Hungary Introduces Pre-insolvency Proceedings

Hungary Introduces Pre-insolvency Proceedings

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On 4 May, the detailed debate has been closed in the Hungarian Parliament in relation to the legislative proposal, which aims to implement Directive 2019/1023, also known as the restructuring directive, providing debtors with a pre-insolvency tool to rescue their viable but struggling enterprises. Restructuring proceedings fill a gap in the Hungarian legal environment and may also help enterprises recover financially from the ongoing coronavirus pandemic.

A legal tool which can rescue enterprises in distress has long been awaited in Hungary. Until now, these enterprises had only one legal tool – bankruptcy proceedings – to settle their debts with creditors. But bankruptcy proceedings are unpopular due to their inflexibility and riskiness compared to restructuring proceedings (unsuccessful bankruptcy proceedings automatically turn into liquidation proceedings). We therefore expect the introduction of restructuring proceedings to strengthen enterprises and the position of their creditors in the Hungarian market, which will have a positive impact on the economy in the long run.

The directive broadly divides restructuring proceedings into two types. A procedure that is largely in the hands of the parties and the role of the court is limited; usually not all creditors are involved and moratorium becomes effective only upon request and in a more general procedure where all creditors take part and the court is more actively involved. In this latter type, a wide range of restructuring tools (e.g. restructuring plan) are available in addition to the moratorium. The restructuring directive allows the Member States to introduce both types of procedure. Hungary opted for a mixture and the debtor may choose which route it wishes to follow.

According to the proposal, the debtor's shareholders must decide whether the debtor can initiate the restructuring proceedings. The restructuring starts as a private procedure and becomes public only if certain criteria are met – for example, if the debtor applies for a general moratorium. The debtor is free to decide which creditor it wishes to involve and it must agree on the reorganisation plan only with them. Within this scope, the moratorium applies only to those creditors that are involved in the procedure. If all creditors are involved, the moratorium is general and the procedure becomes public. If the procedure becomes public, court involvement increases.

To ensure that the restructuring does not pose an unbearable risk to the debtor, the proposal makes it possible to request a moratorium on debt enforcement from the court to ensure that creditors do not take enforcement actions or initiate insolvency proceedings against the debtor during the restructuring procedure. 

If necessary or requested by either party, the debtor is assisted by restructuring experts who help draw up the restructuring plan, consult with creditors, lead the negotiations and are responsible for the proper runoff of the restructuring plan. The tasks of the restructuring expert may even extend to supervision of the debtors' finances and daily operations. 

The aim of the restructuring procedure is to agree on a restructuring plan with the creditors. The restructuring plan is meant to provide a feasible step plan aiming to reinstate the solvency of the debtor, preserve its operations, and reduce its debts in line with its ability to service them. The law will not bind the hands of the parties to freely agree on anything that they deem beneficial for the debtor; nevertheless, the restructuring plan must not cover claims of employees arising from their employment and tort-related debts if the beneficiaries of such debts are natural persons.      

The restructuring plan must be adopted by a majority of votes in each class of creditors. In accordance with the restructuring directive, the proposal renders to the scope of the courts to approve the reorganisation plan. The scrutiny of the court is limited to checking the formality requirement and that the plan does not contradict to mandatory law. The court is not supposed to check and decide if the restructuring plan is economically feasible or not. Should the creditors fail to reach a consensus at the vote, the debtor may ask the court to decide on the approval of the restructuring plan with effect on all creditors of all classes; provided, that the secured creditors and the suppliers of the goods and services that are inevitable for the operation of the debtor have approved of the restructuring plan. Due to its compulsory nature, the decision can only take place if strictly defined legal conditions are met.

If the creditors do not reach consensus at the vote or the court does not approve the restructuring plan, the restructuring procedure is deemed unsuccessful and the moratorium will be lifted. Nevertheless, that failure does not warrant insolvency proceedings being initiated against the debtor. The general insolvency law criteria must still be met.  

A final vote on the proposal of the restructuring proceedings is expected soon. The Hungarian legislator is at the vanguard among EU Member States, considering that the deadline for implementation will expire only on 17 July 2021.

By Gergely Szaloki, Local Partner, and Virag Palguta, Attorney at Law, Schoenherr