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19 June 2020

Hungary: Is a new world coming with the amendment of the Hungarian Insolvency Act?

The Government of Hungary has proposed an amendment to Act XLIX of 1991 on bankruptcy and liquidation proceedings (Insolvency Act) aiming to modernise the procedural rules of insolvency proceedings, for example by introducing communication via email and video conferences.

Technical reliefs

Communication and making legal declarations via email (in compliance with adequate formal requirements) facilitates and speeds up the correspondence between lenders and between lenders and debtors, not only in the current pandemic, but also in general. To communicate via email, the parties must submit their email address to the administrator. Proceedings are modernised further by enabling lenders to hold their meetings by electronic means, where there is no need for the parties to be present together. This leads to big savings of time and money, especially when foreign lenders are involved. The parties must identify themselves in the manner requested by the liquidator. While the technical requirements are broadly defined, it is essential that real-time video and audio communication is ensured during videoconferences.

Promoting settlements

An important practical change is that the debtor cannot amend its reorganisation plan if it is not supported by at least a quarter of the lenders. This rule aims to incentivise debtors to provide lenders with a feasible reorganisation plan and not drag out the procedure. In addition, concluding a settlement in a liquidation proceeding will be easier for lenders since they can vote on the terms of the settlement in writing, unless the debtor specifically asks to hold a settlement meeting.

Reliefs concerning deadlines

In liquidation proceedings, lenders or the liquidator may challenge certain of the debtor's transactions as set forth by the Insolvency Act (such as fraudulent, preferential or undervalued transactions). Pursuant to the current rules, deadlines to challenge these transactions commence only after the lender or the liquidator become aware of such a transaction, but there is an absolute deadline after which the transaction can no longer be challenged. The proposal enables lenders or the liquidator to challenge these transactions after the absolute deadline has elapsed if they only become aware of such a transaction later.

Further relief concerning deadlines is that the duration of the bankruptcy protection under which the debtor has a payment moratorium increases from 120 to 180 days. In addition, the deadline to hold a settlement meeting increases from 60 to 90 days.

Business organisations with strategic importance

In this respect, the amendment brings two important changes. On the one hand, the scope of strategically important business organisations will be broadened to cover water management, public utility management and service providers, public health, transportation, communications, industrial security, research and development, infrastructure development or infrastructure management companies.

On the other hand, in case of the liquidation of strategically important businesses, when selling these companies' assets the Hungarian state has pre-emption right to buy them through its designated organisation. This new rule fits well into the current regulation.

In summary, the changes introduced by the proposal are progressive and will probably facilitate the proceedings for the parties, especially the rules concerning electronic communication.