Being declared insolvent for an unpaid invoice in Hungary seems to be an exaggeration, yet it is a possible outcome in liquidation proceedings. What kind of standard of proof is applied by judges? Does the "beyond a reasonable doubt" standard, known in criminal proceedings applies? This article addresses this issue by analysing a recent decision of the Hungarian Supreme Court.
In Hungary liquidation procedure is a “popular weapon” in the hand of creditors to recover monetary claims as the Hungarian Liquidation Act provides that the debtor shall be declared insolvent if it has not paid or contested its contractual debt within 20 days of its due date, after the receipt of the creditor's final written notice letter.
In the above case debtors can avoid liquidation only if they pay the creditor's claim, that can be reclaimed in separate litigation afterwards. At the same time, in their application for liquidation creditors shall prove that the debtor had actual knowledge of the claim before receiving the final notice.
In a recent case, the question arose whether the above also applies when details of the claim were already indicated in the text of the contract between the parties.
The first and second instance courts found that the creditor shall warn the debtor of the existence and due date of its claim before sending the final notice letter, even if these details were laid down in a contract signed by the debtor. The second-instance court stressed that the debtor shall be aware of the claim and its due date “beyond reasonable doubt” before receiving the final notice letter.
According to the judges, the creditor had to state in its application how the debtor had been informed of the claim specified in the final notice letter, as it was in the creditor's interest to prove this under the "burden of proof" principle specified in the Hungarian Civil Procedure Code (CPC).
However, the creditor intended to prove that the debtor had undoubtedly been made aware of the claim by a testimony of the debtor's managing director, although such testimony cannot be considered as evidence under the CPC.
Losing the case on first and second instance, the creditor submitted a request for judicial review to the Supreme Court of Hungary. He argued that the debtor must be informed of the factual basis, title, amount, and time limit of the claim before sending the final notice letter. Consequently, it was irrelevant how these facts were communicated to the debtor, since the only relevant fact was that the debtor was actually aware of these circumstances due to the parties’ contract.
The Supreme Court pointed out that a contractually overdue debt does not in itself constitute the basis for the debtor's insolvency under the Liquidation Act. Creditors should prove that debtors are aware of the due claim before receiving the final notice letter. This can be made by sending an invoice, or in the absence thereof, by sending a first notice letter to debtors. In this respect, the burden of proof is on creditors.
The Supreme Court pointed out that in the case at hand the creditor could not prove “beyond reasonable doubt” that the debtor was aware of the due claim, therefore the application was unfounded.
Based on the above, the Supreme Court reaffirmed that the principle of "free evaluation of evidence" applies to the first communication of the claim to the debtor.
However, when it comes to the standard of proof in liquidation proceedings, the Supreme Court confirmed the "beyond reasonable proof" standard applies in relation with the declaration of insolvency by the court.
Given that this decision has serious legal and business consequences for every company, it is legitimate that Hungarian courts apply a higher standard of proof, used in criminal proceedings than the usual lower standard applicable in civil or business litigation.
By Richard Schmidt, Managing Partner and Peter Korozs, Junior Associate, SmartLegal Schmidt & Partners