Hungary has recently provoked criticism and elicited recommendations on account of its unfriendly environment towards investors, with a report issued by the EBRD having significant impact.
Against this backdrop, the Hungarian Ministry of Justice has indicated that it will amend certain laws that are related to the enforcement of claims. With the ultimate goal being to make creditors’ lives easier, near-term changes are likely to be made to such fundamental laws as the country’s Civil Code, the act on court enforcement, and the act on insolvency and bankruptcy proceedings.
Transfer of Loan Agreement
The rules of the Civil Code on the transfer of contractual position have been the target of particularly severe criticism. In its current form, the Civil Code stipulates that the security interest terminates in case of a transfer of contract, regardless of which position is affected by the transfer (i.e., the creditor’s or the debtor’s) and irrespective of whether the security provider has given its consent to the transfer. The proposed amendment foresees that the security interest will not terminate under any circumstances, but rather remain in place. In addition, the security provider’s consent will only be required in the event that the debtor transfers its contractual position. These changes may enhance Hungary’s secondary loan market, as the country’s banks have so far been reluctant to transfer loan portfolios or even a single loan agreement under the current rules, as they feared losing the security interest.
Furthermore, this summer the country’s parliament amended the Hungarian Banking Act so that the Hungarian National Bank’s approval is now required for those loan portfolio transfers that exceed the threshold of either 1) HUF 10 billion (approximately EUR 33 million), regardless of the number of loan contracts to be transferred, or 2) 20 contracts regardless of their aggregate value. Together with the envisaged amendment of the Civil Code, this means that even though the transfer of loan portfolios will be possible and feasible under the Civil Code, those transfers that cross either threshold will be subject to the Hungarian National Bank’s approval.
Resurrection of the Non-Accessory Mortgage
The Hungarian National Bank intends to stimulate the market of mortgage-backed instruments. For many years, these instruments relied on non-accessory mortgages, which were transferable without the transfer of the underlying loan. The Civil Code that entered into force on March 15, 2014, abolished this non-accessory mortgage, which caused a hiccup in the market. For this reason, the envisaged amendments may re-introduce this type of security interest for the sake of mortgage-backed instruments.
New Enforcement Act
Most criticism was aimed at the rights of creditors under the Hungarian courts’ enforcement regime. There are several reform concepts currently floating around, but nobody knows yet which ideas will make it into the new enforcement act. The problem currently is that creditors basically have no influence on the court enforcement procedure. Thus, most recommendations aim at strengthening the powers of creditors. It would be a surprise if some of these were to survive the drafting of the new act (e.g., the proposal that creditors should have right to freely choose among the bailiffs); however, others will probably be implemented (e.g., the provision to secured creditors of more influence over the sale of the debtor’s assets and the entitlement by creditors to receive more detailed information on the debtor’s available assets).
Revision of the Insolvency and Bankruptcy Regime
The legislature also wishes to enhance creditors’ positions in insolvency proceedings and to speed up the bankruptcy procedure. According to the recommendations regarding the latter, creditors should also have the right to initiate bankruptcy proceedings (currently, only debtors may apply for such a proceeding). It is also envisaged that creditors will have the opportunity to comment on a debtor’s reorganization plan or to prepare an alternative plan. Debtors would be obliged to file the reorganization plan simultaneously with their bankruptcy application. A fast-track bankruptcy procedure will be available when a debtor’s reorganization plan receives the approval of the majority of creditors before the initiation of the bankruptcy proceeding.
In liquidation proceedings, secured creditors would be granted more power during the liquidation of the debtor’s assets, in the form of more influence on the sale process or even the ability of secured creditors to proceed with the sale of the encumbered asset by way of self-help. A separate department within the Hungarian court system is to be established to supervise liquidation proceedings.
Conclusion
The currently floated plans and ideas, if implemented, will certainly have a positive impact on the position of creditors in Hungary. However, the question is not whether Hungarian rules should be more favorable towards the creditors, or whether these legislative plans and related ideas will successfully navigate the maze of Hungarian legislation. The real question is whether such ideas will be implemented in a form that is able to fulfill the purpose. The devil is in the details, as the saying goes – and Hungary, unfortunately, is infamous for implementing great ideas in a bad way.
By Kinga Hetenyi, Partner, and Gergely Szaloki, Attorney, Schoenherr Hungary
This Article was originally published in Issue 2.6. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
