The Facts

The debtor borrowed significantly from leading domestic investment banks to finance a major construction project. The loan was secured by a pledge established on all of the debtor’s existing and future claims, including rental fees arising from an office building owned by the debtor.

What Happens to Pledges over Receivables when the Pledgor goes into Liquidation?

According to first and second-degree court decisions, one would expect the creditors to be entitled to the receivables arising after the liquidation was initiated (such as future rental fees) because they were – as future claims – duly secured by the pledge.

The Hungarian Supreme Court has a Different View… 

According to a recent decision of the Curia, previous case law (the final, second-degree court decision) was wrong. Although pledges can be established on future claims, this merely means that no further legal action is needed to create the pledge once future claims have arisen. Until that point, there are no receivables to pledge.

On assets which do not exist at the time that the pledge is entered into (e.g. future claims) or exist, but the pledgee does not enjoy the right of disposal over the assets, the pledge is only established when the asset is created (such as receivables), or the pledgee acquires the right of disposal.

Assets subject to liquidation cannot be charged. Monthly rental fees which are due only after the commencement of the liquidation cannot be covered by the pledge. This is so even if the pledge covered all future claims.

Consequently, a pledge on future claims can provide privileged satisfaction for the creditors only when these receivables exist before the start date of the liquidation. Receivables coming into existence after that date are distributed amongst all creditors.