Entrepreneurs may be able to avoid bankruptcy by anticipating difficulties - if they keep a close eye on the financial situation of their business.
The following laws regulate bankruptcy and liquidation proceedings, and the accounting requirements relating to them:
Bankruptcy proceedings are proceedings that aim for the debtor to reach agreement with its creditors and to conclude an agreement on it. If bankruptcy proceedings are initiated by the debtor, the court grants the debtor an immediate, temporary payment deferral until the date on which the bankruptcy proceedings commence. In a bankruptcy agreement, the debtor's debts may be assumed by its creditors or by third parties, who may also take ownership of the debtor's assets or assume a security for its liabilities.
If no agreement is reached during the moratorium, or the implementation of the agreement is unsuccessful, the court will officially order liquidation proceedings.
Bankruptcy proceedings fall under the jurisdiction of the competent court for the debtor's registered seat as it was registered on the date when the application for bankruptcy proceedings was submitted. In the case of transfer of the debtor's seat from the competency area of the previous registry court to another one, bankruptcy or liquidation proceedings may be initiated before the court competent in accordance with the previously registered seat for 180 days after the registration of the new seat.
If, according to the rules on cross-border insolvency, the main proceedings or local proceedings against a company not registered in Hungary are instigated in Hungary, the Budapest Metropolitan Court shall have exclusive competence.
An economic organisation that appears in the list of liquidators may act as liquidator. The list of liquidators is kept by the Public Administration and Justice Office. The list of liquidators is published by the registering body at its website, as well as in the Companies' Gazette and the Official Announcement when the new list is made.
Entrepreneurs having experienced bankruptcy should not lose confidence in their ability to embark on a new business.
Bankruptcy procedure: a step-by-step guide
The head of the indebted economic organisation may submit an application for bankruptcy procedure to the court via their legal representative if there is no bankruptcy procedure pending against them, no application for liquidation has been submitted against them, and no decision of first instance has been made on the initiation of liquidation. The debtor may not submit an additional application for bankruptcy procedure until the creditors' claims existing at the initiation of the previous bankruptcy procedure or raised during it are settled, and two years have lapsed from the announcement of the final closure of a previous bankruptcy procedure, or one year has lapsed from the announcement of the final decision relating to his application rejected previously by the court. The application for the bankruptcy proceedings must be presented on a form specified in the legislation which may be only an electronic form from 1 June 2014.
Based on the application of the debtor - if it is not immediately rejected - the court takes measures in one working day from the announcement of the application and of the immediate, temporary payment grace period due to the debtor in the Companies' Gazette. A 120 day payment grace period is due to the debtor from the starting day of the bankruptcy proceedings, which may be extended on the basis of a decision made in a report countersigned by the trustee.
The application for bankruptcy proceedings must be submitted to the tribunal competent at the economic organisation's registered seat. The court designates a trustee from a register of liquidators concurrently with ordering the bankruptcy proceedings. The trustee, who, unlike the liquidator, does not acquire the right of representation in relation to the debtor’s property, does however have a far-ranging right of approval and to monitor trading.
Creditors must submit their claims to debtor and the trustee. Namely, voting rights are due to the creditors on the basis of the recorded claims. A determined proportion of voting rights is required to extend the original moratorium of 120 days from the start date to 240 or 365 days, or to adopt the bankruptcy agreement.
During the moratorium, the debtor must reach agreement with its creditors concerning the settlement of debts, or otherwise put the creditors’ claims in order.
If the agreement is adopted by creditors with the desired proportion of votes, it complies with the law, and if it has been countersigned by the trustee, or by the creditors’ committee if there is one, the court will approve the bankruptcy agreement and declare the bankruptcy proceedings closed. The approved agreement is a compulsory agreement, so it affects creditors who do not contribute to the agreement or do not participate in the conclusion of the agreement despite being properly notified, as well as those with entitlements to disputed claims. The agreement may not, however, discriminate against creditors who do not participate in its approval.
If a bankruptcy agreement has not been reached, approved by the trustee, or does not comply with the legal provisions, the court will terminate the bankruptcy procedure and officially order liquidation proceedings against the debtor.
The liquidation procedure only starts if the debtor is insolvent and upon request by the creditor or liquidator, or on the basis of a notification by the court of registration or the court presiding over criminal proceedings. If the liquidation proceedings are initiated at the request of the debtor, the creditor or the liquidator then a legal representation is compulsory.
The debtor may request the liquidation proceedings if he cannot or do not wish to initiate a bankruptcy procedure. If the liquidation proceedings are requested by the debtor, he must report the names of all financial service providers keeping his banking accounts, and the names of the relevant accounts.
If the initiation of the liquidation proceedings is requested by the creditor he must indicate the title of the debtor's debt, the due date and a brief explanation of why the debtor is considered insolvent in the request. Simultaneously with or after submission of the application for liquidation proceedings, and before the starting day of the liquidation, the creditor may initiate before the court to appoint a temporary trustee to supervise the business of the debtor.
On considering the request, the court immediately appoints a liquidator from the list of liquidators. The liquidator will fulfil his tasks primarily with the involvement of the organisation of the debtor and of his own organisation. The liquidator asseses the financial situation of the economic organisation and the claims raised against it. The liquidator prepares a recommendation on the distribution of assets, and a final balance sheet for liquidation. Based on these documents, the court makes decisions on who will pay costs, how creditor claims can be met, the closing of bank accounts, completion of the liquidation and winding up of the company.
The liquidator takes possession of the organisation's assets as of the date on which liquidation started. From the start date of the liquidation, the name of the debtor must be supplemented with "under liquidation", or "f.a." (Hungarian abbreviation).
The court will ensure that the fact of liquidation is published in the Companies' Gazette, and it will officially notify the State bodies whose activities may be affected by the liquidation, as well as all financial institutions with which the debtor has accounts.
Initiation of an insolvency procedure (bankruptcy or similar proceedings) against a foreign company made abroad must be announced by the branch to the registry court in ten days from the initiation of the foreign procedure and the publication of an announcement in the Companies' Gazette must be simultaneously initiated by them.
Obligations of the organisation’s managing director
The managing director of a company that is being liquidated is obliged to perform the tasks listed in the Bankruptcy Act (compilation of an annual report, filing of tax returns, handing over of documentary materials, notifying employees, etc.).
The creditors and the debtor may make an agreement any time after 40 days from the announcement of the court decision made on the liquidation until the final balance sheet for liquidation is made, except when the liquidation proceedings are held in the frame of a compulsory liquidation procedure.
Simplified liquidation procedure
If the assets of the debtors are not sufficient to cover the expected liquidation costs, or the liquidation procedure cannot be technically carried out in accordance with the general rules, then an application for a simplified procedure may be submitted to the court. In that case, the liquidator makes a written report, and submits a request or recommendation to the court on the distribution of the assets and outstanding receivables of the debtor among the creditors. The liquidator makes also a closing tax statement, and submits it to the tax authority simultaneously with the submission of the request or recommendation to the court and with the payment of the tax. An appeal against the report or the recommendation on the distribution of the assets may be submitted in 15 working days. If no appeal is submitted in response to the report the court orders the announcement of the abstract of the final decision in the Companies' Gazette, and the liquidator must proceed in 15 days from the announcement before notarial and public registry offices to have all data deleted from the records where the debtor is indicated as an owner or another holder.
As a main rule, the rules relating to setting up a business must be applied to transformation (merger or division). An economic organisation may not be reorganised if it is under liquidation or final settlement, or if a court or prosecutor proceeding in a criminal case notifies the company or the registry court that a criminal action may take place against the company. A company created by transformation is the general legal successor to the transformed company.
The company must decide on transformation on two occasions, unless otherwise provided for in the articles of association. Firstly, it decides on the intention to undergo a transformation, and the form of the new company, and then it decides on the draft balance of assets and property inventory prepared by the managing director, the draft agreement on the legal successor company, and on the procedure for settlement with members who do not wish to participate in the legal successor company. An announcement on the transformation must be published in the Companies' Gazette, and it must contain the most important data relating to the company being created and the company being transformed.
Applications for the registration of a company (transformation) must be submitted electronically, and the necessary stamp duty for the proceedings and the costs of publication must be paid electronically before the application for the registration of a company (transformation) is submitted. The application is submitted by the legal representative (who countersigned the articles of association) authorised by the company's legal representative to the registry court.
You can find out whether a company is under liquidation or bankruptcy proceedings from the Online Companies’ Gazette.
The Weekly Bankruptcy Bulletin is a service that needs to be registered for, and it lists all Hungarian companies in bankruptcy, liquidation or solvent liquidation proceedings.
The purpose of the Simple State Programme is to reduce the administrative loads of the businesses. One of the most important objectives of the medium term government programme is to improve the terms of enforcement of law for businesses. In the frame of the programme, a study will be made that examines how a bankruptcy preventing procedural order can be established that specifies the terms of determination of management responsibility if insolvency is expected, or how an agreement on the reorganisation of the enterprises can be facilitated, or what terms may result in a failure to make a bankruptcy agreement.