Author: István Gárdos - Erika Tomori
GLG International Comparative Legal Guide to Securitisation 2011
1 Receivables Contracts
(a) There are two requirements for the creation of an enforceable debt obligation: a contract and the provision of the service undertaken in the contract. It is not necessary that the sale of goods or services is evidenced by formal receivable contracts, the parties are usually free to chose the form of their agreement (contractual freedom). A contract may be concluded either in writing, orally or by conduct that implies their consensus. In general, the provision of service does not have to be documented either. In certain cases, however, the law expressly requires specific formalities (e.g. written form is required for the validity of a consumer loan contract; and payment may not be required until an invoice is issued). Also, the contracting parties may agree that specific formalities have to be respected for the contract to be valid. Even if there is no such requirement, a written document may facilitate the evidencing of the existence of such contract or the performance of the service in an eventual dispute. (b) As mentioned above, there are no formal requirements either for the creation of a contract or for the performance of the required service. An invoice however may be useful as it indicates both the existence of the agreement and also the provision of the services to which the invoice refers to. However, in a dispute the invoice alone may not be sufficient for evidencing an enforceable debt. The position may substantially be improved by obtaining a confirmation as to the content of the invoice from the obligor, but even in that case the obligor may prove that the service turned out to be defective or that for any other reason he does not owe the amount of the invoice. (c) As mentioned above, the parties’ conduct may create a valid contract. Thus, historic relationships and the behaviour of the parties may serve as the basis of establishing the existence of a contract regarding the sale of goods and services.
(a) There is no limit regarding the interest rate on consumer loans or other kinds of receivables. However, the court, exceptionally, may reduce the agreed rate, if it is unreasonably excessive. Also the contract, where one party gains excessive benefit or unfair advantage by exploiting the other party’s situation, shall be null and void (usurious contract). (b) The Civil Code provides that a debtor who does not pay his debt when it is due, shall pay late payment interest in addition to the contractual interest, and even in cases where the debt originally is interest free. In addition, Hungary transposed European Directive 2005/35 on Combating Late Payment on Commercial Transactions. (c) Hungarian law grants the consumer the right to cancel a receivable where the various EU consumer directives so provide. In particular, the obligor of a consumer loan entitled to pay its debt prior to its due date, and the creditor is obliged to accept such payment and reduce the costs of the loan accordingly. (d) In consumer loans the creditor may not require the obligor to issue possessory note or check for securing the receivable.
There are no special requirements with respect to the sale agreement in case the obligor under a receivables contract is the state or a government agency.
2 Choice of Law – Receivables Contracts
The main principle of determining the governing law of the contract is the residence of the obligor of the obligation primarily characterising the receivables contract (e.g. residence of the seller or of the party providing a service). In case of consumer contracts the residence of the consumer determines primarily the governing law.
There is no reason why a Hungarian court would not give effect to such choice of law, even if the receivable is sold to a foreign party. We note, however, that choice of law is permitted only when the transaction has a foreign element. If both the seller and the obligor are resident in Hungary, and the contract has no other foreign element either, the receivables contract will be governed by Hungarian law irrespective of the choice made by the parties.
If a foreign element exists (e.g. either of the parties is non-resident in Hungary), the parties are free to choose the law applicable to their contract. Such choice is disregarded if it conflicts with Hungarian public order. We are not aware of any limitation to the recognition of foreign law that would typically apply in commercial transactions, in particular if the chosen law is one of the EU member countries. Regulation (EC) No 593/2008 of the European Parliament and of the Council (Rome I) is effective in Hungary. Under the Rome I Regulation the choice of law may not have the result of depriving the consumer of the protection afforded to him by provisions that cannot be derogated from by agreement by virtue of the law which, in the absence of choice, would have been applicable under the Regulation.
Yes, the Convention entered into force on 1 January 1988.
3 Choice of Law – Receivables Purchase Agreement
Hungarian law does not require that the sale of the receivables be governed by the same law as the law governing the receivables themselves. If the parties to an assignment of receivables choose a law which is different from the law which governs the receivables, this choice is applicable to their internal relations, but does not extend to external issues, such as the rights and obligations of obligors, the obligors’ creditors and other third parties.
The parties are free to choose the governing law, if their contract has a foreign element. If that condition is met, the parties are not restricted in their choice, the chosen law does not have to be the law of the country which represent the foreign element in the contract. Therefore, there is no reason why a Hungarian court would not give effect to such choice of law. For the exceptions see the answer to question 2.3.
The default rule is that a contract between Hungarian residents is governed by Hungarian law. This will apply even if the asset involved in the sale is situated abroad or governed by a foreign law. If one of the parties is a non-Hungarian resident, the parties are free to choose any law, including the law of Hungary. As mentioned in question 3.1 above, this choice will not extend to matters relating to the obligor or other third party.
Hungarian courts will apply the law which governs the receivables contract and the receivables purchase agreement. Therefore a transaction which meets the requirement for a true sale under the governing law, will be recognised even against third parties, irrespective whether they meet the Hungarian requirements of a true sale.
4 Asset Sales
The customary method to sell accounts receivables is by assignment whereby the rights stemming from the receivables pass from the seller to the purchaser, and the purchaser steps into the shoes of the seller as creditor with respect to the sold receivables.
In order for the sale of receivables to be perfected, the seller and the purchaser shall enter into a contract of assignment and notice shall be given to the obligor. No specific formalities are required creating a valid assignment (neither registration, notarisation, nor transfer of related documents is necessary). Typically, an assignment is executed in a properly signed document, considering the fact that receivables are intangible, therefore no transfer of possession is possible, thus the only proof of the transaction is the document itself. An assignment, however, is not effective against the obligor without notice. Prior to notification, the obligor may discharge his obligation by paying to the assignor, or even to a subsequent assignee who has given notice about the assignment. As the transfer becomes effective against the seller by concluding the assignment contract, in principle no subsequent purchaser may acquire any right with respect to the sold receivables. However, the obligor may discharge his obligation by paying to the subsequent purchaser in case he is not informed about the first sale but receives proper notice about the sale to the subsequent purchaser.
Promissory notes are not widely used in Hungary; they qualify as negotiable documents which may be transferred by endorsement plus transfer of possession of the document (subsequent to a blank endorsement only delivery is needed). The most commonly used marketable debt securities are bonds which may be paper-based (physical) or electronic (dematerialised); physical securities may be either bearer or registered. Bearer securities do not indicate the name of the holder and may be transferred by mere transfer of possession; whoever holds the security is considered to be entitled to the rights incorporated in the security. Registered physical securities may be transferred by means of special or blank endorsements plus transfer of possession of the security. Dematerialised securities may be transferred by debiting the securities account of the seller and crediting the account of the purchaser.Consumer loans and loans secured by mortgage may be sold in the same way as any other receivables, no additional requirements apply.
Notification of the obligor is necessary to allow the purchaser to enforce the debt directly against the obligor, to prevent the obligor and the seller from modifying the receivables agreement and to prevent the obligor from discharging his debt by paying to the seller rather than the purchaser. However, even notification cannot prevent the obligor from setting off the receivables against already existing obligations of the seller. In order to avoid such possibility, the obligor must waive such right of set-off in addition to the notification. If the obligor is notified by the purchaser instead of the seller, the obligor may demand evidence of the sale or confirmation from the seller before paying to the purchaser. Notification may be made even after the insolvency of the seller or the obligor. Consent of the obligor is not necessary, unless the receivables contract expressly prohibit assignment.
Although there are different interpretations in legal literature, courts tend to accept contractual prohibition of assignment as effective against third parties, i.e. such a prohibition renders the transfer ineffective. In addition, where the receivables contract prohibits assignment, the seller may be found liable for breach of contract.
The sale document must designate the receivables sold in a way that the receivables which are subject of the sale can be identified unambiguously. The receivables sold may be identified individually, by naming the obligor, by describing the specific business from which the receivables arise, or by other forms of general description, even by stating that the sale affects all of the seller’s existing receivables (unless this renders the identification impossible).
It is not primarily the denomination given by the parties, but the economic characteristics of the transaction that will determine whether a court will treat the transaction as a true sale or an assignment by way of security. Under current Hungarian law it is uncertain what economic requirements have to be met in order for a sale of receivables to be perfected. (a) The sale in most cases will not be perfected if the seller retains credit risk of the obligor; however, purely being liable, in case of a bad faith sale, for the insolvency of the obligor at the time of the sale probably would not render the sale ineffective. (b) There is no practice about the effect of retaining interest rate risk on the effectiveness of the sale; the conservative view is that the seller may not retain any such risk.(c) Normally, using the services of the seller to manage the sold debt, and maintain contact with the obligors, would not in itself re-characterise the sale. If, however, as a result of this arrangement, the obligor is not informed about the sale, and the purchaser is deprived of the right to directly contact the obligor and enforce the receivables, there is a risk that the sale shall be re-characterised as a financing transaction.
Neither commercial nor court practice is established in relation to the continuous sale of future receivables. Probably, prior to insolvency, an agreement on continuous sale of receivables would be enforceable against the seller. It is, however, unlikely that such an agreement would also be enforceable subsequent to the commencement of the seller’s insolvent liquidation. In order to make the sale enforceable against the obligors, they have to receive notice of the assignment. Automatic sale in itself shall not be effective against obligors.
A commitment to transfer receivables is effective between the seller and the purchaser, but probably may not be enforceable against the obligor. There is some uncertainty about the assignability of future receivables, in particular when they cannot be specifically identified. The Supreme Court stated earlier that future receivables cannot be assigned, newer decisions seem to overrule this decision, but it is uncertain to what extent future receivables are assignable. It seems to follow from the court practice that receivables can only be assigned if the legal basis out of which the receivable will arise already exists at the time of the assignment. According to the court practice, sale of future receivables will not be effective with respect to receivables which arise after the seller’s insolvency.
In principle, the purchaser automatically, by operation of law becomes beneficiary of any mortgage, pledge and surety securing the sold receivables. In practice, however, order to avoid future disputes, it is useful to re-register mortgages and other charges to the name of the purchaser in the relevant registries (charges registry, land registry, registry for ships and aircrafts). With respect to personal security it is important to find out whether a guarantee is given in general to secure a certain debt or specifically for the benefit of the seller, and to give notice to the guarantor about the sale.
5 Security Issues
Pledge over receivables may be created by a simple agreement between the pledgor and the pledgee. This agreement has to be in writing, but there are no other formal requirements. To make this pledge effective against the obligor, notice has to be given. These requirements are almost the same as for a valid and perfected assignment. Because of this simplicity, there is no risk that in case the transfer is re-characterized as a secured finance transaction, the security will fail for lack of the required formalities. For this reason it is not customary, but possible, to take back-up security in connection with the sale of receivables.
A charge may be created merely by a written agreement between the seller and the purchaser. Notification is required to make the charge effective against the debtor.
As a result of the assignment, the purchaser becomes the “owner” of the claim, therefore the purchaser will become entitled to create a security right over the receivables in the same way as the seller was (see 5.2 above). Security interest may not be granted over related security in itself. Sub-charge is not explicitly recognised in Hungarian law, therefore it is uncertain whether related security will serve the security holder over the receivables.
According to Hungarian private international law, the governing law of a security interest is the law of the country where the collateral is located. In case the collateral is a receivable, this rule might be interpreted in two ways: the governing law with respect to the security shall be either (i) the law of the country where the residence/central administration or usual place of business of the obligor is, or (ii) the law of the receivable itself. Thus, the security interest perfected under the laws of another country will be treated as valid and perfected in Hungary, if the obligor is located in that other country or if the governing law of the receivable is that of the other country.
The most common form of security interest that can be established on promissory notes or marketable debt securities is security deposit (in Hungarian: óvadék). Hungary implemented the EU’s Financial Collateral Directive (2002/47/EC) by amending the rules on security deposit. Security deposit agreement shall be concluded in writing and the possession of the promissory note or of the marketable debt security shall be transferred to the chargee. In case the marketable debt security is in dematerialised form, security interest can be created by transferring the security to the account of the chargeholder. Security interest on consumer loans and loans secured by mortgage can be created in the same way as on any other receivable.
Hungarian law does not recognise trust. A similar institution which may be used for such purpose is a kind of indirect agency (in Hungarian: bizomány) where the seller acts in his own name but for the benefit of the purchaser. The seller has to keep amounts collected for the purchaser separated from its own assets to make it clear that these amounts do not belong to his property. If this requirement is fulfilled, creditors of the seller may not use these collections to satisfy their claims against the seller.
Yes, escrow is recognised in Hungarian law; amounts kept on escrow account will not form part of the account holder’s estate. Amounts on bank account are considered as debt of the bank towards the account holder. The account holder may create charge over his rights against the bank similarly to creating security over receivables or other claims. Security over a bank account located in Hungary may be created in accordance with the laws of Hungary.
6 Insolvency Laws
The primary effect of the commencement of a bankruptcy or liquidation procedure is that the creditors are prohibited from taking enforcement actions against the debtor outside of the given insolvency procedure. This automatic stay however does not apply to the collection of receivables purchased from the seller, if the sale of receivables is perfected before the commencement of the procedure. In this case the receivables sold will be the property of the purchaser, thus the seller’s insolvency will not affect the purchaser’s ability to enforce the receivables, and the purchaser shall be entitled to continue to exercise its rights over the receivables. In the case when the purchaser is deemed to only be a secured party, the court practice is that the receivables which have not been collected from the obligor before insolvency, will belong to the estate of the seller, and the purchaser can receive money as a creditor in the course of the insolvency procedure.
The insolvency official, if believes that the purchaser is not the owner of the receivables, but only a secured creditor, may turn to the court to prohibit the purchaser to enforce the receivable or, alternatively to prohibit the obligor to pay to the purchaser. In such case the insolvency officer also may ask the court to take temporary measure to stop the purchaser collecting the receivable (injunction or stay order).
The insolvency official is entitled within 1 (one) year of the commencement of the insolvency proceedings to challenge fraudulent, undervalued or preferential transactions which were concluded within the suspicion period (five years for fraudulent transactions, two years for undervalued transactions, and ninety days for preferential transactions) irrespective of whether the parties are related or not. If however the parties are related bad faith and the gratuitous nature of the transfer shall be presumed by laws.
The insolvency official does not have right to substantive consolidation; the initiation of an insolvency procedure against the seller shall not give rise to the commencement of such proceedings against the purchaser.
The legislation does not provide for the effect of insolvency proceedings on future receivables, and the court practice is not quite settled in this respect. The court practice recognises the assignment of those future receivables where the contract from which the receivable will arise already exists at the time of the assignment. In such cases the sale will not be affected by the seller’s insolvency. The assignment of future receivables where the contract from which the receivable will arise is not yet concluded would have no effect in the insolvency proceedings.
7 Special Rules
There is no regulation in force specifically providing for securitisation transactions. Assignment is regulated in the Civil Code. This was a Government proposal some years ago, but the bill was never presented to Parliament. The new Civil Code, which is planned to be adopted next year and will enter into force in 2013 will modify the provisions relating to assignment and secured transactions.
Hungarian law does not provide for any aspects of special purpose entities for securitisation.
Yes, in a sale of receivables the parties are free to exclude or limit the right of recourse of the purchaser. It is also possible to agree that certain debts are to be paid only from certain funds and only to the extent that fund is available. If the governing law is the law of another country, Hungarian courts shall give effect to such contractual provision.
There is no established court practice in this regard. Probably the court would only give effect to a prohibition with respect to taking legal action or commencing insolvency proceedings, in case it was agreed for an adequate consideration. If the contract’s governing law is the law of another country, and the prohibition is valid under the governing law, a Hungarian court will give effect to that provision.
Hungarian company law explicitly recognises independent directors only in the context of public companies. We believe, however that the organisational documents of a Hungarian company may require that one or more of the directors have to be independent and that the affirmative vote of the independent directors is necessary for certain decisions. Such a restriction however will not have any effect vis-à-vis third parties, and will not affect the validity of any transaction concluded in breach of this provision.
8 Regulatory Issues
Purchasing receivables falls into the category of lending operation which is construed as a type of financial services, which, if carried on as a business, is subject to authorisation from the Hungarian FSA. The same applies to the transfer of a single portfolio of receivables. No Hungarian authorisation is required if the purchaser is a regulated financial institution in another EU country.
Servicing receivables is also subject to authorisation from the Hungarian FSA.
Yes, Hungary has laws restricting the use or dissemination of data about or provided by obligors. The Act on the Protection of Personal Data applies to the data of natural persons whether consumers or not, the Civil Code provides protection of the inherent rights of any legal and natural persons, and special confidentiality rules apply to all financial institution with respect to their customers.
Consumer protection laws primarily apply to the formation of contracts with consumers. As a result of the sale of receivables, the position of the consumers as obligors may not change, in particular not to the detriment of the consumer. Therefore, the purchaser will not be required to comply with any additional requirements. It may be worth noting that in case of consumer loans (with the exception of mortgage loans), the obligor is entitled to prepayment of the debt.
In Hungary there is no restriction either on making payments outside of the country or on the exchange of the Hungarian currency (HUF).
Under Hungarian law, the only withholding tax is the personal income tax applicable to private persons only. That is, if private persons receive payments on receivables qualifying as income (basically interest), this could be subject to withholding tax. Since in the context of a securitisation neither the seller nor the purchaser would be private persons, in such a context payments on receivables are not subject to withholding tax.
No special accounting rules apply to securitisation for tax purposes.
Hungary does not impose stamp duty or other documentary taxes on sales of receivables. However, stamp duty is imposed on de-registration of mortgages which may be desirable in connection with the sale of certain receivables.
Value added tax is imposed on sales of goods or services. In most cases, the sale of receivables is not subject to value added tax on the basis that not the sale, but the purchase of receivables is treated as financial service, which is exempted from value added tax. As a main rule, the provision of agency services is not exempted from VAT, unless it qualifies as financial service or its intermediation. A recent position paper of the Hungarian Financial Supervisory Authority is of the opinion that the activity of collection agency qualifies as financial intermediation. Therefore, this service shall be exempted from VAT as well.
The tax authority is not entitled to make claims against the purchaser or on the receivables or collections if the seller fails to pay VAT or other taxes upon the sale of receivables (or on the sale of goods or services that give rise to the receivables).
A non-resident purchaser of receivables shall pay company tax only on the profit obtained from business activities conducted by their Hungarian permanent establishments. Whether the regular purchase and enforcement of receivables (directly or through an agent) qualifies as having a permanent establishment in Hungary, requires more specific tax analysis.
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