If someone is unable to pay their outstanding and due debts (or is just partly able to do so), that person is considered insolvent. This applies to companies and to natural persons as well. The number of companies that had to cease operations because of insolvency increased in 2023. Although the Hungarian legal environment provides several solutions to this problem, these have different effectiveness and have different consequences for both debtors and creditors. Below is a general overview of the four typical procedures for dealing with insolvency in the current Hungarian law.
If the Debtor Is Not a Natural Person: Bankruptcy, Liquidation, or Restructuring Proceedings
After the change of the regime in 1989-90, the development of the market economy made it necessary to establish procedures tailored to the insolvency of enterprises, so the law regulating bankruptcy and liquidation proceedings was adopted in 1991. Since then, it has undergone numerous amendments, but it still retains the traits that characterized Hungarian legal-economic thinking at the time of its creation, which, in fact, poses many problems today.
Bankruptcy Proceedings
Bankruptcy is the first of the two procedures that can be considered by a company in payment difficulties. Bankruptcy proceedings are based on the fact that the debtor is still solvent and is only threatened with insolvency, in view of which the debtor is granted a moratorium on payments when proceedings are opened and is also given the possibility of reaching an arrangement (bankruptcy agreement). The bankruptcy procedure is a highly formalized public procedure in which the parties have less room for maneuver. A bankruptcy agreement between the debtor and the creditor(s) is approved by the court and can be enforced at a later date, but if no such agreement is reached, or it does not comply with the legislation, the court orders the debtor’s liquidation.
Liquidation Proceedings
Liquidation proceedings come into the picture when the debtor becomes insolvent, so instead of saving it, the court has to terminate the company. In this regard, liquidation proceedings are – potentially – the last stage in the life of a company, with a dual purpose: to terminate the debtor’s operation and the debtor’s capacity to act as a registered person (i.e., to remove it from the economic mainstream) and to provide at least a partial satisfaction to the creditors’ claims. Although it is possible to reach an arrangement between the debtor and the creditors in liquidation, thereby saving the entity from dissolution, this occurs rarely. The after-effects of liquidation proceedings can be very serious. For instance, members or directors may be later prohibited by the court to hold such functions or titles in other companies.
Restructuring Proceedings
Among other things, to address these problems in compliance with Directive (EU) 2019/1023, a long-awaited new solution, the restructuring procedure (SZAT), was introduced in Hungary from July 2022. The SZAT is conceptually very similar to bankruptcy proceedings, but there are some essential differences. One advantage of the SZAT is that it is mostly non-public, and the debtor can choose which creditors to involve. It may also involve a restructuring expert who is able to support the debtor and take into account the fair interests of the creditors. During the procedure, the agreement can be reached by the majority of the votes, so creditors cannot really form a blocking minority. Finally, once the court approves the agreement, it becomes a compulsory agreement, so it is in the interest of all parties to cooperate.
If the Debtor Is a Natural Person: Debt Settlement Procedure for Natural Persons
From 2015, Hungary introduced in its legal system the debt settlement procedure for natural persons, who in many cases face a risk of losing their livelihoods. The regulation was necessitated by the mass expiry and termination of leasing and loan contracts in foreign currency. The essence of the procedure is to achieve a legal arrangement between a natural person and their creditor to ensure bankruptcy protection for the natural person, in which the role of the court is limited mainly to coordinating in order to reach a settlement.
Conclusion
Hungarian insolvency law is evolving. It has undergone many positive changes in its more than 30-year history, but many of its teething problems have persisted over time. The aim should be to create a uniform set of rules that strikes a balance between a sufficient degree of flexibility and firmness.
By Peter Barta, Head of Tax Litigation and Indirect Taxes, Jalsovszky
This article was originally published in Issue 10.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
