A look at corporate, personal and, where relevant, partnership insolvency proceedings in Hungary, with a brief description to explain key features, as part of our Dictionary of Insolvency Terms in EU Member States. In particular, we highlight who controls the procedure and whether it is likely to be accompanied by a moratorium to prevent enforcement.
Reorganisation proceedings supervised by the court – also known as bankruptcy proceedings
- A court supervised procedure, available to both companies and partnerships, designed to allow for a reorganisation of the entity’s debt with a view to enabling it to keep trading. It is not necessary for the debtor to be insolvent.
- Proceedings are instigated by the debtor filing a petition at court. Within 90 days of commencement of the reorganisation proceedings, the debtor must present a composition agreement/restructuring plan to its creditors. Creditors vote in classes (secured and unsecured). Provided that a simple majority of both secured and unsecured creditors vote in favour of the composition agreement, it will be approved and be binding on all creditors.
- Under the composition agreement, secured creditors may not be repaid in full. However, this is subject to the overriding principle of good faith. The composition agreement should not contain provisions or conditions that are clearly and manifestly unfavourable or unreasonable from the point of view of creditors as a whole, or of certain groups of creditors.
Insolvent liquidation proceedings
- Proceedings can be initiated in respect of both companies and partnerships by creditor’s petition, the debtor, an insolvency practitioner appointed in main proceedings or by the court.
- The aim is to liquidate the debtor and distribute its assets on a pro-rata basis among creditors, taking into consideration the priority of creditors’ claims.
- The liquidator (felszámoló) in charge of the procedure is supervised by the insolvency court and a creditors’ committee.
- Following the commencement of liquidation proceedings, no enforcement proceedings (including actions by secured creditors) can be brought against the debtor. The only exception to this is where a creditor is seeking to enforce security deposits (óvadék), which can be enforced outside of the liquidation proceedings for a limited period of time. Litigation commenced prior to the liquidation proceedings is permitted to continue alongside the liquidation proceedings. Notwithstanding the litigation, monetary claims need to be submitted to the liquidator for registration.
- Following distribution of the proceeds of the debtor’s estate, the debtor is dissolved.
Természetes személyek adósságrendezési eljárása
Debt settlement proceedings available for natural persons
- Aimed at facilitating the conclusion of a settlement agreement between a natural person and their creditors. Beyond this, there are no insolvency proceedings available for natural persons.
- The value of the debt must exceed the debtor’s assets but not by more than 200% and the total debts must be between HUF2 million and 60 million. Debts that arise, even partially, from shareholders’ or directors’ liability will not be subject to (or benefit from) debt settlement proceedings.
- For the duration of the proceedings, creditors are not permitted to bring any enforcement action against the debtor.
- Secured creditors’ claims can be compromised but only with their consent.
- The individual remains subject to the debt settlement proceedings until the relevant claims are either paid or time barred.
Enforcement of mortgage
- Methods of enforcement available to pledgees:
- Court (judicial) enforcement proceedings; requires a court judgment on the merits of the case or a court order/notarial warrant that confirms, without reviewing the merits of the case, the payment obligation.
- Private sale by a pledgee.
- Enforcement of a right or a claim against a third party.
- A pledgee may accept title to property as consideration for full or partial discharge of the secured obligations if the parties agree (consensual).
- For charges documented by notarial deed, and where both parties agree a minimum sales price, a sale through a simplified court enforcement sale.
- None of the above methods of enforcement may be exercised once collective insolvency proceedings (csődeljárás or felszámolási eljárás) have been commenced against the debtor
EU Directive Implementation
The EU Directive on Restructuring and Insolvency1 requires Member States to incorporate minimum common standards into their national restructuring and insolvency laws by 17 July 2021, with an option to extend that deadline by one year. The intention of the Directive is to reduce barriers to the free flow of capital stemming from differences in Member States’ restructuring and insolvency frameworks, and to enhance the rescue culture in the EU.
Notable features required to be included in Member States’ national laws include:
- An effective preventive restructuring framework to enable debtors experiencing financial difficulties to restructure at an early stage, with a view to preventing insolvency and ensuring their viability.
- A stay of up to four months extendable to up to 12 months to support negotiations of a restructuring proposal, which should prevent individual enforcement action and include rules preventing the withholding of performance, termination, acceleration or modification of essential contracts.
- An ability to cram down dissenting classes of creditors.
- Adequate protection for financing needed to allow the business to survive or to preserve the value of the business pending a restructuring, and for new financing necessary to implement a restructuring plan.
- Provision for honest, insolvent entrepreneurs to have access to a procedure that can lead to a full discharge of their debts (subject to limited exceptions) within three years.
Implementation in Hungary
A draft bill of the Act purporting to implement the directive is currently being discussed in the House of Parliament. The Act is expected to be passed within the next few weeks.
The Act (implementing the directive) is expected to enter into effect on 1 July 2022.
Recognition of foreign insolvency processes
EU Regulation of Insolvency Proceedings
The EU Regulation on Insolvency Proceedings2 applies to all EU Member States except Denmark and requires that certain collective insolvency proceedings, which are listed in Annex A to the Regulation, occurring in one EU Member State are automatically recognised in all other EU Member States and that each EU Member State
automatically recognises the powers and authority of an insolvency practitioner appointed in another EU Member State.
Recognition of third country insolvency processes
Hungary has not adopted the UNCITRAL Model Law on Cross Border Insolvency nor is it a signatory to any treaties on international insolvency or the recognition of foreign judgments. Therefore recognition of foreign proceedings will depend on the principle of reciprocity. However, for the time being no reciprocity in respect of insolvency proceedings is in place between Hungary and other countries.
Insolvency changes in response to COVID-19
For more information on changes to insolvency law in Hungary as a result of the COVID-19 pandemic please see our Guide to changes in insolvency law in response to COVID-19.
As part of the COVID-19 emergency legislation, Decree 179/2021 on the reorganization of companies in the event of the State of Danger. (IV. 16.) Government Decree (Reorganization Decree) established a new type of formalized insolvency procedure (in addition to the formalized insolvency procedures already existing in Hungarian law (bankruptcy and liquidation procedures): the so called reorganization procedure. The reorganization procedure is similar to the existing bankruptcy procedure, given that the main purpose of both type of procedures is to reorganize a debtor company in financial distress, ie to restore its solvency.
The reorganisation procedure is introduced for the duration of the state of emergency and, according to the current wording of the Reorganization Decree, it will expire on 23 May 2021 (although it may be prolonged). It is further noted that reorganization procedures initiated before the repeal of the Reorganisation Decree may continue after the repeal.
There are two types of reorganization procedure: private (when it only applies to creditors involved in the reorganization) and public procedure (when it applies to all creditors). In the case of a public reorganization procedure, with the exceptions set forth in the Reorganisation Decree, the rules on bankruptcy shall apply mutatis mutandis.
A reorganization can be carried out by business organizations based in Hungary. The reorganization procedure may be commenced only by the debtor, on the basis of the decision of its decision making body. A precondition for initiating the reorganization procedure is that the debtor company is in imminent insolvency. The assistance of an external expert in the reorganization procedure is mandatory.
In a private reorganization procedure the reorganization plan must be approved by all creditors involved in the procedure. In a public reorganisation, a reorganization plan shall be deemed to have been approved by the creditors if the undertaking has received 60% of the votes in relation to the number of votes attributable to all creditors entitled to vote in the reorganization plan. An important limitation for protecting creditors, however, is that no creditor can receive less recovery than 60% of its principal claim.
The Reorganization Decree allows for the use of temporary or new financing for the operation and for the implementation of the reorganization plan during the reorganization procedure.
Contact: Gábor Borbély, Zoltán Fabók, Márk Seres
Law stated as at 14 May 2021.
1 Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132.
2 Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast).