Hungary collection profile

Hungary
       

Hungary

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Complexity of collecting debt:

grading
Notable High Very High
Severe


Executive summary

  • The conformity of domestic law with EU rules on late payment in business-to-business transactions unfortunately does not protect traders from the uncertain payment behavior of domestic companies with average payment term at over 35 days.
  • When commencing legal action is necessary, it is worth keeping in mind that domestic courts are not known for their independence and transparency, but for the lengthy and costly nature of their proceedings. In fact, commencing legal action in Hungary would be unreasonable in most cases and pre-legal collection efforts remain the only effective option.
  • Although domestic insolvency law aims at rescuing companies to increase the chances of recovering debts, it provides no limitations as to how much of the debt may be written off in restructuration negotiations and it is rare for unsecured creditors to recover from insolvent debtors in practice.
 
General Information GENERAL INFORMATION arrow-transparent
 
Collection Practices COLLECTION PRACTICES arrow-transparent
Court Proceedings Court PROCEEDINGS arrow-transparent
 
Insolvency Proceedings INSOLVENCY PROCEEDINGS arrow-transparent
 
General Information 

GENERAL INFORMATION

Days Sales Outstanding (DSO)

The average payment term in Hungary was a little over 35 days in 2015, but it can vary depending on the industry. However, overdues are on the upside since 2014, now above 20 days on average, as a lot of companies have low liquidity and finance their cash-flow through their creditors.​

 

Late payment interest

The Recast Directive 2011/7/EU which stipulates that payments in the EU must be made within 60 days was recently transposed into domestic law. The rules in Hungary are however stricter than the EU requirements: as a general rule, business-to-business transactions must be paid within 30 calendar days following the invoice date. This period may be slightly extended by contract but payment periods beyond 60 days shall be considered as unfair conditions and may be annulled by courts. If the parties’ contract provides no agreement as to the applicable interests, the base rate of the Hungarian Central Bank (Magyar Nemzeti Bank) shall be applied, increased by at least 8 percentage points (against 7 under the previous framework). In practice, however, interest rates are essentially used as a negotiation tool and are rarely paid to the creditors.

Similarly, Recast Directive 2011/7/EU allows charging a fixed sum of EUR 40 as collections cost to the debtor ('minimum supplementary damages'). The costs ought to be charged systematically, however because the transposing law's wording is complex, it is largely unclear how the rule should be applied in practice.

 
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collection practice 

COLLECTIONS PRACTICES

Orchestrated negotiation first

Commencing ordinary legal action in Hungary is not advisable and amicable settlement opportunities should always be considered as a major alternative to court proceedings. Indeed, the Hungarian judiciary system is overall excessively formal and costly, whilst the courts have difficulties coping with the caseload because they are often ill-equipped and lack trained staff. In particular, negotiating payment instalments is interesting insofar as they constitute obvious debt recognition titles (if authenticated by a bailiff) which would then become enforceable upon court approval whenever the agreement is disregarded. Before starting legal proceedings against a debtor, assessment of assets is important as it allows verification as to whether the company is still active and whether recovery chances are at good. In addition, it is essential to be aware of the debtor’s solvency status: if insolvency proceedings have been initiated, it indeed often becomes impossible to enforce a debt.

 
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Court Proceeding 

COURT PROCEEDINGS

Hungary has a Civil Law system in which claims are allocated to specific courts taking into account the subject matter of the claim and the amounts at stake. Following recent changes from 2012 (based on Act CLXI 2011), the names and attributions of courts have been modified. Claims in excess of HUF 30 million and claims relating to insolvency, administrative disputes, intellectual property, company law or international transportation would now fall under the jurisdiction of 20 County Courts which increasingly operate through specialized divisions. The other cases would belong to Township Courts but claims under HUF 200,000 can only be solved through payment injunctions delivered by public notaries without geographic restrictions. Trust in the Hungarian judicial system is growing as its reliability and stability are improving (compared to the country's volatile legislative system), however transparency remains an issue because judges have enormous discretion in weighing evidence, and corruption scandals emerge time to time.

Legal dunning ought to start with a registered Demand Letter recalling the debtor its obligation to pay the principal together with late payment interests (as contractually agreed or taking a legal rate as a reference). Importantly, since insolvency laws were amended in 2006, dunning letters constitute a legal basis to request a company’s liquidation, with very limited options for the debtor to dispute the claim. If handled properly, such a threat subjects the debtor to considerable pressure and may help reaching a compromise. When the debt is certain and undisputed, a fast-track electronic procedure aiming at obtaining an injunction of payment (fizetézi meghagyas) from a notary is available: the Order becomes enforceable unless the respondent brings a counterclaim within 15 days, in which case the claim must be settled through ordinary proceedings. In practice, it is common for a debtor to dispute the claim in order to stall the procedure. When the debtor company has assets in other EU Member States, a European Payment Order procedure facilitating the recovery of undisputed debts (under Regulation EC No 1896/2006) may furthermore be triggered. When conducting legal action is the only option left, the claimant must file a claim with the court which then has 30 days to decide whether the case is admissible. Upon approval, the court must serve the claim to the debtor. Hearings are organized to collect the respondent's arguments, and the evidence is examined by the court which must then render a decision. Since the law was amended in 2010, the parties to a dispute are no longer required to demonstrate that negotiation attempts took place prior to commencing formal proceedings. Depending on the circumstances of the case, the courts would typically award remedies in the form of compensatory damages, specific performance, injunctions or declarations, but they cannot award remedies which have not been requested by the claimant. Punitive damages are not provided by law.

 
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insolvency Proceeding 

INSOLVENCY PROCEEDINGS

Insolvency is characterized as where the debtor’s debts exceed its assets or where the debtor is deemed unable to settle its debts on the due date. Insolvency in Hungary is governed by Act Act XLIX of 1991 on Bankruptcy Proceedings, Liquidation Proceedings and Voluntary Dissolution, which was amended in 2006. Although there are some gaps in the law, In general, insolvency procedures are regulated in detail. The new legislation points towards increasing creditor protection and significantly departs from the company rescue approach which is widespread in most countries. Insolvency proceedings are usually dealt with by the County Court of the debtor’s registered seat.

 
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