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Why is it necessary to amend the secured transaction regime of the Civil Code?

The Ministry of Justice intends to amend the secured transaction regime of the Civil Code. The initiative is widely supported by banks and legal professionals. However, it is criticized by the courts and legal professors who were mainly involved in the preparation and drafting of the Civil Code. Both parties have their arguments and counter-arguments, but what is the main problem with the secured transaction regime of the Civil Code?

by Dr. Gergely Szalóki, Attorneys at Law, Schoenherr Hetényi

The new Hungarian Civil Code entered into force two years ago and provided brand new concepts regarding secured transactions, which generated discussion among legal professionals and gave rise to severe criticism. The Ministry of Justice, recognizing these critics, entered into discussions with leading law firms, courts, banks and professors and such discussions may lead to the amendment of the secured transaction regime of the Civil Code. The Ministry of Justice is currently scrutinizing the critics and the suggestions of legal professionals and the business sector.

The Ministry of Justice also faces criticism regarding its initiative mostly by professors and the courts claiming that the Civil Code should not be amended within such short period of time and the court practice should be given time to resolve those regulatory uncertainties that are unquestionably present in the Civil Code. The counter-argument is that certain problems are so severe that they need the immediate intervention of the legislator.

But what rules of the Civil Code received such severe criticism and were thought to cause such problems that jurisprudence cannot resolve? Without intending to go into an exhaustive list, we would like to highlight two examples. The current rule of the Civil Code renders that security interests be terminated in the case of transfer of contractual position regardless which position is affected by the transfer or if the security provider has given its consent to such transfer or not. The amended law would foresee that the security interest does not terminate under any circumstances but remains in place; and the consent of the security provider will only be required in the event that the debtor transfers its contractual position (i.e. it would be possible to implement a change in the creditor’s position without the involvement of the security provider).

Secondly, it is also being criticized that the Civil Code abolished the non-accessory mortgage when it entered into force on 15 March 2014, which caused a hiccup in the market of the mortgage-backed instruments. The Hungarian National Bank intends to stimulate that market. For years such instruments relied on the non-accessory mortgages which were transferable without the transfer of the underlying loan. Thus, it is now envisaged to re-introduce this type of security interest for the sake of mortgage-backed instruments.

Beside listing the severe problems, the pro-amendment side argues that even in the event of smaller regulatory uncertainties, the legislator should rectify the wording of the Civil Code. The banks, who are supposed to make business decisions today, cannot wait three, five or even ten years until the courts develop a uniform practice on these uncertain rules. The businessmen expect the lawyers to tell them how and what they may do and how and what they may not do. By the principle of rule of law, lawyers should be able to provide definitive advice. However, the uncertainties of the Civil Code prevent lawyers from providing such advice. Therefore, if it is possible, the banks would avoid applying such uncertain rules.

As a consequence, one may not even expect that the awaited court practice will develop at all. Given that not only banks, but generally, market players would exclude the application of the uncertain rules of the Civil Code, the eventual legal disputes could not concern such rules; therefore, the courts would not be in the position to give interpretation to such rules in their decisions. Provided that such legal disputes would see court rooms at all, since even in Hungary, alternative dispute resolution techniques become increasingly preferred.