Recent Trends

After several years of steady numbers in terms of insolvencies in the 2010s, the beginning of the COVID-19 pandemic caused a spike in the number of companies having financial difficulties. Insolvencies subsequently decreased due to governmental measures aimed at rescuing distressed businesses. More recently, amidst an economic downturn marked by high inflation, the number of newly opened insolvent liquidations almost doubled in 2022 (8,111) compared to 2021 (4,359). Sectors that suffer the most in this new wave of insolvencies include construction, automotive, services (both for businesses and households), wholesale and retail.

Potential Reform of Insolvency Laws

There is a general view that the insolvency laws in Hungary require a comprehensive reform in order to create a better system of proceedings that protects the interests of affected employees, businesses and creditors more effectively. Reasons for the distrust towards the insolvency laws include:

• the low rate of recovery for unsecured creditors;
• the low efficiency of asset sales; and
• the continuing trend of very low confidence in bankruptcy, the reorganisation-type of formal insolvency proceedings.

In 2022, only 38 petitions were filed, of which only nine resulted in an agreed and approved reorganisation composition.

Preparations within the Ministry of Justice of Hungary were reportedly commenced a few years ago to draft and enact a long-awaited new, comprehensive legal regime on restructuring and liquidation.

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: (i) bankruptcy proceedings; and (ii) 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). Restructuring is meant to be a pre-insolvency proceeding that helps businesses in financial distress to avoid a 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 an aim to support Hungarian businesses. A reorganisation may be initiated in an impending insolvency and is in many aspects very similar to a bankruptcy (although is perhaps somewhat more flexible). Since reorganisation has not gained traction and as at the date of preparing this guide (published November 2023) businesses are only allowed to file for opening such proceedings until 31 December 2023, this type of regime will only briefly be mentioned.

No regulated out-of-court restructuring or workout 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. Out-of-Court Restructurings and Consensual Workouts for more details.

The following voluntary and involuntary formal reorganisation and insolvency proceedings are available under Hungarian law:

• bankruptcy proceedings (csődeljárás), a voluntary reorganisation-type of proceeding;
• insolvent liquidation proceedings (felszámolási eljárás), which can be commenced by both the debtor and its creditors or in certain cases ex officio;
• restructuring (szerkezetátalakítás), a preventative voluntary reorganisation-type proceeding based on EU law; and
• reorganisation (reorganizáció), another voluntary proceeding which was introduced as a temporary response to the COVID-19 pandemic (as at the date of preparing this guide (published November 2023), debtors may only submit petitions to open proceedings until 31 December 2023).

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 could indicate financial difficulties, or otherwise in a position of impending insolvency, it is the duty of the directors to inform the shareholders and convene a meeting of them so that the necessary steps can be taken. These potential steps include:

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

If, for any reason, shareholders are not taking such steps, they are required to resolve on 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, the liquidator acting in solvent liquidation and in certain cases competent courts may commence the insolvent liquidation of a debtor:

• creditors may file a claim requesting the competent court to declare the debtor “insolvent” where it failed to pay its debt (see 2.5 Requirement for Insolvency);
• the liquidator acting in the solvent liquidation of the debtor is required to file for insolvent liquidation in certain cases (see 2.3 Obligation to Commence Formal Insolvency Proceedings); and
• competent courts are required to commence the insolvent liquidation ex officio in certain cases (eg, in case of an unsuccessful bankruptcy proceeding).

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.

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.

A restructuring may only be opened where insolvency is probable, ie, a situation where there are reasonable grounds for believing that the company will, in absence of taking any measures, not be able to meet its financial obligations as they fall due.

An insolvency proceeding is generally commenced when the debtor is declared to be insolvent. In general, the situation of insolvency is defined as the inability or unwillingness to pay debts. For example:

• 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; or
• the company fails to pay its debts based on a final and binding court order (or composition concluded in, eg, bankruptcy proceedings) within the applicable deadline; or
• a court enforcement procedure against it was unsuccessful.

Hungarian law provides for special rules in terms of various statutory regimes in relation to certain entities.

• Certain regulated entities operating on the financial markets (such as banks and other credit institutions, insurance service providers, investment firms) may not file for bankruptcy, reorganisation or restructuring, and only the regulator may initiate the insolvent liquidation of these entities. In addition, in the insolvent liquidation of these entities, the order in which the claims of the creditors are satisfied from the proceeds of the liquidation will be slightly different.
• Credit institutions and investment service providers may be subject to a special recovery and resolution process on the basis of laws implementing the EU Bank Recovery and Resolution Directive (Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014).
• In the course of the insolvent liquidation of certain utility companies, the liquidator’s right to terminate the debtor’s contracts is limited.
• Businesses that are declared by the Hungarian government to be strategically important may be subject to more specific rules in a bankruptcy or insolvent liquidation proceeding. Such rules can significantly affect creditors’ rights compared to proceedings against “non-strategic” entities.

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

The willingness of institutional lenders to enter into out-of-court workouts and 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 Hungarian National Bank has published a recommendation on the negotiated restructuring process of claims against co-financed corporate borrowers, addressed to institutional lenders. The recommendation sets out the proposals of the Hungarian National Bank concerning the negotiated restructuring process in relation to claims against co-financed corporate borrowers that are co-operative within the meaning of the recommendation. However, there is no specific informal framework for out-of-court assistance or workouts.

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 advisers 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 shall 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 advisers 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 duration. 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.

Recent experience shows that outside a statutory or other formal process, in cross-border financings new money is typically injected by the syndicate of existing creditors (or a part thereof willing to participate) by way of a bridge/interim loan. New creditors are occasionally invited to such transaction, which is sometimes structured in a way that requires the sponsor to inject new money as well. Super-priority liens are usually granted to the creditors injecting new money (except for sponsors); to the extent there are existing local law security, the consent of the beneficiary of those are required to ensure super-priority.

No specific mandatory laws or legal doctrines impose rules or requirements regarding restructurings and workout processes. The recommendation of the Hungarian National Bank on negotiated restructuring process of claims against co-financed corporate borrowers generally expects parties to co-operate with each other in good faith and encourages communication and the sharing of appropriate information among creditors and borrowers alike in order to enhance the likelihood of realising an outcome that is beneficial for all parties concerned.

Generally, due to the informal nature of these processes, out-of-court restructurings and workout processes require the consent of all affected stakeholders. It is not common in local transactions, but in complex cross-border financings underlying credit agreements sometimes contain terms permitting a majority or super-majority of lenders to bind dissenting lenders to changed credit agreement terms.

There are often options available as to what type of security can be taken over a particular asset. The most common forms of in rem security are a charge or mortgage, a pledge, security assignment or security deposit. In addition, surety and guarantee are also available.

Outside insolvency, secured creditors generally have multiple available options to enforce a security (including court enforcement and out-of-court processes).

In the context of insolvency and restructuring proceedings, limitations to secured creditors’ enforcement rights apply. In particular:

• 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 directly enforced by secured creditors within a limited time period; and
• in bankruptcy proceedings, restructurings and reorganisations, claims of secured creditors may be subject to a statutory moratorium during which no enforcement or collection is possible. There are limited exceptions: security deposits over cash or securities taken prior to the opening of the relevant proceedings may be enforced by the relevant creditor, provided in certain cases that the debtor or the counterparty is one of a type of regulated entities listed in applicable laws.

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.

In bankruptcy proceedings, restructurings 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.

Creditors are assigned to various classes in liquidation, bankruptcy and restructuring 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.

Secured creditors enjoy preferential ranking in insolvent liquidation (see 4.3 Special Procedural Protections and Rights).

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, restructuring or reorganisation, the relevant creditors may not trigger certain clauses in contracts concluded with the debtor.

Unsecured creditors have right for 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.

In the context of insolvent liquidation and bankruptcy proceedings (which are generally controlled by the bankruptcy trustee/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 proceedings overall.

No pre-judgment attachment is available. In Hungarian insolvency proceedings, assets of the debtor remain in the insolvency estate.

There are priority claims in insolvent liquidation proceedings: apart from claims secured by in rem security, among others 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.

In the context of bankruptcy, reorganisation and restructuring proceedings, claims are generally subject to a statutory moratorium. There are, however, certain privileged claims which 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 restructuring 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 case of an insolvent liquidation; the relevant stakeholders are generally free to agree on the implementation of the reorganisation/restructuring.

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 restructuring (szerkezetátalakítás). (Standalone reorganisation proceedings (reorganizáció), which is in many aspects very similar to a bankruptcy, is also available for a limited time – see 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership.)

These proceedings may be initiated only by the debtor itself, with the approval of the shareholders (see 2.5 Requirement for Insolvency). In case of a bankruptcy, creditors of the debtors must report their claims to be eligible to participate. The scope of restructurings may, at the discretion of the debtor, be limited to certain creditors.

The ultimate aim of these proceedings is to draw up a reorganisation/restructuring plan (including a composition) that is agreed to by the relevant creditors and approved by the competent court. 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 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.

An automatic moratorium applies to all creditors’ claims (with limited exceptions) in case of a bankruptcy; on the other hand, in the course of a restructuring, 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.

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 joint right of representation and joint right of disposal over bank accounts.

In a restructuring, 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 case 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).

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

• in case of bankruptcy: secured and unsecured creditors; and
• in case of restructuring:
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/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.

In bankruptcy proceedings creditors may form a creditors’ committee if at least one third of creditors with voting rights holding the majority of votes joins it. 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/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. The bankruptcy trustee is required, among others, to send reports on its activities and the financial situation of the debtor and to inform the creditors’ committee/creditors’ agent on any historical suspect transactions.

Creditors’ rights in a restructuring 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.

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/restructuring plan otherwise comply 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 restructuring proceedings, either (i) 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 (ii) 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 (a) the same treatment in terms of recovery rate and other aspects as consenting creditors in the same class, and (b) more favourable treatment than creditors in the subordinated class.

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

Reorganisation and restructuring 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 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.

The debtor’s use of its assets is generally widely limited and subject to the control of the appointed statutory officer – see 6.2 Position of the Company. In addition, certain disposals require the approval of the creditors.

Generally, the aim of bankruptcy and restructuring 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. However, to the extent it is a sound option and the necessary approvals are granted by all relevant stakeholders, certain assets of the debtor may be disposed of in a manner approved by such stakeholders.

In general, security interests, other security arrangements and other claims can be released pursuant to bankruptcy and restructuring proceedings. Note that this is primarily true where the debtor is the obligor of such obligations. In case of third-party obligors (eg, affiliates of the debtor), such releases can likely not be directly incorporated into approved compositions and separate agreements should be concluded to that effect.

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 restructuring encourages stakeholders to procure interim and/or new financings 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 both bankruptcy and restructuring 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 where the stakeholders fail to agree on a composition.

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

According to court practice, the reorganisation plan in a bankruptcy must not be manifestly unfair or result in abuse of rights. Although no established precedents are available, it is expected that courts will apply similar equitable tests to restructuring plans as well (in addition to the principle of equal treatment of creditors within the same class established by law).

In principle, it is possible that the agreed reorganisation or restructuring plan includes certain concessions by creditors that result in the discharge of claims that are secured by third parties, in which case such third parties may be released from liabilities.

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).

Failure to observe the terms of an agreed and approved reorganisation or restructuring plan may ultimately lead to the insolvent liquidation of the debtor.

Existing equity owners can retain their ownership, subject to the terms of the agreed reorganisation or restructuring plan. However, as affiliates of the debtor, existing equity owners can generally not enjoy more favourable terms than non-affiliated creditors.

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, the debtor itself or a liquidator appointed to a solvent company (to the extent the assets are less than the liabilities of the company). Liquidation proceedings may commence ex officio (by the order of the court) if a corporate bankruptcy proceeding was unsuccessful.

See 2.3 Obligation to Commence Formal Insolvency Proceedings, 2.4 Commencing Involuntary Proceedings and 2.5 Requirement for Insolvency for details on when and how insolvent liquidation may be commenced.

Creditors must register their claims with the liquidator to be eligible to seek recovery and to avoid cessation 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: (i) liquidators and creditors have a right to challenge certain historical transactions during hardening periods (see 11.1 Historical Transactions); and (ii) 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.

The sale of assets is generally organised by the liquidator by way of a public tender or public auction. Creditors have consultation right and may make observations on certain aspects (eg, the timing for when the liquidator should stop the business of the debtor and start selling its assets, or regarding the accuracy of procured valuation reports). 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.

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 to it. 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/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. The liquidator is required, among others, to send quarterly reports on its activities, the financial situation of the debtor and the costs of liquidation. The approval of the committee/agent is required for the extended continuation of the debtor’s business. The committee/agent has a consultation right 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.

As a member state of the European Union, 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. Both the EU Insolvency Regulation and domestic laws provide recognition mechanisms for foreign insolvency proceedings and judgments passed within such proceedings.

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 regulation) are automatically recognised: (i) courts of the member state in which the centre of that debtor’s main interests (COMI) is situated have jurisdiction to open the main insolvency proceedings, while (ii) 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.

Debtors Domiciled in a Third Country

For debtors whose registered seat is outside Hungary, that have no permanent establishment in Hungary and whose COMI is not otherwise in any of the member states of the EU, foreign insolvency proceedings may be recognised in Hungary to the extent there exists reciprocity between Hungary and the relevant jurisdiction, the underlying proceedings are not contrary to public policy and were 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 them to arrange for their defence).

The recognition of foreign main proceedings does not preclude Hungarian courts from ordering secondary insolvency proceedings; should the latter be commenced, the judgment or order that instituted the main proceedings will not have the same legal effects in Hungary as the same would in the jurisdiction of origin. Given the lack of elaborated rules, it is unfortunately unclear what this means in practice and what actual effects such judgment or order would have in Hungary. It is generally expected that the new insolvency law that is currently under preparation will clarify this situation.

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 bi- or multilateral international treaty in place, Hungarian courts are generally not keen on entering into protocols or other arrangements with foreign courts.

The key pieces of legislation in this respect are the EU Insolvency Regulation and the Hungarian Act on Conflicts Law (Act XXVIII of 2017).

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.

Recognition and Enforcement of an EU Judgment

As per applicable EU laws, judgments handed down which 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 judgments 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). Such regulation offers a somewhat 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 them to arrange for their defence, unless the defendant failed to commence proceedings to challenge the judgment when it was possible for them 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 member state of the EU or in a third state 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; or
• 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 which is not a member state of the EU 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 their domicile or residence in a way or in a timely fashion to allow them adequate time to prepare their 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; or
• 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.

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 restructuring: restructuring practitioner (szerkezetátalakítási szakértő);
• in bankruptcy: bankruptcy trustee (vagyonfelügyelő); and
• in insolvent liquidation: temporary liquidator (ideiglenes vagyonfelügyelő), liquidator (felszámoló) or special liquidator (rendkívüli vagyonfelügyelő), as the case may be.

See 6.2 Position of the Company, 7.1 Types of Voluntary/Involuntary Proceedings and 7.2 Distressed Disposals.

Generally, statutory officials are selected/appointed from a register of authorised professionals. In bankruptcy and insolvent liquidations (with the exception below), 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 restructuring, 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 a method set out in 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 the officer gravely or continuously breaches its duties under applicable laws.

Duties of Directors Outside Insolvency

Outside insolvency, directors of a Hungarian company must act and carry out their duties with priority given 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, in the absence of liquid assets, the company is not able to meet its financial obligations. When deciding the date on which impending insolvency has occurred, in the majority of 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 such cash flow test as courts only assess impending insolvency after the fact, once insolvent liquidation has already commenced. In approximately one quarter of the 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”; it is not used independently. Please note that there is no mandatory law on applying the tests and the above is concluded from previous case law of Hungarian courts.

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 exactly means 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 to those of the company.

Failure 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.

“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: (i) majority or even minority shareholders of the company; and (ii) any de facto (unregistered) director of the company.

Where the debtor initiates a restructuring (szerkezetátalakítás) (see 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership), directors of the debtor must take creditors’ interests into account when carrying out their duties.

Duties of Supervisory Board Members

Generally, laws applicable to various pre-insolvency, restructuring and insolvency proceedings require members of the supervisory board of the debtor to co-operate with the relevant statutory officers. No specific requirements or duties apply in relation to creditors.

Both the liquidator and the creditors are entitled to file a claim to establish the civil law liability of directors described in 10.1 Duties of Directors.

Where a debtor becomes the subject of an insolvent liquidation, any creditor or the liquidator has the right to challenge transactions concluded by such insolvent company which is of a type falling under any of the categories listed below. 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 as follows.

• 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 shall be deemed fulfilled.

Please see 11.1 Historical Transactions.

Individual creditors or the liquidator may, only in the context of an insolvent liquidation, submit a claw-back claim of challenge described above.