Hungary: Changes In Hungarian Bankruptcy Rules

In this article, we provide a brief overview of the some of the most important new rules applicable to Hungarian bankruptcy proceedings after 1 September 2009.

Under Hungarian law, bankruptcy is a procedure during which the debtor is granted a moratorium with a view to increasing the chance of a settlement agreement and during which the debtor attempts to reach a settlement with the creditors.

Pursuant to Act no XLIX of 1991 on Bankruptcy and Liquidation Proceedings (the "Bankruptcy Act"), both a debtor and a creditor may initiate a bankruptcy procedure. However, it is worth noting that if the creditor initiates the procedure, this can only be successful if the debtor approves it and the debtor's supreme body consents to the bankruptcy procedure. Taking this into account, it is dubious how often a bankruptcy will be ordered based on a creditor's request. The examination of bankruptcy procedure initiated by creditors falls outside the scope of this article.

A debtor may not submit a bankruptcy request if

  1. there is an ongoing bankruptcy procedure against it;
  2. a liquidation request has been submitted against it and the court ordered the liquidation thereof.

A debtor may not resubmit a bankruptcy request until

  1. creditors' claims existing at the time of the ordering of a previous bankruptcy procedure or which arose during such procedure have been satisfied;
  2. two years have passed from the date of publication of the final completion of a previous bankruptcy procedure;
  3. one year has passed from the publication of the final order on the ex officio rejection of the previous bankruptcy request.

If a debtor submits a request for its bankruptcy, the court orders the publication of the request and of a temporary moratorium in the Companies Gazette within one business day. Any request for the debtor's liquidation submitted simultaneously with or after the submission of the bankruptcy request will be suspended until a decision is made in the issue of bankruptcy. This also applies to a liquidation request submitted before the submission of the bankruptcy request, provided that no order on the establishment of the debtor's insolvency and the liquidation of the same has been delivered.

Once the bankruptcy request has been filed, the court examines whether the submission complies with the Bankruptcy Act. The court rejects the bankruptcy request ex officio if, e.g. (i) there is an ongoing bankruptcy procedure against the debtor, (ii) there is an ongoing liquidation procedure against the debtor and the insolvency of the debtor has been established, (iii) the debtor filed a bankruptcy request within one year and the court rejected the request ex officio and the order on said rejection was published within one year.

If the court does not reject the bankruptcy request, it shall order bankruptcy and also order the publication of the order in the Companies Gazette. In the order, the court appoints a trustee to supervise the activities of the company under bankruptcy.

The debtor under bankruptcy is entitled to a 90-day moratorium from the date of the publication of the order. The creditors have thirty days to report their claims to the debtor and the trustee. The debtor is required to call upon its creditors within 5 business day from the publication of the order on bankruptcy to report their claims. The registration fee payable for the report is set at 1% of the amount claimed and the maximum of HUF 100,000 (about EUR 370).

The trustee is required to register the claims reported in the classification as per the Bankruptcy Act, e.g. acknowledged or non-challenged and challenged claims etc. The trustee is required to inform the debtor and the creditors of the registration, i.e. of the classification and the amount of claims. The debtor and the creditors may make comments in regard of the registration.

It is worth noting that the moratorium does not extend e.g. to the making of payments in connection with employment relationships, the payment of certain public utility fees, the payment of bank charges in connection with account management, certain fees of the trustee and the payment of VAT, excise tax and product fees.

During the term of the moratorium e.g.

  1. no set-off may take place against the debtor;
  2. no prompt collection order may take place against the debtor's accounts;
  3. the enforcement of pecuniary claims against the debtor is suspended;
  4. the debtor may undertake new obligations if the trustee consents to such undertaking;
  5. any payment by the debtor may only be made if the trustee approves such payment;
  6. the contract concluded with the debtor may not be rescinded or terminated on the grounds that the debtor does not fulfill his payment obligations under the contract during the term of the moratorium;
  7. no foreclosure of mortgage may take place against the debtor.

The creditors' meeting must be convened within 45 days from the publication of the bankruptcy order in the Companies Gazette. The debtor is required to put together a plan for the restoration and maintenance of the debtor's solvency and also a draft settlement agreement. The creditors must be provided access to the draft settlement agreement at least 5 business days prior to the creditors' meeting.

The creditors may declare at the first meeting that they do not support the draft settlement agreement. If the debtor does not undertake to redraft the settlement proposal, the meeting will be closed and the minutes taken at the meeting will be sent to the court. If, on the other hand, the debtor undertakes to redraft the settlement proposal, several meetings may be held with the creditors during the term of the moratorium. If the creditors declare that they do not consent to the conclusion of a settlement with the debtor, the debtor is required to close the meeting and provide the court with the minutes taken from such meeting. The court is required to make an order on the termination of the bankruptcy procedure and the end of the moratorium within 8 business days from receipt of the minutes.

Each creditor that reported its claim in due time, paid the registration fee and whose claim has been registered either as acknowledged or non-challenged is entitled to vote at the creditors' meeting.

The moratorium may be extended during the bankruptcy procedure. However, the total length of the same may not exceed 365 days from the commencement date of the bankruptcy.

If the debtor and the creditors reach a settlement agreement, the debtor is required to notify the court of the conclusion of the settlement agreement and to also provide the court with the settlement agreement, the minutes and declarations. If the court finds that the agreement is in line with the Bankruptcy Act, the same approves that agreement and orders the completion of the bankruptcy procedure. If no agreement is reached or the court does not approve the agreement, the court orders the completion of the bankruptcy procedure and establishes the debtor's insolvency ex officio.

Pursuant to the Bankruptcy Act, liquidation may take place if the competent court establishes that a company against which a request for liquidation has been submitted is insolvent. Amongst others, the court declares a company insolvent if e.g.

  1. the debtor company failed to comply with its obligations set forth in the settlement agreement concluded during a bankruptcy procedure or
  2. the court terminated a previous bankruptcy procedure on the grounds that no settlement agreement was reached by the debtor and the creditors or the settlement agreement is not in compliance with Hungarian laws.

Pursuant to Section 28 (3) of the Bankruptcy Act, during a liquidation procedure ordered on the basis of clause (a) above, a creditor may report only the claims that were acknowledged or were not challenged during bankruptcy and which were not recovered during execution of the settlement agreement.

Any claim reported and registered during a bankruptcy procedure preceding the liquidation procedure does not need to be reported to the liquidator within the frame of the liquidation procedure.

Taking into account the provisions of the Bankruptcy Act, a creditor that took legal action against the debtor is highly advised to report its claim within the frame of a bankruptcy procedure against the debtor (provided that there is a bankruptcy procedure against the debtor). In the absence of such a report, if the bankruptcy procedure against the debtor turned into liquidation, the creditor would practically lose its claims against the debtor. This is because all claims against the debtor must be asserted within the frame of liquidation (if there is an ongoing liquidation) and the creditor may no longer report its claim in this case (see Section 28 (3) of the Bankruptcy Act). It is dubious as to whether the legal action taken by the creditor would then be terminated or allowed to come to an end. If the latter, the creditor would in practice have an unenforceable judgment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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