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 obligor’s best interests. The obligor’s arti - cles of incorporation may specifically require the prior approval of the shareholders and/or direc - tors of the obligor for taking a loan and granting valid security. Hungarian law, however, gives a significant degree of protection to lenders con - tracting in good faith with an obligor’s legitimate representatives. Financial assistance restrictions are limited mainly to public companies. Cross-collateralisation is generally permitted; see 3.9 Effects of a Borrower Becoming Insol - vent . Additional restrictions can apply to obligations undertaken or security interests granted by spe - cific 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 con - tain detailed procedures that apply in the event of a default. 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 secu - rity holder in accordance with the security agreement and the provisions of the Hungar -
ian 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 summary enforcement procedure. This method of enforcement is only available if the documentation relied upon has been notarised. Traditionally, lenders have requested that secu - rity documents be notarised in order to ben - efit 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 enforce - ment 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 marketability of the real prop - erty, the form of the underlying documentation, or the enforcement principles initially agreed by the parties under the security documents. Sum - mary or “direct” enforcement may take from six
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