September 2009 – Most new provisions of the Amending Act will enter into force on 1 September 2009 and the new provisions will apply to the proceedings launched after that date.
1 General changes to the provisions on bankruptcy and liquidation proceedings
The Amending Act changes several deadlines in the course of the proceedings, which generally results in a shortening of the length of the proceedings. In most (but not all) instances the time limits set out in calendar days will be converted to business days. With one important exception, the intention to shorten the deadlines is actually not expected to result in any significant reduction of the actual period (e.g., the time limit of 8 business days in practice will be 2-3 days shorter than the currently used time limit of 15 calendar days). The exception, where the reduction will be significant, is the reduction of the deadline available in liquidation proceedings for the lodgement of creditors’ claims from one year to 180 days.
2 Changes to bankruptcy proceedings
2.1 Moratorium
The Amending Act introduces “real” bankruptcy protection, on the basis of which an immediate moratorium may be granted to the debtor and the proceedings may also be launched without the consent of the creditors. The suspension and limitation of creditors’ rights regarding set-off and execution have been clarified.
The most important objective of the recent amendment to the Bankruptcy Act was to harmonise the law with the demands of proceedings in practice and increase its ability to provide “real” bankruptcy protection for companies in distressed situations. The overhaul of the moratorium rules is the most significant tool and probably the most important change introduced by the Amending Act. As of 1 September 2009, the court can order the immediate (and temporary) moratorium in its decree within one working day on the basis of the application of the debtor. By way of the immediate nature of the moratorium, its protective nature is ensured.
Following the ordering of the immediate and temporary moratorium, the court assesses the application. If the application is complete (or in the case of incomplete applications the missing documents have been supplemented), the court orders the “normal” moratorium. In principle, this moratorium ceases on the 0th hour of the business day following the 90th day from the publication of the respective court decree.
In the course of the negotiations with creditors, upon the request of the debtor the moratorium may be extended, but only with the consent of the creditors. With a view to protect the interests of the creditors, the aggregate duration of the moratorium (including any extension) may not exceed 365 days from the commencement date of the bankruptcy proceedings.
In principle, no set-off may be applied vis-a-vis debtors during the moratorium. From the perspective of banks and financial institutions, there is a significant new rule which provides that the bank accounts of debtors prompt collection orders cannot be submitted and/or enforced. Furthermore, money claims cannot be executed by the bank from the date when the debtor notifies the bank that it has submitted an application for bankruptcy proceedings.
The Amending Act introduces an important new provision whereby the contracts of the debtor cannot be rescinded or terminated by claiming that the debtor does not meet its payment obligations due to the moratorium.
The debtor may only assume new obligations with the consent of the administrator and payments from the assets of the debtor may only be made with the countersignature of the administrator.
2.2 Creditors’ committee
The rules of the formation and operation of creditors’ committees will become more precise, and new provisions are introduced regarding the calculation of the votes of the creditors.
The creditors may establish creditors’ committees in the course of both bankruptcy and liquidation proceedings. Compared to the current situation, the Amending Act retains the basic tasks and legal status of creditors’ committees but introduces more detailed regulations.
The rules of formation will differ in the event of bankruptcy and liquidation proceedings. However, the participation of one-third of all creditors (measured by the number of creditors) is required in both proceedings. In the context of bankruptcy proceedings, the creditors’ committee may only be established if the creditors represented in the committee also hold at least half of the total votes that can be cast. Pursuant to new provisions introduced by the Amending Act, creditors have one vote for each HUF 100,000 of debt registered as acknowledged or undisputed. By contrast, in the event of liquidation proceedings, the creditors’ committee may only be established if its members represent one-third of the claims of those creditors that are entitled to enter into a settlement agreement.
The Amending Act also makes it possible for the committees to be comprised of at least three but not more than seven members. Pursuant to a newly introduced conflict of interests rule, the debtor or any person personally or organisationally linked to the owners or executives of the debtor, as well as any person whose claim arose within 180 days prior to the launch of the bankruptcy proceedings may not be a member of the creditors’ committee.
2.3 Enforceability of the security deposit
The enforceability of security deposits during the moratorium is limited.
During the moratorium, no security interest may be enforced over the assets of the debtor, including claims secured by security deposit. In order to ensure that the debtors’ assets are under protection during the negotiations with creditors, the Amending Act sets out only limited cases in which security deposits will be enforceable and those exceptions correspond to the minimal requirements set out in directive 2002/47/EC of the European Parliament and of the Council on financial collateral arrangements. For example, if both the depositor and the depositee are qualified as investment undertakings or credit institutions domiciled in an EEA Member State, the enforcement of the security deposit is possible during the moratorium.
2.4 Role of the administrator
The Amending Act extends and clarifies the role and legal status of the administrator acting in the bankruptcy proceedings and introduces more detailed rules pertaining to the liability and remuneration of administrators.
The most important new task of the administrator is to register and classify the creditors’ claims.
The Amending Act clarifies that the administrator is required to approve the new commitments of the debtor (i.e. commitments made subsequently to the launch of the bankruptcy proceedings). In that context, the administrator may only approve commitments aiming to maintain the day-to-day operation of the debtor, reduce its losses or those that are made in preparation for the settlement agreement. The approval of the administrator to the granting of any additional security is also subject to the consent of the majority of the creditors with voting right.
2.5 Settlement in bankruptcy proceedings
In order to clarify the legal nature of the settlement, new safeguards are incorporated in the Bankruptcy Act.
The purpose of the bankruptcy proceedings is to reach settlement between the debtor and its creditors and the Amending Act has not changed this concept. In the framework of the settlement, the debtor enters into an agreement with its creditors on the conditions of the settlement of its debts. In addition, depending on the circumstances of the case, a settlement agreement may provide for the forgiveness of debt, restructuring, the granting of new securities or the conversion of debt to equity.
A settlement agreement may be agreed if the debtor receives the majority of the votes of the creditors with voting rights both in the secured and unsecured classes of creditors.
The agreed settlement agreement also applies to those creditors entitled to make an agreement who have not given their consent to entering into the agreement, or despite their notification, they did not participate in the negotiation or execution of the agreement. In addition, the settlement agreement also applies to creditors whose claims are disputed and, in the case of disputed claims, the court may order that a provision be established in order to cover the claims once the disputes have been resolved. It is important to ensure that the settlement agreement does not differentiate within a particular class of creditors on the basis of whether a particular creditor approved or rejected the settlement.
2.6 Conversion of bankruptcy proceedings to liquidation proceedings
Under the new rules, liquidation proceedings may only have priority over bankruptcy proceedings if the liquidation has already been ordered by a court decree of the first instance when the application for bankruptcy proceedings is received. In the absence of a court decree of the first instance ordering liquidation, the applications for liquidation do not prevent the launch and conduct of the bankruptcy proceedings. This is because the applications for liquidation are suspended by the court until the ordering of the bankruptcy proceedings (i.e. the “normal” moratorium) or such applications may be rejected or terminated by the court, as the case may be.
If no settlement is reached in the course of the bankruptcy proceedings or the settlement does not meet the requirements set out in the Bankruptcy Act, the court automatically turns the proceedings into liquidation proceedings without considering the existence or appropriateness of any applications for liquidation proceedings.
3 Changes to liquidation proceedings
3.1 Lodgement of creditors’ claims
The deadlines for the lodgement of creditors’ claims are significantly reduced. As a consequence, after 1 September 2009, primarily creditors with pledges have to act quickly following the launch of the proceedings in order to preserve their priority in the order of satisfaction.
In addition to the significant reduction of the period available for the lodgement of creditors’ claims from one year to 180 days, the Amending Act introduces several changes to the procedural rules of the management of the claims, as well.
The date of the lodgement of the creditors’ claims affects the satisfaction of the claims, even if the lodgement has been made within the new limitation period of 180 days. Pursuant to the Amending Act, the pledgee may only enforce its claim prior to other creditors, under the terms of the pledge, if the pledgee lodged its claim within the notification period of 40 days and paid up the registration fee. Importantly, while the pledged asset may also be sold if the pledgee lodged its claim after the expiry of the period of 40 days (but, obviously, within the limitation period of 180 days), in such circumstances the proceeds from the sale of the asset must be held separately and the claim of the pledgee may only be satisfied under the general provisions. In other words, pledgees that miss the 40 days lodgement period will only be satisfied if there is sufficient coverage following the satisfaction of the statutorily defined preferred claims.
3.2 Liability of the executive officers, disqualification
The Amending Act introduces the disqualification as a new legal instrument. In the interests of creditors and other stakeholders, the company register will provide information on the executives who acted fraudulently during liquidation proceedings.
In comparison to the current legislation, the rules pertaining to the liability of executives of companies subject to liquidation will become stricter. The amount of the fine that can be imposed on executives increases to HUF 2 million when the executive fails to meet its obligations, meets its obligations late, gives incorrect information or does not cooperate with the liquidator. The Amending Act extends the scope of the rule on the basis of which the court may oblige the executive to bear the costs incurred due to the failure to comply with his or her obligations, including the cost of involving an expert. In the future, the debtor’s member with majority control will be liable as a guarantor in relation to the payment of the fine and the costs.
Under the new sanction of disqualification, which is incorporated in the Companies Act, a former executive whose liability is established by the court on the basis of the above rule but who failed to comply with his or her payment obligation may not be an executive of any business association. The disqualification will cease after five years following the unsuccessful execution proceedings vis-a-vis the executive. The related amendments of the Companies Act enable the company register to indicate whether the respective executive has been disqualified, including the commencement and termination date of the sanction. As of 1 September 2009, in the course of the establishment of companies, executives will have to declare whether they have been disqualified under the above sanction.
3.3 Duties of the liquidator
The Amending Act introduces several new duties of the liquidator but these changes do not affect the overall mechanics of the proceedings.
In the future, the liquidator will have to notify its appointment to the financial institutions holding the accounts of the debtor without delay. The liquidator will register and classify the claims already lodged in the bankruptcy proceedings immediately before the commencement of the liquidation proceedings. In addition, the Amending Act provides a more clear description of, inter alia, the accounting and taxation-related duties of the liquidator in connection with settlements during liquidation proceedings.
By Csilla Andrékó (Managing Partner)