Restructuring and insolvency law in Hungary

1. What is the primary legislation governing restructuring proceedings in your jurisdiction?

The Insolvency Code (Act XLIX of 1991) and the Restructuring Act (Act LXIV of 2021 which implemented the EU Directive on Restructuring and Insolvency of 20 June 2019 (EUR 2019/1023) are the primary pieces of legislation governing restructuring proceedings. General civil, corporate and labour law also apply to implementing restructuring tools. 

2. How are restructuring proceedings initiated?

Only the debtor can petition for restructuring. 

3. Which different types of restructuring proceedings exist and what are their characteristics?

Bankruptcy 

This is a reorganisation-type procedure when the debtor is granted a moratorium of 180 days, which can be extended up to 365 days if a certain majority of creditors gives its consent. During the moratorium, the debtor remains in possession and has to draw up a reorganisation plan for approval by the creditors. The moratorium is overseen by a court-appointed administrator, but the only power of such administrator is to countersign any new payment obligations of the debtor. The moratorium protects the debtor from any creditor terminating a contract with the debtor on the basis that the debtor is under bankruptcy, or from any enforcement. If the debtor fails to agree a bankruptcy settlement with its creditors, the court will automatically open a liquidation procedure. The bankruptcy settlement agreement must be approved by the court, which will give it a general legal review. This means that the court only analyses whether or not the debtor acted in good faith.

Restructuring

Restructuring will be opened if the debtor is in a financially distressed situation when there is a likelihood of insolvency. The procedure can be public or private. The aim is to give the debtor the possibility to restructure its debt under the protection of individual enforcement actions. An enforcement moratorium can be either general (applicable to all creditors) or limited (applicable to only certain creditors the debtor intends to include). The management remains in control, and the court, by request and in some limited cases ex officio, will appoint a restructuring expert from the closed list of insolvency practitioners. The expert’s responsibility will be to assist the debtor with preparing, negotiating and approving a restructuring plan with creditors and to monitor the debtor’s business.

4. Are there different types of creditors and what is the significance of the differences between them?

Bankruptcy 

There are two classes of creditors: secured and unsecured. A simple majority of each class has to approve the bankruptcy settlement before it is sent for court approval. Different but non-discriminative arrangements can be agreed for the settlement of debts.

Restructuring 

The classification of creditors is based on the type of their claims:

• secured
• relating to business
• other
• relating to anyone having the same interest as the debtor.

No discrimination can be made among creditors in the same class. The first three classes should have preference over the fourth class when the debtor offers restructuring arrangements to each class.

5. Is there any obligation to initiate restructuring/insolvency proceedings? For whom does this obligation exist and under what conditions? What are the consequences if this obligation is violated?

No, except if the administrator in a voluntary solvent winding-up procedure can see that the liabilities exceed the debtor’s assets, in which case the administrator will file for insolvency. No consequences apply other than a challenge which can be submitted to the court, if an individual (e.g. a creditor) can justify that he/she suffered damage or loss due to an omission by the administrator to file for insolvency. However, the administrator cannot be obliged to pay compensation, only to remedy and comply with the filing. Ultimately, the administrator can be removed from this position. 

6. What are the main duties of the representative bodies in connection with restructuring proceedings?

In general, the law requires that the representative body is aware of the company’s financial situation at all times, and if the company is threatened with insolvency, instead of acting in the interests of the shareholders, it acts in the interests of the creditors as a whole (similar to wrongful trading). It may be held liable for compensation for any damage or loss a creditor suffers due to the representative body’s failure to act in the interests of the creditors.

If the company’s registered capital reduces to half or two thirds (depending on the form of the company; a “negative equity scenario”), the representative body will have to convene a shareholders’ meeting so that the shareholders can decide the next step. 

Both in restructuring and bankruptcy procedures, the representative body has to put together a restructuring plan and negotiate it with the creditors.

7. What are the main duties of shareholders in connection with restructuring proceedings?

Shareholders approve the debtor’s decision to file for a restructuring or bankruptcy procedure.

Shareholders can be held liable in the same way as managing directors for any damage and loss creditors suffer from the shareholders’ failure to act in the best interests of the creditors after the threat of insolvency arises. However, only those shareholders would be liable who have effective influence on the decision-making process of the company, i.e. usually sole shareholders, or if the shareholder is also the managing director. 

1. What is the primary legislation governing insolvency proceedings in your jurisdiction?

The Insolvency Code (Act XLIX of 1991) and the European Regulation on Insolvency Proceedings (2015/848) are the primary pieces of legislation governing insolvency proceedings. 

2. How are insolvency proceedings initiated?

Both a debtor and a creditor can petition for insolvency. 

3. What are the legal reasons for insolvency in your country?

The Insolvency Code does not provide a legal definition of insolvency, neither does it specify an “insolvency test”. Section 27 (2) of the Insolvency Code lists certain events which can be considered legal grounds for the court to open a liquidation procedure. These legal grounds are as follows:

• the company fails to fulfil or disputes its previously undisputed and acknowledged debts (exceeding HUF 200,000) within 20 days of their due date, and fails to repay such debt on receipt of the creditor’s written payment notice (similar to a cash flow test)
• the enforcement (foreclosure) against the company’s assets was unsuccessful 
• the company fails to comply with its payment obligations undertaken in a settlement agreement with the creditors in either a bankruptcy procedure or a liquidation procedure
• The debtor and the required majority of creditors are not able to enter into a settlement agreement during the moratorium
  •  if the company files the insolvency petition, the company’s liabilities exceed its assets and the company could not or foreseeably is not able to pay its debts as they fall due, or  
  • if the administrator files the insolvency petition in a solvent dissolution (which is a procedure with the aim of the company being deleted from the company registry at the end without any debt), but the administrator realises that the company could not or foreseeably will not be able to pay its debts as they fall due and the shareholders do not guarantee the payment of such debts (similar to a balance insolvency test).

4. Which different types of insolvency proceedings exist and what are their characteristics?

The only insolvency procedure is liquidation. The aim is to wind up the insolvent company and distribute the assets to its creditors. The procedure is managed by a court-appointed liquidator that takes over management roles. The liquidator will sell the assets and distribute the sale price in accordance with an order of priorities set out in the Insolvency Code. If an asset is secured with a pledge, the secured creditor has priority (after deduction of certain costs and fees).

5. Are there different types of creditors and what is the significance of the differences between them?

Not only the types of creditors, but also the types of claims, are categorised to determine the order of their satisfaction. The order is as follows:

• liquidator’s fee and certain costs to be deducted from the sale of the secured assets (safeguard, maintenance, sale, etc.)
• purchase of secured assets
• costs of liquidation (unless paid once they become due)
• alimony
• claims of private individuals (e.g. damages), excluding bonds
• social security and other taxes
• other claims
• late payment interest, and
• claims of related parties (such as the claims of a majority owner).

6. Is a solvent liquidation of the company an alternative to regular insolvency proceedings?

It is an alternative. However, if a solvent liquidation is opened and it transpires that the company is unable to pay its debt, the administrator will have to petition the court to open a liquidation procedure. 

1. If a lender wants to monitor its borrower very closely (i.e. more closely than the usual information covenants in the credit agreement require), what options are there?

If a borrower is in financial difficulties, the lender and the borrower often contractually agree to appoint a person to monitor the borrower’s activities. Such person is usually authorised to countersign all the borrower’s undertakings, to prepare a regular report on the borrower’s activities and to advise how to restructure the company and its debts in order to avoid insolvency. Such person can incur shadow management personal liability if he/she is involved in the borrower’s decision-making process. He/she may also incur corporate personal liability if he/she is appointed to the board of directors/managing directors or supervisory board and, in both cases, he/she votes for the approval of the resolution which results in the insolvency of the company or causes damage to a creditor or the company.

2. What issues arise if a creditor extends credit facilities or offers support conditional on additional or extended guarantees to a company in financial difficulties and/or takes asset security?

A lender considering extending credit facilities to a company in financial difficulties will want to avoid potential liability to other creditors. As long as the lenders can be viewed to be merely setting out what conditions attach to their extended credit or support, they should not incur the liability of a shadow director or otherwise. Clawback risk can be an issue if the security is taken at undervalue, or by giving preference to one creditor. Corporate benefit does not seem to be an issue in case of third-party security in light of the court practice which considers the right of subrogation as sufficient benefit granted “by law”. The Restructuring Act protects new and interim financing, if they are reasonably and immediately necessary for the survival of the business or preserve or enhance its value. These transactions cannot be declared void, voidable or unenforceable in a subsequent insolvency. Civil or criminal liability cannot be claimed either.

1. How does a lender sell a loan?

Non-performing loans (NPLs) can be sold by assignment. This means a case-by-case transfer. No formalities are required for an assignment and the debtor need not be notified in order to perfect the assignment. However, notification is required to enforce the assignment because until the debtor is notified, it can still discharge the debt by paying the assignor.

Where the to-be-transferred portfolio contains over 20 loan agreements or has an outstanding principal of more than HUF 10 billion (approx. EUR 30 million), and the buyer is a licensed financial service provider, all contractual rights and obligations can be transferred in their entirety in a portfolio transfer. This applies to all related security agreements, insurance agreements and the like.

2. If the underlying credit agreement prohibits transfer or assignment (i.e. a change in the lender of record), how else – if at all – can a lender transfer the economic risk and/or benefit in the loan? For instance, are sub-participation agreements allowed under the law of your jurisdiction?

There are no restrictions on sub-participation agreements. If a true sale is prohibited by the credit agreement, either the lender may enter into a sub-participation agreement with sub-participants (i.e. financial institutions) who take over the underlying risks, or the lender may establish a special purpose vehicle (SPV) and transfer the non-performing loan into it, together with any related security. In a sub-participation transaction, it is not strictly necessary to re-register the sub-participants as the beneficiaries of any related ancillary security, but it is often advisable in order to avoid any dispute over identity of the true real beneficiary of the security and to make any enforcement of the security easier.

3. Regulatory issues: is any form of licence or prior authorisation from any regulatory authority required for the purchase, sale and/or transfer of loans? Does it fall within the definition of providing banking or financial services in the territory of the assignor or the borrower?

A one-off purchase of an NPL does not require a licence, but purchasing NPLs as part of a business would qualify as providing a financial service under Hungarian law, and would consequently require a licence from the Hungarian Financial Supervisory Authority.

Only licensed financial service providers can acquire a collection of NPLs under a portfolio transfer scheme.