Request for Proposals: Supporting the Reform of the Hungarian Insolvency Framework
Hungary, 18 February 2019
Major revisions are needed to Hungary's corporate bankruptcy legislation, the Act XLIX on Bankruptcy and Liquidation Proceedings (the "Bankruptcy Law"), which has not been significantly updated since it was first introduced in 1991. The Government of Hungary recognises the need to reform the Bankruptcy Law to improve the prospects for recovery of viable yet struggling businesses and their employees and to secure the long-term health of both the financial and the corporate sectors. In September 2018 the Ministry of Justice of Hungary (the "Ministry of Justice") set up a working group to reform the Bankruptcy Law comprising judges from the Supreme Court, the Budapest courts and regional courts, law firms, the Banking Association, the Hungarian Central Bank and insolvency practitioners, as well as the association of insolvency practitioners (the "Working Group") with the objective of presenting a new Bankruptcy Law to Parliament in September 2019. The Government intends thereafter to enact supporting by-laws to cover related areas such as insolvency practitioner remuneration (the "Bankruptcy By-Laws"). In parallel to the reform of the Bankruptcy Law, the Government plans to introduce reforms to the Company Law and the Civil Code which are expected to help to achieve the objective of the Bankruptcy Law reform. The Government is also planning a reorganisation of the court system to create a group of 50 to 70 specialist judges in Budapest and four regional centres for bankruptcy and company law matters.
The 2015 'Analysis of Corporate Restructuring and Insolvency in Hungary' by the European Bank for Reconstruction and Development ("EBRD") highlighted a number of issues including weak creditor controls in insolvency proceedings, ineffective judicial control and oversight of certain important aspects of the insolvency case, weak insolvency practitioner duties and powers of investigation and recovery of assets belonging to the debtor's estate and lack of opportunities for successful reorganisation in bankruptcy. The World Bank's 2019 Doing Business Report has highlighted the high costs of insolvency procedures and relatively low recovery rates, when benchmarked against the average of OECD high income countries. According to the European Commission's Country Report dated March 2018, while asset quality has further improved, the ratio of non-performing loans ("NPL") in the Hungarian banking sector is still high, bringing to the fore the importance of well-functioning insolvency frameworks.
Improving Hungary's bankruptcy framework is expected to have a positive impact on the wider economy, the country's investment climate and employment. A more efficient framework will also facilitate the efficient management of existing non-performing loans and reduce the risk of such loans accumulating on banks' balance sheets in the future.
The project is expected to further the objectives of the European Commission's 2014 Recommendation on a new approach to business failure and insolvency and the European Commission's 2016 proposal for a Directive on 'preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures' (the "Proposed Directive") which is now in agreed form and is expected to be enacted later this year. It is intended that the project will help the authorities identify elements in the Proposed Directive which may be included within the scope of the Bankruptcy Law reform project, together with other elements which will need to be considered as part of future legal and institutional reforms.
In the context of the above, the EBRD is now seeking to engage a consultant, which shall comprise leading Hungarian and international experts (with extensive experience in European civil law and bankruptcy law) (the "Consultant"), to assist the Ministry of Justice to reform and modernise the corporate bankruptcy framework in Hungary and related legislation, and align it with European and international best practices (the "Assignment").
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