Contributed by Konrád Siegler and Tamás Simon
What is liquidation?
The purpose of liquidation proceedings under Hungarian law is to terminate the business activities of an insolvent debtor and distribute its assets in accordance with the priority order set out in the Hungarian Bankruptcy Code.
Initiation and commencement of liquidation
Liquidation proceedings may be initiated by the debtor, any creditor or the bankruptcy administrator, as well as the bankruptcy court (in case of unsuccessful bankruptcy), the company court of registration (in case of non-compliance with certain corporate law provisions), or the criminal court (if a criminal sanction of liquidating the company has been imposed). Typically, liquidation proceedings are initiated by a creditor due to the failure of the debtor to pay an uncontested or recognized debt within 15 days of its due date and following a separate written notice requesting payment issued by the creditor after the expiry of such 15-day period.
Once the court establishes the insolvency of the debtor, it will pass a decision commencing the liquidation proceedings and, among other things, appoint a liquidator and invite the creditors to register their claims with the liquidator. Claims should be registered within 40 days of the publication of the court’s decision. In the event that a creditor does not register its claim within 40 days, but does so within 180 days of the publication of the decision, such creditor’s claim will be satisfied only if there are distributable liquidation proceeds following the application of the priority order set by the Hungarian Bankruptcy Code (i.e., such claims – regardless of whether the claim is secured or not – are last to be satisfied). If the claim is not registered with the liquidator within 180 days, it may not be enforced by the creditor.
In the course of liquidation proceedings, the debtor’s management is taken over by a liquidator appointed by the bankruptcy court, and the debtor’s management and shareholders cease to have control over the debtor. The liquidator has the statutory right to terminate and to challenge certain agreements entered into by the debtor prior to the commencement of the liquidation proceedings.
Based on the relevant provisions of the Hungarian Bankruptcy Code, a transaction can be challenged within 90 days of the applicant creditor or liquidator first becoming aware of it, but latest within one year from the publication of the court’s decree ordering the commencement of the liquidation proceedings, if the purpose of such transaction was to:
(i) conceal the debtor’s assets or defraud any of the creditors, and the other party had or should have had knowledge of such intent – in each case, if such transaction was entered into within five years of the application to commence the liquidation proceedings;
(ii) transfer the debtor’s assets or to undertake any commitment for the encumbrance of any part of the debtor’s assets without any compensation, or if the stipulated consideration provides unreasonable and excessive benefits to a third party – in each case, if such transaction was entered into within two years of the application to commence the liquidation proceedings; or
(iii) give preference and privileges to any of the creditors, such as the amendment of an existing contract to the benefit of a creditor, or to provide security interest to a creditor that has none – in each case, if such transaction was entered into within 90 days of the application to commence the liquidation proceedings.
In the event of a successful challenge, the above transactions are declared void, and any affected assets will have to be returned to the debtor and become part of the distributable liquidation proceeds.
The liquidator registers the creditors’ claims and satisfies them pursuant to the priority order set by the Hungarian Bankruptcy Code.
The claims of secured creditors have priority over unsecured claims and are satisfied as follows:
(i) First, claims secured by security deposit (over shares and other securities, cash and bank account receivables) created before the commencement date of the insolvency proceedings are first to be satisfied. These can be directly enforced against the subject of the security deposit. Any excess must be returned to the liquidator and becomes part of the distributable liquidation proceeds. However, if a creditor holding a security deposit fails to exercise its right of direct enforcement within three months of the publication of the commencement of the insolvency proceedings, it will rank at the same level as secured creditors holding mortgages, pledges and floating charges as described in point (ii) below.
(ii) Second, assets that are subject to mortgages, pledges, and floating charges created before the commencement date of the insolvency proceedings are sold, and the proceeds (less the costs of the sale and a proportional part of the liquidator’s fees) are distributed to the creditors holding such security interests. In the case of a floating charge, only 50% of the proceeds from the sale of the charged assets (less the costs of the sale) are distributed directly to the floating charge holders. The remaining 50% becomes part of the liquidation proceeds, and is distributed as described in point (iii) below.
(iii) Third, claims secured by floating charges created before the commencement date of the insolvency proceedings are satisfied from the remaining 50% of the proceeds of the sale of the assets so encumbered, following payment of the expenses of the insolvency proceedings (which include salary-type payments and taxes payable by the debtor, costs incurred in connection with the termination of the debtor’s operations, sale of its assets and enforcement of its claims, protection and preservation of assets, placement and safeguarding of the debtor’s documents and the liquidator’s fee).
The Hungarian Bankruptcy Code also details the order of satisfaction of unsecured claims. Claims of controlling shareholders, controlled entities and certain other related parties have the lowest priority.
The Hungarian Bankruptcy Code recognizes the principle of “equitable subordination,” pursuant to which controlling shareholders and claims held by certain other related parties or the executives of the debtor are satisfied last. This is the case regardless of whether such parties held any perfected mortgages, pledges or floating charges over the assets of the debtor. In the case of security deposits held by such parties, the application of the principle is (unusually) somewhat restricted, although – as described above – such transactions are also challengeable before the court controlling the liquidation proceedings.
The last entry in this series will discuss out-of-court workouts under Hungarian law.