Changes to Hungarian bankruptcy law mean that priority will be given to creditors who pledge property as security or collateral. Minor changes to Hungarian corporate legislation require companies to list specific court registration information on their official correspondence and websites.

Introduction

Recent changes to Hungarian bankruptcy law give priority to creditors who pledge property as security or collateral (section 5, act VI, 2006, effective 1 January 2007, amending the bankruptcy and liquidation proceedings and members’ voluntary dissolution act (XLIX, 1991)).

In response to European Directive 2003/58/EC, minor changes to Hungarian corporate legislation require companies to list specific court registration information on their official correspondence and websites.

Bankruptcy law

Changes

The liquidator may deduct from the proceeds of the sale of the pledged property the:

  • costs of maintaining and protecting the condition of the property; and
  • if the lien was created prior to the date the liquidation began, sale costs and liquidator’s fees.

The balance must be used to satisfy the claims of those to whom the property was pledged as security or collateral (49/D of the amended bankruptcy act).

If there is more than one lien, the liquidator should keep the sequence of satisfaction as regulated in the provisions of lien in the Hungarian civil code (section 256 (1)). In the case of a floating charge, the liquidator must use 50 per cent of the proceeds from the sale of the pledged property, less the costs of sale, to satisfy the claims for which the property was pledged.

The legislator intends to give the same privileged position to creditors without pledges or collateral but who have:

  • a registered right of execution (a court decision which is to be executed and is already registered in a land or other registry); or
  • started the execution process and in the course of execution the movable thing has been seized, but the court decision is not registered.

In both cases, the seizure or registration must have taken place before the liquidation commenced.

The privileged position does not apply where the pledgee is a member, executive officer or employee in a managerial position of the debtor business organisation, or a close relative or spouse of such persons, and if the debtor is a business organisation under majority control.

Objectives and consequences

The legislator’s aim was to bring the creditors of claims for which property was pledged into an expressly prioritised position to enable enterprises to raise credit on more favourable terms. It is hoped that creditors will now feel secure enough to grant credit at lower levels of pledge collateral relying on the new provisions, providing that the value of the property pledged as security or collateral of repayment of a loan will also be used to cover repayment of a loan in the event of liquidation.

These changes should also supplant the collateral constructions pervading the credit regime practice, of amendments made to Directive 68/151/EEC regarding technical developments. According to this directive the statement of the compulsory particulars set out in article 4 of Directive 68/151/EEC should be included in all company letters and order forms, whether they in paper form or other medium, such as email.Moreover it is also appropriate to require that these statements be placed on any company website.Member states had until 31 December 2006 to bring in to force the laws, regulations and administrative provisions necessary for them to comply with the Directive.constructions like lien cum rights, security assignment, and assignment of title as security (purchase and sale cum right of repurchase).

The lien creditors’ favourable position diminishes the chances of other creditors recovering their claims. This carries a number of messages to creditors. On the one hand, they must re-evaluate their collateral practice and reconsider the advantages and disadvantages in atypical collaterals (eg assignment of title as collateral) as against liens, since courts don’t always recognise the validity of atypical collaterals. On the other hand, the contracting practice of creditors with no right of pledge must also be re-evaluated and they must explore ways of improving their position against the potential lien creditors in case a debtor goes into liquidation. This may shift focus on to new forms of collateral as well as the need to take further steps to minimise damages arising from the liquidation of debtors.

Corporate law

Company registration

Revised legislation on public company information, court registration proceedings and voluntary dissolution (section 63(2) act V 2006) stipulates that private limited liability and limited companies must indicate the name of the relevant court of registry, the company’s name and registered office, registration number and any reference to the liquidation or dissolution of the company, on all printed or written forms of official correspondence, including electronic mail and the company’s official website. Evidence of the company’s subscribed capital is optional; however, if listed it must specify the amount of subscribed capital recorded in the companies register and the amount actually paid up.

While this legislation applies only to companies’ official correspondence and websites, it does not define ‘official correspondence’ and ‘official website’.

Non-performance penalties

If a company fails to comply, judicial oversight proceedings may be initiated. If initiated, the competent court of registry will notify the company affected, informing it of the potential legal consequences, and requiring it to restore lawful operations within the time limit prescribed in the ruling, and to notify the court of registry accordingly.

The court of registry may also impose, among other measures, a fine of between HUF100,000 and 10m, payable by the company, or by the executive officer if he is responsible for the judicial review.

European disclosure requirements directive

The European Parliament and the Council have adopted Directive 2003/58/EC of 15 July 2003 (Directive) amending Council Directive 68/151/EEC regarding disclosure requirements for certain types of companies. Specific rules regarding companies’ communications must be changed because of amendments made to Directive 68/151/EEC regarding technical developments. According to this directive the statement of the compulsory particulars set out in article 4 of Directive 68/151/EEC should be included in all company letters and order forms, whether they in paper form or other medium, such as email.Moreover it is also appropriate to require that these statements be placed on any company website.Member states had until 31 December 2006 to bring in to force the laws, regulations and administrative provisions necessary for them to comply with the Directive.