Hungary collection profile

It is difficult to obtain reliable financial information on Hungarian companies. On one hand, it is mandatory for most companies to submit their financials to the Courts of Registration every year. On the other hand, although this information is thus openly available, there are in practice various methods to make these figures look better than they actually are. Audits are far from systematic, especially for small businesses.
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.

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.
  

Hungary has a Civil Law system in which claims are allocated to specific courts, taking into account the subject matter of the claim and the amounts at stake. Following changes from 2012 (based on Act CLXI 2011), the names and attributions of courts have been modified. Claims in excess of HUF 30,000,000=EUR 83,700 and claims relating to insolvency, administrative disputes, intellectual property, company law or international transportation would now fall under the jurisdiction of 20 County Courts which increasingly operate through specialized divisions. Other cases would belong to Township Courts, but claims under HUF 200,000=EUR 5,580 can only be resolved through payment injunctions delivered by public notaries without geographic restrictions.
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.

Similarly, Recast Directive 2011/7/EU allows charging a fixed sum of EUR 40 as collections cost to the debtor (minimum supplementary damages). The costs ought to be charged systematically, however because the transposing law’s wording is complex, it is largely unclear how the rule should be applied in practice.

Retention of Title (RoT) clauses aiming at retaining ownership over goods pending payment of the related invoices are rather uncommon in Hungary and some sophisticated forms of RoT have actually been considered invalid (the new Civil Codex does not consider them at all).
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.

The most common payment methods are often used in a complementary manner and may be listed as follows:
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.

Commencing ordinary legal action in Hungary is not advisable and amicable settlement opportunities should always be considered as a favourable alternative to court proceedings. Indeed, the Hungarian judiciary system is overall excessively formal and costly, while the courts have difficulties coping with the caseload because they are often ill-equipped and there is a lack of trained staff. In particular, negotiating payment instalments is interesting insofar as they constitute obvious debt recognition titles (if authenticated by a bailiff) which would then become enforceable upon court approval whenever the agreement is disregarded.
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.

Legal dunning ought to start with a registered Demand Letter recalling the debtor its obligation to pay the principal together with late payment interests (as contractually agreed or taking a legal rate as a reference). Importantly, since insolvency laws were amended in 2006, dunning letters constitute a legal basis to request a company’s liquidation, with very limited options for the debtor to dispute the claim. If handled properly, such a threat subjects the debtor to considerable pressure and may help reach a compromise.
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.

Client’s extract from company register (preferably notarized),
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.

Commercial claims must be brought before the courts within five years from the date where the cause of action arose. Statutes of limitations are considered as substantive legal requirements and failure to react in due time would bar access to courts unless the debtor acknowledges the debt. The parties may also agree on a different limitation period.

In emergency situations, precautionary measures may help preserve the creditor’s interests pending a final decision provided that a request is brought before or with the main claim. It is however necessary to demonstrate that the measure would allow preventing of imminent damage or maintenance of the status quo, and the court would often order the claimant to provide security on costs in order to protect the respondent from irresponsible action. The respondent may lodge an appeal against interim orders, but the procedure has no suspension effects on the order. Enforcement of interim orders is left to a bailiff, who is entitled to issue attachment orders on the respondent’s assets. In practice, the courts would very rarely order such measures.

The defeated party is entitled to lodge an appeal against the decision rendered by the County Courts in first instance, within 15 days of notification of the decision, before one of the country’s five regional Courts of Appeal. The court will review the case on points of fact, law and procedure but it is not possible to submit new evidence on appeal. Decision rendered in second instance may also be appealed before the Supreme Court (Curia) but the latter normally focuses on legal interpretation matters.

A judgment is enforceable as soon as it becomes final (i.e. when all appeal venues have been exhausted). If the debtor fails to satisfy the judgment, it is possible to request an enforcement order from the Court under Act LIII of 1994 on Judicial Enforcement (the Enforcement Act). In this case, the court would typically order specific performance (i.e. payment) in which case the bailiff can gradually increase the measures necessary to enforce compliance, from seizure of bank accounts to foreclosing real estate. The beneficiary of the enforced decision does not need to request the performance of these enforcement actions separately. Fines may also be imposed on the debtor.

Litigation proceedings in Hungary may be excessively long, two to three years may be necessary before obtaining a final and enforceable order, depending on the complexity of the case. In practice, it is not uncommon for a process to last five to six years and in certain cases even ten years. Enforcement may require eight to nine years but could reach an additional two of years depending on the difficulty faced in locating the debtor’s assets.
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.

The successful party may request from the court a reimbursement of costs deemed necessary to defend the claim, which would be paid by the defeated party. Cost allocation would usually take into account the parties behaviour (good faith, delaying attempts), but full compensation of the successful party’s legal costs is rarely ordered.
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.

The Chamber of Industry and Commerce (Kereskedelmi és Iparkamara) has become the most efficient and common alternative dispute settlement method, especially with international partners. However, while it is usually faster than ordinary proceedings, arbitration may be costly and time consuming in complicated cases.
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.

In certain circumstances, reaching a court decision outside Hungary may be cheaper and quicker. Hungary is a signatory to the Rome I Regulation on the law applicable to contractual obligations, which stipulates that parties of a contract may, by mutual agreement, choose the law applicable to their contract and select the court that will have jurisdiction over disputes. Therefore, foreign traders may well solve their business disputes in a foreign forum. It is however essential that the agreement be characterized by an international connection (for example, one party has elected domicile in another country, or the place of execution is located abroad), and that a jurisdiction clause is specifically drafted to this purpose. Having said this, Hungarian courts normally keep exclusive jurisdiction over numerous claims dealing with consumer protection, real estate property, intellectual property, action against public authorities, company law matters, etc.
Before putting such measures into place, giving mandate to a third party to collect the debt while mediating potential disputes would seem essential.

Hungarian courts have retained exclusive jurisdiction regarding the enforcement of foreign judgments therefore enforcing certain decisions could be difficult. Otherwise, foreign judgments may be enforced under various mechanisms.
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 is characterized as where the debtor’s debts exceed its assets or where the debtor is deemed unable to settle its debts on the due date.
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.

Hungarian law does not formalize out-of-court workouts, but due to high legal constraints and as a result of the policy move mentioned previously, most insolvency proceedings in Hungary end in liquidation. Between a creditor’s request to liquidate a debtor and the court’s order, however, intense negotiations between the parties to avoid this outcome often take place and privately negotiated solutions often constitute a practical approach to avoid liquidation. If an agreement is reached between the two parties, they can request the suspension of the procedure until the agreement is respected.

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.

Liquidation proceedings may otherwise be initiated upon demand of either the debtor or the creditor, in which case a liquidator is appointed.
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.

Priority rules normally apply while distributing the proceeds to the creditors.
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.

Transactions concluded by the debtor with creditors before or during the insolvency proceedings which may be deemed detrimental to the other creditors may be cancelled by the court upon request of the administrator.
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.

Depending on the size of the company and the complexity of the financial relationships, insolvency procedures can take three to five years.

Client’s extract from company register (preferably notarized), original signed and stamped POA 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.