Hungary
Borrowers should be aware of the potential implications of the EU’s Bank Recovery and Resolution Directive (BRRD), which outlines certain measures for dealing with failing financial institutions.
The BRRD applies to financial institutions incorporated in the European Economic Area (EEA), but does not apply to EEA branches of non-EEA incorporated entities.
Article 55 of the BRRD gives authorities the power to ‘bail in‘ obligations of failed EEA financial institutions and also postpone the enforcement of early termination rights against the affected institution. ‘Bail in‘ describes a variety of write down and conversion powers, such as the power to convert certain liabilities into shares or cancel debt instruments. In the case of Hungarian or other EEA law contracts, such powers override what the contracts says. In the case of non-EEA law contracts, there are requirements to incorporate such provisions into the contract.
Are there any restrictions on giving and taking guarantees and security?
Some of the key areas affecting the giving of guarantees and security are as follows.
Capacity
It is important to check the constitutional documents of a company giving a guarantee or security to ensure it has an express or ancillary power to do so and that there are no restrictions on the directors' powers that would be preventative.
Insolvency
Guarantees and security may be at risk of being set aside under the insolvency laws of Hungary if the guarantee or security was granted by a company within a certain period of time prior to the onset of insolvency.
Under Hungarian law, the creditor, and on behalf of the debtor, the liquidator may file for legal action before the court within 90 days from the time of gaining knowledge or within a one-year limitation period from the date of publication of the notice of liquidation to contest certain contracts entered into by the debtor prior to the onset of insolvency.
Financial assistance
Public companies limited by shares may provide financial assistance to third parties for the acquisition of shares issued by the public company limited by shares only under market conditions, from the assets available for the payment of dividends and provided that the general meeting has approved such decision by at least a three-quarters majority upon recommendation by the management board. No financial assistance restrictions apply for other corporate forms.
What are common types of guarantees and security?
Common forms of guarantees
Unless the parties agree otherwise, under the general rules of the Hungarian Civil Code the guarantee contract, and the statement of guarantee means a guarantor’s commitment under which payment is to be made to the creditor subject to the conditions laid down in the statement. The obligation of the guarantor set out in the statement of guarantee is independent of the underlying obligation of the debtor. The guarantor may not raise the same objections that can be made by the debtor against the creditor. The guarantor is liable to make payment under the guarantee if the creditor requested payment in writing, strictly abiding by the requirements specified in the statement of guarantee.
Common forms of security
There are three basic types of security interest that can be created under the laws of Hungary:
- a pledge;
- a charge; and
- a mortgage.
Different types of security are suitable for securing different types of assets.
Under Hungarian law it is possible to grant security over all of the assets of a Hungarian company or over individual assets. Granting security over all of a company's assets will tend to be achieved by way of a pledge agreement which will include:
- a mortgage over real estate;
- a pledge over assets which are identifiable and can be controlled by the creditors (such as equipment);
- a pledge over assets identified by detailed description (such as stock); and
- an assignment or pledge over receivables and rights.
Are there any other notable risks or issues around giving and taking guarantees and security?
Giving or taking guarantees
To be valid, a guarantee needs to be in writing and signed by the guarantor.
Consideration for a guarantee is subject to general contractual principles. In the case of a guarantee, the underlying obligations will usually be the consideration for the guarantee and so it is advisable to execute the guarantee at the same time as executing the underlying obligations to avoid any suggestion of past consideration. Often the guarantee is included in the loan agreement and so this should not be an issue. It can also be difficult to establish consideration for a guarantee as the primary obligations are between the underlying obligor and beneficiary, for example between the borrower and lender.
Giving or taking security
Once granted, certain forms of security need to be properly perfected before they are valid against third parties. Perfection formalities can range from having the secured asset delivered to the security holder, registration of the security and notice being given to third parties. Most charges created by a Hungarian company must be registered at the public registry within 15 days of its creation.
Like guarantees, for a period after a new security interest has been granted (known as the hardening period), it is at risk of being set aside in certain circumstances under Hungarian insolvency laws. Reviewable transactions include those conducted at an undervalue or preferences.
Péter Györfi-Tóth
Partner
Horváth & Partners Law Firm
[email protected]
T +36 1 510 1120
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