HUNGARY Law and Practice Contributed by: John Fenemore, Szabolcs Mestyán, Adrienn Mándoki and Nóra Kertai, Lakatos, Köves & Partners
6.5 Co-Ordination in Cross-Border Cases Cross-Border Cases Within the EU In cross-border cases concerning two or more mem - bers of a group of companies where the EU Insolvency Regulation applies, insolvency practitioners are gen - erally required to co-operate with any insolvency prac - titioner appointed in proceedings concerning another member of the same group. The co-operation may take any form, including the conclusion of agreements or protocols. Similar rules apply to courts. Cross-Border Cases Involving Third Countries Hungary has not adopted the UNCITRAL Model Law on Cross-Border Insolvency. In cross-border cases involving a third country, Hungarian laws do not specifically provide any means of co-operation or co-ordination with foreign courts. Where there is no applicable bilateral or multilateral international treaty in place, Hungarian courts are generally not keen on entering into protocols or other arrangements with foreign courts. 6.6 Foreign Creditors Foreign creditors are generally dealt with in the same way as domestic creditors. However, in practice, cer - tain additional requirements in terms of formalities of documentation and/or costs (eg, cost of translation) may apply. 7. Duties and Liability of Directors and Officers 7.1 Duties of Directors Duties of Directors Outside Insolvency Based on the Hungarian legislation, outside of insol - vency, directors of a Hungarian company must act and carry out their duties with priority to the interests of the company. Duties of Directors in Case of Impending Insolvency Impending insolvency occurs when the directors of the company are aware (or should be aware) of the fact that the company is not able to meet its finan - cial obligations. When deciding the date on which impending insolvency has occurred, in the majority of the cases, Hungarian courts use a “cash flow test”
whereby not only cash but other liquid assets are taken into consideration. There is no prospective element in the cash flow test as courts only assess impending insolvency after the fact once insolvent liquidation has already com - menced. In approximately one-quarter of cases, the courts supplement the “cash flow test” with a “bal - ance sheet test”. When applying the test, typically short-term obliga - tions are compared to working capital. The “balance sheet test” is always supplemental to the “cash flow test” and is not used independently. There is no man - datory law on applying the tests and the above is con - cluded from previous domestic case law. The directors of a company in impending insolvency must act in the interests of the creditors of the compa - ny. It is not entirely clear what this requirement means exactly but the general consensus is that directors are not required to take only the interests of the credi - tors into account when carrying out their management duties or to prioritise creditors’ interests over those of the company. The directors should convene the supreme body and inform it about the situation (the directors may call upon the supreme body to either support the debtor’s situation with supplementary payments or to initiate insolvency proceedings). In addition, the directors should not take any meas - ures in relation to the debtor’s activities that could increase the creditor’s losses. 7.2 Personal Liability of Directors The failure of the directors to take the interests of the creditors into account appropriately may trigger civil and criminal liability. Civil law liability (including potential disqualification for a period of five years) is triggered: • in the case of an impending insolvency; • within the three years preceding the start of the insolvent liquidation proceeding; • if the directors of the company have not acted in the interests of creditors; and
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