Hungary: Will the security interest vanish when the underlying secured obligations are transferred?

26 May 2014 | newsletters

The fact that the new Hungarian Civil Code, which entered into force on 15 March 2014, at last recognized the concept of transfer of contractual position was a welcome development. Previously, a similar effect was achievable through the parallel assumption of debt and assignment of claims, but this solution was problematic in rather complex transactions (e.g. in case a lender wishes to transfer its stake under a credit facility agreement along with all security interests).

Under the new Civil Code, banks are provided with the most obvious solution, as they can simply transfer their contractual positions under a credit facility agreement to the new lender. However, the rules that new Civil Code provides for the transfer of the security interests securing such credit facility agreement are ambiguous.

With regard to the regulation of the security interests, the new Civil Code stipulates that, due to their accessory nature, the security interests are to be transferred to the new lender along with the transferred claim without any further actions (i.e. the security interest transfers automatically). In contrast, with regard to the regulation of the transfer of contractual position, the new Civil Code stipulates that the securities of the contract are terminated with the transfer of the contractual position; should the security provider agree thereto, a new security interest will come into existence at the same rank (and with the same terms) as the original security interest.

How will this apparent contradiction be resolved? One may argue that regulation of the security interest relates only to single claims, not to entire contracts. Thus, if only one single claim is transferred, then the security interest will remain for the benefit of the new lender. Whereas, if an entire contract is transferred, the security interest will remain for the new lender only if the security provider agrees to it. This latter view is supported by the regulation of the assignment: the new Civil Code stipulates that in case of the assignment of a claim, the security interests will continue to secure the assigned claim.

Such interpretation would render the transfer of credit facility agreements among lenders impractical and highly dependent on the security providers. Taking a more market-friendly view, one may argue that the regulation of security interests is mandatory, whereas the rules of transfer of contractual position are of a contractual nature (i.e. the parties may contract otherwise). The weakness of this interpretation that this approach would lead to a solution in which the parties could deprive the security provider of its statutory approval right.

Unfortunately, it may well take several years until Hungarian courts establish interpretative practice on this issue. Until then, lenders may try protecting themselves with various contractual provisions, such as contracting out of the rules on transfer of contractual position or requesting advance approval to the transfer from the security providers, etc.