Hungary: Coronavirus - Insolvency considerations
Regulators and governments across CEE have introduced or are proposing several measures to mitigate the worst economic fall-out of the coronavirus situation. These measures generally include either hard (i.e. legally mandated) or soft (recommended) moratoriums on loans allowing for payment deferment without triggering default provisions, special state-guaranteed emergency financing schemes as well as certain broader macroeconomic remedial measures (bail-outs to impacted small entrepreneurs, tax deferments, “kurzarbeit”-type labour-cost subsidies etc.).
With the on-going corona virus situation continuing to escalate, some jurisdictions are already examining insolvency moratorium as an interim measure to prevent an epidemic of insolvencies. For example several jurisdictions such as Germany have proposed insolvency moratoriums/waivers, whereby the otherwise applicable legal obligation to file for insolvency by the distressed company´s directors is abrogated under certain narrowly drawn circumstances. Although no formal legislative proposal has yet been made in Hungary with regard to such insolvency exemptions, these are being currently debated across professional associations and think tanks alike.
The Hungarian Act No. 49 of 1991 (the Insolvency Act) bases on a cashflow type of insolvency test. This means the debtor is considered insolvent if a claim of a creditor more than 20 days past due is not paid, for whatever reason. In some very limited cases, for example if the debtor files for insolvency against itself (a very rare occasion in Hungary) the balance sheet test applies. This is a general over-indebtedness test when aggregate liabilities are greater than aggregate assets.
Unlike other jurisdictions the directors of a Hungarian insolvent company do not have the direct obligation to file for insolvency. However, they are obliged to consider creditors’ rights in a financially distressed situation and make the necessary steps. Thus the majority of the insolvency filings is done by creditors.
No insolvency moratorium at present
Hungary has not yet imposed a mandatory insolvency moratorium. However, a temporary ban for creditors to file for insolvency of their debtors may be a welcome reprieve and even an economic necessity. Moreover, the Hungarian judicial system would most likely not be equipped to handle an epidemic of insolvency filings.
Scope of a potential insolvency moratorium
The purpose of the moratorium would presumably include a ban on insolvency filings for a certain deadline and in addition the extension of several procedural deadlines, e.g. hardening periods, provided the debtor´s insolvency was the proximate result of the current extraordinary economic situation (it is conceivable that the debtor would bear the full burden of proof, unless blanket exemptions were given by industry/sector). The obligation of the debtor´s directors to consider creditors’ rights in a financial distressed situation would have to be temporarily abrogated as well.
Although at present no amendments to the Insolvency Act are being formally proposed by the legislature, the on-going debate as well as developments in neighbouring countries may result in the unprecedented temporary suspension of certain insolvency requirements, most likely along the lines of the above suggestions. The situation should be closely monitored for the near future.