Proposed changes to the Hungarian Bankruptcy Code

A draft bill on amendment to the Bankruptcy Code (Act XLIX of 1991 on bankruptcy proceedings and liquidation proceedings) was introduced into the Parliament on 12 April 2017 and is currently under review. If the draft bill was approved and published, the new rules would be applicable to the new liquidation proceedings and to new management liability related lawsuits. Lawmakers would grant a 2-month period to prepare for the changes.

Key areas for change are:

1. Fiduciary security interests would be elevated to the same level as pledge-type security

Fiduciary security interests such as security assignment, transfer of rights for security purposes, and options over movable assets (unless these assets are subject to registration in a special register) can be registered into the security register (Hitelbiztosítéki Nyilvántartás). If they are registered, the beneficiary of this security will be entitled to enjoy the same rights, which the Bankruptcy Code delegates to pledgees.

If both fiduciary security interests and a pledge are created over the same assets, the security that is registered first will rank ahead of the other.

In terms of security over receivables, the above may simplify the current market-standard security package by using only security assignment, (conditional upon the occurrence of a default) instead of creating both assignment and pledge over receivables.

The option beneficiary can make a declaration within 60 days from the commencement of liquidation proceedings whether it intends to exercise the option. Given the draft bill would not change the rule that an option right can be exercised until the relevant asset is sold by the liquidator, the purpose and consequence of making or omitting to make a declaration within 60 days would need to be regulated in the draft bill.

2. Pledge over future receivables

Despite the recent decision of the Curia about how a pledge over future receivables should be treated in liquidation proceedings, the draft bill provides that future receivables arising from pre-liquidation agreements but created post-liquidation should be treated the same as and enjoy the same position with receivables arising from and created pre-liquidation.

Since security assignment should be treated equally with the pledge, the above rule would be applicable to the fiduciary security, as well.

3. Determination of minimum purchase price

Minimum purchase price of assets to be sold in tender or auction should be determined in a way prescribed by an additional law (the draft is not yet available) to be approved separately.

4. Recovery from proceeds of sale of secured assets

Only the following items and in the following order can be deducted from the purchase price collected by the liquidator as a result of the sale of secured assets:

• costs (determined by an authority) incurred directly from any work on the secured asset for saving life and properties (if any);
• costs incurred from storage, maintenance and sale of the secured asset as well as from reclaiming assets by the liquidator in a lawsuit (if any);
• tax and court fee becoming due and payable after the commencement date of the liquidation (if any);
• costs incurred from collection of receivables by the liquidator over security established by the debtor (if any);
• maximum 1% of the net purchase price of the secured asset (including receivables collected by the liquidator) for storage of the debtor’s corporate documents; and
• 7.5% of the net purchase price (including receivables collected by the liquidator).

Following the deduction of the above items, the liquidator shall transfer the remaining amount from the purchase price to the secured creditor within 15 days: first, for covering the principle of the secured claims; second, for interest (not including default interest); and third, for any costs and expenses. All this notwithstanding, a deadline (15 days) would be set for the transfer of the recovery to the secured creditor. The date of this deadline is unclear as no deadline is set for the liquidator to complete the above deduction process.

We point out that

• the draft bill attempts to cap the storage costs for corporate documents. On one hand, this rule is welcome since these costs make up a significant portion of liquidation expenses. On the other hand, this would not be acceptable since storage costs relate to the past operation of the debtor and not to the secured asset; and
• 7.5% of the net purchase price should be paid for the following purposes:
  • 3% liquidator fee plus VAT;
  • 2% to be transferred to the court for further distribution to liquidators managing low budget simplified liquidations;
  • the rest should be allocated for those claims, which cannot be paid at the end of liquidation proceedings, pursuant to the general allocation rules set out in section 57 (1) of the Bankruptcy Code.

5. New challengeable transaction

Unless the beneficiary of the fiduciary security complies with its obligation to give any surplus it collected through enforcement of the security, the security agreement made within 3 years from the receipt by the court of the liquidation request can be challenged and declared by the court null and void. If the fiduciary security is not registered into the security register, it would be presumed that the above settlement obligation was not complied with.

Although the purpose of the above rule is appreciated, strictly from a legal perspective, the security agreement should not be declared null and void. Instead, the law should authorize the liquidator with a special right to reclaim the surplus that the security beneficiary failed to give the debtor.

6. Management liability - new exemption criteria

Managing directors liable for wrongful trading can be exempted from such liability if they can prove that they, when threatened with insolvency, did not take unjustifiable risks given the financial situation of the company.