Restructuring and insolvency law in Hungary

1. What is the primary legislation governing insolvency and restructuring proceedings in your jurisdiction?

The Insolvency Code (Act XLIX of 1991) and the European Regulation on Insolvency Proceedings (2015/848) are the primary pieces of legislation governing insolvency proceedings. There is no restructuring proceedings regulated by law. General civil, corporate and labour law are applicable to implementing restructuring tools. 

2. How are insolvency proceedings or restructuring proceedings initiated?

There are two types of insolvency proceedings: bankruptcy (reorganisation) and liquidation (winding-up). Both procedures can be requested by submitting a petition to the court. While only the debtor may petition for bankruptcy, the court may open a liquidation procedure at the request of either the debtor or a creditor. 

The Insolvency Code does not provide a legal definition of insolvency, neither does it specify an “insolvency test”. Section 27 (2) of the Insolvency Code lists certain events which can be considered legal grounds for the court to open a liquidation procedure. These legal grounds are as follows:

  • the company fails to fulfil or disputes its previously undisputed and acknowledged debts (exceeding HUF 200,000) within 20 days of their due date, and fails to repay such debt upon receipt of the creditor’s written payment notice (similar to a cash flow test)
  • the enforcement (foreclosure) against the company’s assets was unsuccessful 
  • the company fails to comply with its payment obligations undertaken in a settlement agreement with the creditors either in a bankruptcy procedure or a liquidation procedure
  • the debtor and the required majority of creditors are not able to enter into a settlement agreement during the moratorium
  • the company’s liabilities exceed its assets or, if it could not or foreseeably cannot pay its debts as they fall due, and if the company starts its solvent dissolution with the aim of the company being deleted from the company registry at the end, but the administrator realises that the company could not or foreseeably will not be able to pay its debts as they fall due and the shareholders do not guarantee the payment of such debts (similar to balance insolvency test).

4. Which different types of restructuring / insolvency proceedings exist and what are their characteristics?

Bankruptcy 

This is a reorganisation-type procedure when the debtor is granted a moratorium of 120 days, which can be extended to a maximum of 365 days provided that a certain majority of creditors gives its consent. During the moratorium, the debtor remains in possession and has to draw a reorganisation plan for the approval of the creditors. The moratorium is overseen by a court-appointed administrator, but the only power of such administrator is to countersign any new payment obligations of the debtor. The moratorium protects the debtor from any creditor terminating a contract with the debtor on the basis that the debtor is under bankruptcy, or from any enforcement. If the debtor fails to agree a bankruptcy settlement with its creditors, a liquidation procedure will be opened automatically by the court. The bankruptcy settlement agreement must be approved by the court which will have a general legal review of it, which means that the court only analyses whether or not the debtor acted in good faith.

Liquidation

Liquidation will be opened if the debtor is insolvent. The aim of the procedure is to wind up the company and distribute the assets to its creditors. The procedure is managed by a court-appointed liquidator that takes over management roles. The liquidator will sell the assets and distribute the sale price in accordance with an order of priorities set out in the Insolvency Code. If an asset is secured with a pledge, the secured creditor has priority (after deduction of certain costs and fees).

5. Are there several types of creditors and what is the effect of a difference?

Bankruptcy 

There are two classes of creditors: secured and unsecured. A simple majority of each class has to approve the bankruptcy settlement before it is sent for court approval.

Liquidation 

Not only the types of creditors but also the types of claims are categorised to determine the order of their satisfaction. The order is as follows:

  • liquidator’s fee and certain costs to be deducted from the sale of the secured assets (safeguard, maintenance, sale, etc.)
  • purchase of secured assets
  • costs of liquidation (unless paid once they become due)
  • alimony
  • claims of private individuals (e.g. damages), excluding bonds
  • social security and other taxes
  • other claims
  • late payment interest, and
  • claims of related parties (such as the claims of a majority owner).

6. Is there any obligation to initiate restructuring / insolvency proceedings? For whom does this obligation exist and under what conditions? What are the consequences if this obligation is violated?

No, except for a voluntary solvent liquidation procedure when the administrator (usually the managing director) must file for insolvency if it becomes aware of the company being unable to pay all of its debts. No consequences apply other than a challenge which can be submitted to the court, if an individual (e.g. a creditor) can justify that he/she suffered damage or loss due to the omission of the administrator to file for insolvency. However, the administrator cannot be obliged to pay compensation, only to remedy and comply with the filing. Ultimately, the administrator can be removed from this position. 

7. What are the main duties of the representative bodies in connection with restructuring / insolvency proceedings?

In general, the law requires that the representative body is aware of the financial situation of the company at all times, and if the company is threatened with insolvency, instead of acting in the interests of the shareholders, it acts in the interests of the creditors as a whole (similar to wrongful trading). It may be held liable for compensation of any damage or loss a creditor suffers due to the representative body’s failure to act in the interests of the creditors.

If the registered capital of the company reduces to half or two thirds (depending on the form of the company; “negative equity scenario”), the representative body will have to convene a shareholders’ meeting so that the shareholders can decide on the next step. 

In bankruptcy, the representative body has to put together a reorganisation plan and negotiate it with the creditors. It retains the management role.

In liquidation, the representative body has to hand over certain company information and documents to the liquidator and prepare a closing balance sheet.

In bankruptcy, the representative body is involved in working out the reorganisation measures and implementing them while retaining its role of managing the company.

In liquidation, the court-appointed liquidator obtains the right to dispose of the assets of the company and exercise employer’s rights. The representative body has to supply information and data to the liquidator and prepare a closing balance sheet.

9. What are the main duties of shareholders in connection with restructuring / insolvency proceedings?

Shareholders are obliged to make decisions once the representative body convenes the meeting to resolve the negative equity scenario. 

Shareholders have no obligation to provide additional funding to enable the company to survive. 

Shareholders can be held liable in the same way as managing directors for any damage and loss creditors suffer from the shareholders’ failure to act in the best interests of the creditors after the threat of insolvency arises. However, only those shareholders would be liable who have effective influence on the decision-making process of the company, i.e. usually sole shareholders, or if the shareholder is also the managing director. 

10. Are the shareholders of a company involved in restructuring / insolvency proceedings?

In bankruptcy and liquidation, shareholders have to consent to the company filing for a bankruptcy moratorium or liquidation procedure (as applicable).

In bankruptcy, shareholders can be involved in the settlement.

In liquidation, they may be asked to provide information.

In general, shareholders have no right to make decisions on the assets of the company.

11. Is a solvent liquidation of the company an alternative to regular insolvency proceedings?

It is an alternative. However, if a solvent liquidation is opened and it turns out that the company is unable to pay its debt, the administrator will have to petition the court to open a liquidation procedure. 

Hungary does not have a preventive restructuring regime, hence all restructuring measures need to be negotiated between the creditors and the company. 

Hungary is in the process of implementing Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency).

13. What is the average success rate after completed restructuring / insolvency proceedings?

There are only a small number of bankruptcy procedures. If a settlement is agreed on, a reorganisation will usually be completed. 

Satisfaction rates can be higher in bankruptcy, but this procedure appears to be out of favour due to the difficulties of an agreement being reached between creditors with various interests and, sometimes, the unwillingness of the debtor to offer a viable reorganisation of the company.

Satisfaction rates in liquidation depend on which sector the debtor operates in and whether the creditor has security over the assets.

Erika Papp
Managing Partner
Budapest
Soptei, Szabina
Szabina Soptei
Associate
London