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Quo Vadis Hungarian Insolvency Laws?

Quo Vadis Hungarian Insolvency Laws?

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The organic development of the Hungarian insolvency laws was interrupted by the era of the socialist planned economy, which ended in 1990. The novel Insolvency Act of 1991 (IA) may have satisfactorily served the economy in the first years of the transition period, but due to the profound changes in the socio-economic environment in subsequent years, the statute has become obsolete. Successive governments over the past three decades have made multiple efforts to keep the IA up-to-date and to follow the numerous demands made by the various players of the market and interested legal professionals, but the more than one hundred (!) amendments have rendered the system opaque and relatively difficult to use.

The European Commission reported that Hungary ranks 25th among EU Member States when it comes to the effectiveness of insolvency proceedings. The recovery rate for secured creditors is 43% – lower than the EU average – with, more often than not, no assets (proceeds) to be distributed to unsecured creditors. There are only two types of insolvency proceedings available in Hungary – bankruptcy proceedings (reorganization) and liquidation (involuntary winding-up) proceedings – and no formal pre-insolvency proceedings are available. A striking deficiency of the Hungarian insolvency regime is the lack of functioning reorganization proceedings: only 24 successful composition agreements (out of 109 reorganization proceedings) were approved in 2017, although the number of new liquidation cases exceeded 15,000. In addition, the IA fails to provide efficient protection to post-commencement financing (i.e. super-priority creditor status) diminishing the chances of a successful reorganization, as well as missing the practical possibility of the sale of the assets as a going concern in liquidation proceedings. Furthermore, the IA provides insufficient protection to creditors and ineffective judicial control in insolvency proceedings and contains uncertainties regarding the qualification and selection of insolvency practitioners as well as deficiencies regarding their remuneration. 

The IA’s regimes are still considered “secured-creditor friendly,” and a number of recent changes to the law strengthen secured creditors’ position even more. The equal treatment of certain fiduciary security with traditional security interest (pledges) and the clarification of long-debated matters like the treatment of future receivables used as collateral show a clear intention towards modernization. However, due to the history of the IA, the realistic level of consistency and coherence of the statute has more or less reached its full potential. There are also a number of areas of the IA where we could expect further progress and the taking of a close look by the codification teams from a secured creditors’ point of view, including the settlement of cash and other financial collaterals, the enforcement of option rights, and the enhanced control of the dominant creditors over sale processes. The question of allowing group insolvencies or the combination of insolvency proceedings for creating larger asset pools may also be considered. 

Insolvency legislation has recently been a shifting landscape in Europe. After having addressed the cross-border aspects of insolvency in the recast Insolvency Regulation, the European legislator has launched the partial harmonization of the substantive insolvency laws of the Member States by adopting the Directive on Restructuring and Insolvency. In the same vein, in 2018 the Ministry of Justice of Hungary set up a working group to reform the Insolvency law consisting of stakeholders from the business, regulatory, judicial, and insolvency community. The objective is to adopt a modern insolvency law promoting efficient reorganization (including pre-insolvency proceedings) or, alternatively, an expedited insolvent liquidation process providing higher distribution rates to creditors. The concept paper of the new insolvency law is expected to be published in the fourth quarter of 2019.

This is a long-awaited and unique opportunity to elevate the Hungarian insolvency laws to the level of the modern, efficient, and well-functioning systems in Europe. We are proud that our colleague Zoltan Fabok, Counsel at DLA Piper, has been invited to participate in the working group, which enables us to contribute to the improvement of Hungary’s insolvency framework.   

Gabor Borbely, Partner, and Zoltan Fabok, Counsel, DLA Piper Hungary

This Article was originally published in Issue 6.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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