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Recent Developments Regarding Hungarian Insolvency Law

Recent Developments Regarding Hungarian Insolvency Law

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The Hungarian Government is considering creating new legislation to cover all kinds of insolvency proceedings, including bankruptcy, liquidation, winding-up, and dissolution proceedings. This move has been roundly welcomed, especially by creditors, as the current law is from 1991, and although it has been amended numerous times, it counts as an outdated and much-criticized piece of legislation.

While work on the new law is still it its initial phase, the current Hungarian Insolvency Act has recently been amended to reconcile the interests of creditors secured by a pledge. The amendment came into force on January 1st, 2019. 

The Purpose of the Amendment to the Hungarian Insolvency Act

In a liquidation proceeding, creditors secured by a pledge may acquire ownership of the unsold pledged assets at the end of the liquidation proceeding. Before the amendment, such creditors were not obliged to pay certain costs that arise in connection with the pledged assets and its purchase price, unlike those creditors secured by a pledge but receiving their claim only from the sale of the pledged assets. Thus, creditors acquiring ownership of the unsold pledged assets at the end of the liquidation proceeding were in a more favorable position than those creditors who received payment from the sale of the pledged assets. 

The recent amendment aims to ensure equal treatment of all secured creditors by requiring them to pay a certain fee to the liquidator. The liquidator must notify the creditors that if they intend to acquire ownership of the unsold pledged assets, they must pay: (i) 3% of the minimum purchase price of the asset as an advance payment for the fee of the liquidator, plus VAT; and (ii) 2% of the minimum purchase price of the asset. The creditor has 30 days from the receipt of the liquidator’s notice make the payment. This new obligation ensures that no creditor is placed in a favorable position to others at the end of the liquidation. 

The Liquidator May Allocate the Proceeds Only If the Sale Is Not Challenged

The amendment clarifies one more important element of the liquidation proceeding. The reasoning of the Amendment Act states that the liquidator may allocate the proceeds stemming from the sale of the pledged assets to the creditors only if the sale is not challenged, or, if it is challenged, the challenge is rejected by the court. Therefore, the amendment extends the deadline for the allocation of the proceeds to 30 days from the elapsing of the deadline to file a challenge or from the date an order of the court rejecting the statement of claim is received by the liquidator – instead of the 15-day deadline that existed before. The extended deadline ensures that the liquidator has enough time to receive the court’s order to allocate the proceeds. 

Plan for a New Insolvency Act

Although amendments such as these (and the 2017 amendment enhancing the protection of beneficiaries of security interests and clarifying the position of creditors secured by call options, security assignments, or pledges over future receivables) brought the insolvency regime closer to the market’s needs in the past few years, the Government still plans to create a new and comprehensive Insolvency Act. We know only a little bit about this initiative so far, but it appears that the Government intends to emphasize the protection of creditors’ interests – in particular secured creditors – which is clearly positive from the market’s perspective. In the meantime, debtors who still have a chance to rescue their business will actually be given the opportunity to do so, but cases concerning creditors who are unable to be restored will be closed faster, simpler, and in a more cost-efficient way than they are at present.

By Kinga Hetenyi, Managing Partner, and Virag Palguta, Associate, Schoenherr Budapest 

This Article was originally published in Issue 6.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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