New restructuring regime in Hungary – Insolvency/Bankruptcy

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The arrival of the long-awaited restructuring law

Due to the transposition of Directive (EU) 2019/1023 through the Restructuring Act, which entered into force on July 1, 2022, a new preventive restructuring framework under Hungarian law is now applicable.1

Objective of the restructuring in general

The essence of restructuring is that companies in financial difficulty, when there is a risk of insolvency with a view to preventing insolvency and ensuring the economic viability of the company, enter into negotiations with all or part of their creditors and include the results of these negotiations of a restructuring plan.

The novelties of the new act in brief

  • According to the new restructuring rules, the debtor can decide on the restructuring if there is a risk of insolvency. A probability of insolvency means a situation in which there are reasonable grounds to believe that the debtor will not be able to meet its outstanding payment obligations when due, unless other measures are taken.
  • The request for the opening of restructuring proceedings is submitted by the debtor. Creditors cannot initiate restructuring proceedings, but in the rest of the proceedings creditors are granted special procedural rights.
  • Suspension of individual proceedings (moratorium) means a temporary suspension, granted by the court, of the right of a creditor to assert a claim against a debtor. The debtor can ask the court to order a moratorium (a moratorium is not an automatic consequence of the opening of restructuring proceedings). The moratorium may be general, covering all creditors, or it may be limited, covering one or more individual creditors or categories of creditors specified by the debtor. This demonstrates the debtor’s significant control over the restructuring process. The duration of the stay is defined by the debtor, but it is limited to a maximum period of 4 months. The total duration of the moratorium, including extensions and renewals, cannot exceed 12 months.
  • The objective of restructuring is to adopt and implement a restructuring plan with all or part of the creditors and thus prevent the future insolvency of the debtor and ensure the financial viability of the debtor. Classes of creditors vote on whether or not to accept the proposed restructuring plan, and final confirmation is up to the court. In the restructuring procedure, it is possible to replace dissenting creditors with a majority of creditors (“cross-class cram-down”).
  • For the purposes of the adoption of the restructuring plan, the claims of the creditors concerned are grouped into the following categories: (i) claims of secured creditors, (ii) claims of creditors linked to the economic activity of the debtor, (iii) claims other creditors, and (iv) claims of creditors resulting from a transaction that affect the debtor. This order of classes of creditors does not constitute a satisfaction order.
  • The court appoints, upon request or in the cases and under the conditions provided by law, a restructuring practitioner who assists the parties in the negotiation and development of the restructuring plan and supervises the debtor’s activities during the negotiations of the plan. of restructuring.
  • The restructuring runs from its start date until the closing date of the implementation of the restructuring plan or until the failure of the restructuring.

Expected effects on practice

The new Restructuring Act provides the missing legal framework in the area of ​​insolvency proceedings. In restructuring proceedings, the objective of the restructuring plan is new, and the concept of “interclass cram-down” and the test of “creditors’ interest” are also new.

This new set of rules offers a number of tools to ensure successful restructuring, including:

  • the intervention of a restructuring practitioner,

  • the new financing provided by creditors for the implementation of the restructuring plan,

  • and interim financing provided by creditors to allow the debtor to continue its activities while individual lawsuits are suspended.

It remains to be seen whether the new restructuring procedure will change the approach of debtors and creditors, as the procedure can be largely controlled by the parties unlike bankruptcy and liquidation procedures.

For more information on the subject of restructuring, you can access the Wolf Theiss Guide – Changing restructuring frameworks.

Footnote

1 Restructuring Act No. LXIV of 2021, Implementing Directive (EU) 2019/1023 on Restructuring and Insolvency

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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