In this article, we provide a brief overview of the most important features of a Hungarian liquidation proceeding. We address the issue of the grounds on which liquidation of a company may take place, as well as the ranking of creditor claims during liquidation. Finally, we briefly address the issue of bail as collateral.

Liquidation Proceeding

Under Hungarian law, the liquidation of a company aims at the dissolution of an insolvent company with no legal successor. Act no XLIX of 1991 on Bankruptcy and Liquidation Proceedings (the "Bankruptcy Act") explicitly provides for the circumstances that may serve as grounds for liquidation.

Pursuant to the Bankruptcy Act, liquidation may take place if the competent court establishes that a company against which a request for liquidation has been submitted is insolvent. The court declares a company insolvent if any of the following conditions applies:

  1. the debtor company failed to comply, within 15 days from the due date, with its contractual obligation which obligation was not challenged or was explicitly acknowledged by the debtor company and the debtor company did not pay its debts following the respective payment notice by the creditor;

  2. the debtor company failed to pay its debts based on a final and binding judicial decision within the deadline set therein;

  3. the enforcement procedure against the debtor company has proven to be unsuccessful; or

  4. the debtor company failed to comply with its obligations set forth in the settlement agreement concluded during a bankruptcy procedure.

If any of these conditions applies, the court orders liquidation within 60 days of receipt of the request. At the same time, the court also appoints a liquidator from the liquidator's list. The liquidation order is published in the Companies Gazette when it becomes final and binding.

Creditors are required to report their claims to the liquidator within 40 days from publication of the liquidation order in the Companies Gazette. During liquidation, all creditors' claims are to be satisfied to the extent possible and in the order prescribed by the Bankruptcy Act. In the event a creditor fails to report its claim within the 40-day period, it may report the same to the liquidator within one year from publication of the liquidation order. However, the likelihood that such a claim will be satisfied is far lower than in case of claims reported to the liquidator within the 40-day period. Any claim reported after the one-year period will be automatically rejected by the liquidator.

Upon reporting the claim, the creditor is required to pay to a specific bank account a so-called registration fee which is currently set at 1% of the amount claimed and a maximum of HUF 100,000 (approx. EUR 420).

Ranking of Claims

After the liquidator has registered the claims, satisfaction thereof is subject to the following ranking:

  1. costs of liquidation;

  2. claims secured by pledge/floating charge prior to the start date of liquidation, up to the value of the encumbered assets and in consideration of the specific provisions of the Bankruptcy Act and the Civil Code;

  3. alimony and life-annuity payments, compensation benefits, income supplement to minors (which are payable by the relevant business entity), as well as monetary aid granted to members of agricultural cooperatives in lieu of household land or crops, to which the beneficiary is entitled for his/her lifetime;

  4. with the exception of claims based on bonds, other claims of private individuals not originating from economic activities (in particular claims resulting from insufficient performance or compensation for damages, also including the amount of warranty or guarantee obligations ordinarily expected in the given trade, as calculated by the liquidator), claims of small and micro companies as well as small-scale agricultural producers;

  5. social insurance debts and overdue private pension fund membership fees, taxes (with the exception of certain tax arrears) and public dues collectable as taxes, repayable government subsidies, as well as water and sewage utility fees;

  6. other claims;

  7. irrespective of the time and grounds of occurrence, default interests and late charges, as well as surcharges and penalty and similar debts;

  8. claims held by any executive officer or executive employee of the business entity or their close relative or "common law partner" or a business entity under the debtor's majority control, and claims resulting from the debtor's obligations arising out of contracts without any consideration, and also claims held by any majority owner of the business entity, which claims came into existence following the occurrence of a situation constituting potential danger of insolvency.

Bail as Collateral

It is worth noting that if the debtor company provides bail as financial collateral under a financial collateral agreement with a view to securing a claim before the start date of liquidation, the entity taking the bail may enforce this financial collateral according to the relevant provision of the Civil Code irrespective of whether liquidation has started or not, and is required to refund any excess collateral to and settle accounts with the liquidator. If the entity taking the bail fails to seek satisfaction from the bail in accordance with the Civil Code within three months following publication of the liquidation order, they may seek satisfaction according to the provisions applicable to a pledge. If the entity taking the bail is under the debtor's majority control, they are required to release the bail to the liquidator (i.e. the debtor's representative) upon publication of the liquidation order; the liquidator shall then proceed according to the bail agreement and shall pay the bail taker after the period open for challenging the bail agreement has passed with no challenge.

In conclusion, bail appears to be the most secure collateral from a creditor's point of view in case the debtor company becomes insolvent and undergoes bankruptcy.

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.