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There has been a longstanding need in Hungary for a legal instrument to rescue distressed companies. The only legal solution so far for such companies was the unpopular and inflexible bankruptcy procedure, which is also risky for the debtor, as failure will automatically turn into a liquidation proceeding and the company will cease to exist. Bankruptcy, with its formalistic procedures and limited involvement of creditors in the decision-making, has done more harm than good. It also usually stigmatised the debtor. The fact that only a few dozen bankruptcies are launched each year illustrates its unpopularity.
The Hungarian Restructuring Act, which will enter into force in July 2022, appears to provide the legal framework that has been missing. One of the great advantages of restructuring is that the procedure is mostly controlled by the parties and the court has limited competence. This gives the parties a flexible tool to keep the debtor afloat while it negotiates with its most important creditors (or all of them).
"One of the great advantages of restructuring is that the procedure is mostly controlled by the parties and the court has limited competence. This gives the parties a flexible tool to keep the debtor afloat while it negotiates with its most important creditors."
The aim of the restructuring procedure is for the debtor and creditors to agree on a plan to restore the debtor's solvency, ensure the feasibility of its operation, reduce its debts and enable it to meet its obligations. The law does not tie the parties' hands, i.e. they can agree on any solution that they deem beneficial.
To ensure the success of the restructuring, the law gives debtors several tools to improve their position, among them:
Overall, the main advantage of the restructuring procedure over a purely contractual agreement between the parties is that a restructuring plan must be adopted by majority vote. This avoids the all-too-frequent situation where a single stubborn creditor blocks the agreement and consequently the debtor's survival. Compared to the current bankruptcy procedure, it also has the advantage of giving creditors much more decision-making power, not tying the debtor's hands and not automatically turning any unsuccessful negotiation into a liquidation proceeding, formerly a significant risk for debtors. It is therefore expected that the introduction of the restructuring procedure will strengthen the position of companies and their creditors in Hungary, which will have a positive impact on the economy in the long-term.
author: Gergely Szalóki
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