On March 15, 2014, the new Civil Code entered into force as the most important legislation, governing the financial and personal relations of companies and persons. The new code with an increased commercial emphasis incorporates the results of legal developments of the past decades by adapting to the economic needs of our times. The new code takes into account the rules crystallized in the Hungarian trade of property and has regard to European legislation as well. The new act came with several new and completely or substantially reformed legal institutions. The changes concern the activity of enterprises widely, thus familiarization and appropriate preparation by business participants is fundamental. With our newsletters, we would like to provide support for your preparation.
With this newsletter we would like to outline the rules of the new Civil Code, i.e. Act V of 2013 (hereinafter: “New Civil Code”) regarding the collateral security structure of credit facilities and especially to the laws on mortgages, pledges and liens.
- Changes related to the collateral security structure of credit facilities in general
The New Civil Code brought a radical paradigm change by declaring the nullity of fiduciary collaterals. According to the new rules all agreements are null and void which, except for the collaterals set forth in the directive on financial collaterals arrangements, provide for the transfer of (i) the ownership; (ii) other right; or (iii) receivables or the establishment of a call option right for the purposes of securing a claim. This novelty might seem to be fairly drastic in the light of the financing documentary practice; however, as it will probably become transparent, the legislator considered the demands of the financing market participants while shaping the new rules on mortgages, pledges and liens, and it was very keen to integrate the majority of the demands that were causing the evolution of the collateral arrangements falling outside the scope of mortgages, pledges and liens.
- Most significant changes regarding mortgages, pledges and liens
2.1 Establishment of a mortgage, pledge and lien
The Civil Code of 1959 used the “establishment” and “perfection” of a mortgage or pledge as synonyms. The New Civil Code differentiates between these two terms, because the establishment of a mortgage and a pledge is the very first and foremost, but it is not a satisfactory step for the perfection of such mortgages and pledges.
The establishment of the mortgage or the pledge occurs in two step: as a first step a mortgage or pledge agreement must be entered into or securities must be issued embodying the parties will and as a second step either (i) transferring the possession of the asset, or (ii) registration into the relevant registry must occur in order to make the establishment of the mortgage or the pledge for third parties transparent.
The mortgage can be established by registration and the possessory lien by transferring the possession of the asset.
Nevertheless, the mortgage or pledge is deemed to be perfected, if (i) the mortgagor/pledgor and the mortgagee/pledgee duly established the mortgage or the pledge and (ii) the mortgagor/pledgor acquired the disposal right over the asset being the subject of the mortgage or pledge.
As to the structure and terms, the New Civil Code introduces a novelty that no independent types of mortgages and/or pledges are determined, but it reflects the fact from section to section as to whether the asset is in the possession of the mortgagor/pledgor or the mortgagee/pledgee during the establishment and the perfection of the relevant mortgage or pledge.
2.2 Content of a mortgage or pledge agreement
In order to simplify the establishment of a mortgage or pledge to the maximum extent possible the New Civil Code provides for only two mandatory elements: the indication of (i) the secured claim and (ii) the asset being the subject of the mortgage or the pledge.
2.3 Form of a mortgage or pledge agreement
A mortgage or pledge agreement can only be validly entered into in written form, but in addition to this requirement the New Civil Code does not provide for compliance with any further formal requirement. The New Civil Code abolishes the mandatory notarized form of pledges regarding movables. According to the New Civil Code (i) the ancillary nature of mortgages/pledges and (ii) the mandatory content of the mortgages/pledges laid down therein provide for sufficient creditors’ protection.
2.4 Security trustee
One of the most anticipated novelties of the New Civil Code is the introduction of the security (mortgage) trustee which is an instrument primarily used in credit facilities with high amount commitments. Granting such credit facilities/loans are usually possible due to the legal lending limits—if the lenders built a consortium (syndicate) and in their capacities as members of this consortium jointly provide loan facilities to the debtor. Lending in consortium (syndicate lending) is a scheme which provides obvious advantages to both parties. The borrower gets access in one transaction to such a high amount of loan that might not be available from one lender at all, and simultaneous negotiations with more lenders likely would be costly and time-consuming. Diversification of loan portfolios, as a result of this lowering the loan risk, means a high regulatory pressure for the lenders. The consortium (syndicate) provides a valuable instrument to achieve this goal by enabling lenders to participate in big lending projects which they could not arrange on their own. It is an additional characteristic of these loans that the members of the consortium can or regularly do change during the term of the loan due to the assignment transactions (sale and purchase of loan receivables) carried out on the so-called secondary market for credit facilities. The usual goal of the consortium is that any change in the lenders should have an impact on the existing facility documentation, but particularly on the registries including the already registered collaterals to the minimum extent possible.
For these purposes the security trustee is an exquisite instrument who deals with the collaterals in its own name but on behalf of one or more lenders. The security trustee, which is generally a reputable credit institution having significant experience in handling the collaterals, is registered in the relevant registries, exercises the mortgagors/pledgors’ rights and enforces the mortgage/pledge. Subsequent to the enforcement of the mortgage/pledge, it allocates the proceeds derived from such enforcement to the other lenders in accordance with its respective engagement agreement (e.g. Intercreditor Agreement).
2.5 Credit collaterals registry
The pledge registry was set up in 1997 and is maintained by the Hungarian National Chamber of Public Notaries (HNCPN). The pledge registry includes (i) the pledges on movables and (ii) the floating charges. The New Civil Code completely reconsidered this field of law and provides for the basic rules of a so-called credit collaterals registry which aims at the alternation of the pledge registry. The details of the credit collaterals registry are set out in the Act CCXXII of 2013 on the Credit Collaterals Registry, which became effective as of March 15, 2014. The HNCPN runs the credit collaterals registry as the legal successor of the pledge registry. The credit collaterals registry must be construed as an activity for running an electronic data base which does not include any discretionary, control or legal assessment rights during the registration, because it will serve the pure administrative recording of such registrations that result from the electronically certified will of the mortgagors/pledgors and the mortgagees/pledgees aimed at the registration.
In addition to the mortgage established on movables not registered elsewhere, the credit collateral registry will contain (i) the pledges over receivables, (ii) the pledges over rights not being registered elsewhere, (iii) the retention of ownership title; (iv) the financial leasing and (v) the factoring.