Do not Delay in Registering the Amount of Your Pledges

Inside View

Dr. Edina Nagy, Lawyer, Director, LeitnerLaw Ügyvédi Iroda

To ensure the safety and smoothness of lending practices, it was deemed necessary to make information on company pledges more transparent. Therefore, according to the new rules of the Company Act, firms with credits have to register the amount of their pledges.

The deadline for the registration of pledges created before Jan. 1, 2024, is the first amendment of information recorded in the company register, but not later than Dec. 31, 2024.

It is worth respecting this deadline, both because companies can make their notification free of charge before it expires and because failure to do so would constitute an infringement. The application concerning a pledge may be submitted via a legal representative.

Before June 24, 2023, the Hungarian Civil Code did not demand that the parties to a contract specify the exact extent of the pledgor’s liability when the contract was signed. This meant that third parties could find out that certain assets had been pledged but they could not determine the amount of the liability. This regulation created problems for the economically crucial lifeline of loan financing. For this reason, the relevant rules were modified as of June 24 last year. Under the new rules, generally, all pledge contracts must now state the amount of the secured claim or the maximum amount up to which the pledgee may seek satisfaction from the pledged assets.

In line with the modification of the Civil Code, the rules governing the registration of pledges over shares in the company register also changed. Since Jan. 1, the company register has to state the amount of claims secured with a pledge or the maximum amount up to which the pledgee may seek satisfaction from the pledged shares, and the prohibition of sale and encumbrance created on the shares (if any) and, finally, information on any sub-pledge created by pledging the pledge over the shares. The new rules of the Companies Act apply to existing and new pledges equally.

However, the new rules are not entirely logical because the shareholder acting as the pledgor and the pledgee are responsible for having changes associated with a pledge recorded, whereas other changes in corporate information must be reported to the competent court of registration by the company itself (or more precisely, its management).

A pledgee will almost surely not be aware when the relevant company first applies for the registration of corporate changes after Jan. 1, 2024, and a shareholder acting as pledgor will not necessarily be aware of this either, unless it cooperates closely with the company’s management. The requirement to align the reporting of information on a pledge with the first application for registration of corporate changes is also curious because two separate submissions will have to be made anyway: one by the pledgor or the pledgee and the other by the company itself.

An application concerning a pledge may be submitted via a legal representative, and no fees are payable if the submission is made within the deadline. Failure to perform this obligation will not affect the existence of the pledge or the pledgee’s rights, but the relevant fees will be payable if the deadline is missed.

Many Hungarian banks have already reminded their debtors to provide for the additional information to be recorded in the company register. However, in the case of foreign financing banks, it will instead be the Hungarian debtors and their shareholders who will have to keep track of the relevant amendments to be made in time.

LeitnerLaw Szabó & Partners works closely with the 30-year-old LeitnerLeitner, a tax, accounting consultancy and audit firm. Due to this, LeitnerLeitner and LeitnerLaw clients have access to all the services related to economic and business matters in-house. LeitnerLaw Szabó & Partners Law Office supports its clients with advice in various areas of international business: for example, family businesses, corporate transactions, banking and finance, restructuring and insolvency, commercial matters, labor law and tax.

This article was first published in the Budapest Business Journal print issue of May 31, 2024.

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