New insolvency prevention tool now in force in Hungary, too

The restructuring procedure in force from July 2022 offers a flexible mechanism to solve a company’s financial problems.

The new rules introduce a procedure aimed at helping companies facing liquidity problems, while not imposing the same strict conditions as bankruptcy proceedings. This can offer a new opportunity to struggling but still economically viable businesses that are coping with the ordeals of the recent pandemic and the current changing economic climate.

The procedure, which is essentially a confidential one, is initiated based on the decision of the debtor. The debtor decides which creditors to include in the procedure and this can only become public at the debtor’s initiative.

The advantage compared to bankruptcy proceedings is that the new procedure can be initiated sooner and the restructuring expert assisting the procedure does not limit the representative or management rights of the manager. During the procedure, the debtor can continue to run its business and assume liabilities. Furthermore, possible failure of the restructuring does not automatically lead to liquidation proceedings, with the added bonus that the stigmatizing suffix of a bankruptcy is not applied.

The debtor is not obliged to include all creditors in the proceedings and so must fully meet all payment obligations towards those not included. Besides the general moratorium, the law also provides for the possibility of a so-called selective moratorium for certain creditors, so that the debtor is protected against individual enforcement actions.

The financial settlement between debtor and creditors is based on the restructuring plan. The plan must be voted on by the creditors and can then be approved by the court. The plan must meet the „best interests of creditors“ test, i.e. that creditors who vote „no“ would not be worse off with a restructuring plan than if they had pursued their claims in liquidation proceedings.

The new procedure aims to find a golden mean between informal contractual restructuring and formal insolvency proceedings and to provide timely rescue assistance to businesses in distress. In the spirit of the emerging „rescue culture“, European legislators have also felt the need to build a fair and trust-based system, as it is more cost-effective from an economic point of view to rescue an existing business − with its machinery, well-established processes, skilled employees and partners − with expert assistance and mutually beneficial solutions than to liquidate it and start from scratch.

Source:

Act LXIV of 2021 – on restructuring and amending certain acts for the purpose of legal harmonization

EU Directive 2017/1132 on restructuring and insolvency

 

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