In 2019 the Directive (EU) 2019/1023 of the European Parliament and of the Council (Restructuring Directive) has become effective. The legislation transplanting the directive into Hungarian law was ratified on 1 July 2021, but the practical use of the various proceedings contained in the legislation can only start from 1 July 2022. How exactly can these new laws aid companies?
Let’s take for example the extraordinary circumstances caused by the COVID-19 pandemic since the spring of 2020 that’s effected every aspect of the economy. Usually, it’s very rare for companies with great potential employing numerous people to come under liquidation. A crisis like this can emerge at any moment as we have experience back in 2008 as well as 2020 and can lead to unexpected circumstances. An economic crisis of such magnitude can lead many business owners and employees to face hardships.
The purpose of the new legislation is to introduce a new legal institution that can save otherwise healthy businesses facing financial hardships. The restructuring process can help for example businesses suffering from the protracted financial strain caused by the covid pandemic. As of right now bankruptcy proceedings are the only possible way to handle the unsecured debt accumulated by a business, however the slow and burdensome process, that also includes of the debtors in some the decision-making process of the business can carry a stigmatizing effect as well. The new process is expected to provide a new, efficient legal tool that can be used to save businesses.
One of the main advantages of the restructuring process, is the fact that it’s in essence governed by the parties of interest, and the courts are only present in a limited fashion. Furthermore, it is up to the debtor to chose which creditor they wish to involve in the process as not all creditors are necessary to be involved by law. However, from the creditors the debtor has involved, a delay in payment can be requested in order to carry out their negotiations but regular payments must be made towards the creditors not involved in the restructuring process. The legislation provides flexible tools for debtors in order for them to maintain their business, meanwhile allowing for the company to arrange negotiations with their most important creditors, those most vital to their operations. Should a debtor decide to involve all their creditors the delay in payments is universal, making the process public. Such a public process also means a larger involvement of the courts.
During the process the debtors may be aided by restructuring experts, should the debtor or the creditors involved see a need for such assistance. The experts – as moderators – are also tasked with helping the debtor to create a restructuring plan, assisting, or directing the negotiations with the creditors and are responsible for the proper execution of the restructuring plan. Guidance from such experts can be very influential as it is important for debtors to set up a realistic restructuring plan. Experts can also aid the negotiations by mediating problems as a neutral third party. These negotiations are important for both sides as debtors and creditors need to agree to a restructuring plan resulting in the renewed solvency and operation of the debtor. There is no strict legal parameter established by the new regulation for the possible restructuring process, the parties are free to use and agree to any solution that’s beneficial for both the debtor and the creditors. Of course, some legal conditions are still applicable – as for example the rights of employees can not be infringed due to the restructuring agreement – and these conditions are monitored by the courts.
The main benefit of the restructuring process is that it can be approved by simple majority resulting in a compulsory agreement. Therefore, it’s no longer possible for a situation to arise where a single dissenting creditor can cause the agreement and therefore the continued operation of the debtor to fall through. Furthermore, unsuccessful negotiations will no longer necessarily result in insolvency proceedings for the debtor. In summary the new restructuring process will strengthen the position of businesses and therefore the position of creditors in the Hungarian market, resulting in long term positive effects on the economy as well.