On 28 May 2020, the Hungarian Government adopted amendments to the laws on company liquidation and forced deletion procedures to cushion the impact of the global coronavirus pandemic on the economy.
1. Changes related to liquidation
Liquidation is initiated when a company is unable to meet its financial obligations and pay off its debt. However, in Hungary, the courts do not apply an actual insolvency test before ordering liquidation but check only whether certain criteria have been met.
The criteria examined by the court include, among others, whether the debtor has failed to pay upon an enforceable judgment or an undisputed contractual debt within 20 days after the due date and despite a written warning by the creditor, in which the creditor must have granted an additional payment deadline. As a result, liquidation is often used as a debt collection method.
The new rules concern cases where liquidation is initiated by the creditor based on the fact that the debtor has not contested the debt.
As seen from the above comparison, the new rules were adopted mostly in favour of the debtors, while the only good news for creditors is the shortened grace period the courts may allow.
2. Ex officio company terminations and forced deletion procedures are suspended until 31 October 2020
As of 29 May 2020, all ex officio company termination and forced deletion procedures opened due to serious noncompliance are suspended until 31 October 2020. This is important, because if such procedures are completed by the court deleting the company in question this may lead to various negative consequences including, for example, the piercing of the corporate veil, personal liability of managing directors and the ban on the managing director being reappointed.
Below we summarise the three types of cases affected:
- In Hungary, the court of registration is not merely a registering body but is also responsible for reviewing the companies' corporate establishment documents and other subsequent shareholders' resolutions for compliance with relevant laws. The court of registration also has the right to examine the companies' operations if it learns from an interested party or another court or authority about a reason to conduct a review.
- If during such a review the court discovers a serious noncompliance which the company fails to remedy upon notice by the court, the court will declare the company terminated and initiate a forced deletion procedure. However, as of 29 May 2020, the court may not declare any company terminated. Furthermore, forced deletion procedures which were pending on 29 May 2020 are automatically suspended until 31 October 2020. This means that companies which are subject to such a procedure will get a second chance to prove – before 31 October 2020 – that they have remedied the noncompliance and can therefore avoid forced deletion.
- If the tax authority has initiated the termination of a company due to the forced deletion of the company's tax registration number (which occurs as a sanction imposed by the tax authority), and this procedure is already pending on 29 May 2020, the procedure will automatically be suspended until 31 October 2020. If the company has already been declared terminated and the procedure is already in the phase of a forced company deletion procedure, the procedure will also be suspended until 31 October 2020.
- If, after 29 May 2020, a forced deletion procedure could be initiated because the company was unable to complete its winding-up within three years, it will get a second chance to complete the winding-up by submitting a deletion request to the court by 31 October 2020 and can therefore avoid forced deletion.
As we can see, liquidation and forced deletion procedures both involve a court process aiming at the termination of the company in question either due to insolvency or some sort of noncompliance. The law-makers' intention was to offer rules preventing the termination and forced deletion of companies during the pandemic or due to a reason potentially arising from the burdensome situation brough about by the pandemic. The new rules therefore remain in force until the state of emergency is officially withdrawn. While companies on the verge of shutting down cannot be saved by legal measures alone, the new rules still offer some (temporary) room for existence.
By Kinga Hetenyi, Local Partner, and Alexandra Bognar, Attorney at Law, Schoenherr