Aid under the State of Emergency: The Reorganisation Procedure

Aid under the State of Emergency: The Reorganisation Procedure

  • Smaller Small Medium Big Bigger
  • Default Helvetica Segoe Georgia Times

More than a year has elapsed since the outbreak of the COVID-19 pandemic, which has had a devastating impact on our economy. Due to the extraordinary measures of the Hungarian government to prevent the spread of the coronavirus, numerous services were suspended, many shops were closed, and travel is still restricted. Companies affected by these restrictions suffered huge losses, which may result in their insolvency.

Recently, the Hungarian government introduced an extraordinary reorganisation procedure aimed at improving the financial situation of these companies and, ultimately, keeping them in business. This procedure is not the long-awaited implementation of the restructuring directive but an extraordinary measure pursuant to which companies at risk of insolvency may apply to this new procedure until 23 May 2021 (the government may prolong this deadline for the duration of the state of emergency in Hungary).

Companies seated in Hungary and at risk of insolvency may initiate the reorganisation procedure. The company may decide which creditors it wishes to involve, and the procedure is private and undisclosed in the Hungarian Company Registry (unless the company applies for a public procedure, in which case all creditors are involved). Creditors of overdue debts must be involved. During the procedure, contractual partners of the company providing continuous services or supply of goods cannot terminate their contracts on the basis that a reorganisation procedure has been initiated, provided that the company declared that it can pay the consideration for their goods or services.

Involving a reorganisation expert, which may be only a certain Hungarian company (Nemzeti Reorganizációs Nonprofit Korlátolt Felelősségű Társaság), is mandatory. The reorganisation expert may also bring in a liquidator for industry-specific expertise. The reorganisation expert will examine the company's request for the reorganisation procedure, and if the expert finds that the company is suitable for the procedure, the court will order a payment moratorium of 90 days (which may be extended by an additional 60 days). The moratorium is applicable only in relation to the creditors that are involved in the procedure.

The aim of the reorganisation procedure is to agree on a reorganisation plan. The company and its creditors may include any tool in the plan which they find appropriate for the reorganisation of the company, e.g. involving a new financing, reorganising the operation or changing the ownership structure of the company, providing payment benefits for the company or waiving a claim in part.

In a private procedure, if all creditors involved in the procedure support the reorganisation plan, the company will submit the plan to the court together with the reorganisation expert's opinion. If the reorganisation expert finds that the plan is appropriate and complies with the law, the court will approve the plan and close the procedure. The plan applies only to the creditors that were involved in the procedure. In a public procedure, the rules of the Hungarian bankruptcy procedure apply, with certain exceptions. Creditors are not assigned into classes, and only the approval of 60 % of the creditors is required to approve the reorganisation plan. Nevertheless, all creditors must receive at least 60 % of their claim according to the plan.

If the court rejects the reorganisation plan, the procedure will not automatically turn into a liquidation proceeding. However, the creditor may initiate the liquidation of the company immediately, meaning this is a simplification for the creditor compared to the general rules.

The reorganisation plan is a debt acknowledgement of the company in respect of claims that are recognised and undisputed when the creditors approve the reorganisation plan. In addition, should the company fail to implement the reorganisation plan, the plan may be directly enforced.

Until now, only one legal tool – the bankruptcy procedure – was available for companies at risk of insolvency to settle their debts. Bankruptcy procedures are unpopular due to their inflexibility and riskiness for distressed companies, so restructuring procedures may fill a gap in the Hungarian legal environment and may help companies to recover financially from the ongoing COVID-19 pandemic.

By Virag Palguta, Attorney at Law, Schoenherr