Harmonisation of insolvency avoidance rights from the Hungarian perspective

Hungarian insolvency law already knows the concept of avoidance actions. Allowing creditors and liquidators to challenge certain transactions aims to protect the value of the insolvency estate.  Although the principles of Hungarian insolvency law are the same as those outlined in the European Commission's proposal for a Directive (i.e. Proposed Directive), there are some aspects which would need to be carefully thought through before they are harmonised.

General avoidance rules

Under the Hungarian Insolvency Code (Act XLIX of 1991), any creditor and the liquidator can contest the following within a one-year limitation period from the date of publication of the notice of liquidation before the court:

• contracts concluded by the debtor within five years preceding the date when the court received the petition for opening liquidation proceedings, or its other commitments, if intended to conceal the debtor’s assets or to defraud any one creditor or the creditors, and the other party had or should have had knowledge of such intent (“Legal acts intentionally detrimental to creditors” as per the Proposal).
• contracts concluded by the debtor within three years preceding the date when the court received the petition for opening liquidation proceedings, or its other commitments, if intended to transfer the debtor’s assets without any compensation or to undertake any commitment for the encumbrance of any part of the debtor’s assets, or if the stipulated consideration constitutes unreasonable and extensive benefits to a third party (“Legal acts against no or a manifestly inadequate consideration” as per the Proposal).
• fiduciary security agreements concluded with the debtor within three years preceding the date when the court received the petition for opening liquidation proceedings, or its other commitments, if the security beneficiary failed to pay out any or none of the surplus it received on the top of what was used for repaying its outstanding claims.
• contracts concluded by the debtor within 90 days preceding the date when the court received the petition for opening liquidation proceedings, or its other commitments, if intended to give preference and privileges to any one creditor, such as the amendment of an existing contract to the benefit of a creditor, or to provide financial collateral to a creditor that does not have any (“Preferences” as per the Proposal).

In addition to the above, the liquidator will be entitled to reclaim within the above one-year time limit any service the debtor provided within a sixty-day period preceding the date when the court received the petition for opening liquidation proceedings, if it was provided to give preference to any one creditor and if the service is not usually provided under normal circumstances. Prepayment of a debt is considered as giving preference or privileges to any one creditor.

By implementing a preventative restructuring framework under Directive (EU) 2019/1023 of the European Parliament and of the Council and Hungarian law, avoidance actions on the ground of preferences are not permitted against payments or security taken for new or interim financing.

Trigger and time frame

The cessation-of-payments test is not among the triggers for opening insolvency proceedings. Hungarian insolvency law uses a unique insolvency test. Triggers include an unpaid and undisputed debt, a final and binding court payment order which the debtor was not able to pay, an unsuccessful enforcement procedure against the debtor`s assets or an unsuccessful bankruptcy settlement, and a test similar to balance sheet test.

The time frame for challenging certain transactions under Hungarian law differs from the time frames set forth in the Proposed Directive, depending on the nature of the concerned contracts.

The Hungarian Insolvency Code does not distinguish between “execution” and “perfection”, but suggests “execution”. The Proposed Directive makes it clear that to protect the value of a bankruptcy estate, laws should include effective rules that enable the annulment of legal acts that are detrimental to creditors and have been perfected prior to the opening of insolvency proceedings. 

Consequences

Hungarian insolvency law does not contain a set of detailed rules that specify the consequences of avoidance actions, but instead falls back on the general principles of civil law. If an act is avoided, this act is considered never having existed, and any benefits that a party may have received will need to be reimbursed to the bankruptcy estate. Depending on the behaviour of the party, this could also result in liability for additional damages.

Conclusion

Major reform is not expected in Hungary with the passage of the Proposed Directive. There are some conceptual questions that may require minor amendments, but these points are often addressed in case-law.

For more information on Hungarian insolvency law and how it may be affected the Proposed Directive, contact your CMS client partner or these CMS experts.