Category: Hungary

More than a year has elapsed since the outbreak of the COVID-19 pandemic, which has had a devastating impact on our economy. Due to the extraordinary measures of the Hungarian government to prevent the spread of the coronavirus, numerous services were suspended, many shops were closed, and travel is still restricted. Companies affected by these restrictions suffered huge losses, which may result in their insolvency.

Recently, the Hungarian government introduced an extraordinary reorganisation procedure aimed at improving the financial situation of these companies and, ultimately, keeping them in business. This procedure is not the long-awaited implementation of the restructuring directive but an extraordinary measure pursuant to which companies at risk of insolvency may apply to this new procedure until 23 May 2021 (the government may prolong this deadline for the duration of the state of emergency in Hungary).

Companies seated in Hungary and at risk of insolvency may initiate the reorganisation procedure. The company may decide which creditors it wishes to involve, and the procedure is private and undisclosed in the Hungarian Company Registry (unless the company applies for a public procedure, in which case all creditors are involved). Creditors of overdue debts must be involved. During the procedure, contractual partners of the company providing continuous services or supply of goods cannot terminate their contracts on the basis that a reorganisation procedure has been initiated, provided that the company declared that it can pay the consideration for their goods or services.

Involving a reorganisation expert, which may be only a certain Hungarian company (Nemzeti Reorganizációs Nonprofit Korlátolt Felelősségű Társaság), is mandatory. The reorganisation expert may also bring in a liquidator for industry-specific expertise. The reorganisation expert will examine the company’s request for the reorganisation procedure, and if the expert finds that the company is suitable for the procedure, the court will order a payment moratorium of 90 days (which may be extended by an additional 60 days). The moratorium is applicable only in relation to the creditors that are involved in the procedure.

The aim of the reorganisation procedure is to agree on a reorganisation plan. The company and its creditors may include any tool in the plan which they find appropriate for the reorganisation of the company, e.g. involving a new financing, reorganising the operation or changing the ownership structure of the company, providing payment benefits for the company or waiving a claim in part.

In a private procedure, if all creditors involved in the procedure support the reorganisation plan, the company will submit the plan to the court together with the reorganisation expert’s opinion. If the reorganisation expert finds that the plan is appropriate and complies with the law, the court will approve the plan and close the procedure. The plan applies only to the creditors that were involved in the procedure. In a public procedure, the rules of the Hungarian bankruptcy procedure apply, with certain exceptions. Creditors are not assigned into classes, and only the approval of 60 % of the creditors is required to approve the reorganisation plan. Nevertheless, all creditors must receive at least 60 % of their claim according to the plan.

If the court rejects the reorganisation plan, the procedure will not automatically turn into a liquidation proceeding. However, the creditor may initiate the liquidation of the company immediately, meaning this is a simplification for the creditor compared to the general rules.

The reorganisation plan is a debt acknowledgement of the company in respect of claims that are recognised and undisputed when the creditors approve the reorganisation plan. In addition, should the company fail to implement the reorganisation plan, the plan may be directly enforced.

Until now, only one legal tool – the bankruptcy procedure – was available for companies at risk of insolvency to settle their debts. Bankruptcy procedures are unpopular due to their inflexibility and riskiness for distressed companies, so restructuring procedures may fill a gap in the Hungarian legal environment and may help companies to recover financially from the ongoing COVID-19 pandemic.

By Virag Palguta, Attorney at Law, Schoenherr

Kinstellar’s Budapest office has advised mandated arranger and facility and security agent Bank of China on an approximately USD 75 million loan to sponsor China National Machinery Import and Export for the construction and operation of a 100 MW photovoltaic power plant in Hungary. Allen & Overy reportedly advised the sponsor.

According to the firm, The financing was provided across two tranches with a maturity of 15 years. The project, consisting of two 49.28 MW photovoltaic power plants, will be built in Kaposvar, a city in south-western Hungary, and provide electricity to 50,000 inhabitants.

“We are delighted to have supported the Bank of China on this successful market-leading financing,” commented Kinstellar Partner Csilla Andreko. “We particularly appreciate the opportunity to have worked closely with this leading international banking group and its outstanding management team to facilitate the success of this transaction.”

The Kinstellar team was coordinated by Counsel Levente Hegedus and Senior Associate Mate Nagy and included Junior Associate Zoltan Zagyva. Andreko served as the firm’s relationship partner for Bank of China.

On 20 April 2021 the Hungarian Government submitted a bill on the Land Register to the Hungarian Parliament. The Government decided on the implementation of the electronic land register project, which requires a new Act on the Land Register, as well as a related execution decree. The purpose of the new system is in particular to develop the land register to an electronic database, completely electronize the land register procedures, connect the land register with other public electronic registers of the state and decrease the time and costs of these proceedings.

As a new element of the regulation, the extent of rights, facts and data that may be registered in the land register must be determined solely by the land register regulation instead of by sectoral legislation. In addition, any rights or obligations based on a fact or data can be enforceable if this right, fact or data was registered in the land register (i.e. principle of completeness and extension of principle of registration). In specific cases, automatic decision will be applied in the land registry procedures, and, as a guarantee, the client may request within five days from the notification of the decision that the application must be proceeded with in a complete procedure repeatedly.

The bill includes several novelties compared to the current Land Register Act partly as a result of the digitalization. For instance, submissions must be filed by electronic means. In addition, the bill does not allow the solution to keep the submission on marginal note (in Hungarian: “széljegy”) in abeyance (pending), but these cases will be rather considered as “suspension” cases. This also means that it will not be possible to hold in abeyance (pending) the application until the submission of the registration permission (but maximum for six months from the submission). In case the seller keeps its ownership right until the payment of the price, the land registry office will suspend the procedure maximum until six months from the date of submission. Furthermore, the so-called ‘not authentic’ land registry extract will be eliminated, as it is not complying with the regulations of electronic documents in force.

The new rules of the land register also affect the activities of the attorneys, since the legislator will require professional training and additional liability insurance from the attorneys, and also the activity of the attorney with gross negligence must be resulted in a disciplinary sanction.

By Lidia Suveges, Attorney at law, KCG Partners Law Firm

According to an information letter issued by the Hungarian National Authority for Data Protection and Freedom of Information (NAIH) on 1 April 2021, employers can only request proof of protection against COVID-19 (e.g. proof of having the vaccine or recovered from COVID19) in certain jobs and after an appropriate risk analysis. If the employer has an appropriate legal basis to process the immunity data, he is obliged to put appropriate measures in place in order to protect its employees against COVID-19 infection. According to the NAIH, the legislator should further precise the requirements for justifying the immunity against COVID-19 in employment relationships.

NAIH also highlights that such data justifying the recovery from the coronavirus disease or the fact of vaccination constitutes health data, which is a sensitive personal data under GDPR. According to NAIH, such data cannot be processed in general, but it has to be specifically assessed in which jobs or range of employees such data processing is considered as necessary and proportionate (e.g. jogs where employee are more exposed to COVID19 infection, or where employees have close contacts with people at higher risk).

It is also highlighted that the employer can only request to present the application of the National eHealth Infrastructure (EESZT) or the immunity certificate, but may not make any copy of them.

At the end of April, the Hungarian Government allowed access to certain services for persons who have already obtained the so-called immunity card (e.g. visiting zoo, hotels, sitting inside a restaurant, etc.). According to the relevant Government decree, service providers are required to ask the consumers to present their immunity card upon entrance. Service providers failing to request the presentation of immunity card may be fined from HUF 100,000 to HUF 1 million, or in the worst-case scenario, they may be locked for up to one year.

According to the president of the Hungarian National Authority for Data Protection and Freedom of Information, requesting to present the immunity card for the use of certain services does not raise any concern from data protection perspective as it is not accompanied by data recording.

By Rita Parkanyi, Partner, KCG Partners Law Firm

The chain of general contractor and subcontractors behind large-scale construction and the occasional failure of certain subcontractors to obtain proper payment gave birth to the institution of construction payment agent, a form of collateral management. It was typical in the construction industry that subcontractors were exposed to circle debt. The construction payment agent is a unique statutory solution to eliminate such debts.

Introduction of Payment Agent

The concept of the construction payment agent was introduced in 2009 with the amendment of Act 1997: LXXVIII on the formation and protection of the built environment (the “BE Act”). Apart from the BE Act, the main rules pertaining to this agency – such as liabilities of the parties involved in the construction or the mandatory elements of the contract constituting the trusteeship – were detailed in Government Decree 191/2009 (IX.15.) on construction activities (or the “Construction Codex”). The aim of the payment agent is to ensure the purposeful use of the funds of construction projects and to ensure that the performance of the construction contract is concluded. The use of a payment agent is mandatory, and the strict consequences if one is not used may involve fines or the suspension of the construction project by the construction supervisory authority.

Payment via the Agent

The payment agent manages the amount held in an escrow account and informs the developer and the general contractor about changes in the amount of collateral placed at his disposal under the payment agent contract. However, the most important function of the agent is that he manages the payments made to the general contractor(s) and the registered subcontractor(s). Registering in the subcontractors’ register, which is part of the main contractor’s construction e-log, is done electronically. The agent, on the basis of the invoice issued with respect to the performance certificate, pays the agreed-upon consideration for the given work phase to the general contractor and the subcontractors. Payments made to the subcontractors are not direct. The agent withholds the amount due to the subcontractor from the amount the general contractor is entitled to and only transfers it if the subcontractor certifies that the payment has been made to him by the general contractor.

When Is It Obligatory? Still Somewhat Unclear

The payment agent is obligatory only if the overall value of the construction work reaches or exceeds the community threshold published by the European Committee. At the moment, that threshold is EUR 5.35 million.

Penalty Decree

The construction’s overall value must be determined based on the rules of Hungary’s Government Decree 245/2006 (XII.5.) on construction fines, if applicable. The first theoretical question, then, is when is the Penalty Decree applicable, especially when no fine will be imposed. Unfortunately, the Penalty Decree is somewhat unclear as to how exactly the value should be calculated. If the Penalty Decree applies, then usually low amounts are calculated (much lower than the contracted price).

Contracted Price

Given the uncertainty in the Penalty Decree, and fearing the consequences, developers tend to choose the net value of the contracted price when determining the need for a payment agent.

In this regard, developers should analyze the costs of technology because that should not be part of the contracted price for purposes of the payment agent requirement. It is not always easy.

Who Can Be a Payment Agent?

The selection should not cause any particular headaches for developers, as commercial banks usually provide this type of service, as does the Hungarian State Treasury, allowing them to choose the best offer.

In Summary

We think that the concept of the construction payment agent is a good answer to certain problems, but it would be useful to clarify the rules pertaining to the value of the construction work. We recommend that investors and developers thoroughly examine the requirements of the payment agent because, if mandatory, the absence of an agent could lead to the suspension of work and fines, potentially adding significant costs to a construction project.

By Peter Berethalmi, Partner, and Andras Juhasz, Associate, Nagy & Trocsanyi

This Article was originally published in Issue 8.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

On 4 May, the detailed debate has been closed in the Hungarian Parliament in relation to the legislative proposal, which aims to implement Directive 2019/1023, also known as the restructuring directive, providing debtors with a pre-insolvency tool to rescue their viable but struggling enterprises. Restructuring proceedings fill a gap in the Hungarian legal environment and may also help enterprises recover financially from the ongoing coronavirus pandemic.

A legal tool which can rescue enterprises in distress has long been awaited in Hungary. Until now, these enterprises had only one legal tool – bankruptcy proceedings – to settle their debts with creditors. But bankruptcy proceedings are unpopular due to their inflexibility and riskiness compared to restructuring proceedings (unsuccessful bankruptcy proceedings automatically turn into liquidation proceedings). We therefore expect the introduction of restructuring proceedings to strengthen enterprises and the position of their creditors in the Hungarian market, which will have a positive impact on the economy in the long run.

The directive broadly divides restructuring proceedings into two types. A procedure that is largely in the hands of the parties and the role of the court is limited; usually not all creditors are involved and moratorium becomes effective only upon request and in a more general procedure where all creditors take part and the court is more actively involved. In this latter type, a wide range of restructuring tools (e.g. restructuring plan) are available in addition to the moratorium. The restructuring directive allows the Member States to introduce both types of procedure. Hungary opted for a mixture and the debtor may choose which route it wishes to follow.

According to the proposal, the debtor’s shareholders must decide whether the debtor can initiate the restructuring proceedings. The restructuring starts as a private procedure and becomes public only if certain criteria are met – for example, if the debtor applies for a general moratorium. The debtor is free to decide which creditor it wishes to involve and it must agree on the reorganisation plan only with them. Within this scope, the moratorium applies only to those creditors that are involved in the procedure. If all creditors are involved, the moratorium is general and the procedure becomes public. If the procedure becomes public, court involvement increases.

To ensure that the restructuring does not pose an unbearable risk to the debtor, the proposal makes it possible to request a moratorium on debt enforcement from the court to ensure that creditors do not take enforcement actions or initiate insolvency proceedings against the debtor during the restructuring procedure. 

If necessary or requested by either party, the debtor is assisted by restructuring experts who help draw up the restructuring plan, consult with creditors, lead the negotiations and are responsible for the proper runoff of the restructuring plan. The tasks of the restructuring expert may even extend to supervision of the debtors’ finances and daily operations. 

The aim of the restructuring procedure is to agree on a restructuring plan with the creditors. The restructuring plan is meant to provide a feasible step plan aiming to reinstate the solvency of the debtor, preserve its operations, and reduce its debts in line with its ability to service them. The law will not bind the hands of the parties to freely agree on anything that they deem beneficial for the debtor; nevertheless, the restructuring plan must not cover claims of employees arising from their employment and tort-related debts if the beneficiaries of such debts are natural persons.      

The restructuring plan must be adopted by a majority of votes in each class of creditors. In accordance with the restructuring directive, the proposal renders to the scope of the courts to approve the reorganisation plan. The scrutiny of the court is limited to checking the formality requirement and that the plan does not contradict to mandatory law. The court is not supposed to check and decide if the restructuring plan is economically feasible or not. Should the creditors fail to reach a consensus at the vote, the debtor may ask the court to decide on the approval of the restructuring plan with effect on all creditors of all classes; provided, that the secured creditors and the suppliers of the goods and services that are inevitable for the operation of the debtor have approved of the restructuring plan. Due to its compulsory nature, the decision can only take place if strictly defined legal conditions are met.

If the creditors do not reach consensus at the vote or the court does not approve the restructuring plan, the restructuring procedure is deemed unsuccessful and the moratorium will be lifted. Nevertheless, that failure does not warrant insolvency proceedings being initiated against the debtor. The general insolvency law criteria must still be met.  

A final vote on the proposal of the restructuring proceedings is expected soon. The Hungarian legislator is at the vanguard among EU Member States, considering that the deadline for implementation will expire only on 17 July 2021.

By Gergely Szaloki, Local Partner, and Virag Palguta, Attorney at Law, Schoenherr

An interview with Ted Boone of Dentons, about his path to Hungary.

CEELM: Run us through your background, and how you ended up in your current role with Dentons in Budapest.

Ted: This is my second time living and working in Budapest. I am thrilled to be back living in Hungary and to have recently joined Dentons. I grew up in a university town in central Illinois called Urbana. It has been called the “cultural capital of the cornfields” because it is where the University of Illinois, a major American public research university, is located.

After receiving my college degree from the University of Illinois, I studied at Ludwig Maximilian University in Munich for a year as a Fulbright Scholar and Bavarian State Grantee. While living in Munich I took my first trip to Budapest. I’ll never forget the first time I saw Budapest’s Chain Bridge, spanning the Danube. I was hooked on this enchanting city.

So after receiving my law degree from Columbia Law School, where I focused on international commercial law (and began my study of Hungarian), I returned to Budapest on an IREX grant to conduct research on international commercial transactions at Hungary’s Eotvos Lorand University’s School of Law under the guidance of Professor Ferenc Madl, who later served as the President of Hungary. After that, I joined the Budapest office of Baker & McKenzie and worked on many of the very first privatizations and foreign investments during Central Europe’s transformation to a market economy. I’ll never forget the optimism and excitement in Hungary when the Iron Curtain fell. It was an amazing and historical time to be living in Central Europe. These were all great adventures for a kid from central Illinois. 

Following this first stint in Hungary I moved to Washington, DC. I worked in the DC area for many years, focusing on complex domestic and international transactions. I worked first for Arnold & Porter and then in-house as an Assistant General Counsel at EY. In recent years I also started teaching a course as an Adjunct Professor at Georgetown University’s law school on structuring, negotiating, and drafting contracts for complex commercial transactions.   

But the magnetism of Central Europe, and particularly of Budapest, was never far from my mind, or indeed my heart. Not long ago I had the opportunity to join the Budapest office of Dentons and also to join the faculty of the Department of Business Law at Hungary’s Corvinus University School of Business. I jumped at the chance to do both. 

CEELM: Was it always your goal to work outside of the United States?

Ted: My father was on the Mathematics faculty at the University of Illinois and we often went to Europe in the summers and for sabbaticals. As a child, I lived and went to school in Oxford, England and Bonn, Germany. One year when I was little we even did a transatlantic crossing from New York to Germany on the Bremen ocean liner. It was these experiences as a kid that planted the seeds of my long-standing affinity for Europe. I feel totally at home in Europe – particularly Hungary. To experience the pleasures of living in Budapest again, now, is superb. Among other things I get to walk to Dentons’ office on Andrassy Street, the stunning Champs-Elysees of Budapest. Sometimes I wonder if I am dreaming…

CEELM: Tell us briefly about your practice, and how you built it up over the years.

Ted: My practice is grounded in my extensive commercial and legal experience arising from previous leadership positions in the United States and Europe at premier international law firms and one of the Big Four. My practice is focused on, among other areas, information technology, financial institutions, manufacturing, energy, entertainment, transport, consumer goods, telecom, media, real estate, biotechnology and services. My strong mix of law firm and in-house experience is something I believe clients appreciate. My ability to speak German and Hungarian in addition to English is important. As I am a former President and Chair of the Board of Governors of the American Chamber of Commerce in Hungary I am also heavily involved in the activities of that organization. 

It is truly an honor to be associated with Dentons’ Budapest office. I am well aware of the highly-respected position of Dentons here in Budapest and greatly admire its dynamic leadership. I have also been a fan of Dentons forward-looking global strategy for many years.  Unlike our competitors, many of whom stood still, contracted, or withdrew from key markets in 2020, Dentons strode boldly forward in implementing its strategy to scale the firm in priority markets. In the midst of a global pandemic and economic crisis, Dentons announced 33 new locations around the world last year. Impressive.

CEELM: How would clients describe your style?

Ted: Practical and solution-driven. Able to analyze, explain, and balance risk. Focused, careful, and clear. Willing to go the extra mile. I’d like to think I’m also someone clients enjoy working with. You can add charming and good looking as well if you like but that’s not for me to judge.

CEELM: There are obviously many differences between the Hungarian and American judicial systems and legal markets. What idiosyncrasies or differences stand out the most?

Ted: Hungary is a civil code based system and the US is a common law based system. During my first stint in Hungary I earned a post-graduate law degree in international commercial law from Hungary’s Eotvos Lorand University’s School of Law to go with my Columbia Law School JD and so am familiar with both legal systems. One encounters and must often address the ramifications of the distinction between civil code and common law systems.  On a day-to-day level one of the aspects of practicing in Hungary that I very much enjoy is that the culture of conducting meetings in person remains strong. Of course, Covid has changed this for the time being, but hopefully not forever.

CEELM: How about the cultures? What differences strike you as most resonant and significant?

Ted: The food during business meetings is often better in Hungary than in the US. Which would you prefer – a ham sandwich and potato chips or a luscious cream of mushroom soup, followed by an aptly spiced chicken paprika and perhaps topped off with a walnut sponge cake drizzled in warm chocolate?

CEELM: What particular value do you think a senior expatriate lawyer in your role adds – both to a firm and to its clients?

Ted: Dentons is an international firm. It is the largest law firm in the world. Our strategy of integrated global growth while maintaining the highest standards of quality is creating a transcendent global firm. In this environment and with these goals an office such as ours needs to have both superb indigenous lawyers and highly qualified expatriate lawyers. The symbiosis created by this mix is both potent and effective.

CEELM: Do you have any plans to move back to the US?

Ted: No, although the US is a special place which remains a part of me. You can take the boy out of Illinois but you can’t take Illinois out of the boy.

CEELM: Outside of Hungary, which CEE country do you enjoy visiting the most, and why?

Ted: The entire Central European region has its great charms and magnetism. Strolling the medieval core of Poland’s Krakow, skiing the Tatra mountains of Slovakia, relishing the magical villages of Romania, relaxing in the spas of the Czech Republic’s Karlovy Vary, absorbing the fairytale atmosphere of Slovenia’s Lake Bled and wandering the old quarter of Sarajevo all come to mind. Lately I have enjoyed exploring Croatia. In particular, I love the Austro-Hungarian vibe of Opatija on the Adriatic.

CEELM: What’s your favorite place to take visitors in Budapest? 

Ted: A classic five stars not-to-be-missed spot is the top of the Gellert Hill, with the stunning panorama of Buda, Pest, and the Danube stretched out below. There are other places that hold a personal resonance for me. The magnificent Eastern Train Station because it is the place where I often first arrived in Budapest. The 1906 statue of George Washington in the City Park because it symbolizes the longstanding ties between Hungary and the US. I also enjoy taking guests on a walking tour of the architecture of Budapest.  I focus on the Hungarian State Opera and other compelling structures designed in the mid and late 19th century by Hungary’s renowned architect Miklos Ybl as well as on the masterpiece that is the Hungarian Parliament, designed during that same era by Imre Steindl.  It is when walking in this great city that one can perhaps become most captivated by its beauty and its elegance.

This Article was originally published in Issue 8.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Procedural rules that have entered into force in recent years have fundamentally changed litigation in Hungary. This is especially true for tax litigation.

The new rules have forced companies, tax advisors, and legal representatives to reshape their strategies for tax disputes.

If a taxpayer does not agree with the resolution of the respective first instance tax authority and files an appeal, the second instance tax authority must review the entire previous procedure. If the taxpayer does not agree with the resulting second-instance decision, it has 30 days to file a judicial review claim against the tax authority.

Under new legislation and case law, the general approach – that a taxpayer and its tax advisor deal with the tax authority, and only then, the moment the second-instance resolution arrives, have a legal representative take over the handling of the case in front of the court – has become outdated.

In court, as a general rule, parties may no longer rely on the facts, circumstances, and evidence that were available at the time of the administrative proceedings. Moreover, in tax authority procedures, this restriction applies in appeals: the facts and evidence that were available to the involved taxpayer during the first instance procedure, as a main rule, may no longer be brought into the procedure.

The new procedural rules have also significantly restricted the strategy for shaping the legal arguments. As any legal arguments must be based on the facts and circumstances available, the essential aspects of the legal arguments must have already been mentioned in the administrative proceedings. The directions of judicial review are determined only by the arguments presented within the 30-day time limit for submitting a judicial review claim.

Contrary to the previous practice and case law, the introduction of new aspects into a legal dispute after the 30-day deadline now qualifies as a prohibited amendment of claim. Thus, for example, previously, if a tax resolution was passed on value added tax and corporate tax and the judicial review claim was filed only in respect of findings relating to the value added tax, it could no longer be extended to corporate tax, after the time limit for submitting a judicial review claim had passed – but it was at least possible to amend the legal arguments in the field of value added tax. According to recent case law, this is no longer possible either.

In other words, after the expiration of the time limit for submitting a judicial review claim but before the end of the first court hearing, it is only possible to clarify and expand on arguments that had already been presented during the time for submitting the judicial review claim.

One of the recent published decision of the Curia reinforces this rule, and it appears, based on the Court’s ruling, that not only arguments concerning facts, circumstances, and evidence, but even subsequent submissions of legal arguments may be more restricted. Consequently, all aspects of subsequent legal arguments must have been included in the tax authority procedures.

In short, neither the elaboration of a legal argument nor the gathering and processing of evidence may be postponed to the time of a subsequent judicial review, and failure to observe these rules significantly reduces the chances of winning on judicial review.

In view of these new features, coordinated cooperation between taxpayers, tax advisors, and legal representatives is required from the very moment the tax authority initiates its procedure.

By Daniel Kelemen, Partner, and Balazs Balog, Attorney at Law, PwC Legal Hungary

This Article was originally published in Issue 8.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Facilitated by strong government support, a consolidated tendering practice, and the growing interest of both domestic and international investors, solar power is driving Hungary’s renewables market to new heights.

In January 2020, the Innovation and Technology Ministry published the reworked version of Hungary’s National Energy Strategy 2030, confirming Hungary’s commitments to ambitious renewables targets, including a 20% share of total electricity generation in Hungary by 2030 and around 30% by 2040. According to the Strategy, expanding solar capacities are expected to take the lion’s share in meeting renewable targets. The Hungarian Government’s declared aim is to have 3,000 MW of installed solar capacity in Hungary by 2022 and 6,000 MW by 2030. This should provide the Hungarian renewables sector with plenty of room to grow and will most likely attract significant investments into solar development.

As a result, it is safe to say that Hungary is on track to becoming one of the most promising Solar Energy markets in Europe. After a record-setting year in 2018, the country more than doubled its solar energy capacity by adding 410MW of new licensed photovoltaic (PV) installations and over 90MW of residential PV systems, increasing the cumulative PV power to over 1GW. The first premium-based renewable energy support scheme (METAR) tender successfully closed in March 2020, with winning bids comprising around 132MW of nominal capacity. The second METAR tender is going to be bigger, with a total subsidy cap of HUF 800 million for 390 GWh/year, and results are expected by the end of February 2021. By August 2022, five more METAR tenders are expected, one every six months and tendering subsidized amounts of 300 to 500 GWh/year each.

Because of the 2017 switch from the feed-in-tariff based mandatory off-take system (KAT) to the premium-based METAR, new renewable installations must sell their generation on the market and conclude PPAs with customers or traders. Also, the KAT eligibility of the first mover renewables generators will expire in coming years, requiring them to employ a new business model to stay profitable. These developments may give rise to innovative PPA structures in Hungary – such as Corporate PPAs – in the near future.

Unfortunately, the COVID-19 pandemic has not left the Hungarian renewables market unscathed. Protective measures employed by the government included the option of postponing commercial operation dates without losing state subsidies and the introduction of a temporary foreign direct investment screening mechanism under which potential foreign (and in certain cases EU) investors must apply for the approval of the competent ministry before investing in virtually any energy company.

Renewables generators did not escape 2020 without a new regulatory challenge either, as stricter scheduling and related balancing surcharge payment obligations were imposed on them. As of April 1, 2020, the acceptable limits applicable to the scheduling of renewables installations were revoked, exposing them – especially solar energy producers, which benefitted from the highest acceptability margin – to a risk previously not present on the Hungarian market. In order to mitigate that risk, a mechanism was enacted entitling renewables generators to decrease the amount of the eventual surcharge. However, the applicable amount of the decrease will conclude by 2026 in predefined annual steps.

Despite these difficulties, and as evidenced by closings of significant finance and M&A deals on the renewables market our firm assisted with in 2020, and the help we have provided investors seeking to secure future projects, the development of the Hungarian renewables market – especially the momentum of solar power – remains strong.

By Daniel Aranyi, Head of Energy, and Eszter Gal, Associate, Bird & Bird Budapest

This Article was originally published in Issue 8.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

In response to the COVID-19 outbreak, the Hungarian government launched Government Decree 47/2020 (III. 18.), introducing a moratorium on the payment of principal, interest, and fees arising from facility, loan, and financial lease contracts until December 31, 2020. This moratorium, which we will call the “2020 Payment Moratorium,” was automatically available to both natural person and business entity borrowers, although they could opt out of if they wished.

The 2020 Payment Moratorium has recently been prolonged until June 30, 2021 by Government Decree 637/2020 (XII. 22.).

2020 Payment Moratorium

While Hungarian banks and leasing companies could easily adapt the 2020 Payment Moratorium to their borrowers (either domestic or foreign), foreign lenders were uncertain if the 2020 Payment Moratorium was also applicable to their facility, loan, or financial leases, since applicable laws (and related guidelines, regulations, and commentaries) did not specify whether it applied to them or not.

The possibility that the 2020 Payment Moratorium applied only to Hungarian financial entities could be distilled from a publication of the National Bank of Hungary summarizing the benefits of a payment moratorium for debtors. This publication described, among other things, possible losses to banks due to the moratorium and the potential aid provided to them by the NBH, which implied that the 2020 Payment Moratorium only applied to Hungarian creditors. On the other hand, Article 9 of Rome I as well as similar provisions in Hungary’s International Law Act suggested the opposite – that the laws introducing the 2020 Payment Moratorium were imperative regulations enacted to protect the Hungarian economy, therefore they would override any contractual provisions arising from agreements governed by any law, and hence were applicable to foreign lenders.

The market seemed to follow the latter interpretation and foreign lenders also provided their borrowers with a payment moratorium, partly because of EU regulations and partly because similar measures were introduced in most EU countries.

As a consequence of the 2020 Payment Moratorium, enforcement of security was not possible, since no payment of principal, interest, or fees could be demanded by lenders, and Hungarian-law-governed security may only be enforced if there are due and payable amounts outstanding under a facility/loan agreement and the borrower fails to pay such due and payable amounts within the set deadline.

2021 Payment Moratorium

While the moratorium granted under Government Decree 637/2020 (XII. 22.) (which we will call the “2021 Payment Moratorium”) has very similar conditions to the 2020 Payment Moratorium, one prominent difference is that the 2021 Payment Moratorium defines the term creditor as applying only to those creditors which have a registered seat in Hungary or which have a Hungarian branch office.

Although remote, there is the possibility that this deviation may cause problems in the case of those facility agreements where there is a combination of domestic and foreign creditors, especially in the jurisdiction of foreign creditors no longer covered by the payment moratorium. This also could worsen the financial position of Hungarian borrowers when the foreign creditor demands payment of the actual debt service or starts to enforce security.

Conclusions

As the conditions of both the 2020 Payment Moratorium and the 2021 Moratorium are favorable to borrowers (i.e., interest accrued during the term of the payment moratorium is not capitalized, the repayment instalment shall not increase after the payment moratorium, and the term of repayment is prolonged), it is not anticipated that they will have a negative effect on many borrowers in the near future.

This is also underpinned by the NBH’s recent guidelines to financial institutions in relation to the assessment of non-payment over nine months as a result of the 2020 Payment Moratorium and the 2021 Moratorium. According to the NBH, no facility will be automatically qualified as “restructured” if the borrower does not have and most probably will not have financial difficulties. This can be verified by a financial institution if a retail client’s salary has not decreased drastically or he/she has adequate savings – or, in the case of business entities, from regularly provided financial statements.

By Melinda Pelikan, Head of Banking & Finance, Wolf Theiss Budapest

This Article was originally published in Issue 8.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.