Category: Hungary

The occurrence and rapid spread of the COVID-19 disease and related legislation force companies and other business actors to rethink the method of their operation. The Hungarian Government declared a State of Danger through Government Decree No. 40/2020. (III.11.) and provided other provisions on the operation of legal entities in Government Decree No. 102/2020. (IV.10.) (hereinafter: “Government Decree”) in connection with the current situation. In this guide we intend to present the most important changes introduced by the Government Decree.

Complying with the stay-at-home order

First of all we would like to highlight that the rules of the Government Decree are not applicable if the shareholders’ meeting or the sole shareholder is not obstructed at the decision-making while complying with the stay-at-home order. In case the shareholders are obstructed, the shareholders’ meeting may not be held, even if the meeting has already been convened. 

Shareholders’ meeting

The decision-making by the shareholders may be held with the participation of the shareholders by electronic means (e.g. Skype, Zoom, Webex etc.) or via written consent procedure.
By companies where the number of the shareholders is 2-5 the shareholders’ meeting may be held by electronic means or via written consent procedure with the participation of all the shareholders. If the company has 6-10 shareholders the majority of the shareholders may request an electronic or a written decision-making and if the number of the shareholders’ exceeds 10 the management is entitled to initiate it.

The sole shareholder companies may still make the resolutions in writing which takes effect upon its communication to the management.
For the use of electronic means the management is entitled to lay down the rules (e.g. the devices and the IT applications) in accordance with the Government Decree and communicate them with the shareholders. The agenda and the draft of the resolutions shall be communicated to the shareholders.

The management is entitled to initiate a written consent procedure (decision-making without meeting) and shareholders shall be given at least 15 days to send their vote to the management. The vote is valid if the number of the draft decision, the content of the vote and the shareholder is identifiable from the vote (name, address or seat, by legal entities the name of the representative).The decision-making process shall be considered effective if the number of votes sent to the management corresponds to at least the number of shareholders with voting right required to attend for a quorum if the meeting was in fact held in session. The shareholder may also send the vote by e-mail. (details of restriction mentioned below).

The above mentioned rules are not applicable to public limited companies (in Hungarian: “Nyrt.”).

Declarations via email

The bodies of the legal entity (e.g. management, supervisory board) may also send written legal declarations to the shareholder’s e-mail address signed by a qualified electronic signature or an advanced electronic signature based on a qualified certificate or by means of document certification with regress to identification (in Hungarian: “ADVH”).

Shareholders may also communicate their legal statements to the legal entity by email. However, if a shareholder is a legal entity it shall sign its declaration by a qualified electronic signature or an advanced electronic signature based on a qualified certificate or by means of document certification with regress to identification (ADVH). In case the shareholder is a natural person a simple e-mail is also sufficient (electronic signature is not required), but the declaration shall contain data necessary for identification. 

Management

Management is entitled to make decisions instead of the shareholder’s meeting if the decision- making is not possible by electronic means or via written consent procedure. Therefore the management is entitled to approve the annual report for 2019, decide on distribution of after-tax profit and also on other matters normally falling under the competence of the shareholder’s meeting, if those decisions are urgent and necessary for the uphold of lawful operation. It shall be noted that the Government appears not to extend the deadline for submission of annual reports.

Decisions may be made by the management if those shareholders who hold own shares of more than 25% object to the proposal of the management via prior written opinion by at least 51% of the votes. If a shareholder has a majority control or qualifying holding in the company, the decision cannot be made if this shareholder objects to it via their prior written consent.

By Akos Bajorfi and Akos Mates-Lanyi, Counsels, Noerr

On March 11, 2020, the Government of Hungary declared a state of emergency for the entire territory of Hungary in connection with the COVID-19 coronavirus epidemic, and at the same time a special legal order. The new type of coronavirus and some related precautionary measures have completely overturned the market in a number of markets: in some sectors (e.g. aviation, event management, other tourism-related services, automotive, etc.) production of goods/provision of services has almost completely stopped, while in other areas, the sudden and extreme increase in consumer demand is causing disruptions (e.g. mouth masks, hand sanitizers, durable foods, toilet paper, medicines / vitamins).

To date, no provision has been adopted under the special legal order allowing for a special exemption from the rules of competition law, thus the undertakings concerned must continue to pay attention to compliance. The following brief summary aims to help companies in this task, taking into account the recommendations of the European Competition Network (ECN). The Hungarian Competition Authority (“HCA”) is a member of the ECN, therefore it will take into account the recommendations of the network.

Antitrust prohibitions

Competition law prohibits agreements and concerted practices between undertakings that aim for or result in the restriction competition, and threatens such conducts with heavy fines (up to 10% of the previous year’s turnover of the undertaking concerned).

During the coronavirus, companies may feel a stronger urge to coordinate their market strategy, align their prices or the amount of products to be put on market, either in order to survive or simply to take advantage of the increased demand and achieve higher profits. Such conducts remain prohibited and should be avoided.

At the same time, cooperation between companies can be driven by mere goodwill: for example, companies contact each other to ensure that products in short supply are properly replenished and distributed fairly. Such consultations and agreements in the interests of consumers, in so far as they are limited in time and limited to what is strictly necessary to ensure the continuity of supply, may be exempted from antitrust prohibitions in the present circumstances.

It is for the companies to assess the legality of their intended agreements with competitors. However, if these cooperation projects have EU relevance and fall under EU competition law, companies may seek guidance of the European Commission (“EC”) in the following ways: The EC has recently published a Temporary Framework Communication to provide antitrust guidance to companies related to the current coronavirus outbreak. The EC has also set up a temporary process where it is willing to provide companies, where appropriate, with written a comfort letter upon request. Such comfort letter would ensure that the specific project aimed at ensuring the continuity of supply is compatible with EU Competition Law under the current special circumstances.

Overpricing of goods in short supply

In connection with the coronavirus epidemic, demand for certain products has increased dramatically, leading to an explosive increase of prices. The prices of face masks, for example, show a sixteen times increase in Hungary compared to pre-epidemic conditions.

Competition law prohibits the setting of unfair selling prices only for companies in a dominant market position – provided the price increase is not the result of a cartel as discussed above. At the same time, the Hungarian Act on Trade establishes a presumption in respect of dominant market position: if the company’s (consolidated) net sales from the retail sale of daily consumer goods exceed HUF 100 billion in the previous year, the company is presumed to be in dominant market position on this market. Due to this rule, most hypermarket chains are in dominant market position in Hungary, so they need to pay close attention to their pricing practices.

In the coming period, competition authorities across Europe will check thoroughly the pricing of products of strategic importance in relation to the coronavirus epidemic (e.g. face masks, hand sanitizers). If they find that an unjustified increase in prices has been the result of an agreement between undertakings (a cartel) or an abuse of a dominant market position, they will not hesitate to take action.

In order to prevent the overpricing of potentially non-dominant retailers, manufacturers have the possibility to set maximum selling prices. This is not only a lawful measure in the present situation, but a strongly recommended one.

Misleading of consumers

Businesses also have to meet a number of requirements when advertising their products. Currently, there is a particularly high demand for products and services that play a role in the prevention and treatment of the coronavirus epidemic. In addition to the face masks and hand sanitizers mentioned above, this includes medicinal products, vitamins and various disinfectant products and services.

According to the HCA, the authority is paying special attention to commercial practices in which

• a medicinal/therapeutic effect is unjustifiably attributed to a product. It is prohibited to attribute a medicinal effect to a product not only by making a direct claim the advertisements, but also if the advertisement provides information about the active substances or ingredients in such a way that the message of the advertisement as a whole suggests that the product has a medicinal/therapeutic effect;
• a medicinal effect is attributed to food, which is prohibited in all cases;
• a particularly sought-after product is advertised for sale when there is no sufficient stock of the product and no replacement of the stock is expected in the future;
• a product is listed on a discounted price while the product has never been sold at the price indicated as “original”.

The HCA has already launched an investigation against a company advertising a product that offers protection against viruses and bacteria.

It is important that if a company advertises through influencers, the company itself is also responsible for ensuring that influencers comply with the above rules.

Takeaway

The coronavirus epidemic has posed new challenges to businesses in many areas of law. Continuous monitoring of legislative changes and relevant regulatory practices is currently essential, of which competition law is no exception. Careful, law-abiding behavior is in the common interest of all of us even in this historic time.

By Anna Turi, Counsel, and Mark Kovacs, Associate, Schoenherr

The impending economic crisis is expected to upset the financial position of many businesses. At these companies, the responsibilities of the company manager will also change: in a near-bankruptcy situation, the manager is obliged to take into account not only the interests of the company but those of the creditors as well. But what is simple on paper is not so straightforward in practice.

The responsibilities of the company manager in general and in crisis situations

In “peacetime”, the company manager is obliged to steer the company in line with the interests of the company and its owners. If, by any decision, the company manager inflicts damage on the company or its owners, he or she bears unlimited liability towards the company.

However, as soon as the company finds itself under threat of insolvency, the responsibilities of the chief executive officer change. From then on, the interests of not only the company but also those of the creditors must be taken into account when making decisions. If the company manager does not act accordingly, creditors whose claims have not been satisfied in the event of liquidation may seek compensation directly from the company manager. This obviously requires a different kind of thinking from the manager of a company in such a situation.

Is my company under threat of insolvency?

If a firm is under threat of insolvency, this means that the management can foresee that the company will not be able to satisfy the claims outstanding against it.

It is often difficult to decide whether a company is under threat of insolvency even during the normal course of business. And this is especially true in the current situation. The business situation is changing from hour to hour, and it is often impossible to know even a few business days in advance whether a particular customer will be able to fulfil its contractual obligations. It is also impossible to foresee when a government-mandated restriction will come into force that will make the operation of the company impossible. Well-functioning supply chains can break down overnight, or demand for the company’s products can fall drastically. There are few market participants who can plan ahead for several months in such a situation and can accurately foresee their company’s liquidity position.

Therefore, deciding whether you are under threat of insolvency is a more difficult and complex task than usual, requiring extensive knowledge of the business environment and in-depth analysis of the information obtained.

And what should I do if my company comes under threat of insolvency?

In such a situation, the manager will be acting prudently if he does not take unreasonable business risks in relation to the company’s financial position, and at the same time, takes all measures needed to avoid or reduce creditor losses.

But what constitutes undue risk? Is it worth continuing production at all if there is a risk that our products will not be sold? Should we rather lay off our employees and try to minimise our losses? Should we start a marketing campaign, or try to find new markets, even if this involves additional costs?

It is generally difficult to make such decisions, and this is particularly true in these times of uncertainty. It is a general principle for a company manager to make a decision that is consistent with the requirements of sound management. It is also important to document and explain your decisions. Even if a decision may be considered unreasonable later on, appropriate documentation may show that the action was rational on the basis of the information available at the time.

In a situation when the company is under threat of insolvency, the company manager has, among other things, the opportunity and the duty to convene the company’s supreme body and to initiate an injection of capital needed to maintain its operations. It may also be a solution if the company manager requests bankruptcy protection, which can temporarily provide the company with respite in terms of making its payments.

Does responsibility only apply if I am a senior executive?

While it is primarily the chief executive who has the opportunity to take action on behalf of the company, the range of persons involved is much wider. Thus, the so-called shadow managers, who, although not senior executives, have a decisive influence on the company’s decision-making, may also have responsibilities to creditors. This includes, but is not limited to, company owners, especially the majority owner. While this does not mean that the owner has to reach into his or her pocket and provide fresh capital when the company is under threat of insolvency, it does mean that the owner cannot adopt a general-meeting resolution or approve a management decision that would put owner interests before creditor interests in such a situation.

By Peter Gyimesi, Senior Attorney, Jalsovszky

“These times are difficult for all governments and it’s very difficult to predict what will occur in the next few weeks, let alone more than that,” begins Pal Jalsovszky, Managing Partner of Jalsovszky Law in Budapest.

“When it comes to Hungary,” he says, “I believe we’re doing a bit worse than other countries in the region, as there are still a lot of people mingling in the streets and not practicing social distancing – but it’s not just that.“ Jalsovszky believes that the Hungarian lawmakers are “lagging behind“ as there are “still no economic stimulus measures to put the economy back on track or mitigate the effects of the crisis.” And, he says, time is of the essence, as the later the government implements its measures the more harm the economy will suffer.

Jalsovszky is frustrated that one of the first things the government did was to boost the pensions of retirees. “This has no direct relevance with the current economic situation,” he says. “It does nothing other than protecting a social group which is strongly pro-government.“

Despite the Government’s slowness to act, Jalsovszky reports that some valuable legislative measures are already in place. “There is a moratorium on the repayment of loans and interests. Now, while this may be good for some debtors, it is not a nuanced measure so it may hurt some folks as well.“ He says that the government has prohibited the termination of leases, but notes that, imposed as a blanket measure, this leaves some businesses that are dependent on customers, such as gyms, in trouble. “With fewer people leaving their homes due to the crisis these businesses suffer, and on top of that, they have to keep on paying their leases – which is very bad for them.”

Despite his dissatisfaction with some elements of the Hungarian government’s response, Jalsovszky says that he is pleased about the way it is communicating during the crisis. “The government is delivering information in a calm and collected manner, to avoid sparking panic and fear,” he says. “And they have been pretty good at it so far; probably a four on a scale of five.”

Jalsovszky says that the crisis has affected different business sectors differently. Still, he says, “the automotive sector has had massive layoffs, as there is less demand for certain types of employees in the production sector. The same goes for the aviation sector, hospitality, retail commerce … a lot of layoffs are expected.“

The crisis, Jalsovszky says, has a mixed effect on the legal industry. On one hand, many business transactions have been suspended, which, obviously, reduced chargeable hours for lawyers.

On the other hand, he says, “a lot of new legal issues have however arisen – especially in terms of determining if one can be fired from one’s job due to the crisis and if contractual obligations can be voided.“ Indeed, he says a number of new legal questions pop up frequently that “require urgent handling“ and that this creates work, balancing out the absence of transactional activity. “It is promising that lawyers will always be needed in these situations, and now more than ever, as the legal environment becomes more difficult to understand.“ He says, also, that liquidation, bankruptcy, and restructuring are highly active at the moment and that “much more work“ is expected in these areas.

Jalsovszky has advised Szkaliczki Holding on the sale of Szkaliczki & Partners Plastic Processing Ltd to Nefab AB, a Swedish company that offers multi-material packaging solutions and logistics services. Oppenheim advised Nefab.

Financial details were not provided.

The Jalsovszky team was led by Senior Associate Agnes Bejo and included Senior Associate Levente Bihari and Associates Akos Barati and Gabor Kerekes.

Oppenheim’s team was led by Partners Mihaly Barcza and Principal Associate Barna Fazekas, and included Partner Gabor Fejes and Senior Associate Zoltan Kolodzey.

Regulators and governments across CEE have introduced or are proposing several measures to mitigate the worst economic fall-out of the coronavirus situation. These measures generally include either hard (i.e. legally mandated) or soft (recommended) moratoriums on loans allowing for payment deferment without triggering default provisions, special state-guaranteed emergency financing schemes as well as certain broader macroeconomic remedial measures (bail-outs to impacted small entrepreneurs, tax deferments, “kurzarbeit”-type labour-cost subsidies etc.).

With the on-going corona virus situation continuing to escalate, some jurisdictions are already examining insolvency moratorium as an interim measure to prevent an epidemic of insolvencies. For example several jurisdictions such as Germany have proposed insolvency moratoriums/waivers, whereby the otherwise applicable legal obligation to file for insolvency by the distressed company´s directors is abrogated under certain narrowly drawn circumstances. Although no formal legislative proposal has yet been made in Hungary with regard to such insolvency exemptions, these are being currently debated across professional associations and think tanks alike.

Insolvency Test

The Hungarian Act No. 49 of 1991 (the Insolvency Act) bases on a cashflow type of insolvency test. This means the debtor is considered insolvent if a claim of a creditor more than 20 days past due is not paid, for whatever reason. In some very limited cases, for example if the debtor files for insolvency against itself (a very rare occasion in Hungary) the balance sheet test applies. This is a general over-indebtedness test when aggregate liabilities are greater than aggregate assets.

Unlike other jurisdictions the directors of a Hungarian insolvent company do not have the direct obligation to file for insolvency. However, they are obliged to consider creditors’ rights in a financially distressed situation and make the necessary steps. Thus the majority of the insolvency filings is done by creditors.

No insolvency moratorium at present

Hungary has not yet imposed a mandatory insolvency moratorium. However, a temporary ban for creditors to file for insolvency of their debtors may be a welcome reprieve and even an economic necessity. Moreover, the Hungarian judicial system would most likely not be equipped to handle an epidemic of insolvency filings.

Scope of a potential insolvency moratorium

The purpose of the moratorium would presumably include a ban on insolvency filings for a certain deadline and in addition the extension of several procedural deadlines, e.g. hardening periods, provided the debtor´s insolvency was the proximate result of the current extraordinary economic situation (it is conceivable that the debtor would bear the full burden of proof, unless blanket exemptions were given by industry/sector). The obligation of the debtor´s directors to consider creditors’ rights in a financial distressed situation would have to be temporarily abrogated as well.

Although at present no amendments to the Insolvency Act are being formally proposed by the legislature, the on-going debate as well as developments in neighbouring countries may result in the unprecedented temporary suspension of certain insolvency requirements, most likely along the lines of the above suggestions. The situation should be closely monitored for the near future.

By Edina Schweizer, Associated Partner, and Akos Bajorfi, Counsel, Noerr

The currently running Public Administration and Public Service Development Strategy 2014-2020 program has set high goals for the processes of public administration, including organization, consistency, professionally trained staff, cost-effectiveness and competitive service fees. To reach these goals, the debate of a legislative package aiming to simplify the operation of government offices started in November 2019 in the Hungarian Parliament. The package was accepted in December 2019, with the majority of the changes getting into effect starting in March 2020, and the remainder coming in September 2020 and January 2021.

The most important overall change to ensure the simplified operation of capital and county government offices is the removal of the pre-existing system of slow procedures caused by rigid regulation and setting the primary focus on the interest of citizens and customers. Having a long term goal of making Hungary one of the most livable countries in Europe for people and businesses as well by 2030, the package is said to affect around 700 procedures. Many disciplines and offices are affected, including the organization of the construction authority, the range of departments entitled to request information from the personal data and address registry, the scope of police cases, the communication between authority offices, the educational activity of the commerce chambers and the application for moral certificates to name a few.

The most important measures are the establishment of a single building authority system as of 1 March 2020, as well as the introduction of a one-step administrative procedure. The right of appeal against decisions of district offices is eliminated and clients can exercise their right of appeal directly in court.

By simplifying, reorganizing and speeding up so many administrative processes and reducing the number of cases, administrative costs can be saved and administrative burdens can be reduced. It is interesting to point out that quite uniquely, the package was developed based on the comments of officials working directly with the people and businesses, which means that in theory this legislative package is based on the input of about 30,000 people.

By Levente Csengery, Partner, KCG Partners Law Firm

The rapidly evolving situation caused by the COVID virus pushes governments to adapt in an ever increasing tempo. Just days after the first banking measures were introduced, additional ones became necessary to prevent further economic disturbance in Hungary.

One-week deposit tender

MNB announced that it will hold a one-week deposit tender every week, which will allow for a more efficient liquidity management by borrowing at a base rate of 0.9%. The deposit tenders have started with the first tender on April 2, 2020. During this tender, eligible banks submitted offers worth of HUF 665 billion. Pursuant to the announcement of the MNB, the issues emerged in the past weeks and the uneven distribution of liquidity among banks justifies such liquidity-absorbing deposit facility. 

Capital buffers

Effective from 1 July 2020, the MNB lifts the capital buffers applicable to domestic systemically important credit institutions due to the extraordinary circumstances caused by the COVID-19 epidemic. The capital release is expected to support the lending activity of the banking sector. The banks concerned will need to gradually build up the capital buffers the original level required by 2020 over a three-year period starting in 2022.

Debtors opting-out

The moratorium has been introduced in Hungary on 18 March to all retail and corporate financings. Retail and corporate debtors, who wish to continue servicing their debts, need to notify their banks of such intention. So far nearly 100,000 debtors have opted out of the moratorium. Banks are asking their clients to primarily use their digital platforms, such as apps and websites, if they wish to continue repaying their loans.

Insurance payments are not suspended

According to the MNB, the moratorium is limited to payment obligations under lending and leasing arrangements, i.e. it does not cover credit related insurance policies. Therefore, the premium for the credit coverage insurance must continue to be paid, otherwise it may lead to the termination of the contract by the insurer. Certain banks still charge the insurance premiums, while other banks apply the moratorium also to the insurance premium.

By Gergely Szaloki, Partner, and Marcell Olajos, Associate, Schoenherr