Will Hungary substantially amend its secured transaction regime again?

Competition

The new Hungarian Civil Code entered into force less than a year ago, on 15 March 2014, and provided for brand new concepts regarding secured transactions. In particular the regulation of in rem security interests has been substantially changed, which generated discussion among professionals and gave rise to severe criticism. 

The committee of the Ministry of Justice is pledged with the task to scrutinize the criticisms and suggestions of the legal professionals and the business sector and based on that, assess whether the revision of the Civil Code, and its secured transaction regime, is necessary or not. Should the decision of the committee be positive, the draft legislation is envisaged to be prepared by the end of this year.

But what new rules received such severe criticism? The critics aimed partly at technical solutions and partly at the conceptual level. It seems a pure technicality that it is not possible to pledge the shares of a limited partnership (betéti társaság), because the rules of the commercial register does not allow the registration of such a pledge, although it is theoretically possible to create a pledge over such shares under the Civil Code. To solve this regulatory deadlock situation the rules of the commercial register should be reconsidered. 

Again it is a technical issue that the most welcome new concept of the Civil Code, the security trustee, is rendered useless in certain cases. The appointment of the security trustee (i.e. the mere fact that the pledgees appointed a security trustee among themselves) must be registered with the relevant registry (with which the pledge itself must be registered) pursuant to the rules of the Civil Code. Nevertheless, the rules of certain registries (e.g. the commercial register) do not allow registering the pledgee in such capacity. This renders the appointment of the security trustee ineffective in respect of that particular security interest. Again the specific rules regulating the relevant registries must be reconsidered.

More of a conceptual issue, and it would require the revision of the Civil Code itself, is the regulation of the transfer of contractual positions. The Civil Code stipulates that in case the lender transfers the credit facility agreement to a third party lender, the security providers must consent to such a transfer, even though the borrower remains unchanged. Failing to obtain such consent results in losing the security interest. The criticism here is that such consent is superfluous if the borrower side of the facility agreement remains intact. This unnecessary consent requirement put on the lenders makes the sale of loan portfolios or single loans very burdensome, if not impossible. Moreover, syndicated loan structures are also exposed to this rule, since each change among the members of the syndicate would require the consent of the security providers. It is urged by critics that the rules should be restricted to situations when the transfer of contractual position is carried out on the borrower side.

Critics from both the commercial and the banking sector claim that certain rules of the receivables pledge may severely harm the business of the debtors of such receivables. The Civil Code sets forth that any amendment to the contractual relationship (from which the pledged receivables stem) made between the security provider and the debtor of the receivables is ineffective from the lenders perspective; provided, that the debtor was duly notified of the pledge. From the debtor’s perspective, who is not participating in the credit arrangement but only notified thereof, this means that the debtor is expected to make payment under the receivables pursuant to the original terms when the lender enforces the pledge even if later amendments between the debtor and the security provider were reasonable or even necessary to avoid e.g. the insolvency or illiquidity of the debtor, and even if the lender would have consented to such amendments. Even the banking sector agrees that the imperative nature of this lender friendly regulation should be relaxed by providing the opportunity for the lenders to consent to such reasonable amendments to the receivables.

The Ministry of Justice has entered into discussions with the legal professionals and the banking sector in order to detect the anomalies of the secured transaction regime and other regulations of the Civil Code that needs to be and may be cured during the revision of the Civil Code. We trust that the efforts of the business sector and the work of the Ministry of Justice will result in a more reasonable regulation of the Hungarian secured transactions as well as any other regulation that is relevant to the business sector.

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