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A new legal institution in Hungarian law: restructuring

Hungary: Another lifebelt for Hungarian firms on the verge of insolvency

A new procedure has been adopted and entered into force on July 1st, 2022 to stabilize the financial situation of companies on the verge of insolvency. This transposed the EU Directive on Restructuring and Insolvency into the Hungarian legal system. Its aim is to keep a company afloat despite its financial difficulties and for the debtor company to adopt and implement a restructuring plan with creditors to prevent a possible bankruptcy or insolvency procedure.

The restructuring procedure has many similarities with the reorganization procedure, the subject of our previous newsletter. Although they have similar aims and will run in parallel for a period (July 1 2021 - December 31,2022), they have different rules. The reason is that reorganization can be initiated by a company facing imminent insolvency, whereas restructuring can be applied in the case of a probability of insolvency. There is currently no legal definition between the two concepts, and in the absence of case law, it can be concluded that the reorganization procedure is fast, urgent, and more binding, and that it is also aimed at more distressed companies. Accordingly, it is subject to stricter procedural rules and more stringent legal conditions.

To be noted, combining the procedures is not allowed, so the differences must be considered when deciding which is better for company survival.

The main difference between the two procedures is a moratorium, starting with its imposition. In the case of reorganization proceedings, this decision is the responsibility of the expert, and if the company is deemed fit to proceed successfully, the court will order a moratorium. The moratorium is therefore subject to the prior opinion of the expert of the National Reorganization Nonprofit Kft.

In contrast, in the case of restructuring, a moratorium is imposed by the court at the request of the debtor and can be general, covering all creditors, or limited, only for the creditors concerned. It may last up to 1 year and may be temporary. It is therefore up to the debtor to decide which creditors to negotiate with and who to involve in the procedure. Close judicial control is present throughout the procedure as the main element of the procedure, the restructuring plan, is also approved by the court.

Importantly, legal representation is mandatory for both procedures, so companies should consult their advisers before they start to decide which institution to use to help their distressed firm.

Source: Act LXIV of 2021 - on restructuring and amending certain acts for harmonization purposes,
Government Decree 345/2021 (18.VI.)
on reorganization and Act XLIX of 1991
on Bankruptcy Proceedings and Liquidation Proceedings and Act V of 2006
on Public Company Information, Company Registration and Winding-up Proceedings,
DIRECTIVE (EU) 2019/1023 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

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