DEBTOR PARADISE – THE SUMMER AMENDMENT OF HUNGARIAN BANKRUPTCY ACT

25 July 2018

The Devil is always in the details. The truth of the old adage is proven by the new bill adopted by the Hungarian Parliament during the hot summer sessions of July 2018. The new law amending the Bankruptcy Act modifies only one section of the liquidation procedure, but it will further erode the already low paying moral in Hungary, giving more months of grace to non-paying debtors.

To better understand the above negative impacts, it is worth to sum up the evolution of the relevant provisions of the Hungarian Bankruptcy Act.

The first 20 years

Liquidation procedures with the aim of debt collection are present in the Hungarian legal system for more than 30 years. The Bankruptcy Act, adopted in 1991 made it possible from the very beginning to launch liquidation procedure because of non-payment of non-disputed invoices.

This “weapon” was used by creditors in practice as an alternative of litigation, because due to the special features of liquidation procedure – procedure in writing, lack of court hearings, witness testimonies – it was possible to collect undisputed claims within 0,5 – 1 year while a classical litigation took more years.

In practice, the vast majority of debtors after being declared insolvent in a liquidation by a first instance court order paid to the creditor. If they still wanted to make a legal dispute, they sued creditor and tried to claim the money back.

Reasonable CEOs did not want to risk whether the appeal is successful or not, because in case it was unfounded, the company was declared insolvent in a minute, and the court-appointed liquidator took control of the company.

2012 – The wall is breached

The above rules were  modified in 2012, when the Bankruptcy Act made it possible  for the creditor to withdraw the liquidation procedure after the second instance court order was issued, but before it was published in the Company Gazette. This obviously happened in case the debtor paid in the meantime.

Even if this solution is not the most elegant from legal point of view, because it breaks through the principle of “res judicata”, the wish of the legislator was clear: it is unreasonable to push into liquidation businesses in “good standing”, if they could agree with their creditors, even after the 24^th hour.

2018 – Lex Airport

The problem that 2012 amendment gave an option to creditors to blackmail debtors: certain creditors made conditional their withdrawal from the liquidation procedure upon further conditions, which were falling outside the scope of the original claim, enforced in the liquidation procedure.

For example, certain creditors tried to force the debtor, threatened by the declaration of insolvency, to pay other claims, or make further concessions in different legal disputes.

The recent amendment of the Bankruptcy Act makes this kind of creditor’s tactic impossible in the future. In fact, it provides that after being declared insolvent by second instance court order, and before the publication of this order in the Company Gazette, the debtor can pay the claim, which forms the basis of the liquidation, and in this case the court shall terminate the procedure.

Out of thy frying pan into the fire

It seems that the legislator, by passing a law to solve rather exceptional problems, has gone from one extreme to the other, or even worse.

In the vast majority of debt collection aimed liquidations, there are simpler creditor-debtor relations, where the legal dispute is between small and medium sized businesses, around one, or two unpaid invoices.

In these cases, there are no complex contracts or more ongoing legal disputes between the parties, which is more characteristic in the relations of bigger corporations, where it is worth to use tactics in relation with the withdrawal of liquidation, in order to win other legal “battles”.

At the same time the opportunities, provided by this new legislation will be used by both small and bigger businesses too.

Given that debtors will have the possibility to avoid liquidation after the delivery of the second instance court order, by simply paying a sum to the creditor, the vast majority will honour payments in the 25^th hour.

It means that the first instance court decision declaring insolvency will not have any force, the debtor will appeal, and he will pay the sum only after the court of second instance declares the insolvency in a 6-12 months procedure.

The icing on the cake is that the new rules will be applicable in ongoing proceedings, too.

Based on the above, who would not say that Hungary is a Debtor Paradise?