Hungary introduces new reorganisation for companies in distress due to pandemic

The Hungarian government has recently introduced a new restructuring tool with the aim of supporting companies suffering from financial difficulties due to COVID-19.

Financially distressed companies will receive an automatic stay while the company puts together a reorganisation plan, which will be supervised by a court and evaluated by a court-appointed expert.

The rules echo the concept of the preventative restructuring measures set down by EU Directive 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132. The new scheme will be in force until 23 May 2021 unless extended by the government.

The key features of the procedure are as follows:

Companies threatened with insolvency can utilise the new restructuring tool. Under Hungarian insolvency law, to be "threatened with insolvency" is a financial position when directors foresee or should conclude from their roles and responsibilities and acting with due diligence that the company will be unable to pay its debts when due.

The company should make preparatory steps (e.g. put together a viable reorganisation plan) before the court opens the procedure and grants a 90-day moratorium, which can be extended by an additional 60 days.

The new rules are designed to help the company restrict suppliers and other business partners through the suspension or termination of their contracts with the entity, which is possible when the court opens the reorganisation procedure.

The court then appoints an expert who will assist in determining whether or not the company’s reorganisation plan is viable enough to avoid insolvency. The expert has a maximum of five business days to evaluate the reorganisation plan and report to the court. The reorganisation plan must outline the actions, which the company intends to take during and after the moratorium to improve its solvency position (e.g. inviting new investor to acquire shares, generating extra profit or cutting cost, etc.), prepare a liquidity plan covering a minimum of two years and list the creditors and claims, which the company must include into the reorganisation.

Only one expert can be appointed, which is a Nemzeti Reorganizációs Nonprofit Korlátolt Felelősségű Társaság (i.e. a state-owned non-profit company). The expert then will monitor the operation of the company and countersign new payment obligations. If the company's operations severely jeopardise the interests of the creditors, the expert can recommend that the court withdraw the moratorium.

The procedure can be either public or confidential, subject to the choice of the company. If confidential, the moratorium will be known only to those creditors that the company invites to negotiate a reorganisation plan.

If the moratorium is public, 60% of the creditors will need to sign off on the plan. If confidential, the company needs the consent of all the creditors. If approved by the creditors, the expert must review and examine the plan before providing expert opinion to the court on whether or not the company, by executing the plan, will be able to stay in business and remain solvent.

Also, the expert should verify whether the plan is in compliance with the law. The plan must provide a time frame that cannot be longer than two years.

While these rules are in place, the Hungarian parliament is working on the implementation of the EU Directive with a draft bill that envisages similar preventative measures for reorganisation.

The above procedure will need to be tested in practice. If the new procedures can be used successfully, they may provide credible alternatives for Hungary's current bankruptcy procedures.

For more information on this procedure and insolvency laws in Hungary, contact your CMS client partner or local CMS experts: