HUNGARY Law and Practice Contributed by: Attila Ungár and Júlia Várkonyi, Lakatos, Köves & Partners
3.5 Legal Requirements Before an Entity Can Give Valid Security The legal requirement to provide valid security must be considered on a case-by-case basis. Generally, managers of an obligor must act with the diligence of a prudent businessperson and in the obli - gor’s best interests. The obligor’s articles of incorpo - ration may specifically require the prior approval of the shareholders and/or directors of the obligor for taking a loan and granting valid security. Hungarian law, however, gives a significant degree of protection to lenders contracting in good faith with an obligor’s legitimate representatives. Financial assistance restrictions are limited mainly to public companies. Upstream and side-stream guaran - tees and third-party collaterals granted to guarantee the debt of (indirect) shareholders or affiliated enti - ties shall be provided on arm’s length terms and in consideration for corporate benefit and for adequate consideration. Cross-collateralisation is generally permitted; see 3.9 Effects of a Borrower Becoming Insolvent . Additional restrictions can apply to obligations under - taken or security interests granted by specific types of obligors – eg, individuals, public entities, regulated entities, real estate funds or their subsidiaries. 3.6 Formalities When a Borrower Is in Default Sophisticated loan and security documents contain detailed procedures that apply in case an event of default occurs. Hungarian security can typically be enforced in the following ways. • Out-of-court enforcement, through an out-of-court sale of the secured assets by the security holder in accordance with the security agreement and the provisions of the Hungarian Civil Code: this method of enforcement is available regardless of whether or not the security document is notarised. • Judicial enforcement by a judicial officer or bailiff on the basis of a court enforcement order: this
method is available regardless of whether or not the security document is notarised. • Summary or “direct” enforcement by a judicial officer or bailiff on the basis of an enforcement order issued by a notary public following a summa - ry enforcement procedure: this method of enforce - ment is only available if the documentation relied upon has been notarised. Traditionally, lenders have requested that security documents be notarised in order to benefit from the direct enforcement mechanism, thereby avoiding the need to go to court but still benefiting from the involvement of a judicial enforcement officer. In theory, the notary should issue the direct enforcement order on the basis of a statement by the secured creditor that an amount has fallen due, and that the obligor has been requested to pay such amount and has not done so. The enforcement order can then be enforced by a judicial enforcement officer on the same basis as a court order. In practice, however, notaries can be wary of granting such orders, and judicial enforcement officers can be wary of acting on the basis of a direct enforcement order. The time needed to successfully enforce and realise on real property security depends on various factors, including the co-operation of the debtor, the market - ability of the real property, the form of the underly - ing documentation, and the enforcement principles initially agreed on by the parties under the security documents. Summary or “direct” enforcement may take from six months to one or two years, whereas judicial enforcement may take one to three years or more. Out-of-court sales by the security holder may take between six and 12 months. The ranking of mortgages over real estate depends on the time of registration (principle of priority). Additional steps to give priority to a lender’s mortgage are not required. The sale of certain property (eg, listed buildings) may be subject to pre-emption rights, including on enforcement. A special regime was introduced in Hungary as a response to the COVID-19 pandemic, before being
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