Hungary: Capital measures - managing capital shortfalls amid the coronavirus crisis

Besides the indisputable health consequences, the occurrence and rapid spread of the COVID-19 disease also forces companies and other business actors to face unforeseen economic and financial challenges, for some, threatening even their survival on the market.

Identifying the capital issues

Some companies are experiencing capital shortfalls, forcing them to implement certain capital measures to protect both the interests of their businesses and their creditors’ interest. If it becomes clear to the management that the company is on the brink of insolvency, has stopped making payments or that the company’s assets do not cover its debt, immediate actions are needed to avoid insolvency or even total bankruptcy.

Possible measures

In such event, it is crucial for the management to inform the founder or, as the case may be, to convene the meeting of the shareholders’ immediately, and to start the crisis management by identifying and investigating the possible solutions. Such solutions may include, first of all, the following capital measures:

• Additional payments
  Probably the most plausible solution is additional payments (“pótbefizetés”) provided by the shareholders to the company. It is important to note, that additional payments may only be declared if the articles include the possibility of such payments (providing also the rules of payment, amount, frequency, schedule and re-payment thereof). Additional payments are re-payable to the shareholders once the company turns profitable again.
• Capital increase
  Another possible way to capital replenishment is the capital increase as a result of which new capital is channelled into the company. It is possible to structure the capital increase such that only a part of the shareholders’ contribution goes to the registered capital, while the remaining part increases the capital reserve. This way the equity increases more than the registered capital, improving or even restoring the balance between the two. Companies might have received shareholder loans in the past from the parent company, it is also possible to convert it into equity now. In such debt-to-equity swap no actual cash is necessary to restore financial equilibrium.
• Loans
  If any of the shareholders of the company has the resources, such shareholder may bail out the company from the distress situation by way of intra-group financing in the form of shareholder’s loans (in Hungarian: “tagi kölcsön”) . Later, such shareholder’s loans may also be used for the purposes of a capital increase (see above). To the extent possible, based on its credibility and indebtedness, the company may also rely on external financing (i.e. bank loan, overdraft facility).
• Capital decrease
  In order to achieve the expected or desired capital balance, the registered capital of the company may also be decreased. This requires the decision of the shareholders and may only be implemented if the registered capital thereafter still reaches the statutory minimum. Such capital adjustment also serves the purpose of boosting other elements of equity and by doing so restoring the capital balance at the company.

The measures decided by the shareholders’ meeting (founder) shall be implemented within three month.

Finding the right solution for individual businesses may not be obvious. Numerous factors have to be considered including the level of indebtedness, available financial resources, creditability of the company as well as group-structure and other group policies.