New Hungarian Civil Code and privileged position of pledgees in insolvency proceedings

On 15 March 2014 the new Hungarian Civil Code entered into force entailing major changes both in the law of obligations and property law. In the field of collateral securities the main aim of the legislator was establishing a modernized and balanced pledge regime which makes the existence of fiduciary securities such as option rights and assignments by way of security dispensable.

To reach this goal the creditors’ rights in an out of court realization process of a mortgage (non-possessory pledge established on real estate, chattel, shares, business quotas, rights and claims) were strengthened and the formal requirements were reduced. Further, from now on each pledgee is entitled to initiate an out of court realization (and not only banks as under the old Civil Code).

The new Hungarian Civil Code further introduced a new public register of collateral securities. Each non-possessory pledge which is not subject to registration in a special register (such as e.g. the land register or the company register) must be registered in the new register on collateral securities in order to come into existence.

In order to qualify as a privileged creditor in the course of insolvency proceedings against the debtor, investors have to have their claims secured by possessory or non-possessory pledges.

Nullity of clauses establishing fiduciary securities

As outlined above, Hungarian law enables creditors to establish non-possessory pledges on any kind of property, as long as these pledges are entered into the respective securities register. This also applies to floating charges.

On the other hand, the new Civil Code declares any and all contractual clauses null and void by which the ownership, other rights or claims are transferred for the purpose of security of a pecuniary claim, or by which an option right (right to purchase) is established for the purpose of security of a pecuniary claim. There are several exceptions as e.g. retention of title, financial leasing and improper factoring.

Hence, the Hungarian legislator has completely turned to a system of register-bound non-possessory pledges and prohibited fiduciary securities which had until now been widely used in practice. This is the case because in the opinion of the legislator the creditor receives in the case of fiduciary securities more than what is necessary for securing his claims and reasonable from a legal point of view. Further, the legislator considers fiduciary securities as an undue circumvention of the pledge regime of the Civil Code.

Comment

The good news is that mortgages, pledges, option rights, assignments by way of security or the like which have been established under the former Civil Code are granted grandfather rights by the transitional provisions regarding the entering into force of the new Civil Code.

Therefore, existing contracts do not have to be amended.

Investors should however be aware that since 15 March 2014, any new collateral security may only be established under the new collateral securities regime. In order to avoid nullity of future structures or other undesirable effects (e.g. re-characterisation into another form of security) thorough preparation and advice on transactions are required.