New insolvency regime gives creditors more active role

New insolvency regime gives creditors more active role

Contributed by Gárdos Füredi Mosonyi Tomori

January 29 2010

Introduction
Key provisions
Main changes
Comment

Introduction
In 2009 the number of insolvent companies in Hungary rose by 36%. Although Hungary's bankruptcy procedure is well established in legislation, it largely failed when the country was badly hit by the global economic downturn, leaving many companies with no prospect of survival. In its search for solutions, Parliament recently adopted Act 51/2009, which amends the Act on Bankruptcy and Liquidation Proceedings (49/1991).
The reform aims to make bankruptcy proceedings attractive to debtors and creditors and to provide a viable alternative to liquidation proceedings. The act is particularly relevant to banks and credit institutions, as although it restricts their ability to enforce overdue claims, it may improve their overall chances of recovering loans.

Key provisions
One of the most significant features of the new regime is the so-called 'prompt payment moratorium', whereby the debtor obtains a payment moratorium automatically as of the date on which its petition for bankruptcy protection is published. If the court approves the petition, it extends the moratorium by 90 days. This order can be made without the creditors' consent, which is a significant departure from the previous regime.
Creditors must report their claims to the court-appointed bankruptcy administrator within 30 days of commencement of proceedings. Within 45 days of the commencement date, the debtor must convene a creditors' meeting in order to conclude a composition agreement. The meeting has the authority to extend the payment moratorium: (i) for up to 180 days from the commencement date, provided that consent is obtained from a simple majority of creditors holding voting rights (in both the secured and unsecured classes); and (ii) for up to one year if two-thirds of such creditors so agree. The total payment moratorium may not run for more than one year from the commencement date.
The aim of the moratorium is to preserve the bankruptcy estate in the interests of reaching a composition with the creditors. To this end, the moratorium provides that creditors cannot:

• offset claims against the bankrupt company (eg, netting cannot be completed during the payment moratorium);
• claim payments;
• terminate agreements with the debtor on the basis of payment default; or
• enforce a pledge, security deposit or call option created for security purposes.

The new rules provided for an exemption from these limitations whereby the moratorium did not affect the enforceability of a financial collateral and close-out netting arrangement between institutional counterparties, such as:

• public sector bodies in the European Economic Area;
• international financial institutions;
• national central banks;
• the European Central Bank;
• credit institutions;
• investment firms;
• financial enterprises;
• insurers;
• collective investment firms; and
• central counterparties in undertakings for collective investment in transferable securities.

However, this new regulation was inconsistent with the regulation that applies in liquidation procedures, where the scope of the exemption is not limited to institutional parties. Therefore, in mid-December 2009 Parliament amended the provisions with effect from January 1 2010. Thus, in bankruptcy procedures initiated after January 1 2010 the enforceability of financial collateral and close-out netting arrangements will be unaffected by the payment moratorium, provided that at least one of the parties to such arrangements is an institutional party.
If a composition agreement cannot be reached, the court will stop the bankruptcy proceedings and will declare the debtor insolvent, at which point the bankruptcy proceedings become liquidation proceedings by virtue of law.

Main changes
Previously, creditors had one year from the start of the liquidation proceedings to report their claims to the liquidator. This period is now 180 days. The deadline for convening the creditors' meeting has been shortened from 90 days to 75 days. Under the former rules, the liquidator retained the right not to convene a creditors' meeting if the debtor's assets would not cover the cost of the liquidation proceedings or the debtor's records were incomplete. Although this rule was intended to apply only in exceptional cases, it became the general rule, which led to a significant reduction in creditors' interests. As a result, the new regime makes it mandatory to convene a creditors' meeting in all cases. The act introduces a new category of claim to be reported to, and taken into account by, the liquidator. Previously, contingent claims could not be accepted before they became due, but the new provisions expressly provide that claims arising from bank guarantees, guarantees by insurers or promissory notes containing joint and several guarantees can be recognized. Moreover, banks or insurers can exercise the rights in such claims as they would in a current claim.
Creditors have long had the right to object before the court to unlawful measures or failures on the part of the liquidator, but the law prescribed no deadlines for a court ruling on such objections. Moreover, such applications had no suspensory effect, causing delays that were seriously detrimental to creditors' interests. In order to solve this problem, the amendment requires the court to rule on such objections within 30 days of submission.
The conditions for appointment and removal of the liquidator have been changed to creditors' considerable advantage. The act provides a powerful weapon for creditors by allowing them to remove and replace the liquidator without specific reason, provided that they have voting rights and hold at least 67% of all claims. Those in favour of removing the liquidator may carry the decision by simple majority vote, but must do so within 15 days of the creditors' meeting. The liquidator can also be removed by the creditors for failing to convene the creditors' meeting.
Under the former rules, once the court had given the order to begin the liquidation proceedings, they could not be terminated by settlement of the creditors' claims. However, the proceedings can now be terminated before the company is liquidated, provided that all claims have been settled and the costs of the proceedings have been met.

Comment
It is difficult to assess the likely impact of these amendments. Many creditors seem sceptical about the changes, but the new regime may provide a temporary safety net for companies that have become temporarily insolvent or have lost their market as a result of the recession. The new bankruptcy regime may also be used by directors of a company on the verge of insolvency to avoid potential liability for not giving priority to creditors' interests. Creditors should be aware that by initiating bankruptcy proceedings, a debtor may effectively pre-empt or halt an individual enforcement action.

For further information on this topic please contact Edina Zrónik at Gárdos, Füredi, Mosonyi, Tomori by telephone (+36 1 327 7560), fax (+36 1 327 7561) or email (edina.zrónik@gfmt.hu).
Comment or question for author

The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.

Register at www.iloinfo.com.