Settlement with creditors in Hungarian bankruptcy proceedings


Financier Worldwide Magazine

March 2015 Issue

March 2015 Issue

The Hungarian financial market, like a number of other Central and Eastern European markets, still faces the legal challenge of how its non-performing loans can be restructured. Given that the economic downturn does not appear to be over in the Hungarian market, it is essential for the banks to achieve the best possible recovery from their non-performing loans. Therefore, settlement with creditors in bankruptcy proceedings has become an important tool of restructuring.

Under Hungarian law, restructuring is not regulated. Instead, each of the Hungarian insolvency proceedings, bankruptcy and liquidation, offers a debtor company a chance of survival by restructuring its debt in a settlement agreement between the debtor and its creditors. We will focus here on bankruptcy settlements as they are a much more common form of insolvency proceedings.

Bankruptcy proceedings may only be initiated by the debtor with the prior consent of the company’s shareholders. Insolvency of the debtor is not a prerequisite. Bankruptcy proceedings mean a payment moratorium which will allow the debtor to negotiate a bankruptcy settlement with its creditors. New payment obligations of the debtor are subject to the consent of the bankruptcy administrator, who is appointed by the court to monitor the activity of the debtor during the moratorium. However, the existing management of the debtor will remain in place and its role will not be taken over by this administrator.

The moratorium is granted for 120 days from the commencement date of the bankruptcy proceedings. This term can be extended with the consent of a simple majority of the creditors for 240 days, or maximum with the consent of the creditors disposing of two-thirds of the claims for 365 days.

Creditors are entitled to register their claim with the debtor and the court appointed administrator. Creditors have one vote per HUF 50,000 (about €170) claim, provided such claims are registered as acknowledged or non-disputed in the bankruptcy proceedings. Creditors who have less than HUF 50,000 claim will have one vote.

If a creditor fails to register its claims, it cannot be a party to the settlement agreement and consequently, such settlement will not be effective vis-à-vis this creditor. Additionally, this creditor will be unable to claim for the unpaid debt during the bankruptcy or after the bankruptcy is successfully terminated. However, if the liquidation of the debtor is requested by any other creditor, the creditor who failed to register its claims in the bankruptcy proceedings will be entitled to register its claims with the liquidator, though the creditor will not be permitted to claim default interest.

Settlement agreements must be approved by more than 50 percent of the votes of both the secured and the unsecured class of creditors, respectively. There can be only one class of secured and one class of unsecured debt.

Furthermore, the validity of a settlement agreement is subject to the countersignature of the bankruptcy administrator and the approval of the court. Countersignature certifies that the required number of creditors attended the creditors’ meeting, the quorum was sufficient for voting purposes and the attendees’ authorisation for representation was acceptable. Judicial approval means legal supervision and it does not mean a review of the settlement agreement from an economic perspective. An extensive review would not be possible since the court will conduct an expedited procedure by making a decision on approval within 15 business days of receipt of the company’s request, though an appeal is possible.

The settlement agreement, once approved by the court, binds both the consenting and the non-consenting creditors, thereby effectively achieving a cram-down of the dissenting creditors.

It is a statutory requirement that the settlement cannot discriminate against the non-consenting creditors. Due to the recent amendment of the Bankruptcy Act, all creditors must be treated on an equal basis and in good faith. Since this new rule has been effective since 1 April 2014, there is no clear guidance about that in court practice.

Until 1 April 2014, equal treatment of the creditors had only been considered with regard to the level of the secured and the unsecured class of creditors, respectively. This has been changed by requiring an overall examination of the treatment of the creditors. This change has resulted in a very difficult examination due to the different interests of the various creditors. The only guidance which the law now provides is that the above principle is breached if the claims of one of the creditor classes has been satisfied at a significantly lower amount or the conditions of satisfaction of that class are more burdensome in comparison with the other creditor classes, or if the overall satisfaction of the claims is much lower than can be expected given the value of the debtor’s assets. It is advisable to first examine whether the satisfaction of the creditors’ claims in the respective class is not discriminatory against the other class. Then the overall picture must be examined in order to determine whether, in terms of the debtor’s assets and the reorganisation program, determination of the recovery of each creditor may be deemed fair.

According to recent court decisions, the court refuses to approve any settlement agreement if it would be subject to any uncertain condition, e.g., satisfaction for the creditors’ claim is offered by the debtor company from an uncertain source, such as any recovery which might be collected from a pending court procedure if the debtor wins the lawsuit, or at an uncertain future time, or in an uncertain amount, or if it is conditional. Additionally, it would not be approved by the court if multiple satisfaction methods are offered to the creditors rather than just one option. Accordingly, if it is not clear from the settlement agreement how each of the creditors’ claims is satisfied or discharged, including a voluntary write-off by the creditor, it would risk the enforceability of the settlement agreement, resulting in the rejection of such a settlement.

If no settlement agreement can be made, the court must ex officio (i.e., without any requests) decide on the commencement of the liquidation proceedings against the debtor company.

The new Civil Code (Act V of 2013) has recently confirmed that the bankruptcy moratorium will have no impact on the undertakings of the guarantor. Accordingly, if the creditor requires payment from the guarantor due to the non-payment of the debtor under bankruptcy, the guarantor will be obliged to pay and it cannot refuse to comply with the payment by reference to the payment moratorium of the debtor. The court practice had been ambiguous until the above regulation came into force. Additionally, the settlement approved by the court will not impact the guarantor’s obligations if the creditor informs the guarantor about the conditions of such settlement prior to entering into such settlement. The guarantor can decide whether it pays the debts to the creditor and joins the bankruptcy proceedings as the legal successor of the creditor. Should such information be lacking, the payment obligation of the guarantor will decrease up to the amount set out in the settlement agreement.


Erika Papp is a partner and Szabina Söptei is an associate at CMS Cameron McKenna. Ms Papp can be contacted on +36 1 483 4813 or by email: Ms Söptei can be contacted at +36 1 505 4926 or by email:

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