In 2003, the European Bank for Reconstruction and Development (EBRD) conducted a survey on Hungary's insolvency legislation based on the 1991 Bankruptcy Proceedings, Liquidation Proceedings and Member's Voluntary Dissolution Act as amended to that date. Drawing on that survey, R. Harmer and N. Cooper reported that Hungary had achieved only "low" overall compliance with the international standards. A 2006 EBRD survey has now been published in tabular form, in which the overall compliance rating was raised to "medium," based on changes introduced by a 2006 amendment to the basic insolvency law. While noting significant improvements, the 2006 survey still indicated a number of areas of deficiency, including still-inadequate creditor safeguards in the course of reorganizations, the failure to require that creditors be given access to material information, and the lack of independent analysis of reorganization proposals. The 2006 summary also notes that the initiation phase of insolvency proceedings is excessively long, lasting as long as 60 days. In its "Doing Business 2008" snapshot of Hungary's closing-a-business regime (published in 2007), the World Bank found that it took, on average 2.0 years to complete an insolvency action in Hungary, compared to a regional average of 3.2 years and an average among Organization for Economic Cooperation and Development (OECD) member states of 1.3 years. The cost of such proceedings in Hungary averages 15% of the debtor estate, compared to 13.7% regionally and 7.5% for OECD member states. Recoveries average 38.4 cents on the dollar in Hungary, compared to 28.9 cents for the region and 74.1 cents on the dollar for OECD member states.

General Overview

A 2006 summary assessment by the European Bank for Reconstruction and Development (EBRD) regarding Hungary's insolvency law regime disclosed that, on the whole, Hungary achieves medium compliance with international standards. According to the EBRD's 2006 report, which as of March 2008 exists only in summary tabular form, recent amendments have improved the legal definition of insolvency and more clearly specified the type of evidence that can be used in establishing the condition of insolvency. New legislation has also included provisions on the avoidance of pre-bankruptcy transactions and covering the issue of cross-border insolvency. On the other hand, the 2006 EBRD report found inadequate safeguards for creditors in the context of a reorganization proceeding, nor is there a requirement that creditors be provided material information. Also lacking are provisions to subject proposed reorganization plans to independent analysis to allow for class voting. In addition, the time required to complete the initiation phase of proceedings remains excessive, ranging up to 60 days. Of the 23 elements assessed by the EBRD, Hungary achieves the highest degree of compliance ("substantial") on six -- commencement eligibility, court/tribunal jurisdiction, interim relief, office holders, enforcement and sanctions, and cross border insolvency. It achieves the lowest rating (noncompliant) on two -- reorganization financing and discharge/release of debts -- with the remaining 15 elements receiving mixed grades.

The "medium" overall compliance rating awarded by the EBRD in 2006 represents a significant improvement over the results of 2003 EBRD survey, in which authors R. Harmer and N. Cooper accorded Hungary an overall compliance rating of "low." At the time of the Harmer and Cooper report, Hungary was rated as "medium" compliance in the commencement and effect of insolvency proceedings. Regarding assets of the debtor estate, Hungary achieves very low compliance, and with regard to the treatment and involvement of creditors, Hungary ranks as highly compliant. However, the authors stressed that these assessments are based solely on the content of the laws themselves, and do not address actual practice, effectiveness, or capacity for implementation of those laws. The EBRD's 2005 report on Commercial Laws in Hungary noted that Hungarian law "is deficient in many key areas of insolvency" (p. 14), particularly with regard to reorganization. This is due largely to the fact that there is virtually no financing available to a company while it is undergoing restructuring, and the required level of creditor support is set too high. Another deficiency cited by the report is in the area of cross-border insolvency. The report mentions that Hungary tends to perform better in insolvencies that are initiated by creditors than by debtors, at least in terms of the commencement process. However, the report notes that "over 80% of all bankrupt estates in Hungary do not contain sufficient assets," leaving unsecured creditors with little prospect of any recovery.

According to the PricewaterhouseCoopers (PWC) 2005 report on Hungary's insolvency regime, Hungary adopted its core legislation, the Insolvency Act, in 1991. Since then, the law has undergone more than 30 amendments. Over time, it has become more and more pro-creditor, but debt recovery levels are generally low. The law provides for liquidation and formal rescue, but the latter option is rarely taken because the criteria are "commercially unrealistic." While liquidations may be either "solvent" (with full creditor satisfaction) or "insolvent" (partial creditor satisfaction), the "insolvent" option is the most common. In 2004, the Insolvency Act was subjected to review, with an eye to reform the regime to provide greater creditor protection, rationalize the rescue process, and address cross-border insolvency issues. The PWC report notes that, as a member of the European Union (EU), Hungary is subject to the EU Insolvency Regulation. This requires that "insolvency procedures opened in another EU member state will be automatically recognized in Hungary (subject to the public policy exception) if they concern a company incorporated in Hungary or incorporated outside Hungary but having an establishment within Hungary."

In 2005, the U.S. Department of Commerce (DoC) published its Country Commercial Guide to Doing Business in Hungary. According to this report, Hungary's bankruptcy legislation applies to all commercial entities with the exception of banks, trusts, and state-owned entities. The report added that only debtors can initiate bankruptcy proceedings, and no debtors can initiate a bankruptcy if they have already done so during the 3 years prior. Creditors must provide majority consent to any debtor-proposed settlement plans, which have to be offered in a settlement conference held no later than 90 days after the debtor first files for bankruptcy protection. In the event of a failure to reach agreement on a settlement plan, the court is authorized to require liquidation of the debtor's assets. The DoC found Hungary's judiciary to be independent and the commercial legislation to be well developed. It did, however, find that the system was subject to lengthy delays. An attempt was made in 2003 to reduce these delays, when parliament created a new regional court system to supplement the local courts, appellate courts, and Supreme Court. The regional courts are five in number, and are called High Courts of Justice. In addition to the Hungarian courts, the fact that Hungary is a member of the European Union (EU) offers other avenues of redress in certain insolvency situations. As the DoC 2005 report notes, private parties have the right to take grievances directly to EU bodies if then involve "violations of EU rights or regulations" (p. 60).

The World Bank's "Doing Business 2008" report, published on the World Bank Doing Business website in 2007, provides a snapshot of the time, cost, and recovery rates for closing a business in Hungary, and compares these results with (a) the regional average and (b) the results achieved by member states of the Organization for Economic Cooperation and Development (OECD). The World Bank found that it took, on average, 2.0 years to complete an insolvency action in Hungary, compared to a regional average of 3.2 years and an OECD average of 1.3 years. The cost of such proceedings in Hungary averages 15% of the debtor estate, compared to 13.7% regionally and 7.5% for OECD member states. Recoveries average 38.4 cents on the dollar in Hungary, compared to 28.9 cents for the region and 74.1 cents on the dollar for OECD member states.