Under Hungarian insolvency law, creditors secured by mortgages or pledges are entitled to privileged satisfaction of their claim, meaning concretely that they are entitled to receive the whole proceeds reached in the course of the realization of the pledged property after deduction of the (i) cost of keeping the property in good repair and of maintenance, and costs of selling the pledged property; and (ii) the liquidator’s fee up to 5% of the net purchase price.

In the past few years an interpretation dilemma had arisen among Hungarian Courts on whether the taxes and other public charges in connection with a pledged property emerging after the starting date of the liquidation proceedings can be deemed to be part of the “cost of keeping the property in good repair and of maintenance” i.e. as a cost in relation to preserving the property.

Some Courts declared that taxes and other public charges are wider cost categories, and are not closely connected in the sense of being a cost, which aims to secure the physical consistency of the property, therefore these costs cannot be deducted from the proceeds of the sale of a pledged property.

By contrast, other Courts argued that the property-preserving-nature of the costs can be deducted for the reason that these costs are closely connected to the pledged property in a way in which the building-tax is also connected to the pledged property.

This issue now has been resolved by the Hungarian Supreme Court (“Curia”) with a decision ensuring uniformity on this question. The Curia clarified that the term “preservation” covers not only the costs related to secure the physical preservation of the property, but also to the costs which preserve the value and ownership of the property. Therefore, every tax and public charges which emerges after the initiation of the liquidation can be deducted from the purchase price of the pledged property.

Although this decision may in some cases lead to higher deductions from the proceeds, it provideslegal security for secured creditors and last but not least – due to less litigation – the prospect of a faster satisfaction of the secured creditors’ claims.