Category: Hungary

At the end of March 2017, the Hungarian Ministry of Justice published the bill of the new act on attorneys at law. The bill includes significant amendments compared to the current regulations. As a main amendment, in house lawyers preparing and countersigning the deeds of the company and acting in court proceedings on behalf of the company would be integrated in the bar association.

According to the bill, the list of activities which may be exercised by the attorneys at law is extended by insurance and employment consultancy. The attorneys at law would be obliged to participate in obligatory trainings and in case of failing this obligation, the exclusion from the bar association may be applicable as a sanction. The draft wording indicates in connection with the mandate fee that the success fee will not be enforceable before the court in case its amount exceeds the two third of the total working fee of the attorney at law. Furthermore, the minimum amount of the liability insurance of the attorneys will increase gradually up to an amount of HUF 15 million per incidental event until 31 December 2023. 

In addition, the bill initiates the “double membership”, which means that the attorneys will be members of the regional bar association as well as the Hungarian Bar Association. 

By Levente Csengery, Partner, KCG Partners Law Firm

Since the publication of Regulation No. 2016/679 of the European Parliament and Council on the protection of natural persons with regard to the processing of personal data and on the free movement of such data (GDPR), it is certain that the regulatory framework of data handling and personal data protection will significantly change.

The GPDR will become applicable on May 25, 2018. This means that member states have more than a year to harmonize or amend their existing laws if necessary. Individual businesses engaged in data-processing activities will also be preparing.

One key area where personal data processing is inevitable is the world of HR. Practically all businesses with employees must process personal data to some extent, which means that they will need to apply and comply with the rules of the GPDR.

Though the GPDR leaves room for member states to establish specific rules for the processing of personal data in the context of employment (e.g., recruitment, work organization, etc.), its general rules remain applicable. Drafts or details of relevant national legislation are not yet available in Hungary, but the most important innovations of the GPDR are known. Below, we take a quick look at some of those aspects of the GDPR that will most significantly affect the world of HR.

Harmonization of the Rules Throughout the EU

The most important objective of the GDPR is to harmonize data protection laws. This is in itself an important improvement for multinational or regional enterprises operating in more than one member state, as, once the GDPR enters into force, they will be able to adopt a unified approach in terms of handling employees’ personal data, as – in principle – the same rules will apply in all member states.

Concept of Personal Data

The GDPR will broaden the definition of personal data though the concept itself – data that makes a natural person identifiable – remains the same. In the world of HR, internal identification codes, personal numbers, or online identifiers by which an employee can be identified will be regarded as personal data and must be protected as such.

Due to the objectivity of the concept (identifiability), from a data-security perspective encrypted data may – under certain circumstances – also be regarded as personal data. Encryptions used 20 years ago can now easily be decrypted. Employers therefore need to review and, if necessary, implement new measures to ensure an appropriate level of data security.

Stricter Liability of Data Processors

The distinction between data controllers and processors, which already exists in Hungarian law, will be adopted by the GDPR. At the moment, data controllers are liable to data subjects for damages arising from any unlawful processing or by a breach of data security requirements. In contrast, as an important change, the GDPR takes a step towards the joint liability of data controllers and processors.

This change will definitely have an impact on providers of ancillary services to employers (e.g., payroll and cafeteria administrators), as they will now have a stricter liability towards employees.

Employee Consent

The most important legal basis of (employee) data processing remains the data subject’s consent. If data processing is required to perform a contract to which the data subject is a party, no consent is needed. From a data protection perspective, however, the extent of intra-group transfer of HR data – for instance – is necessary to perform employment contracts may be questioned. Therefore, under the GDPR, employers may be required to collect employees’ consent to perform certain HR-related data-processing activities.

The GDPR clarifies that this consent should not be regarded as freely given if the data subject has no free choice or is unable to refuse or withdraw consent without detriment. Consequently, particular attention will need to be paid to the nature of the consent, as due to the hierarchical relationship between the parties the freeness of consent may be subsequently questioned.

Increased Fines

Finally, the GDPR dramatically increases penalties for non-compliance. As opposed to the current maximum fine of HUF 20 million (approx. EUR 65,000), the data protection authority will have the power to impose fines up to EUR 10 or 20 million or 2 or 4% of the company’s annual turnover. In addition, the data protection authority will have the right to ban or suspend data processing activities.

Due to the increased power of regulators and the broader rights of data subjects, all businesses should pay particular attention to GDPR-compliant handling of their employees’ (and others’) personal data.

By Kinga Hetenyi, Managing Partner, and Daniel Gera, Attorney at Law, Schoenherr Hungary

This Article was originally published in Issue 4.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

On November 22, 2016 the Hungarian Parliament adopted the Act on the new Code of Civil Procedure. The new Code, which will enter into force on January 1, 2018, brings many innovations to the current rules of civil actions and out-of-court proceedings to – as per the intentions of the legislator – facilitate the effective resolution of civil disputes that have become more and more complex over time, in social and economic conditions that have changed profoundly since the current Code of Civil Procedure entered into force more than 60 years ago.

One of the most important aims of the new Code is to allow civil actions to be judged more effectively and in a shorter period of time – within one single hearing on the merits, if possible. To facilitate this the legislator has implemented the so-called divided trial structure, with the goal of allowing decisions on the merits of the case to be rendered sooner, following a diligent and thorough preparatory phase conducted with the involvement of the parties to the proceedings.

Under this divided trial structure, the first phase, separate both in function and time, will consist of pre-trial hearings that aim to determine both the subject and the framework of the dispute brought to court, followed by a second phase: a hearing on the merits of the case.

The new rules of evidence are adapted to this divided trial structure; designation of evidence and submission of motions for probation shall be carried out within the pre-trial hearings by the parties, while the actual presentation of evidence on the merits of the case will take place in a targeted manner within the hearing phase, though remaining within the boundaries specified in the pre-trial phase. As a rule of thumb, no additional motions for probation on the merits will be allowed in the hearings, although they may be possible under exceptional circumstances.

In addition, the legislator has strived to regulate the legal institutions that are currently not regulated in detail by the effective law, but which were developed by judicial practice or are applied inconsistently due to the lack of proper regulation. As a result, the usage of unlawful items of evidence and the outcome of evidence recorded in other proceedings will be regulated, the scope of named items of evidence increased, and the so-called evidentiary emergency regulated as well.

On this last item – the regulation of evidentiary emergencies – the Code intends to assist the proving party in situations where due to the specific position of the parties, the opposing party holds the relevant evidence, and thus the efficiency of the evidentiary procedure may be hindered or even prevented.

The legislator has expanded the ability to provide evidence by expert testimony as well, especially in respect to controversial evidence provided by private experts, with the expectation that this will further decrease the trend of malicious deferral of litigation.

All these changes are designed to increase the efficiency of providing evidence and thus to improve the speed of the courts’ decision-making process.

In order to further increase the effectiveness and speed of the evidentiary procedure, the new Code extends the possibility of using electronic communications networks to judicial inspections, the new Code endeavors by the revised rules of evidence to reflect technological developments and ensure the flexibility they demand. The same applies to the purpose of the new regulations regarding communications between the courts and parties to proceedings.

The business community has welcomed the announced re-regulation and looks forward to seeing intentions become reality. Since the direct (and partially the indirect) costs of litigation are proportional to the length of the procedure, a system of more effective and thus shorter trials with more foreseeable and predictable conduct of proceedings may result in companies’ being able to decrease their litigation budgets and allocate those savings to other business or functional areas.

By Gergely Ban, Managing Partner, Ban & Karika Attorneys at Law

This Article was originally published in Issue 4.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

In 2016, primarily to correct the legislative concept in relation to collateral and to ease the financing activity of Hungarian financial institutions, the Hungarian Parliament adopted a significant amendment package to the new Civil Code. 

Although forms of fiduciary collateral such as purchase options and assignment of claims had been constant parts of the Hungarian collateral regime under the former Civil Code, the new Code introduced an overall prohibition of fiduciary arrangements as collateral (with some specific exemptions related to the relevant EU Directive on financial collaterals).

Under the Parliament’s new amendments to the Code that became effective on July 1, 2016, however, banks may again create a purchase option as fiduciary collateral. This provides an additional security option for banks, as in case of non-payment the bank may unilaterally acquire the subject asset of the purchase option. Similarly, the assignment of claims or ownership title transfer with collateral purpose may now again be part of the security structure of financing transactions. 

Nonetheless, fiduciary collateral remains excluded from the security structure if the borrower qualifies as a consumer.

The amendments also eliminated the requirement of the consent of the debtor as a condition for the assignment of the bank’s claims to third persons. 

Because the separated mortgage that had been introduced by the new Civil Code was insufficient in terms of the operation of mortgagee banks, the amendment that became effective on October 1, 2016, reintroduced the independent mortgage with regulations based on market standards. 

Only financial institutions may be the beneficiaries of independent mortgages, which may be established over a real property even without an underlying claim. The independent mortgage is not accessory to the underlying claim and may be transferred without the underlying claim in whole or in part. The intention of the legislator with the reinstatement of the independent mortgage was to promote the refinancing of commercial banks through the mortgage bond market in order to enhance the financing activity of the banks.

The existing separated mortgages can be converted to independent mortgages upon the request of the mortgagor under a procedure specified in the amendment act providing such titleholders the opportunity to improve their legal position.

Satisfying the long need of the financial market the legislator acknowledged the security trustee concept in the new Civil Code. Based on practical experience the recent regulation on security trustees was also amended. According to the earlier regulation, a security trustee may only be nominated at or after the conclusion of the mortgage agreement. The new regulation enables the nomination of a security trustee prior to the conclusion of a mortgage agreement as well, which provides the security trustee the right to conclude the mortgage contract in its own name but for the benefit of the other mortgagees.

According to the amendment, a security deposit may be created, not only on payment account balances, but also by expanding the scope of assets serving as collateral on deposited funds available on deposit accounts.

The amendment act has brought changes also with respect to the previously introduced transfer of contract. Previously, the collaterals of the transferred contract terminated without the mortgagor’s approval. Market experience has shown that it is not appropriate to eliminate the collateral related to a contract in the case of a new party’s entering. Due to the amendment, the collaterals related to the rights acquired by the party entering into the contract remain, even without the consent of the collateral provider.

By Zoltan Varga, Partner, Nagy es Trocsanyi

This Article was originally published in Issue 4.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Background – The History of the Principle of Self-Regulation in Hungary

Hungary’s Act XLIV of 1992 on the Employee Stock Ownership Plan (the “ESOP Act”) allows employees to acquire an ownership stake in their employing company on their own initiative within the framework of an Employee Stock Ownership Plan by means of an organization established by themselves on the basis of the principle of self-regulation. The purpose of this legal instrument was to boost the company’s economic performance by bringing together the owners’ and workers’ collective interests. However, the ESOPs established in the nineties ceased to exist after a dynamic initial period, which might be explained by the fact that several benefits related to the ESOP were abolished. In contrast, the ESOPs in the United States of America based on the same principles became stable and reliable operators of the capital market.

Seismic Shift in Hungary – The New ESOPs

The amendment of the ESOP Act by Act CLXXXVII of 2015 established a new form of ESOP, operating with centralized management. As a result of the amendment, financial institutions, insurance companies, and investment firms may also launch an ESOP with the aim of managing financial instruments acquired by the employees within the framework of the remuneration policy. This opportunity may well lead to the widespread use of ESOPs. Depending on which employees are covered by the ESOP, the personal scope might be extended from the managers to all employees of the company and its subsidiaries within the company group.

The ESOP might be used as an incentive instrument in an exclusive or complementary manner or as an instrument used for “privatization purposes.” If, however, the ESOP is based on securities representing shareholders’ rights, the employees do not necessarily become owners of the founding company who established the ESOP, but acquire membership in the ESOP organization, which itself becomes owner of the founding company. 

Upon meeting the conditions set in the remuneration policy, the employees may exchange their membership in the ESOP organization for cash or securities or for a combination of these two.

High Hopes – ESOPs from an International Perspective

From an international perspective, ESOPs could be a major economic growth factor in Hungary. In the United States, for instance, roughly 7,000 ESOPs were launched before 2015, in which approximately 13.5 million employees were involved, owning more than 8% of American corporate assets. 40% of the companies with ESOPs are in fact wholly owned by the ESOP itself, although the average ownership interest in the founding business is 17.4%. According to US surveys, companies launching ESOPs can expect a profit growth of 2.3-2.4% annually, reflecting the extra motivation arising from the participating employees and managers in the ownership. Although the newly introduced ESOPs are still in their birth phase in Hungary, the above figures project high hopes for this entirely recent legal institution.

Competitive Advantage – The Main Advantages of an ESOP-Based Remuneration Policy

The revised ESOP legislation significantly encourages a “stakeholder” approach of employees while control remains with the employer over the business share provided to the ESOP organization.

In addition, it ensures favorable taxation compared to the traditional form of share transfer programs; i.e., payments made to the employees within the ESOP are solely subject to a 15% personal income tax, implying that the social contribution tax of 22% and health care contribution can be saved.

All in all, it gives priority to the company’s long-term business goals over the employees’ short-term interests in a way that ensures that employee performance is rewarded in accordance with the company’s business performance.

What Next? – How to Make the Most of the ESOP Act by Building on the Knowledge Generated in the Last Year

The newly amended ESOP Act can be regarded as a giant achievement in encouraging the business community in Hungary to perceive new economic opportunities. The diversity of approaches in interpreting the vocabulary of this new legislation establishes the need for a close collaboration between legal professionals, tax consultants, and authorities in charge of supervising proper market practices.

By Eszter Kamocsay-Berta, Managing Partner, KCG Partners

This Article was originally published in Issue 4.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.