Category: Hungary

Hungary has recently provoked criticism and elicited recommendations on account of its unfriendly environment towards investors, with a report issued by the EBRD having significant impact.

Against this backdrop, the Hungarian Ministry of Justice has indicated that it will amend certain laws that are related to the enforcement of claims. With the ultimate goal being to make creditors’ lives easier, near-term changes are likely to be made to such fundamental laws as the country’s Civil Code, the act on court enforcement, and the act on insolvency and bankruptcy proceedings.

Transfer of Loan Agreement

The rules of the Civil Code on the transfer of contractual position have been the target of particularly severe criticism. In its current form, the Civil Code stipulates that the security interest terminates in case of a transfer of contract, regardless of which position is affected by the transfer (i.e., the creditor’s or the debtor’s) and irrespective of whether the security provider has given its consent to the transfer. The proposed amendment foresees that the security interest will not terminate under any circumstances, but rather remain in place. In addition, the security provider’s consent will only be required in the event that the debtor transfers its contractual position. These changes may enhance Hungary’s secondary loan market, as the country’s banks have so far been reluctant to transfer loan portfolios or even a single loan agreement under the current rules, as they feared losing the security interest.

Furthermore, this summer the country’s parliament amended the Hungarian Banking Act so that the Hungarian National Bank’s approval is now required for those loan portfolio transfers that exceed the threshold of either 1) HUF 10 billion (approximately EUR 33 million), regardless of the number of loan contracts to be transferred, or 2) 20 contracts regardless of their aggregate value. Together with the envisaged amendment of the Civil Code, this means that even though the transfer of loan portfolios will be possible and feasible under the Civil Code, those transfers that cross either threshold will be subject to the Hungarian National Bank’s approval.

Resurrection of the Non-Accessory Mortgage

The Hungarian National Bank intends to stimulate the market of mortgage-backed instruments. For many years, these instruments relied on non-accessory mortgages, which were transferable without the transfer of the underlying loan. The Civil Code that entered into force on March 15, 2014, abolished this non-accessory mortgage, which caused a hiccup in the market. For this reason, the envisaged amendments may re-introduce this type of security interest for the sake of mortgage-backed instruments. 

New Enforcement Act

Most criticism was aimed at the rights of creditors under the Hungarian courts’ enforcement regime. There are several reform concepts currently floating around, but nobody knows yet which ideas will make it into the new enforcement act. The problem currently is that creditors basically have no influence on the court enforcement procedure. Thus, most recommendations aim at strengthening the powers of creditors. It would be a surprise if some of these were to survive the drafting of the new act (e.g., the proposal that creditors should have right to freely choose among the bailiffs); however, others will probably be implemented (e.g., the provision to secured creditors of more influence over the sale of the debtor’s assets and the entitlement by creditors to receive more detailed information on the debtor’s available assets).

Revision of the Insolvency and Bankruptcy Regime

The legislature also wishes to enhance creditors’ positions in insolvency proceedings and to speed up the bankruptcy procedure. According to the recommendations regarding the latter, creditors should also have the right to initiate bankruptcy proceedings (currently, only debtors may apply for such a proceeding). It is also envisaged that creditors will have the opportunity to comment on a debtor’s reorganization plan or to prepare an alternative plan. Debtors would be obliged to file the reorganization plan simultaneously with their bankruptcy application. A fast-track bankruptcy procedure will be available when a debtor’s reorganization plan receives the approval of the majority of creditors before the initiation of the bankruptcy proceeding. 

In liquidation proceedings, secured creditors would be granted more power during the liquidation of the debtor’s assets, in the form of more influence on the sale process or even the ability of secured creditors to proceed with the sale of the encumbered asset by way of self-help. A separate department within the Hungarian court system is to be established to supervise liquidation proceedings. 

Conclusion 

The currently floated plans and ideas, if implemented, will certainly have a positive impact on the position of creditors in Hungary. However, the question is not whether Hungarian rules should be more favorable towards the creditors, or whether these legislative plans and related ideas will successfully navigate the maze of Hungarian legislation. The real question is whether such ideas will be implemented in a form that is able to fulfill the purpose. The devil is in the details, as the saying goes – and Hungary, unfortunately, is infamous for implementing great ideas in a bad way.

By Kinga Hetenyi, Partner, and Gergely Szaloki, Attorney, Schoenherr Hungary 

This Article was originally published in Issue 2.6. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

On 11 January 2016, the Hungarian Competition Authority (Authority) announced the highest fine it has ever imposed on an association on account of horizontal information exchange. The fine of ca. EUR 12.7 million (HUF 4 billion) was imposed on the Hungarian Banking Association (Association) for the Association’s database, which included not only strategically relevant, but also confidential data.

Undoubtedly, the continuous flow of information is one of the key drivers of business and economic growth. The more unconstrained the flow of information becomes, the more conscious undertakings must be in order to identify the inherent legal risks of information exchange and its lawful limits. The Authority’s decision is one of the most recent indicators of the relevance of such considerations. 

The Association and the bank database

The Association was established in 1989 in order to represent the interests of the Hungarian banking sector. In June 2000, the Association introduced a rather significant extension of its already existing bank database, which then operated until 2012. This extended version involved a wide range of strategically relevant and confidential data on the financial services provided by the members of the Association and was individually accessible in a well-organized manner. The Association’s original aim (based on contemporaneous evidence) was to “aid the members with positioning on the market”. According to the ruling of the Authority, this behaviour constituted a cartel in the form of unlawful horizontal information exchange and as such infringed not only Hungarian, but also EU competition law.

Sanctions

The Authority imposed a fine of ca. EUR 12.7 million on the Association and ca. EUR 50,000 (HUF 15 million) on the Institute for Training and Consulting in Banking, which had also contributed to the database’s maintenance. The Authority imposed the above fine despite the fact that a significant amount of the information stored in the extended database was publicly available and that the Association voluntarily ceased to operate the database upon commencement of the proceeding. In addition, the Authority deemed the commitments proposed by the Association as insufficient and did not accept them.

Secondary liability of the banks

The Authority imposed the fine on the Association itself and not on the Association’s member banks; however, the Authority also indicated the joint and several secondary liability of the 33 banks outlined as participants of the decision. The Authority did not differentiate between the banks under proceeding with regard to their joint and several secondary liability. However, it did terminate proceedings against five banks on the basis that these either had not provided data to the database or that they were not competitors of the other participants of the database. If the Association fails to pay the fine and potential enforcement efforts remain unsuccessful, the Authority will order the banks (as set out in the decision) to pay the fine directly.

The case continues…

The Association claims that the Authority failed to prove the infringement and the database was in fact an efficient and pro-competitive tool in the hands of the market players. The Association intends to challenge the decision “by all national and international means possible.” Regardless of the appeal, the Association remains obliged to pay the exemplary fine; however, it may request the court to suspend the enforcement. It will presumably take a few more years to conclude the appeal proceeding(s) before the courts. However, the Authority’s ruling definitely illustrates the relevance of caution with regard to both the exchange of confidential and market-relevant information and the behaviour of associations of undertakings. 

Lessons to be learnt

The “bank database” represents a profound indication of the inherent risks of sharing information, including within the framework of an industry association. Sharing sensitive information with competitors or even unilaterally accepting such information may easily qualify as infringements of competition law. The market players must consider the limits imposed by competition law in order to safely maximize the potential business benefits of a functioning association or a system of sharing certain information without the risks of infringing competition law. Professional guidance and due diligence in this respect may help to keep the practice of the association or any participating undertaking on a lawful track and ultimately may prevent a significant fine or a protracted competition proceeding.

By Anna Turi, Attorney at Law, and Andras Nagy, Associate at Law, Schoenherr

Summary proceedings in simple administrative cases

Pursuant to amendments of the Hungarian Act on General Rules of Administration implemented on 1 January 2016, an administrative authority — including the Hungarian Competition Authority — must issue a decision immediately, but at latest within 8 calendar days if:

• the facts of the case are fully clarified,
• there is no opposing party involved, and
• the generally governing legal framework provides a deadline under two months or sixty days.

The reasoning of the amendments provides that this so-called “summary procedure” shall constitute a main rule in administrative proceedings.

What does this mean for merger control cases?

Will the 8 days maximum introduced by the amendments really be the new deadline for Phase I merger control cases instead of the 30 days timeframe that such cases have had as deadline to date? Phase I merger control procedures definitely have the potential to qualify as summary procedures and thus receive clearance within the impressively short 8 days deadline (whereas a final decision in a Phase II proceeding, where the authority’s deadline remains 4 months, is automatically excluded). However, in order to benefit from this tight deadline, the applicant must submit to the authority a merger filing that clarifies all facts and circumstances. In a recent press release, the Hungarian Competition Authority (“authority”) highlighted that in order for it to issue a final decision within 8 days of filing, the filing must be complete, indicating that the fulfilment of the requirements largely depends on the applicants.

If the authority issues a data request or simply concludes that further investigation or data is required (including data which the applicant may not even be required or obliged to provide), it may order that the proceedings continue under the general 30 days deadline, even in Phase I merger control cases. The authority considers that the new summary proceeding will basically be used in cases that result in “simplified decisions”, in which the authority does not include a detailed reasoning to the decision. Such decisions accounted for ca. one-third of the Hungarian merger control decisions in 2015. Therefore, the amendments do not mean that the shorter 8 day deadline has replaced the previously applicable 30 days deadline in all Phase I merger control cases; instead, they provide undertakings with a possibility to aim for shorter deadlines with their filing.

Increasing significance of pre-notification talks?

With the promise of a swift decision, pre-notification talks with the authority may take on greater importance. This is especially true for cases in which the applicants provide the authority with a draft filing, as the chances of a later data request are lower, ie there is a higher likelihood of issuing a decision within the framework of a summary proceeding. It has yet to be proven in practice how such tight deadlines will work in the cooperation between undertakings and the authority. In practice, such pre-notification talks may lengthen the preparation of the filing, but shorten the time for receiving clearance once the filing has been formally submitted.                                          

Faster decisions in general? 

The shortening of the applicable deadline in case of summary procedures is part of the general efforts to make the Hungarian administrative procedures less bureaucratic and more client-oriented. The Hungarian Competition Authority has already taken steps towards this purpose, as a result of which the clearance decision in Phase I merger control decisions was generally issued within 20 days (without the time of an additional data request) in 2015. With the new amendments, it is hoped that this tendency will continue at a faster pace, ie merger control decisions are expected to be issued more quickly in Hungary, a development that would be especially welcome in multi-jurisdictional transactions.

By Anna Turi, Attorney at Law, and Andras Nagy, Associate, Schoenherr

The use of temporary staff agencies and agency workers has increased steadily in Hungary over the past two decades. The legal relationship in this context is usually referred to as ‘workforce lending’, as it is understood that the agency’s assignment of workers to the undertaking that uses them constitutes lending.

Although the basic concept of workforce lending and detailed regulations on this tripartite legal relationship were officially adopted in 2001 as part of the harmonisation of Hungarian law with EU law, the concept had actually been in use much earlier.

The use of temporary agency workers is particularly popular among employers whose workforce needs fluctuate or which require employees for short-term or seasonal jobs. There are few restrictions or prohibitions on the employment of agency workers in Hungary. As a general rule, employers may employ an unlimited number of agency workers for any job position, for a period of up to five years. However, the law imposes certain restrictions and prohibitions on the use of temporary agency workers.

Term of employment with same company

The temporary nature of the assignment is a key characteristic of the legal relationship with agency workers. Therefore, in accordance with EU Directive 2008/104/EC, the Labour Code provides that the duration of the agency employee’s assignment to the same user entity must not exceed five years. This timeframe includes periods of an individual’s extended assignment and re-assignment within six months of termination of the individual’s previous assignment, regardless of whether the assignment was made by the same or a different temporary staff agency. This restriction is similar to that for fixed-term employment contracts, which are also restricted to five years and are subject to the same time calculation method.

Employing agency workers in case of strike

In principle, temporary agency workers cannot be used to counteract strikes. This principle was incorporated by the previous regulations in a way that prohibited use of agency workers at a workplace that is affected by a strike. This prohibition was rather strict, as it did not even allow the use of agency workers in positions unaffected by the strike. The existing regulations have relaxed this prohibition, as it now applies only to those positions affected by the strike (ie, employment of agency workers with a view to replacing striking employees is not permitted).

Workforce lending between companies with same shareholders

The Labour Code prohibits workforce lending between companies which have the same shareholders (or partly the same). The aim of this prohibition is to block employers from founding a temporary staff agency which could then provide a workforce to group companies below the standard market price. By applying such a structure, employers could theoretically benefit from the flexible rules on workforce lending without actually exercising the role of employers. However, this is clearly against the concept and principle of agency work.

This restriction is regulated in such a way that an agreement concluded between the temporary staff agency and the user enterprise is invalid if:

• the two parties are affiliated by way of ownership (whole or partial);
• at least one of the two entities has some shareholding in the other; or
• the two entities are connected through their ownership of a third organisation.

Agency work under employment regulations

The Labour Code provides that the assignment of agency workers is not allowed in cases specified by the relevant employment regulations. The aim of this prohibition is twofold. First, it prohibits the employment of agency workers for jobs in which the employment of certain employee groups would otherwise be prohibited (eg, the employment of women or young employees in positions exposed to health hazards). Second, it empowers the parties to a collective agreement to establish further restrictions as to the employment of agency workers.

This latter aim has been the subject of criticism, as it is based on the somewhat outdated assumption that trade unions should seek to restrict the use of agency workers instead of regular employees. Nowadays, unions should also protect agency workers and ensure their equal treatment with regard to regular employees.

Penalties for non-compliance

The Labour Supervision Authority pays particular attention to the use of agency workers and closely scrutinises compliance with the legal provisions related to agency workers during its audits. Companies are therefore strongly recommended to become familiar with the restrictions on the use of agency workers. The Labour Supervision Authority may impose fines of up to HUF 10 million (approximately EUR 32,000) for violations of these provisions.

This article was edited by and first appeared on www.internationallawoffice.com

By Daniel Gera, Attorney at Law, Schoenherr

Dentons has advised South African integrated discount retailer Steinhoff International Holdings in its acquisition of a 50.8% majority stake in Hungarian e-commerce company Extreme Digital — with Wolf Theiss advising Extreme Digital. Neither Dentons nor Wolf Theiss was able to provide additional details on the transaction.

The Dentons team in Budapest was led by Partner Edward Keller, supported by Partner Anita Horvath, Of Counsel Marcell Szonyi, Counsel Zita Albert, Associate Reka Szaloky, and Trainee Associate Eszter Fodor.

The Wolf Theiss Hungary team consisted of Managing Partner Zoltan Faludi and Senior Associate Norbert Balint.

Kapolyi Law Firm has advised FHB Commercial Bank, one of the joint lead managers in MFB Hungarian Development Bank’s bond listing.

MFB announced on August 31, 2015, that it submitted the following originally privately placed domestic bonds to the Budapest Stock Exchange: MFB201610/1, MFB201612/1, MFB201706/1, and MFB202006/1. The reported aggregate value of the bonds is up to HUF 200 billion, with the bond scheme aiming to cover the general funding needs of the bank and help it diversify its liability structure. 

FHB acted as a joint lead manager together with Unicredit Bank Hungary. Both Unicredit and MFB relied on in-house counsel. 

In December 2014 CEE Equity Partners Limited acquired  a majority stake in BKF University of Applied Sciences, a private higher education business in Hungary.

White & Case advised them in the transaction. The White & Case team in Budapest that advised CEEEP was led by Partner Edward Keller and included Partner Rob Irving and Associates Zita Albert, Balazs Varszeghi, and Akos Mates-Lanyi.

We reached out to Judith Gliniecki, the General Counsel at CEE Equity Partners, with several questions about the deal.

J.G.: The China-CEE Fund has a mandate to invest in 16 Central and Eastern European countries. Our goal is to invest in each of these countries. We are happy that we managed to invest in two countries – Poland and Hungary – in the Fund’s first year. We are looking at various opportunities in the CEE region and hope to invest in more countries in the Fund’s second year.

J.G.: We did not encounter any unexpected challenges of a legal nature merely due to the nature of the institution. As this was a somewhat unusual investment, we decided early one that we would need to do a more thorough due diligence to understand the market better, and we followed through on this.

From an in-house perspective, one of my biggest head-aches was dealing with Hungarian KYC requirements. I’m used to the usual requests for identity cards or passports and trade registry excerpts for the Fund subsidiary. However, Hungarian banks and tax advisors have taken requests to new levels. One particularly harrowing moment involved a request from a bank that decided days before the planned closing that the Hong Kong registry extract for a subsidiary of the  China Exim Bank (our main investor) was not sufficient to prove that China Exim Bank was the shareholder of this entity. And, by the way, we would need to provide sworn Hungarian translations of these Chinese documents. 

Edward and his team were very helpful in working with us to figure out what would be acceptable to the Hungarian bank. I was glad to be working with a firm with an extensive network at this crucial moment. We managed to close as planned.

J.G.: It may sound old-fashioned, but when choosing external counsel, I try to determine whether I will work well with a particular lawyer. The firm is a good starting point, but service levels and expectations can differ even within firms with top-notch reputations.  When the rubber meets the road, it’s a person that I will call, not a firm.

White & Case had done some preliminary work for CEE Equity before I came on board. I appreciated that Rob Irving took the time to come to Warsaw to meet with me to discuss feedback on these preliminary matters. Rob then introduced me to Edward, who showed that he was willing to work with us to provide a fee budget that met our requirements. The rest is history.

J.G.: In working with external counsel, I try to keep them focused on substantive work that has a real value to us. Most importantly, I try to scope matters effectively. I like to have a strategy session at the beginning of each matter to discuss what is important from a business perspective. As I was in private practice until joining CEE Equity, I think that I am well-placed to work with our external counsel to deliver legal services that my business team needs. In discussing budgets, for example, I particularly like to have a longer discussion around due diligence—to focus on those areas in which a potential risk is most likely to be discovered, and not to waste time and money on those areas in which the potential to uncover a significant legal risk is remote.

As I have not done many deals in Hungary, I had to lean on Edward and his team to explain some Hungarian-specific issues to make sure that I understood the legal implications and risks when we needed to make the business call. 

Finally, I try to take care of internal matters myself. There is no sense in paying external lawyers to help us get our ducks in a row, to get internal approvals or to provide corporate documents or other Fund deliverables.

J.G.: Our first non-Polish deal was in Hungary because we found a good opportunity. However, it is no secret that we are particularly keen to find other good opportunities in Hungary because the Hungarian Exim Bank is one of our investors.