I INSOLVENCY LAW, POLICY AND PROCEDURE

i Statutory framework and substantive law

In Hungary, insolvency proceedings are governed by Act No. XLIX of 1991 on Bankruptcy and Liquidation Proceedings (Insolvency Act), which has been amended from time to time.

The procedural issues that are not otherwise provided for in the Insolvency Act, the provisions of Act CXXX of 2016 on the Civil Procedure on non-contentious judicial civil actions, shall apply, subject to the derogations stemming from the special characteristics of non-contentious proceedings, as well as the general provisions of the Act on the Rules Applicable to Non-Contentious Civil Actions and on Non-Contentious Court Proceedings.

ii Policy

Prior to initiating insolvency proceedings, business entities usually make out-of-court restructuring and reorganisation efforts, and comprehensive negotiations that can be considered as a prevailing attitude to rectify the financial situation of the business entity.

Under the Insolvency Act, pre-insolvency methods or other special court-administered proceedings at the early stage of business entities' financial distress are not available.

The Insolvency Act allows the financially troubled business entity to initiate bankruptcy proceedings instead of liquidation proceedings, and thus the business entity may make an attempt to rescue the business. If the bankruptcy proceeding fails, it is transformed into a liquidation proceeding by the court.

iii Insolvency procedures

Under the Insolvency Act, there are two types of insolvency proceedings applicable for business entities controlled and supervised by the competent court:

  1. bankruptcy proceedings that aim at recovering the ordinary course of business, achieving a settlement between the financially troubled business entity and its creditors by granting a temporary relief (payment moratorium) for its financial obligations and enable a reorganisation; and
  2. liquidation proceedings that aim at the dissolution of the insolvent business entity and the distribution of its assets to its creditors.

Bankruptcy proceedings

Bankruptcy proceedings allow the reorganisation and restructuring of the business entity in financial distress. In this context there is no insolvency test, the financially troubled business entity decides on the initiation of bankruptcy proceedings.

In bankruptcy proceedings the debtor is granted a temporary relief (payment moratorium) for a maximum of 365 days if agreed by the creditors. If the debtor and its creditors fail to agree on settlement or if the settlement agreement fails to comply with the law, bankruptcy proceedings are terminated and the court will commence liquidation proceedings.

In bankruptcy proceedings, during the payment moratorium the enforcement of financial claims against the debtor is suspended and the enforcement of such claims cannot be ordered.

In bankruptcy proceedings, claims are categorised as per the following:

  1. claims with regard to the payment obligations of the debtor during the payment moratorium (e.g., wages and other similar benefits, the related taxes and other similar charges, value added taxes, exercise taxes, payment obligations assumed with a view to carrying on the economic activity, as endorsed by the administrator); and
  2. secured and unsecured claims notified within the mandatory deadline.

The creditors must file their claims and pay the registration fee within 30 days from the commencement date. The above categories cannot be considered as the order of satisfaction because the settlement agreement concluded between the debtor and the creditors lays down the satisfaction of each claim.

Liquidation proceedings

Liquidation proceedings require the insolvency of the debtor. The court orders the liquidation of the debtor if the court determines that the debtor is insolvent. The debtor may only be qualified as insolvent in the following cases:

  1. the debtor failed to settle or contest its previously uncontested and acknowledged contractual debts within 20 days of the due date, and failed to satisfy such debt upon receipt of the creditor's written payment notice;
  2. the debtor failed to settle its debt within the deadline specified in a final court decision or order for payment;
  3. the enforcement procedure against the debtor was unsuccessful;
  4. the debtor failed to fulfil its payment obligation as stipulated in the settlement agreement concluded in bankruptcy or liquidation proceedings;
  5. the court has declared the previous bankruptcy proceedings terminated; or
  6. 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 debts on the date when they are due, and in proceedings opened by the receiver the members (shareholders) of the debtor fail to provide a statement of commitment in relation to providing funds necessary to cover such debts when due.

A debtor cannot be qualified insolvent in the above cases inside the deadline specified by the court for the settling of debts.

When liquidation proceedings are commenced all pending enforcement procedures are terminated by the court and the creditors can only satisfy their claims within the liquidation proceedings.

Liquidation proceedings must be completed within two years but in certain cases they may take longer due to any failure to sell the debtor's assets.

In liquidation proceedings, creditors' claims are ranked in the following order of satisfaction:

  1. costs of liquidation;
  2. parts of claims secured by pledges established before the commencement date of liquidation proceedings, which were not satisfied under the rules applicable to priority;
  3. alimony claims, life annuity payment claims and compensation benefits to private individuals;
  4. other claims of private individuals not originating from economic activities (e.g., damages, warranty claims, etc.);
  5. taxes and other public dues as well as public utility charges;
  6. other claims (e.g., any unsecured claims);
  7. default interest and late charges, as well as surcharges, penalties and similar debts; and
  8. claims held by the shareholder (member) or executive officer or executive employee of the debtor business entity.

In addition, claims that are secured by pledges will enjoy priority in satisfaction irrespective of the order above. In case of secured creditors (i.e., pledgees) a special order of satisfaction prevails, however, there are also costs to be taken into account before the secured creditor's claim.

The creditors must file their claims within 40 days of the commencement date and at the same time pay the registration fee.

Starting proceedings

Bankruptcy and liquidation proceedings are non-contentious proceedings falling within the competence and exclusive jurisdiction of the regional court responsible for the place where the debtor's Hungarian registered seat is located on the day of submission of the request for opening proceedings.

Under the Insolvency Act, there is no mandatory deadline for filing a request on the commencement of bankruptcy or liquidation proceedings.

The commencement of bankruptcy proceedings and liquidation proceedings becomes effective as of the date they are published in the Company Gazette (a publicly available online platform).

Bankruptcy proceedings can only be initiated by the debtor business entity. The representatives (directors) of the debtor business entity, upon prior approval of its main decision-making body, may request the competent court to commence bankruptcy proceedings.

As of the commencement date of bankruptcy proceedings, the debtor is granted a temporary relief (payment moratorium) for 120 days, which may be extended to 240 days or maximum 365 days if agreed by the creditors.

Liquidation proceedings can be initiated by the debtor business entity, the creditor, the receiver. Further, the court commences liquidation proceedings ex officio following unsuccessful bankruptcy proceedings or upon request of the company court or the criminal court.

If the liquidation proceedings are requested by a creditor, the creditor must prove that the debtor is insolvent and specify the reasons for the debtor's alleged insolvency. A creditor can only request the commencement of liquidation proceedings if the amount of its claim exceeds 200,000 forint.

Upon request of the debtor business entity, the court may allow a maximum period of 45 days for the debtor to settle its debt, except in case of liquidation proceedings following unsuccessful bankruptcy proceedings. A debtor cannot be qualified insolvent inside the deadline specified by the court for the settling of debts.

Control of insolvency proceedings

On the one hand, the proceedings are controlled by the competent court that ordered the bankruptcy or the liquidation proceedings, on the other hand (1) the administrator is responsible for conducting bankruptcy proceedings, and (2) the liquidator is responsible for conducting liquidation proceedings.

The main roles of the competent court are (1) the adjudication on objections filed against the administrator or the liquidator during bankruptcy or liquidation proceedings, and (2) the transformation of unsuccessful bankruptcy proceedings into liquidation proceedings.

In both proceedings the most effective procedural tool available for creditors is the objection. By way of filing an objection to the competent court, diligent creditors may contest the unlawful acts or omission of the administrator or the liquidator (in practice, typically the classification of other creditors' claims, the proposal on the distribution of the debtor's assets).

In both proceedings, creditors may form a creditors' committee for the protection of their interests, the representation before the competent court, and especially to keep monitoring the activities of the administrator or the liquidator. Instead of forming a creditors' committee, creditors may elect to appoint a representative from among themselves. The rules applicable to the creditors' committee are applicable to the creditors' representative as well.

In bankruptcy proceedings, a creditors' committee may be formed if it represents at least one-third of the creditors, provided that such creditors control claims whose amount is at least half of the aggregate amount of claims. In liquidation proceedings, a creditors' committee may be formed if it represents at least one-third of the creditors, provided that such creditors control at least one-third of aggregate amount of the claims. The creditors' committee must consist of minimum three and maximum seven members and the creditors operating the select committee may elect a chairperson. The participating creditors must agree on the creditors' committee's rights, cost advancing method and accounting issues.

Voting rights shall be held by any creditor who registered its claim (in case of bankruptcy: within 30 days of the commencement of the bankruptcy procedure), paid the registration fee and whose claim is shown under recognised or uncontested claims. Any creditor who failed to participate in person or by way of proxy shall be counted as having voted no. As regards voting rights, creditors shall have one full vote awarded for each recognised or uncontested claim of 50,000 forint. There shall be no fractional votes. Creditors holding claims below the 50,000 forint threshold shall also have one vote. Interest accrued during the term of the stay of payment will not be taken into consideration with respect to voting rights. In the case of liquidation procedures, the votes of creditors who notified their claims after the 40-day time limit shall apply this calculation method at a rate of one-half. Decisions shall be adopted by simple majority.

The establishment of a creditors' committee may have, among others, the following practical advantages:

  1. the liquidator sends a quarterly report on his or her activity and the financial situation of the debtor (if there is no creditor's committee, the information of the individual creditors will be verified by the liquidator's intermediate balance sheet);
  2. the liquidator informs the creditors' committee (creditors' representative) regarding the contracts that exceed the scope of day-to-day operations and the termination of existing contracts;
  3. if a creditor's committee has been formed, the liquidator is obliged to obtain the consent of the creditors' committee to continue the economic activity of the debtor during liquidation;
  4. the liquidator may rent the debtor's assets only with the approval of the creditor's (creditors' representative);
  5. in respect of wage increases after the time of the opening of liquidation proceedings, the liquidator may assume any new obligations only upon the committee's consent;
  6. in case of the sale of debtor's assets, the liquidator may forego the application of sale process by way of tender or auction only with prior consent of the creditors' committee;
  7. the creditors' committee may instruct the liquidator to notify the committee on the sales procedure, or to make available the appraisal and the sales procedure for the creditors for inspection and for monitoring;
  8. the creditors' committee may also instruct the liquidator to present the invitation to tender and the auction notice in advance to the committee for inspection, including the appraised value of the assets offered for sale, subject to the right of consultation; and
  9. the creditors' committee may request the court appoint an expert for the cross-verification of the appraised value, and shall advance the costs involved.

In bankruptcy proceedings, the directors of a debtor business entity, including its main decision-making body and owners, shall exercise their respective rights only if it does not violate the powers vested in the administrator. Directors remain in control over the debtor, however an administrator monitors, inter alia, the business of the debtor, the approval of the administrator is required for the new commitments of the debtor and the endorsement of the administrator is required for the fulfilment of payments from the debtor's assets.

The directors of the debtor business entity are obliged to:

  1. cooperate with the administrator;
  2. provide a statement (1) regarding that the annual financial statement and the interim balance sheet give a true and fair view of the financial position of the debtor, and (2) regarding the significant changes in the debtor's financial position since the financial statement and the interim balance sheet had been adopted;
  3. provide a statement indicating the payment service providers holding the debtor's accounts (including account numbers), and investment firms where the debtor has a savings account;
  4. provide a statement of commitment (1) for notifying the payment service providers of the filing of the petition for the commencement of bankruptcy proceedings, and (2) refraining from initiating any payment transaction or credit transfer that would be contradictory to the purpose of the payment moratorium, and from taking any measures by which to provide preferential treatment to any creditor;
  5. provide a data sheet on the debtor's financial position, as prescribed by the relevant laws; and
  6. inform the creditors or creditors' committee, the employees, the trade unions and the works councils regarding the financial position of the debtor upon their request during the bankruptcy proceedings.

In liquidation proceedings, directors lose their management power over the debtor. As of the commencement date of liquidation, the court appoints a liquidator who becomes the sole representative of the debtor business entity (i.e., replacing the directors), and is responsible for conducting the entire liquidation proceedings. After the commencement of liquidation, only the liquidator shall be authorised to make any legal statements in connection with the assets of the debtor business entity.

The directors of the debtor business entity are obliged to:

  1. prepare a closing inventory, annual financial statements, closing balance sheet and tax return, and send them to the liquidator and the tax authority within 30 days of the commencement date of the liquidation, as well as provide a statement (1) that the closing inventory, the annual financial statement and the closing balance sheet give a true and fair view of the financial position of the debtor, and (2) regarding any significant changes in the debtor's financial position since the balance sheet was adopted;
  2. prepare a list of the documents that may not be discarded, and deliver such documents, as well as archive materials to the liquidator within 30 days of the commencement date of the liquidation, together with the assets according to an itemised inventory, and shall provide information regarding the pending affairs, and declare to have delivered all assets and documents as required;
  3. provide a statement to the liquidator and the environmental protection authority within 15 days from the commencement date of the liquidation regarding any environmental damages or environmental hazards that may result in penalties or other payment obligations, and expenses relating to the clean-up of such damage;
  4. disclose information regarding all legal transactions and commitments;
  5. inform without delay the employees, the cooperative members, the trade unions and the works councils regarding the commencement of liquidation proceedings;
  6. inform the beneficiaries of the claims specified in the Insolvency Act regarding the opening of liquidation proceedings within 15 days of the commencement date of the liquidation;
  7. provide information at the liquidator's request regarding the debtor's activities prior to the liquidation and the placement of assets, as well as assist the liquidator in his or her activities;
  8. notify the service provider carrying the securities account of the debtor and the service provider managing other money-market instruments of the debtor regarding the ordering of liquidation proceedings within three business days following the commencement date of the liquidation, as well as the creditors holding a lien, right of enforcement and security deposit, and shall also verify the fulfilment of this notification requirement to the liquidator;
  9. inform the liquidator about fulfilling the obligation of provisioning;
  10. provide a statement of property and other assets controlled by the debtor business entity, supported by documentary evidence, to the liquidator within 30 days from the commencement date of the liquidation, which are beyond the scope of liquidation assets, and shall make them available for the liquidator; and
  11. inform the creditors or creditors' committee, the employees, the trade unions and the works councils regarding the financial position of the debtor upon their request during the liquidation proceedings.

Special regimes

The Insolvency Act contains special provisions regarding insolvency proceedings of business entities with strategic importance. The Hungarian government, acting in its sole discretion, may qualify any business entity as one that has strategic importance if it considers that the bankruptcy or the liquidation proceedings of such a business entity bears state interest (i.e., special public interest; a significant project from a national economic perspective; or a significant activity from a national economic perspective), and hence its creditors need to be satisfied under a special procedural regime. The Hungarian government is entitled to decide on the qualification of any business entity, even in the case of ongoing bankruptcy or liquidation proceedings, as a strategic business entity.

The most notable implications of such a special regime are the following:

  1. certain procedural rights granted to the creditors under the general regime are limited or excluded;
  2. different procedural deadlines are applied; and
  3. only a state-owned administrator or liquidator can be appointed to control the entire bankruptcy or the liquidation proceedings (including the sale of the assets of the debtor business entity).

The Insolvency Act provides for the possibility of simplified liquidation proceedings. Simplified procedural rules apply to liquidation proceedings of a debtor business entity if its assets are not even expected to cover the costs of the liquidation proceedings, or to those liquidation proceedings that cannot proceed owing to deficiencies in the records or in the bookkeeping of the debtor business entity. In this case, the liquidator informs the creditors and requests them to provide any information they may have concerning the assets of the debtor business entity that are generally available, or to render assistance in conducting liquidation proceedings. If no information or no assistance has been provided upon this request of the liquidator and hence the liquidation proceedings cannot be conducted under the general rules, the liquidator prepares a report thereon and submits a request or recommendation to the court for the distribution of the debtors' assets among the creditors.

Besides the above special regime regulated by the Insolvency Act, in the case of financial institutions, insurance companies and Hungarian branch offices of foreign business entities' special insolvency rules are to be applied under the relevant legislation, which defines the proceedings to be followed for insolvency.

Cross-border issues

Insolvency proceedings within the EU are recognised pursuant to the Regulation (EU) No. 848/2015 of the European Parliament and of the Council on insolvency proceedings.

Article 3(1) of the Regulation provides that the courts of the Member State within the territory of which the debtor's COMI is situated shall have jurisdiction to open insolvency proceedings. The COMI shall be the place where the debtor conducts the administration of its interests on a regular basis and which is ascertainable by third parties. In the case of a company, the place of the registered office shall be presumed to be the COMI in the absence of proof to the contrary. This presumption shall only apply if the registered office has not been moved to another Member State within the three-month period prior to the request for the opening of insolvency proceedings. With the re-tailored definition of COMI the EU Regulation prevents bad or abusive forum shopping.

Pursuant to Article 3(2) of the Regulation, if the debtor's COMI is situated within the territory of a Member State, the courts of another Member State shall have jurisdiction to open insolvency proceedings against that debtor only if it possesses an establishment within the territory of that other Member State. The effects of those proceedings shall be restricted to the assets of the debtor situated in the territory of the latter Member State.

Hungary has not adopted the UNCITRAL Model Law on Cross-border Insolvency.

II INSOLVENCY METRICS

The total number of business enterprises2 in Hungary was 1,870,415 at the end of 2017, which represents an increase of approximately 24,314 in comparison with the previous year's figures.3

By contrast to the above trends, the number of liquidation proceedings newly ordered in a given year against partnerships decreased with 15 per cent in 2017, in comparison to 2016, the total number of the newly ordered liquidation proceedings was 6,500. A drop-off with respect to the number of liquidation proceedings was noted in 2015 (after an increase between 2012 and 2014) and this tendency has continued in recent years.

With regard to sectors, 29 per cent of liquidation proceedings were initiated in commerce and 13 per cent in construction – similarly to previous years. The number of liquidation proceedings has increased only in healthcare by 5.6 per cent; in other sectors was a slight decrease apart from information and communication, and education where the decrease was above 20 per cent.

The number of reorganisation proceedings initiated is still surprisingly low, only in total 39 reorganisation proceedings were initiated in 2017 against financially troubled business entities. In comparison with 2016, such numbers show a significant decrease, where 50 reorganisation proceedings were initiated.

III PLENARY INSOLVENCY PROCEEDINGS

The following insolvency proceedings opened in Hungary in recent years are worth highlighting.

Est Media Vagyonkezelő Nyrt

Est Media Vagyonkezelő Nyrt is a B-category issuer at the Budapest Stock Exchange, a Hungarian media company with two core businesses: media and telecommunications. The media sector, which is bundled in the EST Media Group Kft, includes print products, interior advertising, online media as well as audio and video downloads (with the corresponding copyright). The telecommunications segment, which is managed through the subsidiary Externet Zrt, is settled and offers internet and telecommunications services. The third division, asset management, is dedicated to establishing the corporate structure and offering new services based on the company's network technology. In addition, EST MEDIA organises festivals through its subsidiary (Sziget Kft) in Hungary. Est Media Vagyonkezelő Nyrt filed a request on 1 March 2017 to the Regional Court of Budapest to have bankruptcy procedures initiated against itself. The Regional Court of Budapest ordered a payment moratorium (until 18 March 2018) based on the joint request of Est Media Vagyonkezelő Nyrt and its creditors. Lastly, the reorganisation plan of the company was supported by its creditors and approved by the Regional Court of Budapest and therefore the bankruptcy proceeding was terminated.

Sikér Malomipari Zrt

The balance sheet of Sikér Malomipari Zrt, has been ranked in 2014 among Hungary's five largest milling companies, with a liabilities of 6.9 billion forint. By reason of the withdrawal of its creditors, the competition in the sector, the failure of Széchenyi Bank and a fine from the Competition Office for over 300 million forint, Sikér Malomipari Zrt previously faced financial troubles. Sikér Malomipari Zrt has filed a request for bankruptcy against itself and therefore the bankruptcy procedure was initiated by the Regional Court of Tatabánya on 11 February 2017. As the payment moratorium has been passed and the reorganisation proposal of the company has not been supported by its creditors, the Regional Court of Tatabánya ordered the liquidation of Sikér Maloimipari Zrt on 20 October 2016. Based on the notice published in the Official Gazette on 10 November 2016, the Hungarian government has qualified Sikér Malomipari Zrt as business entity with strategic importance, and the National Reorganisation Nonprofit Kft has been appointed as new liquidator of the company and hence a special procedural regime within the Insolvency Act is to be applied. The liquidator advertised the mill of the Sikér Malomipari Zrt in Szekszárd, according to the notice published in the Official Gazette, the target price of the 34,000 square metres property and mill equipment is 900 million forint.

Eurovegas Kft and Ipari Terület Bezenye Kft

The unique Eurovegas casino, entertainment and hotel project would have been implemented near Hungary's borders with Austria and Slovakia. The construction of a €300 million casino project struggled under severe financial difficulties. Eurovegas Kft and Ipari Terület Bezenye Kft are the exclusive owners of the real properties in Bezenye and in Hegyeshalom concerned in this project. Eurovegas Kft and Ipari Terület Bezenye Kft have been declared insolvent and liquidation proceedings have been ordered by the Regional Court of Győr against the companies. Accordingly, the court's order was published in the Company Gazette on 22 July 2016. During the liquidation proceedings, the Hungarian government qualified Eurovegas Kft and Ipari Terület Bezenye Kft as business entities with strategic importance by Government Decree No. 295/2016 (IX.29), and hence the satisfaction of the creditors' claims needs to be completed under a special procedural regime within the Insolvency Act. New state-owned liquidators (National Reorganisation Nonprofit Kft) were appointed by the court that controls the liquidation proceedings. The appraised value of the real properties in the liquidation of Eurovegas Kft was 3,437,700,000 forint, and in the liquidation of Ipari Terület Bezenye Kft was 3.01 billion forint. The first round of the public tender was started on 13 January 2017 in both liquidation proceedings but was revoked on 7 February 2017. The next round of the public tender has yet to be scheduled.

Ikarus Egyedi Kft

The Hungarian manufacturer of buses used in urban transport Ikarus Egyedi Kft is currently in the spotlight. Ikarus Egyedi Kft filed for bankruptcy protection on 9 July 2018 to restore the company's solvency. The Regional Court of Budapest ordered the bankruptcy proceeding and it was published in the Company Gazette on 13 July 2018. The Hungarian government has qualified Ikarus Egyedi Kft as business entity with strategic importance by Government Decree No. 126/2018 (VII.11.), thus the bankruptcy proceeding is to be continued under a special procedural regime.

Iv ANCILLARY INSOLVENCY PROCEEDINGS

Secondary and territorial insolvency proceedings may be opened in Hungary in the event that the main insolvency proceedings are pending in another EU Member State, subject to the EU Regulation. Secondary and territorial insolvency proceedings are not common in Hungary; no information is available regarding the commencement of such insolvency proceedings during the past 12 months.

v TRENDS

In the majority of cases, creditors initiate liquidation proceedings against the debtors. In practice, liquidation proceedings may lead to the sale of all or part of the debtor's business as a going concern to a third party instead of the sale of the individual assets of the debtor's business. If the debtor has several real properties with different values, it is quite common for the real property portfolio to be sold in its entirety. This usually leads to a much higher value being realised at the end of liquidation proceedings.

It bears mentioning that the number of business entities with strategic importance is increasing and it seems that the Hungarian government is making an attempt to use this procedural tool to mitigate sectorial issues of the Hungarian economy (i.e., usually major players of a given industry area are qualified as business entities with strategic importance).

As far as recent developments are concerned, in accordance with the EU Regulation, an insolvency register has been established in Hungary, which contains the particulars of insolvency proceedings falling within the scope of the EU Regulation, opened in Hungary on or after 26 June 2018. We are of the view that this gap-filling insolvency register may play to the advantage of creditors and may also ensure the transparency and traceability of the insolvency proceedings.

The link to the publicly available Hungarian insolvency register is: https://fizeteskeptelenseg.im.gov.hu/#/.


Footnotes

1 Zoltán Faludi is a partner, Enikő Lukács is an associate and Diána Boross-Varga is an associate at Wolf Theiss Attorneys-at-Law.

2 The term business enterprises is used here as an epitome of for profit business associations, including business entities, private entrepreneurs and other forms of entities and businesses.