The Directive (EU) 2019/1023 on Restructuring and Insolvency represents a fundamentally new era for restructuring measures outside of insolvency. Restructuring frameworks should, above all, enable debtors to restructure effectively at an early stage and to avoid insolvency, thus limiting the unnecessary liquidation of viable companies.
By implementing the Directive into Hungarian law, important changes were introduced in the Hungarian legal system. 1 The new regime will constitute a radical change compared to the existing regime concerning restructuring, insolvency and discharge of debt.
The most striking features - a first overview
The new restructuring measures provide a new concept in the existing gap between contract-based restructuring and formal insolvency proceedings. The novelties in the new set of measures include the following points below.
When can a restructuring process be initiated?
According to the restructuring rules, the debtor may decide on restructuring if there is a likelihood of insolvency. The likelihood of insolvency means a situation in which there are reasonable grounds for believing that the debtor will be unable to meet its outstanding payment obligations when they fall due, unless further measures are taken. The aim of restructuring is to adopt and implement a restructuring plan with some or all of the creditors, thus preventing the debtor's future insolvency and ensuring the debtor's viability.
There is an important distinction between insolvency and the threat of insolvency which are defined under the Bankruptcy Act, which allows for the opening of liquidation proceedings.
Within the scope of the Restructuring Act, a debtor is a legal person carrying out economic activities, except for certain entities which cannot be debtors in restructuring (for instance an insurance company, a credit institution).
The debtor's decision-making body cannot take a decision to open restructuring procedure if bankruptcy or liquidation proceedings are pending. In other words: (i) if restructuring procedure is pending, bankruptcy proceedings cannot be opened; (ii) if the court, at the debtor's request, orders a moratorium, the creditor affected by the moratorium cannot in the meantime initiate liquidation proceedings.
A restructuring decision cannot be taken if 3 years have not yet elapsed since the start of the previous restructuring procedure.
What documents are required?
The debtor's decision-making body decides on restructuring on the basis of a proposal by the chief executive officer which includes, among others, the following: (i) the debtor's assets and financial situation, (ii) facts and circumstances supporting the likelihood of insolvency and that there are no legal obstacles to the decision on restructuring, (iii) the affected creditors' claims, (iv) any changes affecting the debtor's operations during the restructuring, (v) legal, economic and other aspects justifying the need for restructuring, (vi) circumstances which make it likely that negotiations with creditors can be successfully conducted and the restructuring plan can be accepted.
The request to open the restructuring procedure shall be submitted by the debtor. The request shall be accompanied by the debtor's decision on restructuring and the debtor's interim balance sheet not older than 6 months and the last available financial statements.
What is a restructuring plan?
The restructuring plan is the key element of the restructuring procedure as the aim of restructuring is to prepare a restructuring plan which is confirmed by the creditors. It is precisely the restructuring plan that allows the debtor to restore its economic and financial situation.
According to the general principles, restructuring measures shall ensure equal treatment of creditors of the same class and the restructuring plan shall not be targeted only at partial or total waiver of creditors' claims. As required by law, the restructuring plan has a minimum content but may contain additional explanations (for example criteria on the basis of which creditors are classified).
How is the restructuring plan voted on?
For the purpose of adopting a restructuring plan, the affected creditors' claims are grouped into the following classes: (i) secured creditors' claims, (ii) creditors' claims related to the debtor's economic activity, (iii) other creditors' claims, (iv) creditors' claims arising from transactions which are of interest to the debtor. This order of the creditors' classes does not constitute an order of satisfaction.
The debtor and the affected creditors who have the right to vote are involved in the adoption of the restructuring plan. Voting on the restructuring plan takes place in a meeting of creditors requiring personal attendance or by decision without a meeting. The plan must be approved by a numerical majority of the affected creditors with voting rights in each class of creditors, and a majority of the total number of votes that can be cast in that class of creditors is necessary.
In the restructuring procedure, it is possible for a majority of creditors to override dissenting creditors ('cross-class cram-down'). If the restructuring plan is not deemed to have been adopted - but it has been approved by at least one class of creditors - the debtor, the equity holders who have majority control or the affected creditors with voting rights (with the debtor's agreement) may file a request with the court regarding confirmation of the restructuring plan, making it binding upon the dissenting creditors and the creditors' classes.
What effects does the restructuring plan have?
Creditors vote on whether to accept the proposed restructuring plan, but the final confirmation rests with the court.
The restructuring plan is accompanied by the debtor's statement that the creditors' claims not affected by the restructuring plan are covered and the debtor must state that the implementation of the restructuring measures will not deprive non-affected creditors of the funds to satisfy their claims.
In order to facilitate negotiations on the restructuring plan and to ensure that the restructuring goal is achieved, the court may, on the application of the debtor, order a stay of individual enforcement actions (moratorium). The stay of individual enforcement actions may be general, covering all creditors, or it may be limited, covering one or more individual creditors or categories of creditors. The duration of a stay of individual enforcement actions shall be the duration defined in the application of the debtor, but it shall be limited to a maximum period of 4 months. The total duration of the stay of individual enforcement actions, including extensions and renewals, shall not exceed 12 months.
During the period of a stay of individual enforcement actions, the creditors to which the stay applies shall not initiate enforcement proceedings, liquidation proceedings against the debtor, and shall not set-off their claims. The time limits for launching a litigation to enforce pecuniary claims are extended by the duration of the stay of individual enforcement actions, but the stay does not affect pending litigations. During the period of a stay of individual enforcement actions, the debtor is also entitled to a payment moratorium in respect of the creditors' claims that became due before the stay.
Are (interim) financing arrangements protected?
Yes. Under a restructuring plan, new financing and interim financing is largely protected against insolvency clawback mechanism. Following the failure of restructuring, the creditors, who provided new financing or interim financing in the restructuring procedure have a privileged status in the ranking of liquidation priorities in liquidation proceedings.
Is there a simplified restructuring procedure?
The new Restructuring Act shall enter into force on 1 July 2022 and represents a new era for restructuring law outside of insolvency. Overall, it remains to be seen whether the new restructuring process will indeed foster the resolution of insolvency situations and will change the approach of debtors and creditors and thus change current practice, which would be a positive development. We draw attention to the following:
- Restructuring measures encourage debtors to apply for restructuring at an early stage of their financial difficulties as they remain in control of their assets and the day-to-day operation of their business.
- The new restructuring procedure enables creditors to actively participate in the choice of measures envisaged in relation to the objectives of the restructuring operation, and creditors are granted special procedural rights during the restructuring procedure.
- A restructuring practitioner assists the parties with negotiating and drafting a restructuring plan and supervises the debtor's activities but without the debtor losing control of its business.
- In restructuring procedures, the stay of individual enforcement actions (moratorium) does not automatically apply to all creditors. The purpose of the protection is to give the debtor sufficient time to negotiate a restructuring plan with the affected creditors in order to continue and restore the financial situation when it appears likely that the debtor's insolvency may be prevented. The stay of individual enforcement actions can be general or limited. A limited stay of individual enforcement actions covers one or more creditors or a group of creditors based on the debtor's decision. Considering that a court order on a limited stay is not published, creditors (in particular financial creditors) will not be aware of the stay and hence it will not affect any other contractual relations of the debtor.
- The Restructuring Act lays down minimum standards for the content of a restructuring plan, so the debtor and creditors may formulate a plan which may contain additional explanations and key factors. The restructuring plan on the one hand focuses on the payment extensions expected from the creditors, on the other hand contains measures undertaken by the debtor.
- Generally, some creditors can have contractual rights, provided for in so-called ipso facto clauses, entitling them to terminate or modify a contract solely on account of insolvency of the debtor, even if the debtor has duly met its obligations. In restructuring procedures, creditors are not allowed to invoke ipso facto clauses which make reference to the restructuring or the stay of individual enforcement actions.
- As an important creditor protection rule, it should be recognised that satisfying the 'best interest of creditors' test means that no dissenting creditor is worse off under a restructuring plan than in liquidation proceedings.
- An important feature of the restructuring plan is the so-called cross-class cram-down. It allows the debtor to apply to the court for approval of a restructuring plan, even where there are dissenting creditors' classes, and the court may approve such a restructuring plan if certain conditions are met. This is to ensure that creditors do not unduly impede the adoption of a restructuring plan which will make the debtor viable again.
- Last but not least, from a precautionary point of view, restructuring measures should be considered if a debtor in financial difficulties is not economically viable or cannot be readily restored to economic viability, and the restructuring efforts could result in the accumulation of losses to the detriment of creditors. Therefore, in case of non-viable businesses with no prospect of survival, the insolvency proceedings should be considered.
1. Act No. LXIV of 2021 on Restructuring, implementation of the Directive (EU) 2019/1023 on Restructuring and Insolvency
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.