences of such insolvency.
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?
Market participants are still concerned to use the official bankruptcy proceeding due to negative PR effects and are usually trying to achieve an out of court settlement with creditors. Macroeconomic factors, such as good growth and increasing foreign investments have improved the efficiency of the restructurings and liquidations by creating demand for assets and “more room” to achieve mutually acceptable restructurings.
On the legal front we would welcome legislation enabling super senior position for fresh money invested into insolvent companies and recognition of contractual subordination which would enable more efficient resolution of insolvency situations.