Hungary has passed an Act that implements EU Directive 2019/1023 on preventive restructuring frameworks, the discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt (amending EU Directive 2017/1132). This new Act was published in Hungary's Official Gazette on 3 June 2021 and will come into force on 1 July 2022.

The Act allows for the restructuring financial liabilities, and also offers protection from enforcement. The statutory framework the legislation creates will provide protection to companies from the moment of insolvency (i.e. when there are grounds for the assumption that without taking further action, the debtor will not be able to comply with its payment obligations when due).

According to the Act, the commencement of restructuring proceedings before the competent court will be obligatory and the debtor must have legal representation. Only the Metropolitan Court of Budapest has competence in these matters, and rulings will be based on a review of documents rather than hearings, such as a classic civil court procedure.

The court, by request and in some limited cases ex officio, will appoint a restructuring expert from the closed list of insolvency practitioners. The expert’s responsibility will be to assist the debtor with preparing, negotiating and approving a restructuring plan with creditors and to monitor the debtor’s business. The restructuring expert cannot impose any restrictions or fine on the debtor, and must notify the court if the debtor breaches the Act in any way.

If approved, the plan binds the debtor and all interested creditors, even if in some cases they vote against the plan. Interested creditors are those whose claims and interests are directly affected. This plan is directly enforceable, which means that it is not necessary to request that the court declare it enforceable in a separate court procedure.

The debtor can also request an enforcement moratorium, which can be either general (i.e. applicable to all creditors) or limited (i.e. applicable to only certain creditors the debtor intends to include). While the general moratorium is public, any information about a limited moratorium can only be shared with the affected creditors. The moratorium is not applicable to any financial collateral. Insolvency would not be declared if the restructuring plan had not been approved during the moratorium. The moratorium can be extended or renewed, but cannot be longer than 12 months in total.

Essential executory contracts cannot be suspended during the moratorium. (This applies to contracts necessary for the continuation of the day-to-day operations of the business, including contracts concerning supplies, which if suspended would bring the debtor's activities to a standstill).

The new pre-insolvency procedure will be closed if no agreement on the restructuring plan is reached within 365 days, if the debtor is not able to produce a restructuring plan after 120 days from the opening of the procedure, or if no class of creditors support the plan.

If the restructuring plan is approved by a simple majority of creditors of each class (i.e. in numbers) and by the court, the dissenting creditors will also be bound to the plan.

The Act provides for the following classifications of creditor claims: secured; relating to business; other; and relating to anyone having the same interest as the debtor. No discrimination can be made between the first three classes.

The approval can be challenged by the dissenting creditors as well as by the equity holder. According to the Directive, however, member states are “not allowed to unreasonably prevent or create obstacles to the implementation of a restructuring plan” by equity holders.

Temporary and new financing during the restructuring process are exempt from challenges on the basis that they may not serve the interests of all creditors (i.e. they may give preference to the financing entity).

The Act introduces a system (i.e. an online platform) to provide companies with early warning of financial difficulties.

The new restructuring framework will operate alongside the current bankruptcy procedure, but questions remain as to what extent this will be possible, especially to prevent the new procedure from being misused.