The Hungarian Supreme Court has ruled that in a lawsuit initiated by an insolvent debtor, a creditor’s claim arising after the commencement date of the liquidation cannot be enforced as a set-off claim against the debtor.

Background

Restructuring proceedings in Hungary provide a more flexible solution than bankruptcy and liquidation proceedings and potentially an effective alternative for companies in financial difficulties.

Key benefits

Commencement pre-insolvency

Objective

The new preventive restructuring procedure aims to deal with companies in financial difficulty before serious problems arise. The measures focus on preventing the insolvency of businesses to preserve their viability.

Main characteristics

Although no insolvency law-specific regulatory changes have been introduced in Hungary due to COVID-19, the Hungarian Government has adopted numerous extraordinary measures that may have a profound effect on how companies deal with solvency and liquidity related problems under the new circumstances.

Firstly, although the bankruptcy procedure is to be initiated by the management of the company, the prior approval of the main body of the company (ie the shareholders) is required. Due to the curfew currently in effect, in-person shareholders’ meetings are mostly prohibited.

Following the EU Insolvency Regulation Nr. 2015/848 (the “Regulation”) coming into force, the Hungarian legislator has accordingly amended the Hungarian Insolvency Code (the “Code”) with effect from 28 October 2017.

Summary

As from 1 July 2017, several amendments to the Hungarian Insolvency Code will come into force which will grant some creditors a much better position in their debtors’ insolvency procedures.

Current Legislation

The Facts

The debtor borrowed significantly from leading domestic investment banks to finance a major construction project. The loan was secured by a pledge established on all of the debtor’s existing and future claims, including rental fees arising from an office building owned by the debtor.

What Happens to Pledges over Receivables when the Pledgor goes into Liquidation?

Hungarian insolvency law provides for a right of the liquidator to terminate, with immediate effect, contracts concluded by the debtor, or – in case neither of the parties rendered any services – to rescind the contract. This applies even in cases where contractual provisions or relevant legislation would otherwise prohibit the termination of the given contract.

With the effect of 1 September 2015, Hungary introduces legal provisions on personal insolvency. Such procedure is reserved for private individuals (may they be entrepreneurs or consumers), who have debts between HUF 2 mln (approx. EUR 6,500) and HUF 60 mln (approx.EUR 195,000).

Under Hungarian insolvency law, creditors secured by mortgages or pledges are entitled to privileged satisfaction of their claim, meaning concretely that they are entitled to receive the whole proceeds reached in the course of the realization of the pledged property after deduction of the (i) cost of keeping the property in good repair and of maintenance, and costs of selling the pledged property; and (ii) the liquidator’s fee up to 5% of the net purchase price.