How does restructuring work in Hungary? What does the Hungarian Restructuring Act hold in store?

There has been a longstanding need in Hungary for a legal instrument to rescue distressed companies. The only legal solution so far for such companies was the unpopular and inflexible bankruptcy procedure, which is also risky for the debtor, as failure will automatically turn into a liquidation proceeding and the company will cease to exist. Bankruptcy, with its formalistic procedures and limited involvement of creditors in the decision-making, has done more harm than good. It also usually stigmatised the debtor.  The fact that only a few dozen bankruptcies are launched each year illustrates its unpopularity.

The Hungarian Restructuring Act

The Hungarian Restructuring Act, which will enter into force in July 2022, appears to provide the legal framework that has been missing. One of the great advantages of restructuring is that the procedure is mostly controlled by the parties and the court has limited competence. This gives the parties a flexible tool to keep the debtor afloat while it negotiates with its most important creditors (or all of them).

"One of the great advantages of restructuring is that the procedure is mostly controlled by the parties and the court has limited competence. This gives the parties a flexible tool to keep the debtor afloat while it negotiates with its most important creditors."

The aim of the restructuring procedure is for the debtor and creditors to agree on a plan to restore the debtor's solvency, ensure the feasibility of its operation, reduce its debts and enable it to meet its obligations. The law does not tie the parties' hands, i.e. they can agree on any solution that they deem beneficial.

Tools to assist debtors

To ensure the success of the restructuring, the law gives debtors several tools to improve their position, among them:

• The debtor is assisted in the procedure by restructuring experts, if necessary or requested by one of the parties. The experts are responsible for assisting in the preparation of the restructuring plan, negotiating with creditors and conducting the negotiations as well as for the correct implementation of the restructuring plan. The expert support is not only important to make the restructuring plan realistic, but it is also expected to help the agreement by providing a neutral perspective.
• The introduction of some form of a new financing (rescue financing) is often essential for the success of the restructuring plan. Unfortunately, the law does not go into detail and does not give absolute priority to creditors providing such rescue financing. Nevertheless, it provides some relief, since if the debtor is not rescued by the restructuring and falls into insolvency, other creditors may not challenge the security of this rescue financing. Generally, security interests provided by the debtor at a time of imminent insolvency constitute an undue preference of the creditor, so that the security interest securing the rescue financing would be challengeable. But the law eliminates this option.

Advantages of a new restructuring procedure

Overall, the main advantage of the restructuring procedure over a purely contractual agreement between the parties is that a restructuring plan must be adopted by majority vote. This avoids the all-too-frequent situation where a single stubborn creditor blocks the agreement and consequently the debtor's survival. Compared to the current bankruptcy procedure, it also has the advantage of giving creditors much more decision-making power, not tying the debtor's hands and not automatically turning any unsuccessful negotiation into a liquidation proceeding, formerly a significant risk for debtors. It is therefore expected that the introduction of the restructuring procedure will strengthen the position of companies and their creditors in Hungary, which will have a positive impact on the economy in the long-term.

author: Gergely Szalóki