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Experts: New Civil Code more bank-friendly

When the government rewrote the Civil Code in 2014, banks balked, saying it ignored the way they normally do business. The rollbacks and revisions expected to pass in Parliament in mid-June are said to be helpful for the sector.

Balázs Bodzási, deputy state secretary for business law and civil law.

When the government changed the Hungarian Civil Code in 2014, it caused headaches for banks and their lawyers. More changes to the code are due to be passed by Parliament on June 13, but this time, experts say, the proposed changes are improvements.

Lawyers will be forced to relearn the Civil Code, but attorneys who are studying the proposed amendments say that the changes are not as drastic as they were in 2014, and that most of the changes actually help facilitate banking activity and reintroduce systems that worked well before the Civil Code was amended in 2014.

The banking sector was taken aback by the 2014 Civil Code revisions, which introduced the new code that put a wrench in the way they had been handling their business.

“New concepts were introduced while the usual concepts were abolished,” says Gergely Szalóki, head of banking and finance at Schoenherr Hetényi Attorneys at Law. “Now the new amendment aims to settle this turmoil because the banking sector, frankly speaking, freaked out.”

After extensive feedback from the sector, experts say, the government decided to revise rules regulating bank activities such as clearing bad debts, selling mortgages and relying on a fiduciary security interest regime. The amendments also reduce the potential liability of executive officers, so that companies are liable for their mistakes.

According to Balázs Bodzási, deputy state secretary for business law and civil law, the latest changes are motivated by economic and political considerations. He says the government’s goal is to ease lending in Hungary, simplify and harmonize the system with sectoral laws, and reduce any ambiguities that exist in the current Civil Code.

Szalóki of Schoenherr Hetényi agrees. In his assessment, the latest legislative corrections and rollback of the previous changes are positive, and were essentially made to improve conditions for market participants.

One encouraging sign about the latest amendments is that they have heavily involved industry consultations.

Critics have blamed the government’s insular approach for making changes to the Civil Code that hurt businesses in 2014. Bodzási counters that the financial crisis forced lawmakers to adopt legislation that may have worked in leaner times, but no longer suits the current economic environment.

“It became necessary to refine, and to amend the relevant parts of the Civil Code, and we conducted an extensive coordination on the matter,” the deputy state secretary says. “The Ministry of Justice, in close cooperation with the National Bank of Hungary, and the Ministry of National Economy, elaborated the legal text, which was also coordinated with professional interest groups (such as the Hungarian Banking Association, Hungarian Leasing Association, and Hungarian Factoring Association).”

Bodzási adds that consulting with such professional groups is required under Hungarian law.

Transfer of contract

One of the new amendments proposed would tweak the rules for “transfer of contract”, a change that was made in 2014 to help with “cleansing bank portfolios”, according to Bodzási.

“The transfer of contract is a new tool in Hungary,” says Szalóki. In the old system, pre-2014, you could either assign a claim or assume a debt but a bank could not transfer its contractual position, he says. “The new Civil Code introduced the transfer of an entire contract and this was very good. The market really needed it, but this transfer of contract rendered all securities interests terminated.”

The new amendment will ensure that the security rights will not automatically cease to exist with the transfer of the contract. The change makes it easier for banks to get rid of bad debt, according to Szalóki. “Cleaning the loan portfolios would be in the interests of the entire economy, not just the banking sector,” he says.

Restoration of independent mortgages

According to Szalóki, a major criticism of the Civil Code amendments of 2014 was that many of the rules did not work technically, and in many cases they were not even adopted. This is what happened with the independent security interest, which allowed banks to sell mortgages without the relevant obligations, Szalóki says. Before 2014, “banks sold mortgages to specialized credit institutions that securitized these and sold asset-backed bonds on the market. That’s how banks refinanced themselves.” But the practice was prevented by the 2014 amendment. Now that problem will be fixed.

Rules pertaining to securities will also be amended, but constitute lesser changes, says Bodzási. “The main goal is to simplify the regulations and create harmony with the capital market act,” he explains.

Fiduciary security interests

Another element addressed in the amendments to the Civil Code is the so-called fiduciary security interests. “These are not mortgages or pledges but are based on transfer of title, such as options or assignments, which are based on general Civil Law principles that were used for security purposes,” says Szalóki. “For example, if I loan you money and in turn you sell me your house and then you pay back the loan, I will retransfer the title to you.”

Use of these instruments was common practice in the corporate sector and worked well in many cases, but these securities were abolished in 2014. “This was another cause of turmoil in the market, in particular among banks, which found fiduciary security interests easier to enforce,” adds Szalóki. Eventually, legislators agreed that banning fiduciary securities impedes banks and the commercial sector from certain transactions. Under the proposed amendment, the entire fiduciary security interest regime will revert back to what it was prior to 2014, but such transactions will only be allowed for the corporate sector.

Liability of executive officers

The Civil Code introduced in 2014 also made it easier to hold a CEO legally responsible for damages caused by his company.

“The liability of managing directors was a very hot topic when the Civil Code was changed in 2014 because at the time a much stricter liability was introduced for them in the case of damage to a third party outside of a contractual relationship,” says Kinga Hetényi, Managing Partner at Schoenherr Hetényi Attorneys at Law.

The new amendment will, for the most part, revert the Civil Code back to its earlier status. The current wording stipulates that a company’s managing director is liable for the damage that he or she caused to a third party in connection with his or her legal relationship with the company, Hetényi explains.

“The new, proposed wording clears any ambiguity and states that the company will be liable for anything in the course of the managing director’s activity that causes damage to a third party, and only if that damage is caused intentionally will he or she be liable, together with the company,” she says.