By early October 2008, following the collapse of Lehman
Brothers, all constituents of the Hungarian financial system
experienced unprecedented turbulence. In response, the
government and the National Bank of Hungary (NBH) introduced
several measures in order to protect the financial sector from
collapse and to minimise the impact of the economic
These measures fall into the following categories:
- Guarantees of bank debt by the state (introduced by Act
CIV of 2008 on the strengthening of the financial
intermediary system (bank bailout law));
- Deposit guarantees by the state;
- Special (monetary) assistance measures by the NBH;
- Recapitalisation measures by the state (under the bank
- Financial support by international organisations (IMF, EU
and World Bank);
- Various economic stimulus packages by the state;
- Development of legislation in critical areas (most
prominently in the field of insolvency); and
- Development (typically tightening) of regulations in the
Bank bailout law
In December 2008 the Hungarian Parliament enacted the bank
bailout law, which introduces a debt guarantee scheme and a
recapitalisation scheme, together requiring the designation of
HUF 600 billion (approximately 2 billion). These measures
are available to Hungarian banks organised as corporations.
This means that retail bank branches are not eligible to
participate in the schemes under the bank bailout law.
The debt guarantee scheme is applied upon the request of an
eligible bank and guarantees obligations based on loans and
debt securities that are denominated in Euros, Hungarian
forints or Swiss francs. Banks participating in the scheme are
required to issue a special voting preference share in favour
of the state. The preference share entitles the state to veto
all major decisions put forward at the general meeting of the
The recapitalisation scheme makes it possible for the state
to inject capital into eligible banks (upon request) in
consideration for a special voting preference share (offering
identical rights to the share issued in the context of the debt
guarantee scheme) and non-voting dividend preference shares. In
the event of a recapitalisation transaction, the state appoints
at least one person to both the board of directors and the
supervisory board of the applicant bank.
Changes to insolvency proceedings
Act 51 of 2009 on the amendment of Act 49 of 1991 on
bankruptcy and liquidation proceedings (Bankruptcy Act) and
other related laws (Amending Act) were adopted by the Hungarian
Parliament on June 8 2009. The Amending Act substantially
modified the rules regulating bankruptcy and liquidation
With some exceptions, the new provisions of the Amending Act
came into force on September 1 2009, and apply to those
insolvency proceedings that start after that date.
The Amending Act changed several deadlines in the course of
bankruptcy and liquidation proceedings, which has resulted in a
shortening of the length of the proceedings. In most (but not
all) instances the time limits set out in calendar days have
been converted to business days.
With one important exception, the intention to shorten the
deadlines is actually not expected to result in any significant
reduction of the relevant period (so the time limit of eight
business days in practice may become two to three days shorter
than the previously used time limit of 15 calendar days). The
exception, where the reduction was significant, is the
reduction of the deadline available in liquidation proceedings
for the lodgement of creditors' claims from one year to 180
As a significant procedural development, since September 1
2009 the county (metropolitan) court with competence on the
basis of the registered seat of the debtor has exclusive
jurisdiction over bankruptcy and liquidation proceedings. In
addition, according to the Amending Act, as of July 1 2010 all
communications between the court and the parties (other than
individuals) will be conducted electronically.
Changes to bankruptcy proceedings
The most important objective of the recent amendment to the
Bankruptcy Act was to harmonise the law with the demands of
proceedings in practice and increase its ability to provide
real bankruptcy protection for companies in distressed
situations. The overhaul of the moratorium rules is the most
significant tool and probably the most important change
introduced by the Amending Act. As of September 1 2009, the
court can order the immediate (and temporary) moratorium in its
decree within one working day on the basis of the application
of the debtor. By way of the immediate nature of the
moratorium, its protective nature is ensured.
Following the ordering of the immediate and temporary
moratorium, the court assesses the application. If the
application is complete (or in the case of incomplete
applications the missing documents have been supplemented), the
court orders the normal moratorium. In principle, this
moratorium ceases on the 0th hour of the business day following
the 90th day from the publication of the respective court
In the course of the negotiations with creditors, upon the
request of the debtor the moratorium may be extended, but only
with the consent of the creditors. With a view to protect the
interests of the creditors, the aggregate duration of the
moratorium (including any extension) may not exceed 365 days
from the commencement date of the bankruptcy proceedings.
Except for certain payment obligations exhaustively set out
by the Amending Act (taxes, salaries, health insurance fund
contributions and so on), as a general principle from the
commencement date of the bankruptcy proceedings the enforcement
of monetary claims against the debtor is suspended and the
debtor is not permitted to make any payments under any existing
claims. Consequently, save for a limited number of exceptions
as set out below, no security interests can be enforced during
a moratorium. In addition, no set-off may be applied vis-a-vis
debtors during a moratorium.
From the perspective of banks and financial institutions,
there is a important new rule that provides that regarding the
bank accounts of debtors, prompt collection orders cannot be
submitted or enforced. Furthermore, money claims cannot be
executed by the bank from the date when the debtor notifies the
bank that it has submitted an application for bankruptcy
The Amending Act introduced a provision whereby the
contracts of the debtor cannot be rescinded or terminated by
claiming that the debtor does not meet its payment obligations
due to the moratorium. The debtor may only assume new
obligations with the consent of the administrator and payments
from the assets of the debtor may only be made with the
countersignature of the administrator.
Enforcing a security deposit during moratorium
As described above, a general prohibition against enforcing
security interests over the assets of the debtor applies during
a moratorium. However, the Amending Act sets out limited
instances when security deposits are enforceable and those
exceptions correspond to the minimal requirements set out in
Directive 2002/47/EC of the European Parliament and of the
Council on financial collateral arrangements. For example, if
both the depositor and the depositee are qualified as
investment undertakings or credit institutions domiciled in an
EEA Member State, the enforcement of the security deposit is
possible during a moratorium.
Prohibition of payments during moratorium
Even before the effective date of the Amending Act, market
players and commentators have raised serious concerns regarding
the prohibition of payments during a moratorium.
It is regarded as problematic that the enforcement of
close-out netting for financial arrangements (in particular
derivatives developed on the basis of the International Swaps
and Derivatives Association master agreement) is not regulated
satisfactorily. The gist of the problem is that unlike the
exception available for close-out netting arrangements in
liquidation proceedings, no carve-out for close-out netting is
provided among the exceptions to the general moratorium rules
in bankruptcy proceedings.
Therefore, certain market participants are believed to be
actively lobbying with the government for the inclusion of a
specific exception benefiting close-out netting arrangements in
The creditors may establish creditors' committees in the
course of both bankruptcy and liquidation proceedings. Compared
to the previously applicable rules, the Amending Act has
retained the basic tasks and legal status of creditors'
committees but introduced more detailed regulations.
The rules of formation differ in the event of bankruptcy and
liquidation proceedings. However, the participation of
one-third of all creditors (measured by the number of
creditors) is required in both proceedings. In the context of
bankruptcy proceedings, the creditors' committee may only be
established if the creditors represented in the committee also
hold at least half of the total votes that can be cast.
Pursuant to the Amending Act, creditors have one vote for each
HUF 100,000 of debt registered as acknowledged or undisputed.
By contrast, in the event of liquidation proceedings, the
creditors' committee may only be established if its members
represent one-third of the claims of those creditors that are
entitled to enter into a settlement agreement.
The Amending Act also allows for the committees to be
comprised of at least three but not more than seven members.
Pursuant to a newly introduced conflict of interests rule, the
debtor or any person personally or organisationally linked to
the owners or executives of the debtor, as well as any person
whose claim arose within 180 days prior to the launch of the
bankruptcy proceedings may not be a member of the creditors'
Role of the administrator
The most important new task of an administrator is to
register and classify the creditors' claims.
The Amending Act clarified that the administrator is
required to approve the new commitments of the debtor (i.e.
commitments made subsequently to the launch of the bankruptcy
proceedings). In that context, the administrator may only
approve commitments aiming to maintain the day-to-day operation
of the debtor, reduce its losses or those that are made in
preparation for the settlement agreement. The approval of the
administrator to the granting of any additional security is
also subject to the consent of the majority of the creditors
with voting right.
While the book value of the debtor's assets has remained the
basis for the administrator's fee, the Amending Act introduced
a new method for calculating the fee. In addition, if a
settlement is reached in bankruptcy proceedings, the
administrator may also be entitled to a success fee.
Settlement in bankruptcy proceedings
The Amending Act has maintained the concept that the purpose
of bankruptcy proceedings is to reach a settlement between the
debtor and its creditors. In the framework of the settlement,
the debtor enters into an agreement with its creditors on the
conditions of the settlement of its debts. In addition,
depending on the circumstances of the case, a settlement
agreement may provide for the forgiveness of debt,
restructuring, the granting of new securities or the conversion
of debt to equity.
A settlement agreement may be agreed if the debtor receives
the majority of the votes of the creditors with voting rights
both in the secured and unsecured classes of creditors.
The agreed settlement agreement also applies to those
creditors entitled to make an agreement who have not given
their consent to entering into the agreement, or despite their
notification, they did not participate in the negotiation or
execution of the agreement. In addition, the settlement
agreement also applies to creditors whose claims are disputed
and in the case of disputed claims, the court may order that a
provision be established in order to cover the claims once the
disputes have been resolved. It is important to ensure that the
settlement agreement does not differentiate within a particular
class of creditors on the basis of whether a particular
creditor approved or rejected the settlement.
Bankruptcy vs liquidation
Under the new rules, liquidation proceedings may only have
priority over bankruptcy proceedings if the liquidation has
already been ordered by a court decree of the first instance
when the application for bankruptcy proceedings is received. In
the absence of a court decree of the first instance ordering
liquidation, the applications for liquidation do not prevent
the launch and conduct of the bankruptcy proceedings. This is
because the applications for liquidation are suspended by the
court until the ordering of the bankruptcy proceedings (the
normal moratorium) or such applications may be rejected or
terminated by the court, as the case may be.
If no settlement is reached in the course of the bankruptcy
proceedings or the settlement does not meet the requirements
set out in the Bankruptcy Act, the court automatically turns
the proceedings into liquidation proceedings without
considering the existence or appropriateness of any
applications for liquidation proceedings.
Changes to liquidation proceedings
In addition to the significant reduction of the period
available for the lodgement of creditors' claims from one year
to 180 days, the Amending Act introduced several changes to the
procedural rules of the management of the claims as well.
The date of the lodgement of the creditors' claims affects
the satisfaction of the claims, even if the lodgement has been
made within the new limitation period of 180 days. Pursuant to
the Amending Act, a pledgee, chargee or mortgagee (pledgee) may
only enforce its claim prior to other creditors, under the
terms of the pledge, charge or mortgage, if the pledgee lodged
its claim within the notification period of 40 days and paid up
the registration fee.
Importantly, while the pledged, charged or mortgaged asset
may also be sold if the pledgee lodged its claim after the
expiry of the period of 40 days (but, obviously, within the
limitation period of 180 days), in such circumstances the
proceeds from the sale of the asset must be held separately and
the claim of the pledgee may only be satisfied under the
general provisions. In other words, pledgees that miss the 40
days lodgement period will only be satisfied if there is
sufficient coverage following the satisfaction of the
statutorily defined preferred claims.
Enforcing security interests
The Amending Act kept the general rule whereby secured
creditors rank ahead of the unsecured creditors in liquidation
proceedings. Furthermore, with minor changes, the previously
applicable mandatory order of satisfaction among secured
creditors remains effective as well.
Accordingly, under the Amending Act the satisfaction of
claims secured by a mortgage, a pledge or any charge other than
a floating charge (the mortgages) enjoys priority over the
satisfaction of (i) claims secured by floating charges; and
(ii) unsecured claims, provided that such secured claims are
duly registered by the liquidator.
The Amending Act created a new category for pending claims.
Since September 1 2009, special payment mechanisms are
applicable to such pending claims among claims secured by
mortgages. Pursuant to the Amending Act, the term pending
claims means claims where the creditor undertook conditional
payment obligations in favour of the debtor, but those payment
obligations have not yet materialised or become due.
So as of September 1 2009 the so-called hundred-percent rule
is only applicable if the claim secured by mortgage does not
qualify as a pending claim. The hundred-percent rule provides
that (save for the reduction of the costs of purchase of the
encumbered asset and the liquidation fee as set out by law) the
total revenues arising from the sale of the asset over which a
mortgage was established have to be exclusively used for the
satisfaction of claims, provided that the mortgage was
established over the charged asset prior to the commencement of
the liquidation proceedings.
In the context of pending claims (save for the reduction of
the costs of purchase of the encumbered asset and the
liquidation fee as set out by law), the total revenues arising
from the sale of the asset over which the mortgage was
established have to be deposited at the court, provided that
the mortgage was established over the charged asset prior to
the commencement of the liquidation proceedings.
Liability of executive officers
In comparison to the previously applicable legislation, the
rules pertaining to the liability of executives of companies
subject to liquidation have become stricter under the Amending
Act. The amount of the fine that can be imposed on executives
increased to HUF 2 million when the executive fails to meet its
obligations, meets its obligations late, gives incorrect
information or does not cooperate with the liquidator.
The Amending Act extended the scope of the rule on the basis
of which the court may oblige the executive to bear the costs
incurred due to the failure to comply with his or her
obligations, including the cost of involving an expert.
Consequently, the debtor's member with majority control will be
liable as a guarantor in relation to the payment of the fine
and the costs.
Under the new sanction of disqualification, which is
incorporated in the Companies Act, a former executive whose
liability is established by the court on the basis of the above
rule but who failed to comply with his or her payment
obligation may not be an executive of any business association.
The disqualification will cease after five years following the
unsuccessful execution proceedings vis-a-vis the executive.
The related amendments of the Companies Act enable the
company register to indicate whether the respective executive
has been disqualified, including the commencement and
termination date of the sanction. As of September 1 2009, in
the course of the establishment of companies, executives have
to declare whether they have been disqualified under the above
Duties of the liquidator
The liquidator has to notify its appointment to the
financial institutions holding the accounts of the debtor
without delay under the provisions of the Amending Act. The
liquidator registers and classifies the claims already lodged
in the bankruptcy proceedings immediately before the
commencement of the liquidation proceedings. In addition, the
Amending Act set out a more clear description of, inter
alia, the accounting and taxation-related duties of the
liquidator in connection with settlements during liquidation
The Amending Act signals a generally positive development
and can be regarded as a milestone towards a more viable
bankruptcy regime. This new regime appears to be more
debtor-friendly than its predecessor. As a consequence, certain
resentment can be expected on the creditors' side mostly on
account of conflicting interests regarding the enforceability
of security arrangements.
Nevertheless, the Hungarian economy may still be approaching
a significant wave of insolvencies. It remains to be seen how
the existing uncertainties can be eliminated by developing best
practices. The reactions of courts to particular arrangements
in an insolvency context may also substantially modify the
practices of the various interested parties.
Csilla Andrékó has been Managing Partner of
Andrékó Kinstellar Ügyvédi
Iroda in Budapest since November 2008. Her main areas of
practice include international banking work and capital
market transactions including syndicated lending, project
finance, structured trade finance, medium-term note
programmes, bond and securities issues, restructuring,
insolvency, refinancing and general financing
Csilla is a member of the Budapest Bar and Registered
Foreign Adviser of the Law Society of England and
1054 Budapest, Széchenyi rkp. 3
Tel: +36 1 428 4400
Direct: +36 1 428 4404
Fax: +36 1 428 4444
Gábor Antal is a managing associate at
Andrékó Kinstellar Ügyvédi
Iroda. His main areas of practice include deal
structuring and the tax consequences of domestic and
cross-border investments, mergers and acquisitions,
restructuring, insolvency, distressed situations,
financial instruments and structured products.
Gábor is a member of the Budapest Bar and the New
York Bar and a licensed tax adviser in Hungary.
Andrékó Kinstellar Ügyvédi
1054 Budapest, Széchenyi rkp. 3
Tel: +36 1 428 4400
Direct: +36 1 428 4435
Fax: +36 1 428 4444