After more than 50 years, Hungary has a new Civil Code (“New Civil Code”), which will come into force as of 15 March 2014. The civil code revision initiative aimed to give Hungary a modern civil codex that satisfies vital social and economic needs and reflects established norms of a competitive Europe. The New Civil Code will introduce, inter alia, a completely new collateral regime, including the concept of the security agent/trustee (hereinafter together referred to as “security agent”).
This article aims to address one particular achievement that has been long awaited and is very important in syndicated financings, namely the regulation of the role of the security agent. Since the first syndicated loans were concluded under Hungarian law, interpretation of the legal status of the security agent representing the joint and several claims of all secured parties has been a continuous struggle.
The current practice
In cross-border transactions the appointment, rights and obligations of the security agent are all regulated under foreign (typically English) law facility agreements, intercreditor or trust deeds. Given the lack of any specific regulations in the former Civil Code, the correct interpretation of the role of the security agent and the determination of an appropriate method to implement the role of the security agent in Hungarian law security documents has been a perennial question.
One solution was to attach a power of attorney to the Hungarian law security documents, under which the secured parties gave specific authorisation to the security agent to act on their behalf and enforce their joint and several claims in an enforcement of the Hungarian law security interests. The so-called “bizományos” (commission agent) has always been recognised in Hungary, but not in the terms of court proceedings. Therefore, there has always been uncertainty as to whether an agent could represent the joint and several claims of all secured parties and enforce their claims and rights in a potential enforcement proceeding, or whether all secured parties have to participate in such proceedings in order to enforce their claims and rights. To avoid any risk each bank in a syndicate ought to be registered as a beneficiary with the relevant registries, which in many cases has been an onerous, or even impossible task given the high number of lenders.
The other solution which was developed in practice in order to get around the problem of the lack of legal title of the security agent in enforcement proceedings was to include in the foreign law facility agreement a parallel debt covenant for the benefit of the security agent. This method was acceptable in those jurisdictions (e.g. Germany) where the concept of the security agent is not specifically regulated or recognised. In the parallel debt structure the borrower acknowledges that an additional, separate debt exists vis-à-vis the security agent simultaneously or “in parallel” with the debt owed by the borrower to the lenders, i.e. the security agent becomes entitled to claim all of the lenders’ claims arising under the finance documents. When the borrower performs any of its payment obligations to the security agent, that payment reduces the claims of such lender to whom the specific obligation should have been performed. Furthermore, when a payment has been made to a lender, it also reduces the security agent’s claims under the parallel debt. This concept is alien to Hungarian law and there is no precedent where a Hungarian court has confirmed its validity, therefore a certain risk remains as to whether a Hungarian court would understand and accept this method.
It should be noted that the courts of Hungary have never tested either method.
Security agent under the New Civil Code
In the beginning of the codification process, the draft of the New Civil Code only recognised the concept of the “trustee”, whereby the beneficiaries of the security interest could nominate a trustee to hold and manage the security for them; however, the trustee itself could not be named as a beneficiary. This method would not have been satisfactory in syndicated lending and the problems detailed above would have remained. Our firm, amongst others, specifically asked for the introduction of the “security agent” concept during the codification process to put an end to the uncertainty around the role. Fortunately, the need for legislation was recognised and the concept of the security agent has finally been introduced.
The Hungarian “zálogjogosulti bizományos” (“security agent”) basically operates as a “trustee”, acting in its own name, holding, managing and enforcing the security for and on behalf of the changing group of beneficiaries. The appointment must be made in writing either in the security agreement or in a separate document. The security agent must also be registered as such in the relevant charge registries in order for its appointment to be valid against third parties. It is important that the security agent has to separate any receivables arising from the holding, managing or enforcing of the security or otherwise received in respect of or pursuant to the security from its own property. Following this logic, the new legislation states that the lenders of the security agent cannot claim any monies handled separately for the benefit of the beneficiaries of the security from the security agent. The draft amendment of the Enforcement Act addresses the segregation of the assets handled separately by the security agent in its position as security agent so that they cannot be part of the assets of the security agent subject to enforcement during an enforcement proceeding. We expect that the Bankruptcy Act will also be amended to address this issue and implement the concept of “bankruptcy remoteness” in liquidation and bankruptcy proceedings, however the procedural provisions applicable to the enforcement of civil law concepts are still under negotiation.
Introducing the concept of the security agent in Hungary is a much needed and timely development, although it is yet to be seen whether the role of the security agent will, in practice, be largely administrative or more substantial as in Western Europe, where the security agent’s role has evolved greatly.