Pre-pack sales procedures in Hungary

The success of the recently introduced pre-pack-like rules in Hungary will help determined how the EU Directive on pre-pack sales will be implemented in this country.

Existing pre-pack-like rules

Pre-pack does exist in Hungarian liquidation procedural rules (i.e. the winding up an insolvent company). Rules were introduced in 2023 as part of emergency legislation with the aim of making the sale of an insolvent debtor`s assets more efficient. Under the scheme, the liquidator can set up a Special Purpose Vehicle (SPV) and transfer the debtor`s business (e.g. assets, employees and contracts) to the SPV. The SPV will be solely owned by the debtor and sold within one year in a public auction. Valuation of assets has to be prepared by two independent valuers.

Pre-packs in restructuring

Bankruptcy and preventive restructuring

Hungarian law has two reorganisational types of court procedures:

• bankruptcy, which grants a 180, but maximum 365 day, public and general moratorium (i.e. the debtor in possession prepares a reorganisation plan for creditors` vote and court approval); and
• preventive restructuring, which, if requested by the debtor, can grant a maximum four months either public and general or private and limited moratorium (as implemented in Directive (EU) 2019/1023 on preventive restructuring frameworks).

It is possible in any of these procedures to implement a pre-pack sale. It is not common, however, to try to utilise all its benefits when preparing a reorganisation plan. Therefore, we think that both debtors and creditors can see the benefits of a quick sale with high return.

Starting prep-packs as early as possible

Preventive restructuring would be the ideal procedure for pre-packs. This procedure provides protection to companies from the moment the directors assume that without taking further action, the debtor will not be able to comply with its payment obligations when due.

Rules of restructuring would sit better with pre-packs

Valuation of assets at that moment with a kick-start of preparing for the sale could result in a better recovery. A moratorium is not necessary to proceed with a pre-pack. Directors can decide whether a moratorium can or cannot help, which is an option only in the preventive restructuring procedure. Generally, the flexible rules of a preventive restructuring procedure can offer more room for negotiations and make it easier to set up a SPV. Interim financing is protected under the restructuring rules.

Rules similar to pre-packs already existing in the liquidation procedure clearly show a need for such a sale process. If the process is available at an earlier stage with the responsibilities strictly regulated, we think that the chance of selling distressed assets at a higher price will increase in Hungary.

For more information on pre-pack regulations in Hungary, contact your CMS client partner or local CMS experts.

This article is part of our Law-Now blog series "Harmonisation of Insolvency Laws in the EU", which will provide an overview of the EU Commission's draft directive, including the most important objectives and planned measures. The series itself will deal with the two exciting topics of the draft directive, "pre-pack proceedings" and "insolvency avoidance actions" and show how these topics are being discussed in the Member States and what the situation is like in individual non-Member States.