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Life of Loans During and After COVID-19

Life of Loans During and After COVID-19

Hungary
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In response to the COVID-19 outbreak, the Hungarian government launched Government Decree 47/2020 (III. 18.), introducing a moratorium on the payment of principal, interest, and fees arising from facility, loan, and financial lease contracts until December 31, 2020. This moratorium, which we will call the “2020 Payment Moratorium,” was automatically available to both natural person and business entity borrowers, although they could opt out of if they wished.

The 2020 Payment Moratorium has recently been prolonged until June 30, 2021 by Government Decree 637/2020 (XII. 22.).

2020 Payment Moratorium

While Hungarian banks and leasing companies could easily adapt the 2020 Payment Moratorium to their borrowers (either domestic or foreign), foreign lenders were uncertain if the 2020 Payment Moratorium was also applicable to their facility, loan, or financial leases, since applicable laws (and related guidelines, regulations, and commentaries) did not specify whether it applied to them or not.

The possibility that the 2020 Payment Moratorium applied only to Hungarian financial entities could be distilled from a publication of the National Bank of Hungary summarizing the benefits of a payment moratorium for debtors. This publication described, among other things, possible losses to banks due to the moratorium and the potential aid provided to them by the NBH, which implied that the 2020 Payment Moratorium only applied to Hungarian creditors. On the other hand, Article 9 of Rome I as well as similar provisions in Hungary’s International Law Act suggested the opposite – that the laws introducing the 2020 Payment Moratorium were imperative regulations enacted to protect the Hungarian economy, therefore they would override any contractual provisions arising from agreements governed by any law, and hence were applicable to foreign lenders.

The market seemed to follow the latter interpretation and foreign lenders also provided their borrowers with a payment moratorium, partly because of EU regulations and partly because similar measures were introduced in most EU countries.

As a consequence of the 2020 Payment Moratorium, enforcement of security was not possible, since no payment of principal, interest, or fees could be demanded by lenders, and Hungarian-law-governed security may only be enforced if there are due and payable amounts outstanding under a facility/loan agreement and the borrower fails to pay such due and payable amounts within the set deadline.

2021 Payment Moratorium

While the moratorium granted under Government Decree 637/2020 (XII. 22.) (which we will call the “2021 Payment Moratorium”) has very similar conditions to the 2020 Payment Moratorium, one prominent difference is that the 2021 Payment Moratorium defines the term creditor as applying only to those creditors which have a registered seat in Hungary or which have a Hungarian branch office.

Although remote, there is the possibility that this deviation may cause problems in the case of those facility agreements where there is a combination of domestic and foreign creditors, especially in the jurisdiction of foreign creditors no longer covered by the payment moratorium. This also could worsen the financial position of Hungarian borrowers when the foreign creditor demands payment of the actual debt service or starts to enforce security.

Conclusions

As the conditions of both the 2020 Payment Moratorium and the 2021 Moratorium are favorable to borrowers (i.e., interest accrued during the term of the payment moratorium is not capitalized, the repayment instalment shall not increase after the payment moratorium, and the term of repayment is prolonged), it is not anticipated that they will have a negative effect on many borrowers in the near future.

This is also underpinned by the NBH’s recent guidelines to financial institutions in relation to the assessment of non-payment over nine months as a result of the 2020 Payment Moratorium and the 2021 Moratorium. According to the NBH, no facility will be automatically qualified as “restructured” if the borrower does not have and most probably will not have financial difficulties. This can be verified by a financial institution if a retail client’s salary has not decreased drastically or he/she has adequate savings – or, in the case of business entities, from regularly provided financial statements.

By Melinda Pelikan, Head of Banking & Finance, Wolf Theiss Budapest

This Article was originally published in Issue 8.2 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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