28/09/2023
Continuation of economic activity after liquidation? How?
The winding-up proceedings lead to the final liquidation of the bankrupt company, from which - at least according to the Hungarian legal provisions to date - there was no return. The purpose of winding-up proceedings is to wind up a company that has become insolvent without any legal successor. In doing so, the liquidator could, of course, have decided earlier that the bankrupt company would continue its economic activities in the interests of its creditors, but only until the liquidation was completed and only in order to satisfy creditors' claims to the maximum extent possible.
However, it is difficult to ignore that there may be other important considerations besides the continuation of economic activity, which may be in the primary interests of creditors. For example, it is often the case that the assets of a company in liquidation would be disproportionately difficult to sell or even impossible to remove because of the special nature of the company's business or the specific nature of its assets. Temporary continuity of operations may also be justified if the company employs workers with specific skills whose access to the labour market would be disproportionately hampered, or even rendered impossible, by an immediate cessation of operations. The continued operation of the failing firm may also be important for the business partners and the wider geographical and social environment of the firm, even after the winding-up proceedings have been completed. Unfortunately, however, until recently the Hungarian legal system did not provide for any such possibility. However, the situation has recently changed significantly, albeit not spectacularly.
To continue/restart the economic activity of a company in liquidation, the liquidator can now also set up a new company
An emergency government decree could provide a solution to the above problem, but only during the emergency. The legislation allows, during an "emergency", i.e. during the "state of emergency" which still exists under the legislation in force, the liquidator of a company in liquidation which meets certain conditions to set up a new company in the name of the company, with the cooperation of the owners, to continue the activities of the company being liquidated, taking over the necessary assets and workforce. The liquidator does not even need to obtain the consent of the creditors' committee or the public authorities, but must sell the shares in the new company within one calendar year by public sale. The subsequent owners of the new company will then be in the fortunate position of no longer having to carry the burdens, debts and unresolved financial positions of the bankrupt company. The new owners of the company set up by the liquidator will acquire the assets of the liquidated company "clean", i.e. free of any encumbrances. This is not a spectacular change, but it is a very significant one, since until now in liquidation proceedings it was only possible to acquire assets "piecemeal". For many companies in decline, a way out could have been to package their assets and liabilities separately into a successor and, forgetting debts and liabilities, start again "with only the good". However, this was prohibited in principle by the former Company Act and now also by the Civil Code. However, an exception has now been made, albeit not for everyone.
Persons entitled to set up a company to carry on an economic activity
The real question is now not "how" but "which company in liquidation" can continue its activities free of charge after the liquidation proceedings. The answer to this may seem strange at first sight to many: under the "emergency" legislation, the liquidator may only exercise the option to continue as a going concern for companies in liquidation which (i) have not complied with their obligation to file and publish annual accounts under the Accounting Act for more than 400 days and (ii) have a net turnover of sales of HUF 10 billion or more according to their last filed annual accounts.
The real question is now not "how" but "which company in liquidation" can continue its activities free of charge after the liquidation proceedings. The answer to this may seem strange at first sight to many: under the "emergency" legislation, the liquidator may only exercise the option to continue as a going concern for companies in liquidation which (i) have not complied with their obligation to file and publish annual accounts under the Accounting Act for more than 400 days and (ii) have a net turnover of sales of HUF 10 billion or more according to their last filed annual accounts.
However, the legislation has serious limitations:
1) Its personal scope alone inevitably raises questions, as smaller turnover companies may be worthy of being saved as a going concern.
2) There is no time limit for failing to file annual accounts, so even once significant companies that have been "dormant" for years can become resuscitated without the burden of "sorting out" the values.
3) The exclusion of creditors from the liquidation decision process for the formation of a new company may be of particular concern to many.
4) Failure to sell the shares in the established new company will place an unnecessary and disproportionate burden on the liquidation of the new company and thus on the assets that can be distributed in liquidation and thus on creditors, who have no say in the process.
5) The Government Decree is a so-called emergency decree which, as it stands, will expire when the emergency ceases to exist - this date is 25 November 2023, the date of writing of this article, in accordance with Article 2 of Act XI of 2023 (State of Publication) - and is therefore 'time- and purpose-bound'.
The real weight and value of the legislation will be determined by the length of the emergency, as far as we know at the moment. Its true role will only be understood when it becomes clear which businesses have been saved from bankruptcy or revived for sale during the 'emergency'. It is also an interesting question whether the legislature may later decide to raise this option to the level of normal, non-emergency legislation.
This article was written by Dr. Márton Balogh, our new attorney at law, who has joined the dynamic and well-trained international team of bpv JÁDI NÉMETH Law Firm.
During his practice as an attorney at law, dr. Márton Balogh has, among other areas of law, significant experience in bank financing, corporate law and litigation representation.
Dr. Andrea Jádi Németh, managing partner of the bpv JÁDI NÉMETH Law Office, welcomed the new member of our team with the following: "As a result of his previous experience, Márton is now considered one of the most knowledgeable lawyers in his field, so his knowledge is very important, he further strengthens the successful operation of the Banking and Financing Group of our office."
Dr. Márton Balogh said: "I am very happy to be a member of a team that has become one of Hungary's leading legal advisors. The energetic team of the bpv JÁDI NÉMETH Law Office, as an independent law firm with serious international relations as a member of the bpv LEGAL Alliance, provides me a great platform for the further development of my law practice, I look forward to the new successes we could achieve together."
Sources:
Article 53 (1) and (5) of the Fundamental Law of Hungary
Act XCIII of 2021 on the Coordination of Defence and Security Activities, Articles 80-81