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The Hungarian Civil Code rules on mortgages and pledges were recently amended by Act XXVI of 1996. The Act was adopted by parliament on April 9 1996 and some provisions entered into effect on May 1 1996, but the remaining provisions take effect on May 1 1997. This briefing outlines the main changes.

Pledge of movable assets

One major disadvantage of the former regime was that a pledgor had to release possession of the pledged assets to the pledgee. Only financial institutions did not have to take possession of pledged assets. The Act enables pledgees to acquire a valid security interest in movable assets without taking possession of them. Under the Act, the pledgor and pledgee can agree to sell the pledged assets if the pledgor defaults. The agreement must specify a minimum purchase price and deadline for the sale.

The pledge agreement must be in the form of a notarial deed, registered at the new registry of the Hungarian Chamber of Notaries. If the pledgee takes possession of the assets registration is not necessary. Using the notarial deed the pledgee can obtain immediate execution in a court proceeding taking a couple of days rather than requiring enforcement by a two-year court case.

The applicable legal terms have also been changed. All the pledged personal assets remaining in the possession of the pledgor will now be called 'mortgaged assets', not 'pledged assets'. Therefore, the agreement on mortgaged assets is a mortgage not a pledge agreement.

Pledge of entire assets

For the first time, the Act makes it possible for a debtor to pledge all its assets, such as its inventory. This is similar to the floating charge used in common law regimes. This used to be impossible because of the constant change in the assets involved. It is also now possible to pledge conditional or future rights.

The same formalities apply to the pledge of the entire assets as to a normal pledge. Only a written agreement is needed for a pledge of conditional or future rights to be valid, and this does not have to be registered with the Chamber of Notaries.

Independent pledges

The Act makes it possible to establish a pledge without having to refer to the pledgor's underlying obligation. Independent pledges can be established at the same time as the underlying obligation is terminated. If this is done, the pledgee can seek satisfaction from the pledged asset up to the amount of the pledge agreement but will not be able to recover anything further. The advantage of independent pledges is that their validity is not affected by the validity of the underlying obligation, nor will set off claims or payment deadlines be affected.

Independent pledges can be secured on real or movable property, and also rights, obligations, shares, quotas in business organizations and so on.

To obtain satisfaction from the independent pledge, one of the parties must terminate the agreement. The termination notice period is six months unless the parties agree otherwise. Independent pledges are not considered securities under the Civil Code, so can only be transferred by assignment.

Additional securities

Creditors have also been given additional rights to safeguard their interests if there is a danger of the pledged items deteriorating or being sold. If the creditor believes this to be possible, the pledgee can require repair or restitution, and can call for further security. If these requests are not fulfilled, the pledgee can seek immediate satisfaction from the pledged items. If the pledgee has a security interest in the entire business assets of the debtor, the creditor may also have the right to supervise the debtor's business activities.

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