- The conformity of domestic law with EU rules on late payment in business-to-business transactions unfortunately does not protect traders from the uncertain payment behaviour of domestic companies, with the average payment term at over 35 days.
- When considering legal action, it is worth keeping in mind that domestic courts are known for the lengthy and costly nature of their proceedings. In fact, commencing legal action in Hungary would be unreasonable in most cases and pre-legal collection efforts remain the only effective option.
- Although domestic insolvency law aims at rescuing companies to increase the chances of recovering debts, it provides no limitations as to how much of the debt may be written off in restructuration negotiations and it is rare for unsecured creditors to recover from insolvent debtors in practice.
Collecting in Hungary
Availability of financial information
Allianz Trade allocates each company a grade reflecting its financial health and how it conducts business. In addition to the openly available financial figures, our experts obtain relevant information from external providers, request information directly from the companies under evaluation, and conduct on- site visits if necessary. Grades represent a core of Allianz Trade’ knowledge and analyses, and help clients identify and avoid risk. Data is continuously monitored to offer the most up-to- date information to support management decisions.
Main corporate structures
Liability for business debts is determined by legal structures, which are described as follows:
- Sole Proprietorship (Egyéni cég, i.e. Private Company) is available for small businesses managed by an individual and for which no commercial structure is necessary. In this case, the owner is held liable for all business debts.
- Two or more individuals may also decide to share ownership and responsibilities through Unlimited Partnerships (Kkt), in which case the partners may be fully, jointly and individually liable for the actions of the other partners (while increasing fundraising capacity. Limited Partnerships (Betéti Társaság, Bt) may alternatively offer limited liability to the non-managing partners.
- Limited Liability Companies (Korlátolt Felelősségű Társaság, Kft) are in practice the most favoured legal entities because they require a reasonable minimum of capital funds (HUF 3,000,000=EUR 8,370 since March 2014) while the partners’ liability is limited to their contribution. Corporations (Részvénytársaság, Rt) tend to be used for larger structures and require a minimum capital amount of HUF 5,000,000=EUR 13,950 for private entities (Zrt) or HUF 20,000,000=EUR 55,800 for public corporations (Nyrt), which must be divided into tradable shares. In these entities, the shareholders’ liability is of course limited to the value of their shares.
- Foreign businesses also tend to settle in Hungary through Representative Offices intended to conduct liaison functions without pursuing core business activities and income creation. Alternatively, Branch Offices are allowed to conduct business activities but cannot provide liability limitations to the foreign parent company. Therefore, subsidiaries tend to be set up through Limited Liability Companies.
Trust in the Hungarian judicial system is growing as its reliability and stability are improving (compared to the country’s volatile legislative system), however transparency remains an issue since judges have enormous discretion in weighing evidence, and corruption scandals emerge from time to time.
Days Sales Outstanding (DSO)
Late payment interest
If the parties’ contract provides no agreement as to the applicable interest the base rate of the Hungarian Central Bank (Magyar Nemzeti Bank) shall be applied, increased by at least 8 percentage points (against 7 under the previous framework). In practice, however, interest rates are essentially used as a negotiation tool and are rarely paid to the creditors.
Debt collection costs
It should be noted that ownership protection in Hungary would not provide a right to request goods to be returned but merely grant a priority in case the debt is resolved through insolvency proceedings (provided that the agreement is registered in a public database maintained by the Chamber of Public Notaries). The regulations are largely unclear as to how the registration process should take place.
Sepa transfers are among the most popular payment means as they are fast, secured, and supported by an increasingly developed banking network internationally and domestically. For export transactions, transfers are usually guaranteed through an Export Credit Insurance policy, which helps minimize the risk of sudden or unexpected customer insolvency. Allianz Trade’ worldwide network of risk offices monitors the financial well-being of customers and grants them a specific credit limit up to which clients may trade and claim should something go wrong. Standby Letters of Credit (a bank guarantees the debtor’s credit quality and repayment abilities) which usually constitute reliable guarantees are not very common in Hungary.
Payment by check is also uncommon. Negotiating down payments may be advisable, depending on the amounts at stake.
Before starting legal proceedings against a debtor, assessment of assets is important as it allows verification as to whether the company is still active and whether recovery chances are good. In addition, it is essential to be aware of the debtor’s solvency status: if insolvency proceedings have been initiated, it indeed often becomes impossible to enforce a debt.
When the debt is certain and undisputed, a fast-track electronic procedure aiming at obtaining an injunction of payment (fizetézi meghagyas) from a notary is available: the Order becomes enforceable unless the respondent brings a counterclaim within 15 days, in which case the claim must be settled through ordinary proceedings. In practice, it is common for a debtor to dispute the claim in order to stall the procedure. When the debtor company has assets in other EU Member States, a European Payment Order procedure facilitating the recovery of undisputed debts (under Regulation EC No 1896/2006) may furthermore be triggered.
When conducting legal action is the only option left, the claimant must file a claim with the court which then has 30 days to decide whether the case is admissible. Upon approval, the court must serve the claim to the debtor. Hearings are organized to collect the respondent’s arguments, and the evidence is examined by the court which must then render a decision. Since the law was amended in 2010, the parties to a dispute are no longer required to demonstrate that negotiation attempts took place prior to commencing formal proceedings.
Depending on the circumstances of the case, the courts would typically award remedies in the form of compensatory damages, specific performance, injunctions or declarations, but they cannot award remedies which have not been requested by the claimant. Punitive damages are not provided by law.
original signed and stamped Power of Attorney and Proxy (signed by an authorized person included on the extract from company register), copies of invoices, CMR copies, contract between the parties, any relevant correspondence between the parties.
Lodging an appeal
Enforcing court decisions
How long could legal action take?
Domestic courts would normally make no difference between domestic and international litigation proceedings, however delays may be increased when it is necessary to obtain documents, evidence or statements from abroad.
How much could this cost?
Court costs for fast-track procedures would typically reach 3% of the claim, doubled in ordinary legal proceedings. Enforcement may also cost up to 3% of the amount. Overall, the cost of conducting legal action could reach 15% of the claim.
Legal professionals invoicing a combination of a negotiated base price and contingent fees are very common.
Alternatives to legal action
Alternative Dispute Resolution methods (ADR)
Arbitration (under Act LXXI of 1994 on Arbitration) is generally permitted provided that a written agreement was included in the parties’ contract to this end. Confidential international arbitration is also worth considering. Arbitral awards are final and binding on the parties, they are not subject to appeal and may be enforced as any other final decisions.
Mediation (under Act LV of 2002) aims at assisting the parties in finding a compromise. This ADR method is also increasingly considered.
Before putting such measures into place, giving mandate to a third party to collect the debt while mediating potential disputes would seem essential.
Enforcing foreign awards
On one hand, decisions rendered in an EU country would benefit from particularly advantageous enforcement conditions. Apart from EU Payment Orders which are normally enforceable directly in domestic courts, the two main methods of enforcing an EU judgment in Hungary are by the use of a European Enforcement Order (EEO, as provided under Regulation EC No. 805/2004) when the claim is undisputed, or by registering the judgment under the provisions of the Brussels I Regulation (44/2001).
If the judgment qualifies as an uncontested claim, it can be enforced directly (i.e. without registration) by use of an EEO provided that the debtor has identified assets in the country. A European Small Claims Procedure (as provided by Regulation EC 861/2007) aiming at eliminating intermediate steps may similarly be relied upon while enforcing decisions up to EUR 2,000.
If the claim is disputed, the procedure for registering an EU judgment with domestic courts is relatively simple. The judgment holder must apply to the relevant court for the judgment to be registered and provide the court with, among other documents, an authenticated copy of the judgment, a certified translation and, if interest is claimed, a statement confirming the amount and rate of interest at the date of the application and going forward. Once the judgment has been registered, it can be enforced as if it were issued by domestic courts (according to the Recast Regulation EC 1215/2012, such an exequatur procedure is no longer required from January 2015).
On the other hand, judgments rendered in foreign countries outside the EU would be recognized and enforced on a reciprocity basis provided that the issuing country is party to a bilateral or multilateral agreement with Hungary drafted for this purpose.
Hungary is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958, therefore its domestic courts ought to recognize and enforce awards rendered through international arbitration proceedings.
Insolvency in Hungary is governed by Act XLIX of 1991 on Bankruptcy Proceedings, Liquidation Proceedings and Voluntary Dissolution, which was amended in 2006. Although there are some gaps in the law, in general, insolvency procedures are regulated in detail. The new legislation points towards increasing creditor protection and significantly departs from the company rescue approach which is widespread in most countries. Insolvency proceedings are usually dealt with by the County Court of the debtor’s registered seat.
Restructuring the debt
Companies in Hungary are under no obligation to file for mandatory insolvency proceedings, but the law entitles debtors to file for reorganization proceedings as a means to overcome financial difficulties. In practice, this method of solving insolvency situations remains rarely relied upon.
Upon its application, the debtor is granted a systematic 90-day stay, with a view to reach a composition agreement with the creditors and to preserve or restore its solvency. From this moment, the acts of the debtor are overlooked by an administrator. The reorganization agreement must be validated by a majority of creditors (secured and unsecured alike), but the court must also approve the plan. The agreement binds all creditors who registered their claim, whether they accepted or rejected the plan, if the majority of both the unsecured and secured creditors separately accepted it. Should the parties fail to reach a compromise, the court would typically terminate the proceedings and declare the debtor insolvent. In this case, the liquidation phase would begin.
As a general rule, creditors alone cannot force a debtor into restructuration proceedings against its will but every creditor can directly request the debtor’s liquidation, thus skipping the entire restructuring process.
Directive (EU) 2019/1023 regulates the preventive restructuring frameworks available to debtors in financial difficulty where there is a likelihood of insolvency, with the objective to prevent insolvency and ensure the debtor's viability. The Directive’s provisions include also debt write-offs procedures for insolvent entrepreneurs and some measures to enhance the effectiveness of restructuring and insolvency procedures. The Directive has been transposed into Hungarian law with an entry into force on 1st July 2022. There is no big impact expected from implementation of this Directive as similar measures was implement in relation to Covid-19 outbreak but it has not been widely used by companies. In general these procedures are not widely used in small markets of middle sized companies that are affraid by the costs and expertize related to them. In addition, middle sized companies are more vulnerable for reputational risk that such procedures (suspending or hair cutting any companies debts) could induce.
Winding up proceedings
All creditors must lodge their claim within 40 days of the commencement of the proceedings in order to be listed in the table of creditors and have any chance to receive a share of the proceeds (late claims may be registered within up to 180 days, but the creditors would only be satisfied after all other properly registered claims are settled). The liquidator then assesses the debtor’s economic situation together with the various claims and provides the court with recommendations as to how the assets should be distributed among the creditors. The court then makes a decision.
In case a company is liquidated, the creditors are classified into several tiers, where the satisfaction of the higher tiers takes precedence over the lower tiers. Secured creditors (financial institutions, employees, public authorities) must be paid out in full before unsecured creditors may receive any proceeds. Unusually, providers of fresh cash during debt restructuration proceedings seem unable to obtain superiority over anterior debts. In addition, since it is unclear whether Retention of Title provisions would be applied (see above), recovery chances are overall difficult to quantify.
Cancellation of suspect transactions (clawback)
Similarly, liquidators may require cancellation of transactions aiming at making the debtor insolvent in order to escape its creditors (when the transaction has occurred within a suspect period of five years prior to the commencement of the proceedings), or at favouring one creditor over the others (when the transaction has occurred within 90 days prior to the commencement of the proceedings). Various timelines apply depending on the context.