New provisions in insolvency proceedings

Hungary: New rules on fiduciary collaterals introduced

One of the reasons for passing the amendment – in force from 1 July 2017 – was the uncertainty of application of certain provisions in connection with enforceability of claims secured by fiduciary transfer of ownership or assignment of claims (fiduciary collaterals).

When the new Civil Code was adopted in 2013 legislation decided to prohibit the application of two very important and commonly used securities: fiduciary transfer of ownership and assignment of claims. Due to the high number of the application of such collaterals under the old Civil Code, there was a big pressure on legislation to amend this provision. This resulted in an amendment of the Civil Code in July 2016 allowing the establishment of fiduciary collaterals over claims against debtors other than consumers.

Still, the status of fiduciary collateral agreements in insolvency proceedings was unclear. Lien holders have enjoyed priority in satisfaction of their claims during the sale of the debtor’s secured assets ever since. However, claims of holders of other fiduciary collaterals were not suitable to be prioritized by the insolvency administrators according to earlier regulation.

New provisions allow the application of rules on the prioritized satisfaction of claims secured by liens for holders of fiduciary collaterals such as fiduciary transfer of ownership and assignment of claims, provided that the collaterals have been registered prior to the opening of the insolvency proceeding in the so-called collateral register maintained by the Hungarian Chamber of Public Notaries. The purpose of this register – introduced along with the new Civil Code in 2013 – is to provide a framework to record and prove the establishment of collaterals other than mortgages, which are registered in the land registry. Through the records of this register, the fact and date of the establishment of the security can be proven undoubtedly.

Lien holders still qualify for a prioritized satisfaction of their claims if the lien has been registered earlier than other fiduciary collaterals over the respective asset.

The new provisions are to be applied in proceedings opened after 1 July 2017. The insolvency act does not prohibit applying the new provisions on fiduciary collaterals registered earlier. If the fiduciary collateral has not been registered yet, a registration of it is advisable in order to enforce it in an insolvency proceeding.

This new regulation not only strengthens legal certainty in connection with fiduciary collaterals, but also secures liquid assets of the insolvent companies in order to protect the creditor’s rights.

Source: Act XLIX of 1991 on Bankruptcy Proceedings and Liquidation Proceedings

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