Restructuring and Insolvency in Hungary 2024

Restructuring and Insolvency in Hungary 2024 – Hungary Supreme Court

RESTRUCTURING AND INSOLVENCY 2024

HUNGARY

Viktor Jéger, Zóra Lehoczki

(Nagy és Trócsányi)

GENERAL

Legislation

1. What main legislation is applicable to insolvencies and reorganizations?

The main provisions concerning the insolvency or the reorganization of an economic operator are regulated in:

• Act XLIX of 1991 on bankruptcy proceedings and liquidation proceedings (the Bankruptcy Act);
• Act CXXXII of 1997 on Hungarian branch offices and commercial representative offices of foreign-registered companies;
• Act LXXXVIII of 2014 on insurance business activity;
• Act I of 2012 on the Labor Code;
• Act V of 2013 on the Civil Code;
• Act CXXX of 2016 on the Code of Civil Procedure;
• Act XXXVII of 2014 on the further development of the institutional system promoting the security of certain actors of the financial intermediary system;
• Act V of 2006 on public company information, company registration and winding-up proceedings (the Companies Act);
• Act CCXXXVII of 2013 on Credit Institutions and Financial Enterprises;
• Act CXXXIX of 2013 on the National Bank of Hungary;
• Government Decree No. 106/1995 (IX 8) on the requirements of environmental and nature protection during liquidation and bankruptcy proceedings;
• Act LVIII of 2020 on transitional arrangements connected to the cessation of the state of emergency and on epidemiological preparedness;
• Act XXVIII of 2017 on private international law;
• Act LXIV of 2021 on restructuring and on the amendment of certain acts for legal harmonization(the Restructuring Act);
• Act XCIX of 2021 on the transitional rules connected to the state of emergency;
• Act XXXII of 2021 on the the Supervisory Authority for Regulated Services; and
• Government Decree No. 321/2022 (VIII 18) on the detailed provisions applicable to bankruptcy and liquidation proceedings of strategic importance.

Concerning the armed conflict taking place in the territory of Ukraine, the Hungarian government has declared a state of emergency, currently in effect until 26 November 2023; however, its term might be extended. Due to this state of emergency, a number of government decrees have been adopted, resulting in certain provisions of the Bankruptcy Act and other relevant laws being applied in a dissenting manner temporarily.

Excluded entities and excluded assets

2. What entities are excluded from customary insolvency or reorganization proceedings and what legislation applies to them? What assets are excluded or exempt from claims of creditors?

The Bankruptcy Act applies to all economic operators and their creditors. For the purpose of the Bankruptcy Act, economic operator refers to:

• business associations, private pension funds, cooperative societies, associations and so on established in Hungary; and
• all other legal entities and unincorporated organizations qualified as business associations under national law, and any other organization pursuing economic activities that has its center of main interests within the territory of the European Union as defined in Regulation (EU) 2015/848, and the insolvency proceedings to which it is subject fall within the scope of the same Regulation.

As to restructuring proceedings, several entities are excluded, as the respective law sets forth that certain entities may not be involved in restructuring as debtors, including:

• the state;
• municipal and county governments, minority self-governments and associations of local authorities;
• budgetary agencies;
• the National Bank of Hungary and certain entities supervised by it; and
• political parties.

All assets held by the economic operator in bankruptcy or liquidation proceedings at the time of the opening of proceedings, as well as all assets acquired during the proceedings, will be realized in bankruptcy and during liquidation proceedings. The assets of an economic operator include all assets that it owns or controls.

Assets such as natural preservation areas, land reserved for compensatory purposes and taxes and other similar dues taken out of the wages of employees will not be construed to comprise the economic operator’s assets.

Special provisions apply to banks, municipalities and major economic operators of strategic importance.

Public enterprises

3. What procedures are followed in the insolvency of a government-owned enterprise? What remedies do creditors of insolvent public enterprises have?

The provisions of the Bankruptcy Act also apply to government-owned enterprises. The creditors of a government-owned enterprise have the same remedies as the creditors of a private enterprise.

However, the Bankruptcy Act contains special provisions on major economic operators of strategic importance, which deviate in certain aspects from the general provisions of the Bankruptcy Act. The decision to apply the provisions of the chapter of the Bankruptcy Act titled ‘Special Provisions Pertaining to Bankruptcy and Liquidation Proceedings of Strategic Importance’ might be adopted regarding an any economic operator that:

1. operates in fields that may be construed to be of national importance for reasons of public health, infrastructure development, defense, law enforcement, military, energy safety, energy supply and so on;
2. is involved in the implementation of, or undertook to execute, priority projects in consideration of the national economy;
3. is involved in discharging public functions conferred by law nationwide;
4. received large amounts of state aid for restructuring, credit guarantees, surety facilities or export credit insurance, or is engaged in the pursuit of, or has undertaken to carry out, concession-bound activities and is, therefore, engaged under contract with the state or specific public bodies (including government-owned enterprises established for carrying out the aforesaid functions) in connection with the above;
5. carries out waste management activity; or
6. is engaged in the pursuit of activities considered to carry strategic importance for national economic purposes not falling under the scope of points (1) to (5).

The government may decide – by means of a decree – to apply the provisions of the chapter of the Bankruptcy Act titled ‘Special Provisions Pertaining to Bankruptcy and Liquidation Proceedings of Strategic Importance’ regarding the economic operators to whom the following criteria apply:

• settlement of the debts of those operators, composition with creditors is in the interests of the national economy or is of particular common interest; or
• the winding-up of those operators without succession, where the lack of funding and insolvency cannot presumably be resolved, in a simplified, transparent and standardized procedure is given priority because of economic considerations.

According to the relevant provisions of Act XCIX of 2021 on the transitional rules connected to the state of emergency, during liquidation proceedings having strategic importance the liquidator may simultaneously operate the part of the debtor’s assets that is suitable for the continuation of economic activity during liquidation proceedings and that is suitable for sale as a self-operating unit. The operation takes place by means of a business association being established as a result of demerger, provided that the substantial law applicable to the debtor allows the establishment of a business association by means of the demerger of the debtor.

No approval is necessary from the creditors’ committee. Holders of creditors’ claims with mortgages, independent liens and other types of securities will be notified in writing of the liquidator’s intent of detachment. Detachment proceedings are generally governed by the rules applicable to the transformation, merger and demerger of legal persons; however, certain exceptions are set forth by law. For example:

• the decisions will be adopted by the liquidator instead of the supreme body of the debtor;
• only a limited liability company or a private limited liability company may be established as a result of detachment; and
• the debtor will be the sole quota holder or shareholder of this entity.

Protection for large financial institutions

4. Has your country enacted legislation to deal with the financial difficulties of institutions that are considered ‘too big to fail’?

To maintain the stability of the financial sector, the Hungarian parliament adopted Act XXXVII of 2014 on the further development of the institutional system promoting the security of certain actors of the financial intermediary system, which introduced the resolution system based on the EU Bank Recovery and Resolution Directive. The Hungarian resolution authority is the Hungarian National Bank (MNB). The MNB orders and launches the resolution proceedings in respect of an institution if all of the following conditions have been met:

• the MNB establishes that the institution is insolvent or is likely to become insolvent;
• according to the assessment of the MNB acting in its scope of resolution authority, with respect to the timing and other relevant circumstances it is not likely that apart from the resolution actions, any other measure would prevent the insolvency of the institution within a reasonable time period; and
• according to the assessment of the MNB, the resolution is justified by public interests.

The Resolution Fund, which comprises the contributions of market participants (credit institutions and investment firms), finances the costs incurred in the resolution phase of institutional crisis management (ie, the application of the resolution tools). MSZVK Hungarian Resolution Property Management Private Company Limited by Shares, which is fully owned by the Resolution Fund, was set up in 2015 for the purpose of receiving some of or all the assets, liabilities and rights and obligations of institutions under resolution or bridge institutions.

Courts and appeals

5. What courts are involved? What are the rights of appeal from court orders? Does an appellant have an automatic right of appeal or must it obtain permission? Is there a requirement to post security to proceed with an appeal?

Bankruptcy and liquidation proceedings are non-contentious proceedings falling within the competence and exclusive jurisdiction of the general court responsible for the territory where the debtor’s seat is located on the day when the request for opening the proceedings is submitted. The Metropolitan Tribunal has competence and jurisdiction to open and conduct main insolvency proceedings instituted against economic operators falling under Regulation (EU) 2015/848, established in a place other than Hungary.

As regards procedural issues, unless otherwise provided by the Bankruptcy Act, the provisions of the Code of Civil Procedures apply, subject to the derogations stemming from the special characteristics of non-contentious proceedings, as well as the general provisions of Act CXVIII of 2017 on the rules applicable to non-contentious court proceedings.

The Bankruptcy Act determines the rules applicable to legal remedies in insolvency proceedings. In bankruptcy proceedings, the court decision ordering the opening of bankruptcy proceedings may not be appealed separately. An appeal against the decision for the refusal of the petition for the opening of bankruptcy proceedings must be lodged within eight days. In liquidation proceedings, the court decision ordering the liquidation may be appealed separately.

Under Hungarian law, there is no requirement to post security to proceed with an appeal; however, duty will be paid when submitting an appeal. The amount of the duty is determined by Act XCIII of 1990 on duties.

TYPES OF LIQUIDATION AND REORGANIZATION PROCESSES

Voluntary liquidations

6. What are the requirements for a debtor commencing a voluntary liquidation case and what are the effects?

Debtors may request the opening of liquidation proceedings if the company is unable or unwilling to enter into bankruptcy. The petition may be submitted with the prior consent of the supreme body of the debtor economic operator that exercises founders’ or shareholders’ rights.

In the case of sole proprietorships, the petition may be submitted by the owner at its own discretion. Employees and the trade unions defined in the Labor Code or the competent works councils must be duly informed when the petition is filed. Legal representation is mandatory with regard to submission of the application. Commencing a voluntary liquidation has the same effect as commencing liquidation by the creditors.

Voluntary reorganizations

7. What are the requirements for a debtor commencing a voluntary reorganization and what are the effects?

The directors of debtor economic operators may submit an application for the opening of bankruptcy proceedings at the court.

Owing to the covid-19 pandemic, a new type of proceeding, called a reorganization, has been introduced; however, the two types of proceedings are different. This new reorganization introduced as a result of the pandemic is a pre-insolvency reorganization.

According to the currently effective legislation, applications for opening a reorganization procedure may be filed until 31 December 2023. As to the submission of the application, legal representation for the debtor is mandatory.

The debtor may not file a petition for bankruptcy if:

• its reorganization procedure is pending;
• the implementation period of its restructuring plan accepted by the court during a restructuring procedure is not yet lapsed;
• a restructuring procedure where the debtor received a stay of payment was pending prior to the filing of the application for bankruptcy and one year has not yet passed since the failure of the restructuring;
• it is already subject to bankruptcy proceedings, or
• if a request for its liquidation has been submitted and a first instance decision has already been adopted in its liquidation.

The debtor may not file another petition for bankruptcy:

• before the satisfaction of any creditor’s claim that existed at the time of ordering the previous bankruptcy proceedings or that was established by those proceedings; and
• within a period of two years following the time of publication of the final and definitive conclusion of the previous bankruptcy proceedings;
• if the court ex officio refused the debtor’s request for the previous bankruptcy proceedings pursuant to the provisions of the Bankruptcy Act and one year has not lapsed since the publication of the final ruling thereof; or
• before the lapse of the period specified in the restructuring plan for its implementation.

If the court did not refuse the request for bankruptcy proceedings, it will forthwith adopt a ruling on the opening of bankruptcy proceedings and appoint an administrator from the register of liquidators, and will consequently provide for the publication of such ruling in the Company Gazette and for the indication of ‘csa’ in the company register next to the company’s name. The indication ‘csa’ reflects the fact that the undertaking is in bankruptcy. No remedy is available against the court’s order.

As a consequence of opening bankruptcy proceedings, the debtor is granted a stay of payment with a view to seeking an arrangement with creditors. The objective of a stay of payment is to preserve the assets under bankruptcy protection with a view to reaching a composition with creditors, during which the debtor, the administrator, the financial institutions carrying their accounts and the creditors are liable to refrain from taking any measure contradictory to the objective of the stay of payment.

The provisions applicable to the restructuring procedure entered into force on 1 July 2022. According to Act LXIV of 2021 on restructuring and on the amendment of certain acts for the purpose of approximation, the debtor may initiate restructuring where there is a likelihood of insolvency. The purpose of restructuring is for the debtor to adopt and implement a restructuring plan with certain specific creditors or all creditors capable of preventing the insolvency of the debtor and ensuring the viability of the business. Restructuring cannot be initiated under special conditions, for example if:

• a restructuring procedure or reorganization procedure defined by law is in progress against the debtor in Hungary;
• the debtor is undergoing voluntary dissolution proceedings; or
• criminal proceedings are in progress where a criminal law measure may be imposed upon the debtor.

Restructuring and the date of opening thereof are decided by the debtor’s decision-making body, or, if the debtor is a single-member legal person, its founder or sole member, based on the proposition prepared by the executive officer of the debtor.

Successful reorganizations

8. How are creditors classified for purposes of a reorganizationplan and how is the plan approved? Can a reorganization plan release non-debtor parties from liability and, if so, in what circumstances?

Composition means the debtor’s agreement with the creditors laying down the conditions for debt settlement, such as, in particular:

• any allowances and payment facilities relating to the debt;
• the remission or assumption of certain claims;
• the receipt of shares in the debtor company in exchange for a debt;
• guarantees for the satisfaction of claims and other similar securities;
• the approval of the debtor’s programme for restructuring and for cutting losses; and
• any and all other action deemed necessary to restore or preserve the debtor’s solvency, including the duration of and the procedures for monitoring the implementation of the composition arrangement.

A composition agreement (reorganization plan) must separate creditors into classes. In particular, it must distinguish between secured and unsecured creditors. A reorganization plan may be concluded if the debtor was able to secure the majority of the votes for the agreement from the creditors holding voting rights.

In the composition conference, voting rights are held by any creditor who registered its claim by the deadline specified in the Bankruptcy Act, who paid the registration fee and whose claim is shown under recognized or uncontested claims. The composition agreement must be signed by the parties and their legal representatives or proxies, and countersigned by the administrator and the creditors’ committee, if there is one.

If the composition arrangement conforms with the relevant legislation, the court grants approval by way of a ruling and shall declare the bankruptcy proceedings dismissed.

If no composition is arranged or the arrangement fails to comply with the relevant regulations, the court will dismiss the bankruptcy proceedings, declare the debtor insolvent ex officio in the liquidation proceedings and order the liquidation of the debtor.

The composition agreement does not release non-debtor parties from liability. However, because of the accessory nature, a guarantor or surety will be released from liability to the extent of the reduction of the claim secured by the guarantor or surety.

In the case of restructuring proceedings, the debtor must register and classify the known claims of affected creditors. The claims of affected creditors must be registered showing, at minimum, the name of the creditor, the legal basis of the claim, the amount of the claim or the method of calculation, the due date and the data underlying the classification and the category. The claims of affected creditors are classified as follows:

• secured creditors’ claim;
• creditors’ claim related to economic activity;
• other creditors’ claims; and
• a creditors’ claim arising from a transaction in the debtor’s interest.

The above sequence of the class of creditors does not constitute a priority order of satisfaction.

The debtor must discuss the restructuring plan with the affected creditors and, after the conclusion of the negotiations, submit the restructuring plan to the affected creditors with voting rights for adoption.

A draft of a restructuring plan may be submitted for adoption, which must have been approved by the debtor in advance, specifically by the debtor’s decision-making body, founder or sole member, if the debtor is a single-member legal person, or another body, if the debtor’s instrument of constitution designates another body of the debtor. The negotiation of the restructuring plan and the decision-making regarding the restructuring plan may take place at a meeting of the creditors for restructuring where physical presence is required, or by making a decision out of session.

The negotiation of the restructuring plan may also be held in a way that only some of the affected creditors are invited to the meeting or some of the affected creditors are included in the written submission of decisions. However, the debtor must provide all affected creditors the opportunity for negotiations before the first decision on the restructuring plan is made.

The debtor and the affected creditors with voting rights participate in the adoption of the restructuring plan. The restructuring plan is considered adopted if it is supported in each creditor class by the numerical majority of all affected creditors with recognized or undisputed claims of that class of creditors, as well as a majority of votes relative to the total number of votes held by the affected creditors of the class of creditors in question. The debtor must submit the adopted restructuring plan to the court for confirmation.

Involuntary liquidations

9. What are the requirements for creditors placing a debtor into involuntary liquidation and what are the effects? Once the proceeding is opened, are there material differences to proceedings opened voluntarily?

If liquidation is requested by the creditor, the petition to the competent court must specify the debtor’s liabilities (the amount of the claim), the date of maturity (due date) and a summary of the reasons for claiming that the debtor is insolvent. Furthermore, the latest published annual report of the debtor must also be attached, provided that the report is available.

The documents necessary to prove the contents of the petition must be attached, including a copy of the written notice sent to the debtor. If the court has not rejected the petition, it will notify the debtor by sending a copy of the petition. The debtor must, within eight days of receipt of the notice, declare before the court whether it acknowledges the contents of the petition.

If the debtor acknowledges the claim, it must also simultaneously declare whether it desires respite for the settlement of the debts. If the debtor fails to respond to the court within the above-specified deadline, its insolvency will be presumed.

Upon request of a creditor, the court will appoint a temporary administrator without delay if the requesting creditor:

• evidences that satisfaction of its claim at a later date is in jeopardy;
• proves the contract underlying the extent and expiry of the claim, with full probative documentation; and
• has advanced the fee for the temporary administrator (200,000 forints if the debtor has no legal personality and 400,000 forints for legal persons) and deposited it at the time of lodging the request.

After the ruling ordering the liquidation of the debtor becomes final, the court must, without delay, appoint the liquidator and order the publication of the abstract of the ruling on liquidation and the ruling on the appointment of the liquidator in the Company Gazette.

Once the proceedings are opened, there are no material differences to proceedings opened voluntarily.

Involuntary reorganizations

10. What are the requirements for creditors commencing an involuntary reorganization and what are the effects? Once the proceeding is opened, are there any material differences to proceedings opened voluntarily?

Hungarian law does not regulate the kind of reorganization that can be commenced by creditors.

Expedited reorganizations

11. Do procedures exist for expedited reorganizations(eg, ‘prepackaged’ reorganizations)?

A new type of insolvency proceedings was introduced as a result of the state of emergency triggered by the covid-19 pandemic. This insolvency proceeding is the reorganization, which is regulated by Act XCIX of 2021 on the transitional rules connected to the state of emergency. We will refer to this proceeding as pre-insolvency reorganization. These provisions are temporary, and pre-insolvency reorganization can be requested until 31 December 2023.

The pre-insolvency reorganization proceedings might be initiated by a business organization that is threatened by insolvency with exceptions set out by the applicable law. The pre-insolvency reorganization itself is a non-contentious civil proceeding, and the Metropolitan Tribunal has exclusive jurisdiction over it.

The objective of pre-insolvency reorganization proceedings is to restore the solvency of the undertaking concerned; therefore, there are a number of similarities between pre-insolvency reorganization proceedings and bankruptcy proceedings. However, the deadlines applicable to the procedural steps of pre-insolvency reorganization proceedings are shorter than the deadlines provided for bankruptcy proceedings.

There are two types of pre-insolvency reorganization proceedings: public and non-public. The non-public pre-insolvency reorganization covers only the creditors involved in the proceedings. In the case of public pre-insolvency reorganization, the name of the undertaking will be supplemented with an ‘ra’ addendum, meaning that the undertaking is under pre-insolvency reorganization, and the provisions of the Bankruptcy Act apply, albeit with certain exceptions, for example:

• no creditors’ classes are formed;
• no administrator will be appointed as its duties are fulfilled by the reorganizationexpert; and
• the creditors shall notify their claims within 30 days after the publication of the resolution ordering the pre-insolvency reorganization.

Unsuccessful reorganizations

12. How is a proposed reorganizationdefeated and what is the effect of a reorganization plan not being approved? What if the debtor fails to perform a plan?

During the opening session of the composition conference, the creditors may express their refusal to support the composition proposal. If the debtor refuses to rework the composition proposal, the meeting will be declared closed and so recorded in the minutes, and it will be sent to the court and the supreme body of the debtor without delay. If no composition is arranged with the creditors, or if the arrangement fails to comply with the relevant regulations, the court will dismiss the bankruptcy proceedings, declare the debtor insolvent and order the liquidation of the debtor.

The composition agreement must be made in writing, and if it conforms with the relevant legislation, the court will grant approval by way of a ruling and declare the bankruptcy proceedings dismissed. However, if the debtor did not fulfil its payment obligation as stipulated in the composition agreement concluded in the bankruptcy proceedings, creditors have the right to request the court to declare the debtor insolvent.

Pursuant to several rulings of the Curia of Hungary, the creditor’s claim does not cease to exist from the point of view of contract law with the approval of the composition agreement; only the right to their claim against the debtor in excess of the amount specified in the arrangement ceases. The creditor’s entire claim against the debtor; therefore, does not cease until it has fulfilled all its obligations under the composition settlement arrangement against all its creditors.

If the debtor fails to fulfil its obligations, upon the creditors’ request, the court will declare the debtor insolvent and order the liquidation of the debtor. In this case, creditors give notice about their claims that they were unable to recover in previous bankruptcy or liquidation proceedings.

In the case of restructuring proceedings, once the application for confirmation of the restructuring plan by the court is filed, the court calls upon the dissenting creditor and the equity holders to submit their counter-statement governed by the applicable legislation to the court within the prescribed time limit of 15 days. No justification will be accepted upon failure to meet that deadline.

If the court determines that the restructuring plan or any document attached to the application to be examined by the court does not comply with the respective provisions of the Restructuring Act, yet the infringement can be remedied, it will call upon the debtor to take the necessary measures to cease the infringement (eg, to renegotiate the restructuring plan and submit the new one for confirmation within the prescribed time limit of 45 days). In the event of non-compliance with this deadline, the court will refuse to confirm the restructuring plan.

If the restructuring plan or any document attached to the application to be examined by the court does not comply with the respective provisions, and the infringement cannot be remedied as specified in the Restructuring Act, the court will refuse to confirm the restructuring plan. If the restructuring plan is rejected by the court, the liquidation of the economic operator might be ordered.

Corporate procedures

13. Are there corporate procedures for the dissolution of a corporation? How do such processes contrast with bankruptcy proceedings?

Act V of 2006 (the Companies Act) contains the rules for dissolution proceedings. According to the Companies Act, a company, if not insolvent, may be wound up without succession by way of dissolution proceedings. Dissolution proceedings may be opened by decision of the supreme body of the company.

The company’s supreme body may elect any person to serve as the receiver, if the person conforms with the requirements set out for the director and accepts the assignment. The term of the appointment of the managing director expires as of the starting date of the dissolution proceedings; however, the former managing director of the company may also be elected to act as receiver.

If the receiver concludes that the company’s assets are insufficient to cover the creditors’ claims, and the members fail to supply the missing funds within 30 days, a request for liquidation must be submitted without delay. The request for liquidation may be submitted in the absence of the consent of the supreme body.

Dissolution proceedings may only be initiated if the company is not insolvent. No resolution on dissolution may be adopted after the receipt of an order establishing that the company is insolvent.

Conclusion of case

14. How are liquidation and reorganizationcases formally concluded?

In the case of bankruptcy, the debtor and its creditors may establish a composition arrangement. If the arrangement conforms with the relevant legislation, the court will grant approval by way of a ruling and declare the bankruptcy proceedings dismissed.

If no composition is arranged, or if the arrangement fails to comply with the relevant regulations, the court will dismiss the bankruptcy proceedings, declare the debtor insolvent ex officio in the liquidation proceedings and order the liquidation of the debtor. If the debtor fails to fulfil its obligations according to the composition arrangement, the court will declare the debtor insolvent upon the creditor’s request and order the liquidation of the debtor.

In the case of non-public pre-insolvency reorganization, if the undertaking came to an agreement with all its creditors involved in the pre-insolvency reorganization proceedings and the creditors approved the reorganization plan, the plan must be submitted to the tribunal.

In the case of public pre-insolvency reorganization, if at least 75 per cent of the votes casted supports the pre-insolvency reorganization plan, the plan must be submitted to the tribunal. The tribunal adopts a decision on the reorganization plan within 10 business days.

If the court approves the plan, it renders the proceedings terminated. The court may deny the approval of the reorganization plan based on the expert report of the reorganization expert. In the case of rejection, liquidation proceedings will not be launched automatically.

In the case of restructuring proceedings, the restructuring plan must be submitted to the court, where the dissenting parties have the right to submit their counter-statements. If a counter-statement has been submitted, the court will ex officio appoint a practitioner in the field of restructuring, and if an appointed practitioner in the field of restructuring is already involved, it may also appoint another practitioner in the field of restructuring where this is justified considering the exceptional complexity of the restructuring plan or the debtor’s economic activity, their financial situation or on account of specific issues related to the counter-statement.

Finally, the court decides on the confirmation or the rejection of the restructuring plan. If the restructuring plan is confirmed by the court, the rights and obligations contained in the plan apply to the debtor, all affected creditors and the parties who joined the restructuring plan by means of a legal statement. If the restructuring plan is rejected by the court, the liquidation of the economic operator may be ordered.

As to liquidation proceedings, the court decides on the conclusion of liquidation and the dissolution of the debtor without succession, as well as the dissolution of any subsidiary of the debtor or any trust company of the debtor, provided that the debtor is a trust, where conditions are fulfilled.

INSOLVENCY TESTS AND FILING REQUIREMENTS

Conditions for insolvency

15. What is the test to determine if a debtor is insolvent?

The court declares the debtor insolvent:

• upon the debtor’s failure to settle or contest its previously uncontested and acknowledged contractual debts within 20 days of the due date, and failure to satisfy the debt upon receipt of the creditor’s written payment notice;
• upon the debtor’s failure to settle its debt within the deadline specified in a final court decision or order for payment;
• if the enforcement procedure against the debtor was unsuccessful;
• if the debtor did not fulfil its payment obligation as stipulated in the composition agreement concluded in bankruptcy or liquidation proceedings, in the court-approved reorganization plan in reorganization procedures, or in the court-approved restructuring plan in restructuring procedures;
• if it has declared the previous bankruptcy proceedings terminated; or
• if the debtor’s liabilities in proceedings initiated by the debtor or by the receiver exceed the debtor’s assets, or the debtor was unable and presumably will not be able to settle its debt or debts on the date when they are due, and if, in proceedings opened by the receiver, the members (shareholders) of the debtor economic operator fail to provide a statement of commitment, following due notice, to guarantee the funds necessary to cover the debts when due.

A debtor cannot be declared insolvent in the cases defined above within the deadline specified by the court for the settling of debts.

Mandatory filing

16. Must companies commence insolvency proceedings in particular circumstances?

Under Hungarian law, there is no obligation for the companies to commence insolvency proceedings. Companies may initiate bankruptcy, reorganization or liquidation proceedings voluntarily.

DIRECTORS AND OFFICERS

Directors’ liability – failure to commence proceedings and trading while insolvent

17. If proceedings are not commenced, what liability can result for directors and officers? What are the consequences for directors and officers if a company carries on business while insolvent?

The liability of directors towards the company and towards third persons during the operation of the company is regulated by Act V of 2013 on the Civil Code. The executive officer will be held liable for damage caused to legal persons resulting from their management activities in accordance with the provisions on liability for damages for loss caused by non-performance of an obligation.

The legal person will be liable for damage caused to third parties by the executive officer in that capacity. Liability for any damage caused by the executive officer intentionally lies with the executive officer and the legal person jointly and severally.

Concerning the executive officer’s liability towards creditors, the Civil Code prescribes that in the event of a business association’s dissolution without succession, creditors may bring action for damages against the company’s executive officers on the grounds of non-contractual liability, should the executive officer affected fail to take the creditors’ interests into account in the event of an imminent threat to the business association’s solvency. This provision is not applicable in the case where the company is wound up without going into liquidation.

Any creditor or, in the debtor’s name, the liquidator may bring action during the liquidation proceedings before the court to establish that the former executives of the economic operator failed to represent the interests of creditors in the three years prior to the opening of liquidation proceedings in the wake of any situation carrying potential danger of insolvency, in direct consequence of which the economic operator’s assets diminished, or providing full satisfaction for the creditors’ claims frustrated for other reasons.

Directors’ liability – other sources of liability

18. Apart from failure to file for proceedings, are corporate officers and directors personally liable for their corporation’s obligations? Are they liable for corporate pre-insolvency or pre-reorganization actions? Can they be subject to sanctions for other reasons?

Any creditor or liquidator may bring action during liquidation proceedings before the court for establishing that the former executives of the economic operator failed to properly represent the interests of the creditors in the span of three years prior to the opening of liquidation proceedings. Financial security may also be demanded with a view to providing satisfaction for the creditor’s claims.

The creditors’ interests are considered to have been ignored if the manager failed to fulfil the obligations set out by law relating to the prevention of environmental damage or the seizure of environmental offenses, or concerning remediation, in consequence of which providing full satisfaction for the creditors’ claims may be frustrated. If damage is caused by several persons together, their liability is joint and several.

Following the time of publication in the Company Gazette of the resolution on the final conclusion of liquidation proceedings, any creditor may bring action before the competent court for ordering the debtor’s former executive, whose liability was already established based on the action described above, to satisfy the debtor’s claim registered in the liquidation proceedings, which were not recovered in those proceedings, up to the extent of loss suffered.

The court imposes a fine on the executive officer of the debtor economic operator for effecting any payment in violation of the provisions of the Bankruptcy Act or for enabling creditors to obtain satisfaction of their claims in violation of the provisions of the Bankruptcy Act. The fine covers 10 per cent of the amount paid out.

According to the Companies Act, if the court of registry removed a company from the company register by way of involuntary de-registration procedure, the company’s executive officer, including any executive officer removed from the register before the opening of involuntary deregistration, will bear liability for the outstanding claims of the company’s creditors to the extent of their contribution to the resulting loss, if they are found to have failed to properly carry out their managerial functions in the wake of any situation of imminent insolvency, in consequence of which the company’s assets have diminished or fail to provide full satisfaction for the creditors’ claims.

If there is more than one such executive officer, their liability will be joint and several. A situation is considered to carry potential danger of insolvency from the day when the executives of the company foresaw or should have been able to foresee that the company will not be able to satisfy its liabilities when due.

Criminal liability of the directors may be established according to the relevant sections of Act C of 2012 on the Criminal Code prescribing the rules of fraudulent bankruptcy. Fraudulent bankruptcy will be considered a criminal act if committed by a person who has powers to control the assets, or any part thereof, of the debtor economic operator, or has the opportunity to do so, and also if the contract for any transaction with the assets is considered invalid.

Directors’ liability – defenses

19. What defenses are available to directors and officers in the context of an insolvency or reorganization?

Both the Bankruptcy Act and the Companies Act establish when the director of the company will be relieved of liability.

In the case of the Bankruptcy Act, a manager will not be held responsible if they can prove that, upon the occurrence of a situation carrying potential danger of insolvency, they did not undertake any business risk that may be considered unreasonable in light of the debtor’s financial position, or they have taken all measures within reason that are to be expected from persons in such a position, so as to prevent and mitigate the losses of creditors, and they prompted the supreme body (decision-making body) of the debtor economic operator to take action.

In the case of the Companies Act, an executive officer will be relieved of liability if they can prove that the threat of insolvency occurred before or after their term in said executive office or for reasons other than its managerial actions, and they have taken all measures within reason that are to be expected from persons in such a position, so as to prevent and mitigate the losses of creditors, and they prompted the supreme body of the company to take action.

Shift in directors’ duties

20. Do the duties that directors owe to the corporation shift to the creditors when an insolvency or reorganization proceeding is likely? When?

There is no provision in the Hungarian regulation on the basis of which creditors may take over the duties of the executive directors, even when insolvency or bankruptcy proceedings is likely.

Directors’ powers after proceedings commence

21. What powers can directors and officers exercise after liquidation or reorganization proceedings are commenced by, or against, their corporation?

In the case of reorganization, the directors of a debtor economic operator, including its supreme body and owners, exercise their respective rights only if the powers vested in the administrator are not violated.

The administrator will approve and endorse any financial commitment of the debtor after the opening of bankruptcy proceedings. The administrator has powers to approve any new commitment made by the debtor. After the opening of liquidation, only the liquidator is authorized to make any legal statements in connection with the assets of the economic operator.

In the case of liquidation, the directors of the debtor company, following the temporary administrator taking office, are restricted from:

• entering into any contract considered to be in excess of the scope of normal operations where the economic operator’s assets are concerned without the prior consent and countersignature of the temporary administrator; or
• providing services under an existing contract without the prior consent and countersignature of the temporary administrator.

From the opening of liquidation, only the liquidator is authorized to make any legal statements in connection with the assets of the company. However, the director of the debtor company is only entitled to proceed in the internal legal relationships of the company.

MATTERS ARISING IN A LIQUIDATION OR REORGANIZATION

Stays of proceedings and moratoria

22. What prohibitions against the continuation of legal proceedings or the enforcement of claims by creditors apply in liquidations and reorganizations? In what circumstances may creditors obtain relief from such prohibitions?

In the case of bankruptcy proceedings, the debtor is granted a stay of payment period (moratorium) to preserve the assets under bankruptcy protection, during which the debtor, the administrator, the financial institutions carrying their accounts and creditors must refrain from taking any measures contradictory to the objectives of the stay of payment. The stay of payment does not apply to claims such as claims for wages and other similar benefits, to claims to any value added tax or refunds of sums transferred to the debtor’s account by mistake.

Under the duration of the stay of payment, as a general rule:

• set-off may not be applied against the debtor; however, set-off may be adjudged in judicial proceedings initiated by the debtor and still in progress if submitted before the opening of bankruptcy proceedings;
• payment orders may not be satisfied from the debtor’s accounts, and payment orders may not be submitted against the debtor;
• the enforcement of money claims against the debtor is suspended, and the enforcement of such claims may not be ordered;
• no satisfaction may be sought on the basis of a lien on the debtor’s assets and the debtor cannot effect any payment for claims existing at the time of the opening of bankruptcy proceedings;
• the debtor is allowed to undertake any new commitment subject to the consent of the administrator;
• payments may be made from the debtor’s assets subject to authorization by the administrator, including for the liabilities assumed, with a view to continuing the debtor’s economic activity;
• the contract concluded with the debtor may not be avoided, and it may not be terminated on the grounds of the debtor’s failure to settle during the term of the stay of payment of its debts incurred before the term of the temporary stay of payment; and
• the legal consequences associated with any non-performance or late performance of the debtor’s money payment obligations does not apply.

Judicial enforcement proceedings in progress against the debtor at the time of the opening of liquidation proceedings in connection with any assets realized in liquidation are abated forthwith by the court (authority) ordering the enforcement. The assets seized and the funds yet unpaid, remaining after deducting the costs of the enforcement proceedings, are transferred to the appointed liquidator.

Judicial and non-judicial proceedings opened prior to the opening of liquidation proceedings continue before the same court.

From the opening of liquidation proceedings, any pecuniary claim against the economic operator in connection with any assets to be liquidated may only be enforced in the framework of liquidation. The creditor – in an action brought by the economic operator – may enforce its claim existing at the time of the opening of liquidation proceedings against the economic operator as a set-off claim, provided that the beneficiary of the claim was the same creditor at the time of the opening of liquidation proceedings.

The creditors cannot obtain relief from such prohibitions, the only exception being the set-off as detailed above.

In the case of pre-insolvency reorganization proceedings, the acting court has the power to decide on a stay of payment lasting for 90 days. The provisions applicable to the stay of payment in pre-insolvency reorganization proceedings are very similar to the relevant provisions of the Bankruptcy Act; however, there are certain differences, for example:

• the order on the stay of payment is not published in the Company Gazette, and it is effective as of the receipt of the order; and
• the executive officer of the undertaking must notify the financial institutions holding its accounts without delay on the order, as well as the creditors and their claims concerned by the stay of payment, in writing.

The undertaking is entitled to the stay of payment against the creditors involved in the pre-insolvency reorganization as of the time of receipt of the order on the moratorium.

In the case of restructuring proceedings, the court may order a stay of individual enforcement actions (moratorium) upon the debtor’s request to support the negotiations of a restructuring plan. The moratorium may be general or restricted. The moratorium may be extended, and a new moratorium may also be ordered.

Unless otherwise provided by the Restructuring Act, the moratorium covers all the claims that may be enforced against the debtor by the affected creditors falling within the scope of general or restricted moratorium, including claims that fall due or that come into existence during the period of the moratorium.

During the moratorium, the creditor to whom the moratorium applies:

• may not initiate enforcement against the debtor, and ongoing enforcement initiated after the starting date of the restructuring process will be suspended;
• may not initiate liquidation proceedings against the debtor;
• may not exercise set-off against the debtor, with the exception specified in the Restructuring Act; and
• must refrain from making any claims against the debtor that is in breach of the provisions laid down in the Restructuring Act.

Doing business

23. When can the debtor carry on business during a liquidation or reorganization? Is any special treatment given to creditors who supply goods or services after the filing? What are the roles of the creditors and the court in supervising the debtor’s business activities?

In the case of bankruptcy, under the duration of the stay of payment, the debtor is allowed to undertake any new commitment subject to the consent of the administrator, and payments may be made from the debtor’s assets subject to authorization by the administrator. During bankruptcy, the debtor can carry on business only with the supervision of the administrator. During liquidation, carrying on business by the debtor must be fit for the purposes of the liquidation proceedings (eg, if needed for the operation of the debtor company).

In bankruptcy, no special treatment is given to creditors doing business after filing.

It is the duty of the administrator to supervise the debtor’s business activities with a view to protecting the creditors’ interests and to making preparations for the composition with creditors. The court does not supervise the debtor’s business activities; however, the approval of the composition agreement falls within the court’s exclusive competence.

In liquidation proceedings, if the creditors have formed a committee with selected members or selected a creditors’ representative, the consent of the committee (representative) must be obtained to continue business operations during liquidation. If the committee fails to respond within 15 days of receipt of the liquidator’s request, it will be construed to have granted its consent for the continuation of business operations.

The consent will be in effect for one year. If the liquidator intends to continue operations after the one-year period, the consent of the committee (creditors’ representative) must be obtained again up to 30 days before the end of the one-year period. In liquidation, no special treatment is given to creditors who supply goods or services after filing unless the costs are in connection with the rational termination of the debtor’s business operations.

In the case of restructuring, provided that the debtor’s financial affairs are supervised by the practitioner in the field of restructuring, the debtor is allowed to undertake a new contractual (permanent) legal obligation, other than interim or new financing arrangements, only if the practitioner in the field of restructuring has consented in writing in advance.

Furthermore, the debtor is allowed to enter into a contract considered to be in excess of the scope of normal operations regarding its assets or make other legal statements only upon the prior written consent of the practitioner in the field of restructuring, the holder of security and the affected creditor.

During the moratorium, the creditors to whom the moratorium applies may not suspend the performance of essential executory contracts, and these contracts may not be terminated and may not be amended in any way or form to the debtor’s disadvantage. This will not prevent the creditor from exercising its contractual rights if the debtor fails to fulfil its other contractual obligations apart from the payment obligation.

Post-filing credit

24. May a debtor in a liquidation or reorganization obtain secured or unsecured loans or credit? What priority is or can be given to such loans or credit?

In the case of reorganization, according to the general rule, no priority is given to credit obtained after filing. The debtor is allowed to undertake any new commitment – secured or unsecured loans or credit – only with the consent of the administrator.

In the case of restructurings, the practitioner in the field of restructuring must consent in advance for the debtor to undertake a new contractual obligation, provided that a practitioner has been appointed. Generally, no priority is given for post-filing credits in the case of restructuring.

In the case of liquidation, the Bankruptcy Act does not expressly regulate a debtor’s right to obtain secured or unsecured loans or credit. The liquidator, however, is able to contract new obligations, such as a loan or credit, but only in connection with the rational termination of the debtor’s business operations. Loans granted to the debtor have priority in liquidation.

Sale of assets

25. In reorganizationsand liquidations, what provisions apply to the sale of specific assets out of the ordinary course of business and to the sale of the entire business of the debtor? Does the purchaser acquire the assets ‘free and clear’ of claims or do some liabilities pass with the assets?

In the case of reorganization, the sale of specific assets out of the ordinary course of business or the entire business of the debtor is subject to the approval of the administrator. By selling assets in reorganization, the encumbrance on assets will persist.

In the case of restructuring, the definition of restructuring itself includes the sale of assets or even the whole business by stating that restructuring refers to measures aimed at restoring the debtor’s financial stability, including changing the composition, conditions or structure of the debtor’s assets and liabilities or any other part of the debtor’s capital structure, such as sales of the debtor’s assets or parts of the business, the sales of shares held in the debtor and the sale of the business as a going concern, as well as any necessary operational changes, or a combination of those elements.

The debtor’s executive officer must obtain the prior written consent of the creditor who holds a lien on the asset to be sold.

In the case of liquidation, the liquidator disposes of the debtor’s assets through public sales at the highest price that can be obtained on the market, in which case the highest bidder will acquire the assets free and clear. The liquidator effects the sale by way of a tender or an auction. The liquidator may forego these procedures:

upon the prior consent of the committee formed by creditors;

if the asset in question deteriorates rapidly;

if the estimated proceeds are insufficient to cover the costs of sale; or

if the difference between the prospective proceeds and estimated costs is less than 100,000 forints.

In this case, the liquidator may apply other public forms of sale for the purpose of achieving a more favorable result.

If the assets to be sold include land or a farmstead, the relevant provisions of Act CXXII of 2013 on transactions in agricultural and forestry land will be applied.

Negotiating sale of assets

26. Does your system allow for ‘stalking horse’ bids in sale procedures and does your system permit credit bidding in sales?

Generally, stalking horse rules or credit bidding are not part of insolvency proceedings under Hungarian law.

In the case of liquidation proceedings, the debtor is not allowed to dispose of its assets. The debtor’s assets will be disposed by the liquidator through public sales at the highest price that can be obtained on the market. The highest bidder will acquire the ownership of the asset.

A credit bidding may take place when even the second tender procedure on the same asset is declared unsuccessful, and the liquidator – in agreement with the creditors’ committee – instead of repeating the tender procedure for the third time, moves to sell the asset in question at the appraised value directly to a creditor holding a lien on the asset if the creditor lays claim to it.

The party acquiring ownership or any other right of value may not apply a set-off at a public sale, except if the sale concerns the debtor’s residential property and certain other conditions are fulfilled as well.

Rejection and disclaimer of contracts

27. Can a debtor undergoing a liquidation or reorganizationreject or disclaim an unfavorable contract? Are there contracts that may not be rejected? What procedure is followed to reject a contract and what is the effect of rejection on the other party? What happens if a debtor breaches the contract after the insolvency case is opened?

Hungarian insolvency law does not recognize the concepts of rejection and disclaimer of contracts.

In a reorganization or restructuring proceedings, the debtor or the administrator or practitioner may challenge the contract before the general court only in accordance with the Hungarian Civil Code and the provisions of the Code of Civil Procedure.

In the case of a liquidation, all debts of the economic operator will be deemed due at the time of the opening of liquidation proceedings. The liquidator has the power to terminate, with immediate effect, the contracts concluded by the debtor.

Any claim that is due to the other party owing to termination may be enforced within the framework of the liquidation procedure by notifying the liquidator within 40 days of the date when the termination was communicated.

There are no specific regulations with regard to the debtor’s breach of contract after the insolvency case is opened. The debtor’s breach of contract is governed by the general breach of contract provisions of the Hungarian Civil Code. However, the claims arising from the breach of contract and acknowledged by the debtor or adjudicated by the competent court may only be enforced in the liquidation proceedings.

Intellectual property assets

28. May an IP licensor or owner terminate the debtor’s right to use the IP when a liquidation or reorganizationis opened? To what extent may IP rights granted under an agreement with the debtor continue to be used?

No specific rules exist under Hungarian law regarding the IP rights in cases of bankruptcy, reorganization or liquidation.

According to the general rule, during bankruptcy a contract concluded with the debtor may not be avoided, and it may not be terminated on the grounds of the debtor’s failure to settle, during the term of the stay of payment, its debts incurred before the term of the temporary stay of payment. However, if the given contract stipulates that the commencement of bankruptcy proceedings or liquidation proceedings establishes a right to terminate the contract, the licensor or the owner has the right to do so.

The liquidator has the right to terminate any contract of the debtor.

Personal data

29. Where personal information or customer data collected by a company in liquidation or reorganizationis valuable, are there any restrictions in your country on the use of that information or its transfer to a purchaser?

The Bankruptcy Act does not stipulate special provisions regarding the use of any personal information or customer data collected by a company in liquidation or reorganization. The Restructuring Act does not set forth special provisions applicable to the aforementioned pieces of data collected by the company.

The Restructuring Act establishes only that the representatives of employees, the affected creditors and the practitioner in the field of restructuring are allowed access to the debtor’s business secrets and other confidential data and documents to the extent necessary for exercising their rights and fulfilling their obligations, and shall provide a declaration of confidentiality for the safekeeping thereof.

In accordance with the provisions of Act CXII of 2011 on the right of informational self-determination and on freedom of information, personal data may be processed only for specified and explicit purposes, where it is necessary for the implementation of certain rights or obligations. The purpose of processing must be satisfied in all stages of data processing operations; recording of personal data must be done under the principle of lawfulness and fairness.

The personal data processed must be essential for the purpose for which it was recorded, and it must be suitable to achieve that purpose. Personal data may be processed to the extent and for the duration necessary to achieve its purpose. Personal data may be processed only when the data subject has given consent, or when processing is necessary as decreed by law or by a local authority based on authorization conferred by law.

The EU General Data Protection Regulation is also applicable in the case of the processing of personal data wholly or partly by automated means and to the processing other than by automated means of personal data that form part of a filing system or are intended to form part of a filing system.

Arbitration processes

30. How frequently is arbitration used in liquidation or reorganizationproceedings? Are there certain types of disputes that may not be arbitrated? Can disputes that arise after the liquidation or reorganization case is opened be arbitrated with the consent of the parties?

Bankruptcy and liquidation proceedings are non-contentious proceedings conducted exclusively by the general court of competence and jurisdiction by reference to the debtor’s registered office of record on the day when the request for opening the proceedings has been submitted and by the Metropolitan Tribunal.

Pre-insolvency reorganization proceedings and restructuring proceedings are also non-contentious proceedings, falling under the exclusive powers of the Metropolitan Tribunal by law.

Thus, arbitration courts cannot commence insolvency proceedings.

CREDITOR REMEDIES

Creditors’ enforcement

31. Are there processes by which some or all of the assets of a business may be seized outside of court proceedings? How are these processes carried out?

As a general rule, creditors’ claims can be enforced only within the frame and according to the rules of bankruptcy or liquidation proceedings.

If the debtor provides collateral security under a financial collateral arrangement to secure a claim before the time of the opening of liquidation proceedings, the collateral taker will be able to realize the collateral directly, irrespective of whether liquidation is opened, and must refund any excess collateral to and settle accounts with the liquidator.

If the collateral taker fails to exercise its right to direct satisfaction within three months of publication of the opening of liquidation, it may seek satisfaction as a lien holder. If the collateral taker is under the debtor’s majority control, it must release the collateral to the liquidator – acting as the representative of the debtor – upon publication of the notice of liquidation. Collateral security may be arranged on money and securities and on payment account balances.

Unsecured credit

32. What remedies are available to unsecured creditors? Are the processes difficult or time-consuming? Are pre-judgment attachments available?

The Bankruptcy Act does not stipulate special remedies regarding unsecured creditors. Application of interim measures may be requested in accordance with the provisions of the Code of Civil Procedure.

Although, the regulations on preferred ranking claims secured by lien also apply to claims that are satisfied by seized movable property or for which the right of enforcement has been registered by a court bailiff before the opening of liquidation proceedings.

The place in ranking of those claims under execution will be determined in accordance with the date of seizure of the movable property or the date of registration of the right of enforcement.

There are no specific statutory provisions dealing with pre-judgment attachments in the Bankruptcy Act.

CREDITOR INVOLVEMENT AND PROVING CLAIMS

Creditor participation

33. During the liquidation or reorganization, what notices are given to creditors? What meetings are held and how are they called? What information regarding the administration of the estate, its assets and the claims against it is available to creditors or creditors’ committees? What are the liquidator’s reporting obligations?

In the case of bankruptcy, the debtor must notify its creditors directly within five working days of publication of the ruling ordering the opening of bankruptcy proceedings, and furthermore, must publish a notice in a daily newspaper of nationwide circulation and also on its website (if available) advising the creditors to register their claims within the time limit specified and to make the payment charged for the registration of claims to the payment account of the administrator appointed by the Supervisory Authority for Regulated Services and to attach the documents in proof of their claim.

In the case of restructuring, if the application for the initiation of restructuring cannot be rejected, the court advises the affected creditors of their right to dispute the probability of the debtor becoming insolvent and, thus, the fulfillment of the condition for starting the restructuring procedure. The court sends the submissions made by the creditors affected to the debtor and calls upon it to reply to the creditor’s submissions within five business days and attach any supporting evidence.

The aforementioned procedure may be omitted if, with its application, the debtor submits the statement of all creditors consenting to the initiation of the restructuring procedure. The debtor must register and classify the known claims of affected creditors. The debtor must inform the affected creditor in writing within 15 days of the starting date of the restructuring proceedings about the registration of its claim.

Negotiations with the creditors will be carried out within 45 days of the starting date of the restructuring proceedings. The debtor must discuss the restructuring plan with the affected creditors and, after the conclusion of the negotiations, submit the restructuring plan to the affected creditors with voting rights for adoption. A restructuring plan may only be submitted for adoption if it was approved by the debtor in advance, specifically by the debtor’s decision-making body or, if the debtor is a single-member legal person, founder or sole member.

The negotiation of and decision-making on the restructuring plan may take place at the creditor’s meeting where physical presence is required or out of session. Negotiation of the restructuring plan may also be held in a way that only some of the affected creditors are invited to a meeting or some of the affected creditors are included in the written submission of decisions. Nevertheless, the debtor must provide all affected creditors with the opportunity for negotiations before the first decision on the restructuring plan is made.

In the case of liquidation, upon the ruling ordering liquidation of a debtor becoming final, the court will without delay appoint the liquidator and order to have the abstract of the ruling ordering liquidation and the ruling on the appointment of the liquidator published in the Company Gazette. The notice published must contain, among other things, a notice sent to the creditors to report their known claims to the liquidator within 40 days of publication of the ruling ordering liquidation.

Moreover, the directors of the company under liquidation are obliged to inform the beneficiaries of the claims specified in the Bankruptcy Act regarding the opening of liquidation proceedings within 15 days from the time of opening. If the director does not comply with the regulations, the court imposes a fine.

In bankruptcy and liquidation proceedings, the meeting between the creditors and the debtor is called composition conference.

The liquidator must send a financial statement and give account of its activities to the creditors’ select committee (creditors’ representative) quarterly, and report on the financial status (revenues and expenses) of the debtor and the costs of liquidation.

Creditor representation

34. What committees can be formed (or representative counsel appointed) and what powers or responsibilities do they have? How are they selected and appointed? May they retain advisers and how are their expenses funded?

Creditors may form a creditors’ select committee for the protection of their interests and to provide representation to monitor the activities of the administrator and the liquidator. The select committee shall exercise the rights and entitlements conferred by the Bankruptcy Act. The select committee has, among other things, the following rights:

• upon a request received during bankruptcy proceedings and liquidation proceedings, the director of the debtor company, the administrator or the liquidator must, within eight working days, inform the select committee;
• the liquidator must inform the select committee at least 15 days in advance, or eight working days in advance in justified cases, of any contracts that exceed the scope of day-to-day operations, terminate valid contracts and discard the debtor’s stocks, provided however that the committee has the right to comment such actions within eight working days of receipt of notice;
• the liquidator must send a financial statement and give account of its activities to the select committee quarterly and report on the financial status (revenues and expenses) of the debtor and on the costs of liquidation; and
• upon request, the liquidator must present the timetable to the select committee, with entitlement to contest it in court and so on.

Only one select committee can be appointed in respect of any one company in debt. Other creditors may subsequently join in the operation of the creditors’ select committee.

In bankruptcy proceedings, a select committee is deemed legitimate if it comprises at least one-third of the creditors with voting rights, and if those creditors control at least one-half of the votes. In liquidation proceedings, a select committee is deemed legitimate if it comprises at least one-third of the notified creditors, and the creditors hold at least one-third of all claims of creditors entitled to participate in the composition agreement.

If the number of creditors operating the select committee is later reduced, and consequently the rate of participation no longer reaches the percentage required, the select committee ceases to exist on the 30th day following the time of the occurrence of those circumstances, unless other creditors have joined up within the time limit, thereby reaching the required rate of participation.

For the purpose of establishing a creditors’ select committee or for selecting a creditors’ representative, the liquidator must convene all registered creditors within 75 days of the date of publication of the opening of liquidation.

The liquidator is obliged to allow creditors to attend the creditors’ meeting by using an electronic means of communication instead of a personal appearance. The rules of participation for using an electronic means of communication are established in the Bankruptcy Act.

The select committee’s powers, the representation of the creditors operating the select committee, the provision of funding and the rules for the advancing and accounting of costs and expenses will be laid down by agreement concluded by the creditors. In the process of setting up and operating the select committee, voting rights are distributed among the participating creditors.

Decisions will be adopted by open ballot subject to simple majority. A creditors’ select committee that was established in bankruptcy may continue to function in the liquidation proceedings, if it is able to meet the conditions specified.

Creditors may also appoint a creditors’ representative instead of the creditors’ select committee, who will have the same rights and entitlements as the select committee.

The creditors’ select committee may request the court to appoint an expert for the cross-verification of the appraised value of the assets offered for sale, and advance the costs involved. The court decides upon the request within eight days. The fee of the expert will be claimed under liquidation costs if the appraised value it had supplied is accepted. If the expert is of the opinion that the appraised value need not be modified, the expert’s fee will be borne by the creditors participating in the select committee in the percentage shown in their agreement for requesting an expert.

Enforcement of estate’s rights

35. If the liquidator has no assets to pursue a claim, may the creditors pursue the estate’s remedies? If so, to whom do the fruits of the remedies belong? Can they be assigned to a third party?

The estate’s rights are part of the assets of the company under liquidation. In principle, the creditors are not allowed to pursue the estate’s remedies in the absence of assets to pursue a claim. It is the liquidator’s right and obligation to enforce the claims. As regards the proceeds from assets realized in liquidation, the regulations on satisfying debts will be applied.

Claims

36. How is a creditor’s claim submitted and what are the time limits? How are claims disallowed and how does a creditor appeal? Can claims for contingent or unliquidated amounts be recognized? Are there provisions on the transfer of claims and must transfers be disclosed? How are the amounts of such claims determined?

In the case of reorganization, creditors must make the payment charged for the registration of claims to the payment account of the administrator appointed by the Supervisory Authority for Regulated Services, and must attach the documents in proof of their claim. No claim will be registered in the event of their failure to do so in due time. Claims where any payment obligation of the debtor depends on a future event need not be notified.

The registration of claims is subject to a registration fee payable by the creditor amounting to 1 per cent of the claim (5,000 forints minimum and 100,000 forints maximum) to the administrator’s current account. The administrator must then categorize and register the claims. The debtor and creditors must be informed without delay of the classification of claims and the amount registered, and they will be given an opportunity to present their views within a time limit of not less than five working days.

Such comments will be decided by the administrator, and the creditor and the debtor must be notified immediately, upon which they have five working days to submit any objection to the court concerning the administrator’s action pertaining to the classification process, including where the administrator registered a claim of an amount other than the one notified by the creditor. The court adopts a decision relating to the objection in priority proceedings. The ruling may be appealed separately.

In the case of restructuring, prior to the supreme body’s decision-making on the initiation of a restructuring procedure, the executive officer of the debtor shall prepare a presentation on, inter alia, the affected creditors’ claims and indicate the creditors’ claims not intended to be included in the restructuring, showing also the reasons.

In the case of liquidation, the liquidator must register the claims against the debtor that are notified after 40 days, but within 180 days of the publication of the opening of liquidation proceedings. These claims must be satisfied if there are sufficient funds remaining following the settlement of the debts duly notified. The general rules on the order of satisfaction apply to the creditors notifying their claims past the prescribed time limit.

Set-off and netting

37. To what extent may creditors exercise rights of set-off or netting in a liquidation or in a reorganization? Can creditors be deprived of the right of set-off either temporarily or permanently?

For the duration of the stay of payment, set-off may not be applied against the debtor; however, a set-off claim may be heard in judicial proceedings initiated by the debtor and still in progress, if submitted before the time of the opening of bankruptcy proceedings.

In the case of restructuring, as a general rule, the creditor to whom the moratorium applies may not exercise set-off against the debtor. During the registration of the known claims of affected creditors, the right of set-off may be exercised only in respect of any creditor claim acquired by way other than assignment, assumption of debt, undertaking a debt or assumption of performance.

The affected creditor may also exercise the right of set-off if the affected creditor acquired the right of set-off on the basis of the respective provisions of the Restructuring Act or if assignment takes place between financial institutions subject to consolidated supervision. No set-off may be exercised with respect to the claims of the debtor’s executive officer, supervisory board member, auditor or holder of a participating interest, or the debtor’s affiliated company or the executive officer thereof.

In a liquidation proceeding, only claims can be set off that have been registered by the liquidator as acknowledged and have not been assigned subsequent to the time of the opening of liquidation proceedings, or, if the claim has occurred at a later date, subsequent to its occurrence.

If performance is affected after the time of the opening of liquidation proceedings, the creditor may not exercise the right of set-off with regard to debts assumed under section 6:203 of the Civil Code (assumption of debt), or undertaken under section 6:206 of the Civil Code (undertaking a debt) inside two years prior to the date the court received the petition for opening liquidation proceedings, or subsequently, nor with regard to performance assumed under section 6:205 of the Civil Code (assumption of performance).

The directors and executive employees of the debtor economic operator, their close relatives and their domestic partners, and any member (shareholder) of the economic operator with majority control over the debtor or the economic operator in which the debtor has majority control (or the member in the case of single-member companies, the owner in the case of sole proprietorships, or the foreign-registered company in the case of Hungarian branches) may not set off their claims against the debtor.

In addition, in the case of an agreement for close-out netting concluded prior to the time of the opening of liquidation proceedings, the creditor must notify this net claim to the liquidator, and the liquidator must enforce this net claim. Contracts underlying close-out netting arrangements or framework contracts may be avoided or canceled only if done concurrently.

Modifying creditors’ rights

38. May the court change the rank (priority) of a creditor’s claim? If so, what are the grounds for doing so and how frequently does this occur?

Under Hungarian law, the court may change the rank (priority) of a creditor’s claim (which is determined by law) if the creditor appealed the administrator’s decision of ranking its claim and the court rules in favor of the creditor.

There are no publicly available databases on how often creditors appeal the administrator’s decision or how many cases the court rules in the creditor’s favor.

Priority claims

39. Apart from employee-related claims, what are the major privileged and priority claims in liquidations and reorganizations? Which have priority over secured creditors?

In the liquidation process, the following priority groups of claims exist:

• liquidation costs;
• claims secured;
• claims as alimony and life annuity payments; compensation benefits; income supplement to minors, which is payable by the economic operator; and monetary aid granted to members of agricultural cooperatives in lieu of household land or produce for which the beneficiary is entitled for its lifetime;
• claims of private individuals not originating from economic activities and claims of small and micro companies;
• debts owed to social security funds and taxes;
• other claims;
• default interest and late charges, as well as surcharges and penalty and similar debts; and
• claims, other than wages and other similar benefits.

In bankruptcy proceedings, the administrator categorizes the claims as per the following:

• claims with regard to stay of payment; and
• secured and unsecured claims notified within the time limit.

In restructuring proceedings, the executive officer of the debtor classifies the claims of affected creditors as follows:

• secured creditor claims;
• creditors’ claims related to economic activity;
• other creditors’ claims; and
• creditors’ claims arising from a transaction in the debtor’s interest.

The above list does not define an order of satisfaction.

Employment-related liabilities

40. What employee claims arise where employees’ contracts are terminated during a restructuring or liquidation? What are the procedures for termination? (Are employee claims as a whole increased where large numbers of employees’ contracts are terminated or where the business ceases operations?)

Pursuant to the Bankruptcy Act, from the opening of the liquidation proceedings, employer’s rights must be exercised and obligations must be fulfilled by the liquidator within the framework of the relevant legislation, the collective agreement and internal regulations and contracts of employment.

As a general rule, the liquidator has powers to terminate, with immediate effect, the contracts concluded by the debtor; however, the liquidator may not exercise the right of termination with immediate effect with regard to employment contracts. The liquidator has the right to establish employment relationships for the purpose of continuing the economic activity during liquidation proceedings or for the reasonable termination of the economic activity.

During the course of restructuring, the interests of the employees must be taken into account. The Restructuring Act sets forth that interests of the employees must be protected as defined in the relevant legislation individually and also at the group level. As regards the interests of employees, the employees’ right to information and the rules relating to business transfer and collective redundancy are of particular importance.

As far as restructuring measures are concerned, the restructuring plan must, at the minimum, include, among other things, the arrangements regarding informing and consulting the employees’ representatives and a description of the overall consequences as regards employment, such as dismissals, short-time working arrangements or similar, if the restructuring plan also affects the situation of employees.

The Labor Code expressly provides that the employer is permitted to terminate a fixed-term employment relationship by notice if undergoing liquidation or bankruptcy proceedings; thus, without stipulating differently in the contract, no claims will arise from termination. In the case of different contractual obligations, the employee may submit a claim. The employer is entitled to collective redundancy according to the provisions of the Labor Code.

The employer is liable to pay up to six months’ absentee pay owed to the executive employee from the remuneration payable upon termination of employment, if the notice of termination is delivered after the opening of bankruptcy or liquidation proceedings. Any additional sum is payable upon the conclusion or termination of bankruptcy proceedings, or upon the conclusion of liquidation proceedings.

Pension claims

41. What remedies exist for pension-related claims against employers in insolvency or reorganization proceedings and what priorities attach to such claims?

Debts owed to social security funds will be satisfied from the economic operator’s assets, if its assets are sufficient to cover these debts as well. Other pension-related claims may not be enforced against employers in insolvency or reorganization; however, in the case of liquidation, the court must notify the health insurance agency and pension insurance administration agency competent for the place where the debtor’s registered office is situated when ordering liquidation.

In connection with data disclosure requirements relating to pension insurance, the liquidator must disclose data relating to the relationship of insured persons relevant for pension insurance in the form of a declaration submitted in accordance with other specific legislation. Information on payments made subject to social security obligations must be provided to the state tax authority.

The liquidator must send the certificate issued by the competent pension insurance administration agency and the state tax authority on its fulfillment of the obligation of declaration to the court.

Environmental problems and liabilities

42. Where there are environmental problems, who is responsible for controlling the environmental problem and for remediating the damage caused? Are any of these liabilities imposed on the insolvency administrator personally, secured or unsecured creditors, the debtor’s officers and directors, or on third parties?

Government Decree No. 106/1995 (IX 8) on the requirements of environmental and nature protection during liquidation and bankruptcy proceedings stipulates the provisions regarding environmental protection, requirements and the manner of resolving environmental damage and contamination, as well as the types of expenses arising therefrom.

According to the general rule, the liquidator must provide for damage and contamination of the environment proven to originate from before the time of the opening of liquidation proceedings. This means that the costs of the necessary measures to be taken, even in the lack of the debtor’s assets, to eliminate dangerous waste will be borne by the central budget of the state.

Any creditor or, in the debtor’s name, the liquidator may bring action during the liquidation proceedings before the court to establish that the former executives of the economic operator failed to properly represent the interests of creditors in the three years prior to the opening of liquidation proceedings in the wake of any situation carrying potential danger of insolvency, in direct consequence of which the economic operator’s assets have diminished, or providing full satisfaction for the creditors’ claims may be frustrated for other reasons.

In the application of the above provision, creditors’ interests will be considered to have been ignored if the executive failed to fulfil the obligations set out by law relating to the prevention of environmental damage or the seizure of environmental offenses, or concerning remediation, in consequence of which providing full satisfaction of the creditors’ claims may be frustrated. If damage is caused by several persons, their liability will be joint and several.

Liabilities that survive insolvency or reorganization proceedings

43. Do any liabilities of a debtor survive an insolvency or a reorganization?

In the case of reorganization, the qualified composition agreement outlines the survival of any liability.

In the case of liquidation, after the proceedings are concluded, the economic operator ceases to exist without successor; thus, no liability survives.

In the case of restructuring, the restructuring plan must include the debtor’s liabilities. The beneficiary of the obligation included in the restructuring plan may – after the due date – request that the court of first instance to issue an enforcement clause, making the judicial enforcement of the obligation in the restructuring plan possible.

At the debtor’s initiative, the debtor’s equity holders and affiliated companies may also join the restructuring plan by making a legal statement for assuming or taking over some of the debtor’s liabilities, and for undertaking an ancillary obligation to fulfil the debtor’s obligations contained in the restructuring plan, or for undertaking to provide professional support for the implementation of restructuring measures.

Third parties may also join the restructuring plan by way of making legal statements on behalf of the debtor, for example, by undertaking to provide interim or new financing to the debtor.

Distributions

44. How and when are distributions made to creditors in liquidations and reorganizations?

In the case of a reorganization or restructuring, distribution is made in accordance with the composition plan or the restructuring plan. In the case of liquidation, distribution is made in accordance with the distribution plan prepared by the liquidator and approved by the court or the decision of the court.

The time of the distribution depends on the claim. Generally, the claims must be distributed within 30 days of the approval of the closing balance sheet or the closing simplified balance sheet. In certain cases, the claim can be satisfied upon maturity (eg, working capital loans).

The rank of the claims is governed by the relevant provisions of the Bankruptcy Act.

SECURITY

Secured lending and credit (immovables)

45. What principal types of security are taken on immovable (real) property?

The main types of security on immovables are real property mortgages and independent liens.

The mortgage agreement is valid only if concluded in writing and in the form required for registration in the real estate register and it goes into effect when it is registered. Priority is determined according to the date of registration; if more than one request is submitted on the same day, the priority is determined according to the date on which the mortgage agreement was concluded.

A mortgage may be filed on a real estate property on a financial institution’s behalf also by way of pledging the mortgaged property to secure a specific sum other than the secured claim (independent lien). The agreement on establishing the independent lien must contain a description of the pledged property and indicate the specific sum up to which satisfaction may be sought from the pledged property. That sum must be entered in the real estate register.

The conditions for exercising the right to satisfaction from the pledged property will be fixed in a guarantee agreement between the lien holder and the lienor.

The guarantee agreement must be made out in writing and must specify the reason for which the independent lien is filed, the terms and conditions for, and the extent of, exercising the right to satisfaction, or if the right to satisfaction opens upon cancellation, the conditions for exercising the right of cancellation, including the notice period. The right to satisfaction may be exercised as laid down in the guarantee agreement.

An independent lien may be transferred to another financial institution in whole or in part, or in installments. The party to whom the independent lien is transferred replaces the transferor in the guarantee agreement, as commensurate according to the extent of the transfer.

If the independent lien is transferred in part or in installments, the acquiring party may request that the division of the independent lien is indicated in the real estate register.

Secured lending and credit (movables)

46. What principal types of security are taken on movable (personal) property?

The main types of security on movables are mortgage on movables, pledge on movables, floating charge and security deposit in the form of money, securities or payment account balances (possessory liens).

The pledge agreement contains an arrangement between the lienor and the lien holder on pledging a specific item and to secure a specific claim. Under the pledge agreement, the lienor undertakes the obligation to transfer possession of, or control over, the pledged property to the creditor in the case of a possessory lien, or grant approval for the registration of a mortgage.

Mortgages are registered in the collateral register in the case of movable properties. The collateral register contains the mortgages established on non-registered movable properties, rights and claims separately for each lienor, as well as other security rights established by the Civil Code.

Where ownership of a movable property is recorded in a public register (eg, the registry of boats), the mortgage is considered established if registered in the relevant registry.

The holder of a property subjected to a possessory lien must keep the pledged property in their possession and keep it in good condition.

The lien holder’s right to satisfaction opens in the case of default, when the claim secured by a pledge falls due.

The rules related to these securities are established by the Civil Code.

CLAWBACK AND RELATED-PARTY TRANSACTIONS

Transactions that may be annulled

47. What transactions can be annulled or set aside in liquidations and reorganizations and what are the grounds? Who can attack such transactions?

The following transactions can be annulled or set aside:

• contracts concluded by the debtor within five years preceding the date when the court received the petition for opening liquidation proceedings or thereafter, or its other commitments, if intended to conceal the debtor’s assets or to defraud any one creditor or the creditors, and the other party had or should have had knowledge of such intent;
• contracts concluded by the debtor within three years preceding the date when the court received the petition for opening liquidation proceedings or thereafter, or its other commitments, if intended to transfer the debtor’s assets without any compensation or to undertake any commitment for the encumbrance of any part of the debtor’s assets, or if the stipulated consideration constitutes unreasonable and extensive benefits to a third party;
• contracts concluded by the debtor within 120 days preceding the date when the court received the petition for opening liquidation proceedings or thereafter, or its other commitments, if intended to give preference and privileges to any one creditor (eg, the amendment of an existing contract to the benefit of a creditor), or to provide financial collateral to a creditor that does not have any; and
• contracts concluded by the debtor within three years before the date when the court received the petition for opening liquidation proceedings or thereafter, or its other commitments, if made for the purpose of transfer of ownership by way of guarantee, or the assignment of a right or claim by way of a guarantee or exercising a collateralized option to buy, where the beneficiary exercised such acquired right by failing to fulfil its obligation of accounting toward the debtor, or did so improperly, or failed to pay the amount remaining after the secured claim is satisfied; if the right-holder did not have the acquisition of ownership, or the assignment of a right or claim by way of a guarantee registered in the collateral register, or its buy option in the real estate register, the conditions for lodging a contest shall be presumed to exist.

The above transactions can be contested before the court by the creditor and, on behalf of the debtor, the liquidator within a one-year limitation period from the date of publication of the notice of liquidation.

If the contest is successful, the provisions of the Civil Code pertaining to invalid contracts apply. The liquidator and the creditor may request on the grounds of invalidity to have the original state restored, and to have any right registered in a public register on the asset after the alienation of the asset stricken from the records.

Equitable subordination

48. Are there any restrictions on claims by related parties or non-arm’s length creditors (including shareholders) against corporations in insolvency or reorganization proceedings?

If the debtor enters into an agreement with a company that is under its majority control, with a shareholder or directors of such company, or with their relatives, the agreement is intended to conceal the debtor’s assets or to defraud the creditors, or to transfer the debtor’s assets without any compensation, and such agreement is contested before the court, bad faith or gratuitous promise will be presumed.

Furthermore, bad faith or gratuitous promise will also be presumed when this contract is concluded between economic operators that are not directly or indirectly connected by way of affiliation, but are controlled by the same person or the same company.

The following may not set off their claims against the debtor:

• directors and executive employees of the debtor economic operator, their close relatives and their domestic partners; or
• any member (shareholder) of the economic operator with majority control over the debtor or the economic operator in which the debtor has majority control (or the member in the case of single-member companies, the owner in the case of sole proprietorships or the foreign-registered company in the case of Hungarian branches).

Lender liability

49. Are there any circumstances where lenders could be held liable for the insolvency of a debtor?

The respective Hungarian legislation does not provide for specific rules applicable to the liability of lenders for the debtor’s insolvency.

GROUPS OF COMPANIES

Groups of companies

50. In which circumstances can a parent or affiliated corporation be responsible for the liabilities of subsidiaries or affiliates?

In the case of groups of corporations, if any controlled member of the group is undergoing liquidation, the dominant member will be held liable for any debt the member may have outstanding. The dominant member will be relieved of liability if it is able to verify that the controlled member’s insolvency did not arise as a consequence of the group’s common business strategy.

Majority control means a relationship where a natural or legal person (holder of a participating interest) controls over 50 per cent of the voting rights in a legal person, or in which it has a dominant influence. The holder of a participating interest is deemed to have dominant influence on a legal person if it is a member of or shareholder in that company and:

• it has the right to appoint and recall the majority of the executive officers or supervisory board members of the legal person; or
• other members of or shareholder in that legal person are committed under agreement with the holder of a participating interest to vote in concert with the holder of a participating interest, or they exercise their voting rights through the holder of a participating interest, provided that together they control more than half of the votes.

Insolvency proceedings initiated against the foreign parent company abroad only apply to the Hungarian branch office under an international agreement or state of reciprocity or in accordance with Regulation (EU) 2015/848 on insolvency proceedings.

If the branch office is not involved in the insolvency proceedings initiated against the foreign parent company abroad under the laws of that country because of the lack of an international agreement or state of reciprocity or if the provisions of Regulation (EU) 2015/848 apply, the general court responsible for the place where the branch office is registered will order dissolution of the branch office ex officio on the basis of notification by the court of registry.

Combining parent and subsidiary proceedings

51. In proceedings involving a corporate group, are the proceedings by the parent and its subsidiaries combined for administrative purposes? May the assets and liabilities of the companies be pooled for distribution purposes?

There are no combined insolvency proceedings under Hungarian law. If any controlled member of the group is undergoing liquidation, the dominant member will be held liable for any debt the member may have outstanding. The dominant member will be relieved of liability if able to verify that the controlled member’s insolvency did not arise as a consequence of the group’s common business strategy.

INTERNATIONAL CASES

Recognition of foreign judgments

52. Are foreign judgments or orders recognized, and in what circumstances? Is your country a signatory to a treaty on international insolvency or on the recognition of foreign judgments?

The general rules regarding the recognition of foreign judgments apply (with the provisions of the EU Insolvency Regulation). Act XXVIII of 2017 on private international law prescribes specific provisions for the recognition of judgments adopted in insolvency proceedings.

Pursuant to these provisions, additionally, the recognition of judgments in insolvency proceedings is subject to reciprocity between Hungary and the state of the court that delivered that judgment. Recognition of main insolvency proceedings conducted abroad does not preclude the opening of secondary insolvency proceedings before a Hungarian court.

In Hungary, a foreign judgment opening main insolvency proceedings may impart legal effects provided for in the law of the state of the opening of proceedings only if no secondary insolvency proceedings are opened in Hungary. Additional conditions and special rules of procedure may be established by law regarding the recognition of legal effects related to the main insolvency proceedings conducted abroad.

The provisions of Regulation (EU) 2015/848 on insolvency proceedings (recast) are directly applicable in Hungary. Furthermore, Hungary is also a signatory to a number of treaties that include provisions on the recognition of foreign judgments.

UNCITRAL Model Laws

53. Have any of the UNCITRAL Model Laws on Cross-Border Insolvency been adopted or is adoption under consideration in your country?

Neither the UNCITRAL Model Law on Cross-Border Insolvency, nor the UNCITRAL Model Law on Enterprise Group Insolvency or the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments have been adopted in Hungary. No public information is available on the consideration of their potential adoption in the near future.

Foreign creditors

54. How are foreign creditors dealt with in liquidations and reorganizations?

Foreign creditors are dealt the same way in liquidations and reorganizations as any other creditor.

Cross-border transfers of assets under administration

55. May assets be transferred from an administration in your country to an administration of the same company or another group company in another country?

The rules governing the sale of the debtor’s assets are set out in detail in the Bankruptcy Act, and it is not possible to transfer the debtor’s property in any other way. The liquidator must dispose of the debtor’s assets through public sales at the highest price that can be obtained on the market. The liquidator effects the sale by way of tender or auction, and the buyer pays the purchase price to acquire ownership over the debtor’s asset.

COMI

56. What test is used in your jurisdiction to determine the COMI (center of main interests) of a debtor company or group of companies? Is there a test for, or any experience with, determining the COMI of a corporate group of companies in your jurisdiction?

There is no specific test on the determination of the center of main interests other than the one established by Regulation (EU) 2015/848. The Bankruptcy Act follows this Regulation.

Cross-border cooperation

57. Does your country’s system provide for recognition of foreign insolvency proceedings and for cooperation between domestic and foreign courts and domestic and foreign insolvency administrators in cross-border insolvencies and restructurings? Have courts in your country refused to recognize foreign proceedings or to cooperate with foreign courts and, if so, on what grounds?

Pursuant to the relevant provisions of Act XXVIII of 2017 on private international law, the recognition of judgments in insolvency proceedings is subject to reciprocity between Hungary and the state of the court that delivered the judgment. Recognition of main insolvency proceedings conducted abroad does not preclude the opening of secondary insolvency proceedings before a Hungarian court.

No court statistics are available regarding refusals.

Cross-border insolvency protocols and joint court hearings

58. In cross-border cases, have the courts in your country entered into cross-border insolvency protocols or other arrangements to coordinate proceedings with courts in other countries? Have courts in your country communicated or held joint hearings with courts in other countries in cross-border cases? If so, with which other countries?

Cooperation in cross-border cases is based on the applicable EU laws on insolvency proceedings.

The Metropolitan Tribunal has competence and jurisdiction to open and conduct main insolvency proceedings instituted against an economic operator covered by Regulation (EU) 2015/848 and established in a place other than Hungary.

There is no publicly available information on either any joint hearings or on the communication with courts of other countries.

Winding-up of foreign companies

59. What is the extent of your courts’ powers to order the winding-up of foreign companies doing business in your jurisdiction?

According to the Bankruptcy Act, in respect of the Hungarian branches of foreign companies, the provisions of the Bankruptcy Act regarding liquidation proceedings apply subject to the exceptions set out in the Act on the Hungarian Branch Offices and Commercial Representative Offices of Foreign-Registered Companies.

To the liquidation of Hungarian branches of foreign companies, generally the relevant EU regulation applies. If a foreign company becomes insolvent in connection with business activities performed by its Hungarian branch and the insolvency proceedings to which it is subject does not fall within the scope of Regulation (EU) 2015/848, and there is no reciprocity with the state where the foreign company is established in respect of insolvency proceedings, creditors may request dissolution of the branch by the general court at which the branch is registered.

In those proceedings, the provisions of the Bankruptcy Act on liquidation proceedings apply with certain derogations. The court terminates the liquidation proceedings if the foreign company or the branch provides guarantees for settlement of the creditors’ claims notified in the proceedings.

After the conclusion of the branch’s liquidation proceedings, the assets remaining will be at the foreign company’s disposal.

The main rules of liquidation of Hungarian branches of foreign companies are the following:

• the foreign company is to be regarded as the debtor in relation to debts incurred through its branch office;
• the assets of the branch office will be understood as all the assets of the foreign company (invested assets or current assets) that are used (administrated) by the branch office according to the accounting records of such;
• where the Bankruptcy Act refers to the executive officer of an economic organization, it will be understood as the director of the branch office; and
• where the Bankruptcy Act, in relation to liquidating proceedings, refers to the organs or bodies of the company, it will be understood as the person or body acting as the managing director as delegated by its deed of foundation or, in respect of insolvency proceedings initiated abroad, the liquidator authorized to dispose over the assets of the foreign company.

Insolvency will be declared if the foreign company or the branch office has not paid non-disputed or acknowledged debts within 60 days of due date, or execution proceedings conducted in Hungary against such party were unsuccessful.

Liquidation proceedings are initiated if requested by the creditor or upon notification by the Court of Registry. A branch office is considered dissolved upon removal from the company registration records.

UPDATE AND TRENDS IN RESTRUCTURING AND INSOLVENCY IN HUNGARY

Trends and reforms

60. Are there any emerging trends or hot topics in the law of insolvency and restructuring? Is there any new or pending legislation affecting domestic bankruptcy procedures, international bankruptcy cooperation or recognition of foreign judgments and orders?

Many of the measures and provisions deviating from the general rules implemented in view of the covid-19 pandemic and its global economic effects are no longer in effect. Others, including the special insolvency procedure known as the reorganization procedure, are expected to remain effective until 31 December 2023. According to the laws currently in force, an application for reorganization may only be filed until the end of this year.

Concerning the armed conflict on the territory of Ukraine and the subsequent state of emergency, certain provisions of the Bankruptcy Act will be applied differently. These differing provisions remain in force under the current legislation until 26 November 2023; however, the duration of the state of emergency may be extended. These differing provisions concern plenty of provisions of the Bankruptcy Act.

Certain amendments of the Bankruptcy Act are expected to take effect on 1 January 2024. These amendments mostly concern the different amount of fees payable in bankruptcy and liquidation proceedings. For example, the minimum fee payable for the registration of a claim will be increased to 10,000 forints instead of 5,000 forints, and the maximum fee will be increased to 200,000 forints instead of 100,000 forints. Also, the percentage rate and the minimum amount of fees due to the liquidator will be increased by virtue of this amendment.

* The information in this chapter was accurate as at September 2023.

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“The article’s content refers to the regulations that were applicable at the time of its creation and is intended solely for reference purposes. To obtain accurate information, it is advisable to seek the guidance of a consulting lawyer.”

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