Category: Hungary

The Hungarian Government is considering creating new legislation to cover all kinds of insolvency proceedings, including bankruptcy, liquidation, winding-up, and dissolution proceedings. This move has been roundly welcomed, especially by creditors, as the current law is from 1991, and although it has been amended numerous times, it counts as an outdated and much-criticized piece of legislation.

While work on the new law is still it its initial phase, the current Hungarian Insolvency Act has recently been amended to reconcile the interests of creditors secured by a pledge. The amendment came into force on January 1st, 2019. 

The Purpose of the Amendment to the Hungarian Insolvency Act

In a liquidation proceeding, creditors secured by a pledge may acquire ownership of the unsold pledged assets at the end of the liquidation proceeding. Before the amendment, such creditors were not obliged to pay certain costs that arise in connection with the pledged assets and its purchase price, unlike those creditors secured by a pledge but receiving their claim only from the sale of the pledged assets. Thus, creditors acquiring ownership of the unsold pledged assets at the end of the liquidation proceeding were in a more favorable position than those creditors who received payment from the sale of the pledged assets. 

The recent amendment aims to ensure equal treatment of all secured creditors by requiring them to pay a certain fee to the liquidator. The liquidator must notify the creditors that if they intend to acquire ownership of the unsold pledged assets, they must pay: (i) 3% of the minimum purchase price of the asset as an advance payment for the fee of the liquidator, plus VAT; and (ii) 2% of the minimum purchase price of the asset. The creditor has 30 days from the receipt of the liquidator’s notice make the payment. This new obligation ensures that no creditor is placed in a favorable position to others at the end of the liquidation. 

The Liquidator May Allocate the Proceeds Only If the Sale Is Not Challenged

The amendment clarifies one more important element of the liquidation proceeding. The reasoning of the Amendment Act states that the liquidator may allocate the proceeds stemming from the sale of the pledged assets to the creditors only if the sale is not challenged, or, if it is challenged, the challenge is rejected by the court. Therefore, the amendment extends the deadline for the allocation of the proceeds to 30 days from the elapsing of the deadline to file a challenge or from the date an order of the court rejecting the statement of claim is received by the liquidator – instead of the 15-day deadline that existed before. The extended deadline ensures that the liquidator has enough time to receive the court’s order to allocate the proceeds. 

Plan for a New Insolvency Act

Although amendments such as these (and the 2017 amendment enhancing the protection of beneficiaries of security interests and clarifying the position of creditors secured by call options, security assignments, or pledges over future receivables) brought the insolvency regime closer to the market’s needs in the past few years, the Government still plans to create a new and comprehensive Insolvency Act. We know only a little bit about this initiative so far, but it appears that the Government intends to emphasize the protection of creditors’ interests – in particular secured creditors – which is clearly positive from the market’s perspective. In the meantime, debtors who still have a chance to rescue their business will actually be given the opportunity to do so, but cases concerning creditors who are unable to be restored will be closed faster, simpler, and in a more cost-efficient way than they are at present.

By Kinga Hetenyi, Managing Partner, and Virag Palguta, Associate, Schoenherr Budapest 

This Article was originally published in Issue 6.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

In honor of CMS Budapest’s 30-year anniversary – the Pearl anniversary, formally, in the city often called the Pearl of the Danube – we reached out to several of the prominent partners to learn a bit more about the changes they’ve seen over the years, and the practices they manage.

CEELM: Gabriella, you’ve been with CMS since the firm (then operating as Cameron McKenna) opened its doors in Hungary in 1989, and you played a significant role in establishing it as a highly-regarded (and consistently highly-ranked) provider of top tier legal services across a wide variety of practices, including Employment, where you still lead the firm’s team. How did you build it up over the years?

GABRIELLA: We started to build up our Employment practice around the time of privatizations in the early nineties. We advised investors in the privatization process itself, and in most cases, we continued to work for them even after the transactions finished, as new problems and issues arose. Often those key issues involved employment, so we had to build up an expertise to be able to provide solutions. 

This then became our strategy: to develop practice areas that our clients actually needed on a daily basis. The more we became specialized, the more practice areas we built up. In the beginning, commercial and corporate were together, and then areas became more defined, and we had to hire more and more people who were experts in each specific area. And then we slowly grew out of legal polymaths and became a firm of highly-specialized experts. 

But the evolution didn’t stop there. What we see now is that companies have regional GCs who are responsible for several countries, so we had to be able to coordinate and advise them on a regional level. I think we recognized this trend pretty early and adapted ourselves to it. Now our comprehensive coverage of the region is one of our biggest advantages.

CEELM: Focusing on Employment in particular, can you give us a quick snapshot of where the market stands at the moment?

GABRIELLA: The area of employment went through significant changes in the past couple of decades (as did all of the other areas, of course). Currently the biggest issue is the labor shortage. While Hungary is good in attracting foreign investors, the shortage of a qualified, trained, and skilled workforce may be a problem in the long term. There are two other trends which are closely connected to the labor shortage: one is the rising popularity of trade unions, especially in the manufacturing sector, and the second is the growing need of companies to find solutions to not to lose workers whose specialized training they have heavily invested in.

CEELM:  Let’s turn to Real Estate. Gabor and Jozsef, what can you tell us about the current Real Estate market in Hungary?

GABOR:  We chatted with our Polish colleagues recently about the market, and while there are plenty of similarities between the two markets, such as low interest rates, the most striking difference is the ratio of domestic investors here. In the Hungarian market, domestic investors have played a rapidly growing role in the past ten years or so, and local institutional investors now account for 60% of the total deal volume. Just to put this in perspective, only 38% of deal volume was tied to local investors in 2016-2017, and although we don’t have the exact statistics for this, before 2008 it must have been around 10%. This is a very significant trend, but many worry that, as assets purchased by local investors are often held for a longer term, if Hungarian funds keeps buying at this rate, there won’t be enough assets left on the market and the price competition will be even greater. The recent requirement of the National Bank of Hungary that the issuance of new investment units should be made subject to a redemption period of 180 days and the commencement of consultation discussions about the fees banks may charge for the trading of real estate fund investment units may have a negative impact on the flow short term investors’ money into the real estate funds, which may create a climate change on the real estate investment market. 

JOZSEF:  Otherwise, the most important trend has been the huge influx of greenfield developments and industrial investments. We have advised several major companies from the industrial manufacturing and automotive sectors in the past few years, most of the time from the very beginning, even sometimes providing assistance in choosing the most suitable location for their investments. Of course, tax incentives always play an important role in their decisions, but other issues, such as for instance the quality of workforce, can be just as important to their decision-making process.

CEELM: Erika, you’re both the Managing Partner of CMS in Budapest, and you are in charge of the firm’s Hungarian Banking/Finance practice. What’s that sector like?

ERIKA:  I have been riding waves of the Banking and Finance Market for 23 years, alternating between financial crises, liquidations, and restructurings, and booming markets with strong competition for customers. I have also had to deal with the financial regulator’s response to these changes, with regulation and overregulation following each other in waves. As far as I can tell these waves are largely the same across all the CEE countries, although there are of course countries where events occur with a slightly different timing.

CEELM:  And how has the firm’s practice adapted to these waves?

ERIKA: Banking and Finance has become very specialized in the last several years. Twenty years ago our practice focused primarily on real estate finance and simple project finance transactions. Then, as CEE markets were populated by foreign banks, we started dealing with big banking M&A transactions. Then came the financial crisis, and with it a lot of restructuring and insolvency cases. After the financial crisis regulators in Eastern Europe – like everywhere else in the world – started a strong regulation wave which provided us lawyers with the opportunity to specialize in the interesting regulatory aspects of banking law, such as payment services, markets in financial instruments, market abuse, and so on. Since Banking and Finance moves in cycles, it is interesting to compare the ups and downs of the market and to prepare for the next move of the market.

CEELM:  Finally, Dora, you specialize in Commercial and TMT. How have you developed those practices over the years?

DORA: I arrived at CMS ten years ago – just when Lehman Brothers filed for bankruptcy – so we had to grow our practice in a time of financial crisis, on the basis of the strong foundation of the existing team. We started out with strategic advice, both in sectoral and HCA matters, and focused on what kept GCs awake at night. This proved to be a good strategy, as we now we have a commercial team of over 30 lawyers, including the strongest TMT team in Hungary (with four people ranked in legal directories) and a competition team which has three lawyers recommended and ranked. This recognition is huge, and it is something that I’m truly proud of. 

In terms of the TMT sector, we are still on the digitalization trip, like we were ten years ago. I used to say back then that it’s good to be a TMT lawyer, because in ten years every company is going to be a TMT company. I think the CEOs of both TESLA and Mercedes have said that their companies are essentially software companies – they just put cars around them.

Everything is about digitalization, and at CMS we want to not simply follow this trend, but also to shape it. Accordingly, we have initiated several campaigns on topics that keep GC’s awake at night these days: cybersecurity, data privacy, and artificial intelligence.  If we look at these topics, we see that there is huge competition between neighboring countries, and even neighboring regions. Almost all countries claim that they are the Silicon Valley of the east. As a Hungarian lawyer I cheer for Hungary to come out as the winner of this competition, but when I’m wearing my regional hat, I say “the more the merrier.”

CEELM: In honor of CMS’s anniversary in Hungary, let’s end this with a different question: What are you proudest of at CMS, or what gives you the most pleasure, at the firm?

DORA: What gives me the most pleasure? Maybe the ability to react quickly to challenges and change, which is extremely crucial in our jurisdiction. I am very proud of our team spirit (both at work and outside work), but I was probably the proudest when our men and women soccer teams were both won the annual CMS Global Football Championship.

JOZSEF: The thing I enjoy the most is that every year we participate in some of the biggest real estate projects on the market, so I get to go around the city and show my kids some of the buildings and developments I played a role in creating. 

GABRIELLA:  I’m proud that I joined a firm, where every minute I feel that I’m at the right place – for 30 years now. And every day I come in, I see that people are happy to be here too, which gives me the most pleasure.

ERIKA:  As a woman lawyer, I take great pleasure in watching our young lawyers develop and grow in an office which I consider one of the top equal-opportunity law firms in Europe. One shouldn’t forget that CMS Budapest’s first managing partner was the brilliant Gabriella Ormai. That I have had the good fortune to continue Gabi’s work proves that CMS remains an environment where women can rise as high as men, and that this firm judges people by merit, dedication and industry. It’s also important to remember that equal opportunity benefits men as well as women, and so when I see young lawyers beginning their career with us, I know there is nothing that can hold them back. 

This Article was originally published in Issue 6.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

As a first-generation lawyer I did not have a profound career perspective when I graduated from law school in the early ‘90s. I saw a job ad in a newspaper – “International law firm looks for junior lawyers” – and even though I had no clue what an “international law firm” was, I had nothing to lose, so I thought it would be worth seeing how a real job interview worked. In the end I was selected and I decided to stay … and I have never regretted that decision.

The economic changes and evolution of the Hungarian legal market have been, relatively, the same as elsewhere in the CEE region, although Hungary’s transition to a market economy was less painful than in other countries of the former Soviet bloc. A consolidated market, open towards capitalism, had already started to form in the late ‘80s, and this encouraged more trade with the West. 

The bubbling business opportunities encouraged foreign investments and the sizable deals attracted international law firms to Hungary. Some big firms arrived on a deal basis only, but many of them established a local presence, and almost every Magic Circle and White Shoe law firm appeared in the region. Among others, the former in-house lawyers of the Hungarian state-owned trading companies – “Impex”-es – became the local managing partners of these newly established international law firms. They were the professionals in this field, with international experience, language-skills, and that type of commercial vein, business knowledge, and higher risk propensity that is crucial for this position. The situation was special because our generation was no less prepared than those local lawyers who had been on the market for decades; in this new world we were all rookies. The advisory experience of the customary client-attorney relationship had to be placed on a new, business-centered footing. 

I had the chance to learn to practice law first-hand from the sharpest minds (both colleagues and clients) and that was precious. These brilliant international professionals showed us how to do business and how to lead transactions. I was full of enthusiasm and a sense of adventure, ready to absorb the best international standards and practices. 

In the first ten years, international law firms focused mainly on privatization and foreign investment projects, all the other practice areas were secondary to M&A transactions. From the 2000s, after the era of privatization calmed down in Hungary, international law firms had to reconsider they strategy in the region and consciously extend their expertise with other practice areas, such as litigation, competition, regulatory, real estate, or labor law, in order to keep their stability. 

This was the time when I became managing/equity partner of the Budapest office of the US-based law firm Squire Patton Boggs. I was working with Americans from the very beginning, and I was impressed by their proactive and business-minded approach. We shared the same values in business. 

The 2008-2010 crisis strongly affected FDI flows to Hungary, which was reflected in the number of sizable deals. The relatively small markets in the region make the stability and profitability of international law firms more complicated. Many UK-based law firms chose to spin off their offices in the region and transform them into independent local firms, as Freshfields, Linklaters, and Clifford Chance did in Hungary. As a global trend, US law firms like Squire Patton Boggs have diminished their presence in the region. They focus instead on the US market, and although they continue to work on sizable global deals, they now need local guidance in CEE, and often keep a preferred team for referrals. Today, the regional and local law firms in Hungary and in other CEE countries work in close cooperation with some of the world’s largest law firms because the principle remains unchanged: “Winners hunt in packs.”

Americans tend to view their jobs as extensions of themselves, and therefore devote themselves completely to their careers. They consider their work not primarily as a career or financial opportunity but rather as a value in itself. The healthy combination of Hungarian roots and the American way of thinking is a great advantage, I believe. Lawyering in itself is just the base of everything. You have to feel your client’s problem as if it was your own and use your best efforts to provide proactive, solution-oriented advice. If your team shares the vision and understands that commitment and alignment are critical, this can be a key for success.

We are lucky, because as attorneys we regularly have opportunities to be of service, to do things which can have a lasting impact. The opportunities are there. We just need to have the courage to pursue them and be proud of it.

By Akos Eros, Partner, Wolf Theiss

This Article was originally published in Issue 6.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

More than a thousand companies have decided to perform the corporate income tax as a member of a so-called corporate taxpayer group, which may result in a total savings of HUF 15 billion for the companies. One of the greatest advantages of the corporate taxpayer groups is the offsetting of positive and negative tax bases, better use of tax incentives, and the non-applicability of transfer pricing rules.

According to the Hungarian Government, the new rules can increase Hungary’s competitiveness, and many foreign investors can be attracted to our country, helping Hungary becoming an investment destination.

Almost without exception, all sectors were concerned by the new tax form. More than 200 corporate taxpayer groups filed their application with the tax authority at the beginning of 2019. In average, the groups consist of 2-5 companies, but there are groups with 65 members.

By Levente Csengery, Partner, KCG Partners Law Firm

The main amendments to the act on the spatial plan (“területrendezési terv” in Hungarian) of Hungary and certain high priority regions (Spatial Planning Act) entered into force on 15 March 2019 aiming at the reform of spatial planning. The Spatial Planning Act rules and revises the national spatial plan, as well as the spatial plans of the agglomeration of Budapest and the Lake Balaton High Priority Holiday Zone which areas had been regulated in separate acts earlier.

The major achievement of the Spatial Planning Act is the system of plans unified in the different design levels, used by city municipalities, enlargeable and taking the land registry map as a basis. These plans make the system of the spatial planning and city development completely transparent, ensure the effectiveness of the spatial plans and facilitate the compliance with the laws. 

The spatial planning instruments falling within the scope of the county spatial plan must be revised and if necessary, amended by the municipalities within two years from the date of entry of the Spatial Planning Act into force. It is an important provision for municipalities that the city municipality will not need to pay compensation for prescribing a spatial planning instrument (e.g. local building regulation) in case it is the direct consequence of the local implementation of the spatial planning laws and the government decree on the national spatial planning and building requirements. 

The Spatial Planning Act determines the main aspects that need to be considered in the course of designating a new land to be zoned for development (“új beépítésre szánt terület” in Hungarian). Similarly to the earlier regulations, the Spatial Planning Act includes that the county municipality, in addition to the region zones determined by the Spatial Planmig Act, may establish specific zones for different purposes, e.g. for the protection and development of the natural, building environmental and economical qualities of the county area.

By Gabriella Galik, Partner, KCG Partners Law Firm