Insolvency 2024 Comparisons

Hungarian Insolvency Act

The main piece of Hungarian insolvency legislation is the Hungarian Insolvency Act (Act XLIX of 1991) which regulates the two traditional types of proceedings:

• bankruptcy proceedings; and
• insolvent liquidation proceedings.

Restructuring Act

The Restructuring Act (Act LXIV of 2021) was adopted to implement the EU Directive on restructuring and insolvency (Directive (EU) 2019/1023 of the European Parliament and of the Council on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132). The “preventive restructuring” (szerkezetátalakítás) procedure was introduced by Act LXIV of 2021 and was designed to help businesses in financial distress avoid formal insolvency.

Other Proceedings

As a response to the negative effects of the COVID-19 pandemic on the Hungarian market, in April 2021 a new procedure (reorganisation proceeding) was introduced by the Hungarian government and later confirmed and extended by the Hungarian Parliament with the aim of supporting Hungarian businesses. A reorganisation may be initiated in an impending insolvency and is in many aspects very similar to bankruptcy (although it is perhaps somewhat more flexible).

Since reorganisation has not gained traction and as of the date of preparing this guide businesses are only allowed to file for opening such proceedings until 31 December 2024, we will only discuss this regime in brief.

The following insolvency proceedings are available under Hungarian law.

• Bankruptcy proceedings (csődeljárás), a voluntary reorganisation-type of proceedings.
• Insolvent liquidation proceedings (felszámolási eljárás), which can be commenced by both the debtor and its creditors or in certain cases ex officio.
• Preventive restructuring (szerkezetátalakítás), a preventive voluntary reorganisation-type of proceedings based on EU law.
• Reorganisation (reorganizáció), another voluntary proceeding that was introduced as a temporary response to the COVID-19 pandemic (as at the date of preparing this guide, debtors may only submit a petition to open proceedings until 31 December 2024).

Types of Statutory Officers

The following types of statutory officers may be appointed in various pre-insolvency and insolvency proceedings.

• In a reorganisation: reorganisation practitioner (reorganizációs szakértő).
• In a preventive restructuring (szerkezetátalakítás): restructuring practitioner (szerkezetátalakítási szakértő).
• In bankruptcy: bankruptcy trustee (vagyonfelügyelő).
• In insolvent liquidation: temporary liquidator (ideiglenes vagyonfelügyelő), liquidator (felszámoló) or special liquidator (rendkívüli vagyonfelügyelő), as the case may be.

Selection of Officers

Statutory officers are generally selected or appointed from a register of authorised insolvency professionals. In bankruptcy and insolvent liquidations (with the below exception), the court appoints the officer by random selection.

In a reorganisation (and in certain cases in insolvent liquidations), only the state-owned liquidator designated by applicable law may act as statutory officer.

In a preventive restructuring (szerkezetátalakítás), the debtor and/or the creditors are entitled to propose the statutory officer. However, in cases where the court appoints the officer ex officio, selection is done via the method set out in the applicable law.

Statutory officers can and are replaced in cases where eg, the incumbent officer should have originally been disqualified (eg, for conflict of interest reasons) or if the officer seriously or regularly breaches its duties under the applicable laws.

Rights and Responsibilities of Officers

The powers of the bankruptcy trustee considerably limit those of the management of the debtor. In particular, the approval of the trustee is required for any payment to be made by the debtor and for any new legal undertaking. In certain cases the court may grant a joint right of representation and a joint right of disposal over bank accounts.

In the case of liquidation, the liquidator represents the full spectrum of claimants of the insolvent debtor. The sale of assets is generally organised by the liquidator as well by way of a public tender or public auction.

Liquidators and creditors have a right to challenge certain historical transactions during hardening periods (see 8.1 Circumstances for Setting Aside a Transaction or Transfer). As a result, in most circumstances, liquidation of such assets will be performed by the liquidator.

Under Hungarian law, the secured assets remain part of the insolvency estate of an insolvent company.

In preventive restructurings (szerkezetátalakítás), the existing management continues to manage the debtor and the task of the restructuring practitioner is to facilitate the preparation, negotiation and approval of the restructuring plan. At the request of the debtor or the creditors, the court may vest the restructuring practitioner with oversight powers. In this case the practitioner closely monitors the management and his approval is required for any disposal of the assets of the debtor and any new undertakings (other than interim or new financings).

Creditors are assigned to various classes in liquidation, bankruptcy and preventive restructuring (szerkezetátalakítás) proceedings depending on, as the case may be, the type of claim they have or whether they are secured or not. Secured and unsecured creditors are usually treated separately in terms of key decision-making, and the approval of a certain proportion of both groups is required for a successful composition.

Creditors are put into separate classes (voting separately) in both bankruptcy and preventive restructuring (szerkezetátalakítás) proceedings as follows.

• In case of bankruptcy: secured and unsecured creditors.
• In case of preventive restructuring (szerkezetátalakítás):
1. secured creditors;
2. business-related creditors (ie, creditors that are supplying goods and/or services that are essential for the business of the debtor or the preventive restructuring (szerkezetátalakítás) and unsecured interim or new financing creditors);
3. subordinated creditors (eg, creditors that are affiliated with the debtor or whose claims are arising from gratuitous transactions); and
4. other creditors.

Secured creditors enjoy preferential ranking in insolvent liquidation (see 4.6 The Position of Shareholders and Creditors in Restructuring, Rehabilitation and Reorganisation and 5.4 The Position of Shareholders and Creditors in Liquidation).

There are priority claims in insolvent liquidation proceedings. These include the costs and fees arising in connection with the liquidation, employees’ salaries and similar payments, maintenance allowances and similar payments; damages and similar payments; taxes and similar payments and other public debt have priority in respect of the proceeds of liquidation over secured and unsecured claims.

In the context of bankruptcy, reorganisation and preventive restructuring (szerkezetátalakítás) proceedings, claims are generally subject to statutory moratorium. However, there are certain privileged claims that are exempt from the effects of the moratorium, eg, in certain cases claims arising from the supply of goods and/or services necessary for the continuation of the business (to the extent the purchase of the same was approved by the insolvency practitioner), certain taxes and other public debt.

Where a bankruptcy, reorganisation or preventive restructuring (szerkezetátalakítás) successfully ends in the conclusion of a relevant composition, there is no requirement that such arrangement reflects the priority of claims that would otherwise prevail in an insolvent liquidation. The relevant stakeholders are generally free to agree on the implementation of the reorganisation or restructuring.

Creditors may secure their claims by various forms of security interests. They may establish pledges, mortgages, liens or deposits or they may secure their assets by way of security assignment or call option for collateral purposes, etc.

Pledges may be enforced, subject to the applicable laws and subject to the terms of the underlying agreements, by way of:

• court enforcement proceedings;
• simplified court enforcement procedure;
• sale of the relevant asset either by way of public or private sale;
• acquisition of the relevant asset; or
• in any other way provided in the underlying agreements.

Security deposits over cash or securities may be directly enforced by secured creditors within a limited time period. Direct enforceability means that the cash or securities over which deposits were established may be acquired by the creditor to the extent of the secured claim.

In the case of a call option, the creditor acquires ownership of the secured asset by unilateral declaration.

In the case of a security assignment, the creditor (to whom the claim is assigned) acquires ownership by the performance of the debtor subject to the relevant Hungarian law.

Unsecured creditors have certain rights and remedies to collect their claims outside the context of formal restructuring or insolvency proceedings. These include sending payment notices, setting off claims or retaining title to goods (if this is permitted under the underlying agreements).

The creditors may initiate a simplified order for payment procedure for claims under HUF3 million (approximately EUR8,000) through a notary. If the debtor does not contest the payment order, it becomes enforceable. The rights and remedies available to unsecured creditors mostly depend on the provisions of the underlying agreements.

Lenders generally tend to be open to out-of-court restructurings, which are viewed as more efficient alternatives to formal insolvency proceedings (with a potentially much higher overall recovery rate for creditors) in Hungary. However, in the absence of statutory incentives and laws or other mandatory provisions governing these processes, established market practice only exists to a limited extent.

The willingness of institutional lenders to enter into out-of-court restructurings is enhanced by the fact that the Hungarian National Bank (HNB) published a recommendation in 2017 on the negotiated restructuring process of claims against co-financed corporate borrowers, which is addressed to credit institutions, investment firms and insurers. The recommendation is not mandatory and there is a perception among market players that it does not work particularly well in practice.

The recommendation gives guidance and a general framework for the process of negotiated restructuring, the success of which can help to avoid generally lengthy and costly judicial enforcement and insolvency proceedings. Providing a framework, the recommendation primarily aims to draw up broad principles of negotiation.

However, compliance with these principles during the restructuring process takes place in various specific ways, taking into account all the circumstances of the particular case, the proposals of the advisors and the information obtained in the course of due diligence.

Under the framework, one key good practice is that if the borrower notifies a lender about its payment difficulties, that lender will inform the other institutional lenders and, to the extent necessary, set up a restructuring panel. The primary objective of a restructuring panel is to ensure efficient information sharing among the institutional lenders and between institutional lenders and the co-financed corporate borrower; to co-ordinate the activity of the institutional lenders and their communication with the borrower; to provide a platform for dispute resolution; and, if applicable, to give instructions to and co-ordinate the joint advisors of the institutional lenders.

The recommendation suggests the application of a de facto moratorium as a temporary behaviour, during which the institutional lenders providing co-financing that fall within the scope of the recommendation refrain from initiating legal debt adjustment proceedings against the co-financed corporate borrower or taking any steps to enforce any claim or collateral provided in favour of such lenders. The recommendation expects that the de facto moratorium lasts for the shortest possible time.

The purpose of a moratorium is to encourage co-operation between the institutional lenders and the corporate debtors and to allow the institutional lenders to assess the financial situation of the debtor. In addition to setting out the general principles of a de facto moratorium, the recommendation provides guidelines for agreements between the institutional lenders and the corporate debtors on individually negotiated moratoria.

Due to the informal nature of out-of-court restructuring processes, the consent of all affected stakeholders is required. It is not common in local transactions, but in complex cross-border financings underlying credit agreements sometimes contain terms permitting a majority or supermajority of lenders to bind dissenting lenders to changed credit agreement terms.

No regulated out-of-court restructuring proceeding is available in Hungary. The Hungarian National Bank published a recommendation on the negotiated restructuring process of claims against co-financed corporate borrowers, but this is not mandatory (see 3.1 Out-of-Court Restructuring Process).

The two main types of formal proceedings aimed at recovering a financially distressed debtor by way of attempting to draw up a reorganisation plan and reach an agreement with its creditors are bankruptcy proceedings (csődeljárás), and preventive restructuring (szerkezetátalakítás). Standalone reorganisation proceedings (reorganizáció), which are in many ways very similar to bankruptcy, are also available for a limited time (see 1.2 Types of Insolvency).

These proceedings may be initiated by a creditor or by the debtor itself, with the approval of its shareholders.

In principle, bankruptcy proceedings may be commenced by a debtor that is unable or is expected to be unable to meet its financial obligations as they fall due. In case of a bankruptcy, creditors of the debtors must report their claims to be eligible to participate.

A preventive restructuring (szerkezetátalakítás) may only be opened in case insolvency is probable, ie, a situation where there are reasonable grounds for believing that the company will, in the absence of taking any measures, not be able to meet its financial obligations as they fall due. The scope of restructurings may, at the discretion of the debtor, be limited to certain creditors.

A reorganisation may only be opened in a situation of impending insolvency, which means the time when the directors of the company are aware (or should be aware) of the fact that the company will not be able to meet its financial obligations as they fall due.

The Aim of These Proceedings

The ultimate aim of these proceedings is to draw up a reorganisation or restructuring plan (including a composition) that is agreed to by the relevant creditors and approved by the competent court (see 4.3 The End of the Restructuring, Rehabilitation and Reorganisation Procedure). According to court practice, a composition in a bankruptcy must contemplate and provide the appropriate conditions for the continuation of the business of the debtor, ie, courts do not approve the composition if its real aim is to provide recovery for the creditors outside of an insolvent liquidation, without a real intention to continue the debtor’s business. It is likely that courts will apply the same doctrine to restructurings as well.

Creditors

Creditors are put into separate classes (voting separately) in both bankruptcy and preventive restructuring (szerkezetátalakítás) proceedings (see 4.6 The Position of Shareholders and Creditors in Restructuring, Rehabilitation and Reorganisation).

Claims of dissenting creditors or a dissenting class of creditors can be modified without the consent of such creditors, provided that the required majority of creditors voted in the affirmative and the reorganisation or restructuring plan otherwise complies with statutory requirements.

The required majority is available if:

• in bankruptcy proceedings, the majority of eligible votes in both the secured and unsecured creditor class was cast in the affirmative, provided that dissenting creditors are not subject to terms less favourable than those applicable to consenting creditors in the same class or to creditors that are affiliates of the debtor; and
• in preventive restructuring (szerkezetátalakítás) proceedings, either:
1. the majority of creditors in the majority of creditor classes (including the secured creditor class and/or the business-related creditor class) voted in the affirmative; or
2. the majority of creditors (also representing the majority of votes within the relevant class) in at least one of the creditor classes voted in the affirmative, provided that affected creditors in such class could reasonably be expected to receive proceeds in case of an insolvent liquidation of the debtor. In each case, the restructuring plan must ensure that dissenting creditors enjoy:
1. the same treatment in terms of recovery rate and other aspects as consenting creditors in the same class; and
2. more favourable treatment than creditors in the subordinated class.

Registration of Claims

In both bankruptcy and preventive restructuring (szerkezetátalakítás) proceedings, claims of creditors will be valued and registered. Objections may be filed by the respective creditors against the assessment, but ultimately these are not binding if the stakeholders fail to agree on a composition.

New Money

The rules on bankruptcy generally do not contemplate the injection of new money, but in principle it is possible to arrange (including the granting of new security) to the extent approved by the bankruptcy trustee and the majority of the relevant creditors.

The framework of preventive restructuring (szerkezetátalakítás) encourages stakeholders to procure interim and/or new financing by granting certain special procedural protections under some conditions. In particular, the right to challenge such financing in subsequent insolvency proceedings is widely excluded.

In case a bankruptcy, reorganisation or preventive restructuring (szerkezetátalakítás) successfully ends in the conclusion of a relevant composition, there is no requirement that such arrangement reflects the priority of claims that would otherwise prevail in the case of an insolvent liquidation. The relevant stakeholders are generally free to agree on the implementation of the reorganisation or restructuring.

In terms of preventive restructuring (szerkezetátalakítás), the restructuring plan will be approved by a majority of the creditors and will be approved by the court if it meets all legal requirements. In this case, the majority of the creditors means:

• the majority of creditors in the majority of creditor classes; and
• the majority of the creditors within the classes in relation to the total number of votes that can be obtained.

However, upon the debtor’s or the relevant creditor’s request (with the approval of the debtor), the court may approve the restructuring plan with compulsory composition effect for all classes.

In bankruptcy proceedings, the composition is accepted if the majority of both secured and unsecured creditors vote in favour. The accepted composition also extends to those creditors eligible to participate in the settlement who did not agree to it or, despite being properly notified, did not take part in the settlement process.

If the competent court approves the composition the bankruptcy proceeding is ended. Otherwise, if the composition was not settled or does not comply with legal requirements, the court terminates the bankruptcy proceedings and determines the insolvency of the company ex officio (see 5.1 The Different Types of Liquidation Procedure).

Generally, the aim of bankruptcy and preventive restructuring (szerkezetátalakítás) proceedings is to preserve (or increase, if possible) the assets of the debtor by way of continuing its business while negotiations with creditors are ongoing and a composition is agreed. An automatic moratorium applies to all creditors’ claims (with limited exceptions) in case of bankruptcy.

On the other hand, in the course of a preventive restructuring (szerkezetátalakítás), a moratorium (which can be general or limited to certain creditors) is only ordered by the court at the request of the debtor. The purpose of the moratorium in each case is to facilitate the continuation of the business of the debtor while negotiations with the creditors are in progress.

Reorganisation and preventive restructuring (szerkezetátalakítás) proceedings relate to the underlying debtor exclusively and may not be utilised to reorganise a corporate group on a combined basis. Having said that, it is possible for affiliates of the debtor to join the plan (more informally in the case of bankruptcy and formally in the case of a restructuring), but in practice this can only manifest in the undertaking of additional security or other obligations in favour of the agreed composition.

In case of a bankruptcy, a bankruptcy trustee will automatically be appointed by the court. The powers of the bankruptcy trustee considerably limit those of the management of the debtor. In particular, the approval of the trustee is required for any payments to be made by the debtor and any new undertakings. In certain cases the court may grant a joint right of representation and a joint right of disposal over bank accounts. The bankruptcy trustee is also required, among others, to send reports on the activities and the financial situation of the debtor and to inform the creditors’ committee or creditors’ agent (see 4.6 The Position of Shareholders and Creditors in Restructuring, Rehabilitation and Reorganisation) on any historical suspect transactions.

In a preventive restructuring (szerkezetátalakítás), the involvement of a statutory officer (restructuring practitioner) is not a must. However, in certain cases, one is appointed by the court ex officio. The existing management continues to manage the debtor and the task of the restructuring practitioner is to facilitate the preparation, negotiation and approval of the restructuring plan.

At the request of the debtor or the creditors, the court may vest the restructuring practitioner with oversight powers. In such cases, the practitioner closely monitors the management and must approve any disposal of the assets of the debtor and any new undertakings (other than interim or new financings).

Reorganisation and restructuring plans are required to be countersigned by the relevant statutory officeholder (in a preventive restructuring (szerkezetátalakítás), to the extent one was appointed) and approved by the competent court.

Creditors’ Classes

Creditors are put into separate classes (voting separately) in both bankruptcy and preventive restructuring (szerkezetátalakítás) proceedings as follows.

• In case of bankruptcy: secured and unsecured creditors.
• In case of preventive restructuring (szerkezetátalakítás):
1. secured creditors;
2. business-related creditors (ie, creditors that are supplying goods and/or services that are essential for the business of the debtor or the restructuring and unsecured interim or new financing creditors);
3. subordinated creditors (eg, creditors that are affiliated with the debtor or whose claims are arising from gratuitous transactions); and
4. other creditors.

Unsecured creditors have the right to certain information and participation rights in the course of restructuring and insolvency proceedings. In addition, they may file appeals against the competent court’s orders (where applicable law allows) as well as requests for disqualifying the relevant practitioner.

Representation of the Creditors

In bankruptcy proceedings creditors may form a creditors’ committee provided that the members of the committee represent:

• at least one-third of creditors; and
• hold debt respectively at least 50% of the claims against the company.

The committee makes its decisions with majority votes. Alternatively, creditors may decide to elect a creditors’ agent who has the functions and powers of the committee. The creditors’ committee or creditors’ agent represents the relevant creditors in front of the court and in communication with the insolvency practitioner and has the right to certain information.

In the context of bankruptcy proceedings (which are generally controlled by the bankruptcy trustee or liquidator), all creditors are entitled to file objections against the individual actions taken by the relevant insolvency practitioner. Under certain circumstances, the competent court may order a stay on the enforcement of the relevant action and therefore frivolous and/or vexatious objections may temporarily frustrate the proceedings.

However, individual creditors (whether they be secured or unsecured) are not able to disrupt the overall proceedings.

Creditors’ rights in a preventive restructuring (szerkezetátalakítás) are less formalised (in particular in terms of organisation), but overall can have more control over key decisions during the process and, similarly to a bankruptcy, have approval rights in respect of certain transactions of the debtor, as well as challenge rights in respect of certain court orders.

In bankruptcy proceedings, preventive restructurings (szerkezetátalakítás) and reorganisations, the relevant bankruptcy/restructuring/reorganisation plan cannot be approved without the consent of a certain proportion of secured creditors. In addition, creditors providing interim and/or new financing in a restructuring enjoy certain special procedural protections under some conditions (in particular, the right to challenge such financing in subsequent insolvency proceedings is widely excluded).

Unsecured Trade Creditors

Trade creditors are generally treated in the same way as any other (secured or unsecured, as the case may be) creditor. However, where the continuing provision of certain goods and services is crucial for the continuation of the business of the debtor, certain special rules and exceptions may apply to trade creditors.

In particular:

• in a bankruptcy or reorganisation, the statutory moratorium does not apply to claims arising from the supply of goods and/or services necessary for the continuation of the business, to the extent the purchase of the same was approved by the insolvency practitioner; and
• in a bankruptcy, preventive restructuring (szerkezetátalakítás) or reorganisation, the relevant creditors may not trigger certain clauses in contracts concluded with the debtor.

Trading of Claims

Trading of claims against the debtor is generally permissible under Hungarian law.

Rights of Set-Off

Creditors can exercise set-off and netting rights with certain limitations. In particular, set-off is generally not permissible during the period of a moratorium.

The aim of an insolvent liquidation proceeding is the winding up of a company by way of collecting its receivables, disposing of its assets and distributing the proceeds to satisfy the claims of registered creditors in accordance with a statutory order of claims.

Insolvent liquidation proceedings may be initiated by:

• any creditor (creditors may file a claim requesting the competent court to declare the debtor “insolvent” in case it failed to pay its debt);
• the debtor itself;
• a liquidator (végelszámoló) appointed to a solvent company is required to file for insolvent liquidation in certain cases (to the extent the assets are less than the liabilities of the company); and
• competent courts are required to commence the insolvent liquidation ex officio in certain cases (eg, in the case of an unsuccessful bankruptcy proceeding).

If the insolvency proceeding commences upon request (ie, not ex officio), the court examines the solvency of the debtor first. In general, insolvency is defined as the inability or unwillingness to pay debts, eg, the company fails:

• to comply with its contractual payment obligations within the applicable deadline, such obligations were not challenged or they were explicitly acknowledged by the company and the company did not pay its debts following the appropriate payment notice of the creditor;
• to pay its debts based on a final and binding court order (or composition concluded in eg, a bankruptcy proceedings) within the applicable deadline; or
• a court enforcement procedure against it was unsuccessful.

Registration of Claims

A liquidation proceeding is generally commenced when the debtor is declared to be insolvent. After the debtor is found insolvent, the court orders the liquidation proceeding, appoints a liquidator and publishes its order in the Company Gazette (Cégközlöny).

Creditors must register their claims with the liquidator to be eligible to seek recovery and to avoid cessation of their claims (see 5.4 The Position of Shareholders and Creditors in Liquidation).

Termination of Business Activity

As a general rule as of the date of the opening of the liquidation, the business activity of the debtor ceases. In exceptional cases, the liquidator may decide to continue the business if the continuation of the business is beneficial for the preservation of the assets of the company.

Sale of Assets

The liquidator must try to collect debts owed to the insolvent company and sell its assets at the highest price possible on the relevant market. The sale of assets is generally organised by the liquidator by way of a public tender or public auction. Creditors have consultation rights and may make observations on certain aspects (eg, the timing on when the liquidator should stop the business of the debtor and start selling its assets, or regarding the accuracy of valuation reports obtained by the liquidator).

Affiliate companies, directors and other related persons and entities may not participate in bidding. Creditors can submit bids but no set-off may be effected to discharge the purchase price.

The proceeds must then be distributed among the creditors in accordance with a specific order set out in the relevant legislation and after the fees and costs of the liquidator are reimbursed from the proceeds.

The liquidation will conclude either with or without the striking of the debtor from the company registry.

Conclusion Without the Deletion of the Debtor

Liquidation may be terminated this way if:

• the debtor satisfies all creditors’ claims; or
• the debtor manages to conclude a settlement with its creditors.

A settlement may be reached if:

• approved by at least 50% of the unsecured creditors, provided that the claims of these creditors make up more than half of the total claims of those entitled to conclude the settlement; and
• the conclusion of the agreement is also supported by two-thirds of the secured creditors.

Conclusion With the Deletion of the Debtor

In the event of the completion of the sale of all assets of the debtor, the liquidator distributes the income between the creditors. As a main rule, income from the sale of a secured asset should be distributed to the creditor who has security over the relevant assets. All other income (if not enough to satisfy all creditors) should be settled in accordance with a waterfall payment mechanism as described in the relevant legislation.

Member of the Debtor

Directors of a Hungarian company are not under an obligation (and are not entitled without the prior approval of the shareholders) to commence insolvency proceedings against the company even in financially distressed situations. However, in certain cases prescribed by law that indicate financial difficulties, it is the duty of the directors to inform the shareholders and convene a shareholders’ meeting so that the necessary steps can be taken.

These potential steps include:

• the making of supplementary contributions by the shareholders to cover losses;
• any other steps ensuring that the amount of equity capital reaches the amount of registered capital; or
• reduction of the registered capital.

If, for any reason, shareholders do not take such steps, they are required to resolve the company’s transformation, merger, division or dissolution without succession.

Where the shareholders of the company resolve to open a solvent liquidation and the liquidator finds that the assets of the company are not sufficient to cover its debts, the liquidator will, to the extent the shareholders fail to pay an additional amount that covers the debts within 30 days, be required to file for insolvent liquidation without delay. Failure to do so may result in civil law liability.

Creditors

Creditors must register their claims with the liquidator to be eligible to seek recovery and to avoid loss of their claims. In the process of enforcement of lawful claims the liquidator represents the full spectrum of claimants of the insolvent debtor which, in certain cases, may result in a conflict between the interests of the liquidator and the creditors.

Under Hungarian law, liquidators and creditors have a right to challenge certain historical transactions during hardening periods (see 8.1 Circumstances for Setting Aside a Transaction or Transfer). The secured assets remain part of the insolvency estate of an insolvent company. As a result, in most circumstances, liquidation of such assets will be performed by the liquidator. Set-off rights are limited.

Creditors may form a creditors’ committee if at least one-third of all creditors that registered their claims within the applicable deadline holding at least one-third of eligible creditor votes joins it. The committee makes its decisions by majority votes. Alternatively, creditors may decide to elect a creditors’ agent who has the functions and powers of the committee.

The creditors’ committee or creditors’ agent represents the relevant creditors before the court and in communication with the insolvency practitioner and has the right to obtain certain information. The liquidator is required, among other things, to send quarterly reports on its activities; the financial situation of the debtor; and the costs of liquidation.

The approval of the committee or agent is required for the extended continuation of the debtor’s business. The committee or agent has consultation rights in respect of the timing of the sale of assets and may make observations regarding the valuation report and the accounts to be prepared by the liquidator in the course of the proceeding.

In an insolvent liquidation, secured creditors generally enjoy preferential ranking in the order in which the claims of creditors are satisfied from the proceeds of the liquidation. However, certain claims (eg, costs and fees arising in connection with the liquidation, employees’ salaries and similar payments) rank ahead of secured creditors (see 5.3 The End of the Liquidation Procedure(s)).

Enforcement

In an insolvent liquidation, all claims and security may only be collected and enforced within the rules of that proceeding (which is highly regulated and generally controlled by the liquidator), with the exception of security deposits over cash or securities taken prior to the opening of the liquidation, which may be seized by secured creditors within a limited time period (see 2.3 Secured Creditors).

As an EU member state, the EU Insolvency Regulation (Regulation (EU) 2015/848 of the European Parliament and of the Council on insolvency proceedings) directly applies in Hungary. In the context of non-EU member states, domestic Hungarian conflict laws apply.

The criteria to determine which country has jurisdiction to open an insolvency procedure are primarily based on the debtor’s centre of main interests (COMI). See 6.4 Recognition and Enforceability.

The EU Insolvency Regulation and the Hungarian Act on Conflicts Law (Act XXVIII of 2017) contain the relevant criteria to be used to determine which domestic law applies to restructuring and insolvency related matters.

Recognition Regarding Debtors Domiciled in an EU Member State

For debtors located within an EU member state, main and secondary insolvency proceedings (to the extent those are of a type listed in the Insolvency Regulation) are automatically recognised if:

• the courts of the member state in which the COMI is situated have jurisdiction to open the main insolvency proceedings; and
• the courts of another member state have jurisdiction to open secondary insolvency proceedings against the same debtor but only if it possesses an establishment within the territory of that other member state. Hungarian courts may only refuse to recognise such foreign insolvency proceedings if the effects of such recognition or enforcement would be manifestly contrary to public policy, in particular the fundamental principles or the constitutional rights and liberties of the individual in Hungary.

Recognition Regarding Debtors Domiciled in a Third Country

For debtors whose registered seat is outside Hungary, have no permanent establishment in Hungary and whose COMI is not otherwise in any of the EU member states, foreign insolvency proceedings may be recognised in Hungary to the extent that there exists reciprocity between Hungary and the relevant jurisdiction and the underlying proceedings is not contrary to public policy and was ordered in a manner that complies with certain procedural guarantees (eg, the relevant foreign court had jurisdiction; the underlying judgment or order is final; the principle of res judicata was not violated; the underlying judgment or order was given in default of appearance and the defendant was not served with the document which instituted the proceedings or with an equivalent document in sufficient time and in such a way as to enable him to arrange for his defence).

The recognition of a foreign main proceeding does not preclude Hungarian courts from ordering a secondary insolvency proceeding. If a secondary insolvency proceeding is commenced, the judgment or order that instituted the main proceedings will not have the same legal effects in Hungary as it would in its jurisdiction of origin.

The absence of detailed rules in this area means it is unfortunately unclear what this means in practice and what actual effects such judgment or order would have in Hungary.

Recognition and Enforcement of an EU Judgment

As per applicable EU laws, judgments handed down that concern the course and closure of insolvency proceedings duly opened in another member state, as well as compositions approved are recognised in Hungary with no further formalities. Recognition and enforcement may only be refused where the effects of such recognition or enforcement would be manifestly contrary to public policy, in particular the fundamental principles or the constitutional rights and liberties of the individual in Hungary.

Other types of judgements rendered in the context of recognised insolvency proceedings are generally recognised and enforced without any special procedure being required in accordance with the Brussels I Regulation (Regulation (EU) No 1215/2012 of the European Parliament and of the Council on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters).

This Regulation offers a wider range of grounds for non-recognition.

• If such recognition is manifestly contrary to public policy in Hungary.
• Where the judgment was given in default of appearance, if the defendant was not served with the document which instituted the proceedings or with an equivalent document in sufficient time and in such a way as to enable him to arrange for his defence, unless the defendant failed to commence proceedings to challenge the judgment when it was possible for him to do so.
• If the judgment is irreconcilable with a judgment given between the same parties in Hungary.
• If the judgment is irreconcilable with an earlier judgment given in another EU member state or in a third country involving the same cause of action and between the same parties, provided that the earlier judgment fulfils the conditions necessary for its recognition in Hungary.
• If the judgment conflicts with the provisions of the Brussels I Regulation dealing with jurisdiction in matters relating to insurance, jurisdiction over consumer contracts, jurisdiction over individual contracts of employment or exclusive jurisdiction.

Recognition and Enforcement of a Judgment Rendered in a Third Country

Judgments rendered in the context of insolvency proceedings in a jurisdiction that is not an EU member state can only be recognised and enforced in Hungary if:

• the relevant court did have jurisdiction;
• the judgment has become final in the jurisdiction of origin;
• none of the potential grounds for non-recognition applies; and
• there exists reciprocity between Hungary and the jurisdiction of origin.

The potential grounds for non-recognition are as follows.

• Recognition of the judgment would violate Hungarian public policy.
• The party against whom the judgment was made did not attend the proceedings in person or by way of a representative as the summons, statement of claim or other document on the basis of which the proceedings were instituted had not been properly served at his domicile or residence in a way or in a timely fashion to allow him adequate time to prepare his defence.
• Proceedings have commenced with respect to the same legal matter and factual background between the same parties before a Hungarian court or other authority prior to the commencement of the foreign proceedings.
• A final judgment with respect to the same legal matter and factual background between the same parties has been rendered by a Hungarian court or other authority.
• A final judgment with respect to the same legal matter and factual background between the same parties has been rendered by a court or other authority in a third jurisdiction (ie, a jurisdiction other than Hungary and the jurisdiction where the court whose judgment is to be enforced in Hungary sits) prior to the date of the relevant judgment of the court, provided that the judgment rendered in that third jurisdiction complies with all requirements concerning enforceability in Hungary.

Cross-Border Cases Within the EU

In cross-border cases concerning two or more members of a group of companies where the EU Insolvency Regulation applies, insolvency practitioners are generally required to co-operate with any insolvency practitioner appointed in proceedings concerning another member of the same group. The co-operation may take any form, including the conclusion of agreements or protocols. Similar rules apply to courts.

Cross-Border Cases Involving Third Countries

Hungary has not adopted the UNCITRAL Model Law on Cross-Border Insolvency. In cross-border cases involving a third country, Hungarian laws do not specifically provide any means of co-operation or co-ordination with foreign courts. Where there is no applicable bilateral or multilateral international treaty in place, Hungarian courts are generally not keen on entering into protocols or other arrangements with foreign courts.

Foreign creditors are generally dealt with in the same way as domestic creditors. However, in practice, certain additional requirements in terms of formalities of documentation and/or costs (eg, cost of translation) may apply.

Duties of Directors Outside Insolvency

Based on the Hungarian legislation, outside of insolvency, directors of a Hungarian company must act and carry out their duties with priority to the interests of the company.

Duties of Directors in Case of Impending Insolvency

Impending insolvency occurs when the directors of the company are aware (or should be aware) of the fact that the company is not able to meet its financial obligations. When deciding the date on which impending insolvency has occurred in the majority of the cases Hungarian courts use a “cash flow test” whereby not only cash but other liquid assets are taken into consideration.

There is no prospective element in the cash flow test as courts only assess impending insolvency after the fact once insolvent liquidation has already commenced. In approximately one-quarter of cases, the courts supplement the “cash flow test” with a ”balance sheet test”.

When applying the test, typically short-term obligations are compared to working capital. The “balance sheet test” is always supplemental to the “cash flow test” and is not used independently. There is no mandatory law on applying the tests and the above is concluded from previous domestic case law.

The directors of a company in impending insolvency must act in the interests of the creditors of the company. It is not entirely clear what this requirement means exactly but the general consensus is that directors are not required to take only the interests of the creditors into account when carrying out their management duties or to prioritise creditors’ interests over those of the company. The directors should convene the supreme body and inform it about the situation (the directors may call upon the supreme body to either support the debtor’s situation with supplementary payments or to initiate insolvency proceedings).

In addition, the directors should not take any measures in relation to the debtor’s activities that could increase the creditor’s losses.

The failure of the directors to take the interests of the creditors into account appropriately may trigger civil and criminal liability.

Civil law liability (including potential disqualification for a period of five years) is triggered if:

• in the case of an impending insolvency;
• within the three years preceding the start of the insolvent liquidation proceeding;
• the directors of the company have not acted in the interests of creditors; and
• due to this conduct the total assets of the company have decreased or the claims of the creditors of the company cannot otherwise be met.

In addition, if an insolvent liquidation proceeding is commenced, directors may face a fine of up to 50% of their annual salary if they do not co-operate with the liquidator of the company.

Criminal law liability can be established if the directors commit fraudulent acts, such as hiding or damaging the assets of the company, acknowledging disputed claims or voluntarily decreasing the assets of the company and as a consequence the claims of the creditors of the company cannot be satisfied.

The directors may be exempt from liability if they can prove that after the occurrence of an impending insolvency, they did not undertake any business risks that were unreasonable in relation to the debtor’s financial situation and that they took all appropriate measures expected in the given situation to avoid or minimise creditor losses.

“Shadow directors” may also be held liable. A shadow director is an individual or legal entity that had dominant influence over the conduct of the company.

According to case law, the following persons may typically qualify as shadow directors.

• Majority or even minority shareholders of the company; and
• Any de facto (unregistered) director of the company.

Generally, laws applicable to various pre-insolvency, restructuring and insolvency proceedings require members of the supervisory board or other members of the debtor to co-operate with the relevant statutory officers.

See 7.2 Personal Liability of Directors.

If a debtor becomes the subject of an insolvent liquidation, any creditor or the liquidator has the right to challenge transactions concluded by the insolvent company that are of a type falling under any of the below categories. A challenge may be submitted within one year from the date of publication of the court order on the commencement of the liquidation proceedings.

The types of transactions open to challenge are the following.

• Contracts concluded or legal declarations made by the insolvent company within five years of the date preceding the date when a competent court received a petition for the initiation of liquidation proceedings or at any time thereafter, if such contract or legal declaration resulted in the decrease in the value of the insolvent company’s assets and the intent of the insolvent company was to defraud any or all of the creditors, and the contracting party or beneficiary of the legal declaration had or should have had knowledge of such intent.
• Contracts concluded or legal declarations made by the insolvent company within two years of the date preceding the date when a competent court received a petition for the initiation of liquidation proceedings or at any time thereafter, if the subject matter of such contract or legal declaration is:
1. an asset transfer by the insolvent company for no consideration;
2. an undertaking by the insolvent company in respect of its assets for no consideration; or
3. an arrangement resulting in evidently disproportional benefit in value to the contracting party.
• Contracts concluded or legal declarations made by the insolvent company within 90 days of the date preceding the date when a competent court received a petition for the initiation of liquidation proceedings or at any time thereafter, if the subject matter of such contract or legal declaration is to grant preference to any one creditor, in particular an amendment of an existing contract for the benefit of such creditor, or provision of collateral to an unsecured creditor.
• Contracts concluded or legal declarations made by the insolvent company within three years of the date preceding the date when a competent court received a petition for the initiation of liquidation proceedings or at any time thereafter, if the subject matter of such contract or legal declaration is transfer of ownership or assignment of right or claim by way of security or exercising call option right granted by way of security where the beneficiary has exercised such acquired right without (duly) fulfilling its obligation to account with the debtor and/or failed to return to the debtor the amount exceeding the amount of the secured claim (ie, no adequate settlement has occurred).

In the event any of the above security interests has not been registered in the appropriate registry, the conditions of the challenge will be deemed fulfilled.

Individual creditors or the liquidator may, only in the context of an insolvent liquidation, submit a claw-back claim of challenge. See 8.1 Circumstances for Setting Aside a Transaction or Transfer.