Hungary

Winding-up proceedings

1. Liquidation proceedings

In Hungarian: “felszámolási eljárás” mean the winding-up proceedings as referred to in Annex B to the Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceeding (the “Regulation”).

Conditions for opening

Please see the list of the main conditions to open the liquidation proceedings by the competent court:

  • If the request is submitted:
    • By the debtor company, inter alia, it must file the following documents with the court:
      • The annual account or interim balance sheet prepared within three months prior to the date of liquidation request to certify that the debtor meets the insolvency test, (i.e., that the company’s debts exceed its assets or that the company is not, or foreseeably will not be able to, comply with its payment obligations when they are due and the company’s shareholders refuse to give an undertaking to guarantee the company’s payment on time);
      • Consent of its shareholders;
      • A list of creditors; and
      • A declaration that the company does not intend to request a bankruptcy moratorium.
    • By a creditor, it should be evidenced that:
      • The company failed to fulfil or dispute its previously undisputed and acknowledged debts within twenty days of the due date, and failed to fulfil such debt upon receipt of the creditor’s written payment notice provided that the amount of the debt exceeds HUF 200,000 (approx. EUR 670);
      • The company failed to timely fulfil a payment obligation set out in a final and binding court judgment provided that the amount of the payment obligation exceeds HUF 200,000 (approx. EUR 670);
      • A judicial enforcement procedure against the company was unsuccessful; or
      • The company failed to comply with its payment obligations set out in a bankruptcy settlement agreement made during bankruptcy proceedings.

Or the court can open the proceedings ex officio (e.g., if the competent court terminates the bankruptcy proceedings where no composition agreement was entered into, or if the company failed to perform its payment obligations, or at the request of the court of registration or the criminal court);

  • Payment of a court fee.

If bankruptcy proceedings (which are a reorganization insolvency procedure under Hungarian law) are pending against the debtor company, liquidation proceedings cannot be opened.

Restructuring methods

There are two exit options that give an opportunity to restructure the debtor company:

  • Payment of all the debts to each creditor; or
  • Reaching a settlement agreement with certain majority of the creditors.
Success rate

Liquidation proceedings end up in the sale of all the assets of the debtor to satisfy creditors’ claims. If the creditor’s claim is secured with a pledge, this secured creditor can expect receive around 95% of the purchase price, while other creditors are highly unlikely to receive anything from the procedure as the income from the asset sale is generally only sufficient to cover the liquidation costs.

Pros and cons

Pros: From our experience, we find minimal practical benefit to liquidation proceedings.

Cons:

  • Unless any of the exit options are used, the company will terminate as a result of the liquidation proceedings;
  • There is no statutory deadline to complete the proceedings;
  • Chance of full recovery of creditors’ claims is very low;
  • Certain agreements and declarations of the debtor company can be challenged by the liquidator or any creditor as a result of which agreements and declarations may be invalidated;
  • The liquidator has wide-ranging power because he or she takes over the representation of the company regarding the liquidation of assets. Most of the decisions are subject to his or her discretion, although such decisions may be challenged before the court by the party affected by such decision (including the debtor, any of the creditors or the creditors’ committee).

Other proceedings

1. Bankruptcy proceedings

The other proceedings are the bankruptcy proceedings (in Hungarian: “csődeljárás”) listed in Annex A to the Regulation.

Conditions for opening

Please see the list below for the main conditions of opening bankruptcy proceedings by the competent court:

  • Consent of the shareholder(s) (please note that these proceedings can be opened only at the request of the debtor company);
  • The annual account or interim balance sheet prepared within three months prior to the date of the bankruptcy request;
  • The list of creditors;
  • Payment of a court fee.
Restructuring methods

During the proceedings, the debtor company is granted a payment moratorium to reach a settlement with its creditors. If the parties reach a successful settlement, the company can survive and avoid liquidation.

Success rate

The number of successful bankruptcy settlements is low. This might be a consequence of how these proceedings are regulated. Under the current legislation, it is difficult to reach (due to the rules regulating creditors’ voting rights) and then comply with a settlement agreement (not-registered creditors often enforce their claims against the debtor and challenge settlement agreements).

Pros and cons

Pros:

  • Debtor company can restructure its debts and survive;
  • Management remains in place and will be monitored by a court appointed administrator.

Cons:

  • Debtor company can win time or “misuse” with the payment moratorium (120 days which can be extended for a maximum period of 365 days);
  • The settlement agreement binds each creditor – in practice, has resulted in large creditors losing a significant portion of their claims (e.g., 90%) due to the current regulations (the method under which the voting classes must be set up).

Other restructuring techniques

Although a debt settlement procedure, which is applicable only to Hungarian municipalities (i.e. local governments, in Hungarian: önkormányzatok), is a regulated insolvency procedure, it has not been listed in the Annexes of the Regulation. This procedure offers the possibility for Hungarian municipalities to restructure their debts and reach a settlement with their creditors. Therefore, in terms of municipalities, this procedure can be regarded as a regulated insolvency procedure.

Under Hungarian law, restructuring tools (except for those which bankruptcy proceedings may offer) are not regulated. However, this does not prevent the parties from making an agreement on a contractual basis using general Hungarian civil law.

Dealing with restructuring happens on an ad-hoc basis in Hungary. Also, in syndicated deals banks we usually do not see a common platform for restructuring.

Restructuring techniques most commonly used in Hungary:

  • Get more security;
  • Delegate board observer;
  • Haircut;
  • Debt-to-equity swap;
  • Joint sale and sharing of income.

Budapest Rules have been recently adopted by the Banking Association − these rules are a non-binding set of principles together with template documentation for those banks who accept such rules.