Financial compensation for long-continued civil procedures

author: dr. József ANTAL

The excessive length of civil procedures is not a Hungarian nor a new problem.  This issue arises from several causes, so the solution shall involve more elements as well.  One way of accelerating the process is the modernization of the procedural code, which the new Code of Civil Procedure has attempted to achieve – although the result is not yet completely clear.  A further way is to sanction if a court is simply slow despite the rules that allow the reasonable duration of a litigation matter.  This is the purpose of Act XCIV of 2021 adopted at the end of June on the enforcement of financial compensation in connection with long-lasting civil litigation procedures (hereinafter referred to as „ Pevtv”).

The excessive length of civil lawsuits obviously arises as a problem because, in a specific case, it may cause a harm to the interests of a party, who would therefore seek legal remedy and / or request a financial compensation.  Such cases have existed so far, for example in the practice of the European Court of Human Rights (ECHR).  However, this is not a system-wide solution for the problem.

By sanctioning the slowness of a civil lawsuit, the Pevtv can force the judicial organization to work even more efficiently.  The Pevtv can also give the party affected by a still long-continued civil litigation an opportunity for a compensation that can be enforced in a relatively simple manner.

My aim here is not to present the details of the Pevtv and the various methods of calculation and possible interpretation problems, but to describe the essential provisions of this new Act.

The point of the Pevtv is that a party is entitled to financial compensation if the total length of a civil lawsuit, or the length of a specific stage of the process, exceeds the duration determined by the legislator as the maximum limit of the reasonable duration of the lawsuit or that of the relevant stage of the process.

The scope of the Pevtv extends exclusively to civil litigation matters (including payment order procedures turning into litigation).  The Pevtv excludes criminal procedures.

The court procedure lasts until the day of the communication of the final and binding decision closing the procedure – including here the judgement rendered in extraordinary judicial review procedures.  (This means that, if such review procedure is decided on the merits by a judgment, the duration of the extraordinary review phase shall also be taken into account when calculating the duration of the litigation.)

The total length of the procedure also includes the duration of any repeated procedure as well as that of an allowed retrial procedure.  It can be expected mostly in the case of repeated procedures and retrials that the – otherwise sufficiently generously set – maximum acceptable time would be exceeded.

The Pevtv specifies the reasonable duration of a civil lawsuit, beyond which “the cash register may ring”.  The main rule for the entire duration of a civil lawsuit is sixty months (five years), and for each stage of the procedure it is the following: first instance – thirty months; first instance beginning with an order for payment – thirty-six months; second instance – eighteen months; and extraordinary judicial review – twelve months.

The maximum limit of the entire reasonable duration is shorter – thirty-six months (3 years) – in lawsuits regarding personal status, in lawsuits for the maintenance of a minor child, in press rectification lawsuits and, in labour lawsuits; furthermore, the maximum boundary of the reasonable duration for each stage of such procedures is shorter, as well. However, this list could be supplemented by other cases to be dealt with quickly.  Additionally, thirty-six months still seems too much in cases that do require a quick adjudication.

The court adjudging the claim for financial compensation may deviate in both directions from the above limits based on a well-reasoned decision (subject to certain limitations).  This may be necessary for the appropriate individualisation of the cases.

We already know when the financial compensation may be due; yet we do not know how much that is exactly.  The answer to this basic question is given by a government decree also adopted at the end of June (372/2021): “at the start”, the daily amount of financial compensation will be fixed at four hundred forints per day. Therefore, after a full year of delay, a maximum of HUF 146,000 can be paid.

An extremely important question is how well this government decree has “shot” the appropriate level of the financial compensation. If it is too low, there will be no real compensation nor will it push the courts towards greater efficiency.  If it is too high, it can lead to an undue burdening of the judicial budget and even to malignant, profitable cases. In my opinion, the daily HUF 400 compensation is too low, to say at least, so the new legal institution will not have any significant effect at all. As in the case of legal assistance (which many would need), there is a good chance that the lawyer’s fee will take away the full financial compensation granted, even when somebody has a very fair fee agreement. Because no one should expect at this moment that the courts are about to start awarding realistic lawyers’ fees to the winner, especially in non-litigious procedures – which has not really been seen before so far, not even in cases between private parties (and in this case we are talking about cases against national courts and ultimately the state budget).

Of course, the success of the Pevtv would – in theory – depend on other factors.  For example, it is a question whether a judge who is recurrently slow should expect consequences.  In case the answer is no, and particularly if the amount of the compensation is also set too low in the government decree, the whole new compensation system will not make much sense in practice.

In fact, despite the noble intention of the legislator, it is possible that the Pevtv will introduce or institutionalize a semi-new legal institution that will have little or no practical effect relevant to the legislature’s real aim; while courts will attempt to avoid potential delays to the detriment of the parties and their legal representatives.

The essence of the Pevtv can be seen from the above, I would like to highlight some further important details.

It will still be possible to go to the ECHR with a claim based on the excessive slowness of a civil lawsuit, but the Pevtv seeks to manage that it will not be possible to make money in both ways (in Hungary based on the new act and before the ECHR) for the same excess.

The claim for financial compensation will be enforceable against the court of first instance (in case of a district court, against the competent tribunal), so not directly against the state.

According to the Pevtv the enforcement will take place in non-litigious civil proceedings solely on the basis of documents, even in connection with ongoing litigation procedures, and in rapid proceedings with very strict deadlines (in some cases a few months, up to half a year).

According to the Pevtv, it will be ensured that the court(s) affected by the delay will not take part in the compensation procedure, so there will be no need for a separate (time-consuming) exclusion procedure.

In non-litigious proceedings, the duties will only have to be paid by the applicant in arrears if the application fails.

The new Act and the related government decree, will enter into force on 1 January 2022 and shall be applied to the ongoing cases as well.

Otherwise, in addition to, or instead of, the compensation under the Pevtv, there will still be no obstacle of making a pecuniary claim on other possible grounds (grievance fee, damages caused by a court) if their relevant statutory preconditions are met in the given case.

The success of Pevtv – namely, whether if it is be able to speed up civil litigation procedures and compensate those harmed by delays – is very doubtful from the outset, with the daily amount of the compensation being too low. But success will also depend to a large extent on the attitude of the civil courts that decide on the compensation. What will be considered as the protection of the “honour of the uniform”: granting the financial compensation, whenever possible, or the denial of the slowness, and therefore the refusal of the compensation as well, whenever possible? It will be revealed soon.

A new ESOP arrangement on the horizon

The Employee Stock Ownership Plan (ESOP) for managing financial assets available under the so-called remuneration policy was introduced by the amendment in 2015 to the Act of 1992 on the Employee Stock Ownership Plan. As part of the general provisions, the amendment stipulates that for a financial institution, an insurance undertaking, an investment firm, and for a legal person that is authorised to market securities issued by or with a majority influence on a regulated market in a Member State of the European Union ESOP can only be initiated for the management of financial assets that may be acquired under a remuneration policy.

This was amended by the Act CI of 2021 on Certain Asset Management Issues and Amending Certain Laws to Strengthen the Coherence of the Legal System, adopted on 15 June 2021. It created the legal framework for the so-called Special Employee Stock Ownership Plan (SESOP). Accordingly, these organisations may only initiate ESOP to manage financial assets available under the SESOP or a remuneration policy.

SESOP provides an opportunity to acquire ownership based on certain rules of ESOP, but specifically different from it, in order to acquire participations (shares or business shares) of a limited liability company or private company limited by shares by the company’s employees or members of its supervisory board or board of directors.

According to the Act, the SESOP is created on the basis of the employees’ initiative and programme launch (as opposed to an ESOP, which is initiated by the company). Therefore, while several parts of the general normative material governing ESOPs apply to the SESOP, the current rules governing the ESOP for the management of financial assets available under the remuneration policy are excluded one-to-one.

An organising committee should be set up to establish a SESOP; the inaugural general meeting will adopt the articles of association and elect the body responsible for operations as well as the executive officers. At the general meeting, participants have voting rights in proportion to their payments (in the absence of a payment, in equal proportions).

The company concerned may make a non-refundable contribution to the operation of the SESOP in order to acquire the shares. An interesting possibility is that in addition to establishing the SESOP organisation, employees can also establish a trust foundation under the Asset Management foundation Act to manage SESOP. In this case, at least HUF 10 million of SESOP assets must be transferred to the foundation managing the same in trust. Such a foundation may manage more than one SESOP.

The number of participants in the SESOP may not be increased after the establishment of the organisation, and, as a rule, membership in the sorganisation may not be terminated, except in the case of transfer. A company can operate multiple SESOPs at the same time. In the event of a participant’s death, the membership share may be inherited, and only one death beneficiary may be nominated, in the absence of which a new participant may become a member.

The plan may be operated for a fixed period of at least ten years, after which the participations acquired by the implementing body or the value thereof must be transferred to the participants, and the implementing body must be dissolved.

The asset management method chosen by the SESOP at the time of its formation cannot be changed during the fixed period.

According to the Act, the organisation distributes the assets in stages: first, it transfers the participations at its disposal to the participants or attempts to sell participations to them. In the event of an unsuccessful sale, in the alternative, the company is entitled to purchase the participations from the organisation. If this also fails, the organisation attempts to sell the participations on the market in the third stage. If the market sale was also unsuccessful, covered assets must be accepted by the eligible participants even if they have previously requested the value thereof.

The above-mentioned closing general meeting is convened by the SESOP’s operational body to decide on the dissolution of the SESOP without a legal successor, for example, if the SESOP’s term of operation has expired or the company dissolved without a successor or the number of participants fell below ten and are not replaced.

The SESOP differs from the existing remuneration policy-based ESOP in the following main features:

– the plan lasts for a pre-defined period,

– the number of participants may not be increased after the foundation of the organisation,

– the company may provide support for the operation of the organisation,

– the establishment of the SESOP does not require the approval of the company concerned,

– the SESOP may carry out other economic activities only on a limited basis, in the form of bond issuance and the purchase of government securities, and may not (usually) alienate the acquired assets before the closing general meeting,

– the sources of the acquisition of participations by the SESOP organisation are freely chosen,

– participants may acquire participations only after the expiry of the fixed term of the plan,

– participants may request consideration for the participations instead of acquiring them, provided that the organisation is able to sell them.

In connection with the amendment of the Act XLIV of 1992 on the Employee Stock Ownership Plan, it was also necessary to amend the Act on Duties, the Personal Income Tax Act and the Corporate Tax Act, which are also covered by the Act.

The new provisions will enter into force on 13 July 2021.

News on Crowdfunding

And what news: in our previous article we reported on the preparatory phase yet, however, on 7 October 2020 the EU has adopted its regulation on Crowdfunding service providers[1], which, due to its regulatory nature, must be directly applicable by all Member States from 10 November 2021.

  1. Uniform regulation at EU level

The Regulation, as planned originally, creates a single and uniform set of rules for crowdfunding providers and services at the EU level. While, pursuant to some previous concepts, national and EU rules would have co-existed, clause (76) of the Regulation’s explanatory part states that fragmented national provisions will be replaced by the common Regulation rules, providing transitional period until 10 November 2022 for the already authorized service providers  to convert their national licences into authorizations under the Regulation.[2] Another important change is that the authorizing authority shall be, instead of the ESMA, the financial supervisory authority of the Member State, where the service provider is established,[3] holding also all dedicated supervisory power related to the service.[4] ESMA’s roles include the registration of service providers,[5] the drafting of regulatory technical standards, close cooperation with the local financial authorities,[6] as well as the collection and publication of statistics related to the activity, among others.

  1. The most important provisions of the Regulation
  • crowdfunding activity means a publicly accessible internet-based information system (platform), operated or managed by the crowdfunding service provider;
  • crowdfunding service means the matching of business funding interests of investors and project owners through the use of a crowdfunding platform and which consists of any of the following activities (a) the facilitation of granting of loans and/or (b) the placing without a firm commitment of transferable securities and admitted instruments for crowdfunding purposes issued by project owners or a special purpose vehicle, and the reception and transmission of client orders in this regard;
  • client means any prospective or actual investor or project owner to whom a crowdfunding service provider provides, or intends to provide, crowdfunding services;
  • project owner means any natural or legal person who seeks funding through a crowdfunding platform;
  • investor means any natural or legal person who, through a crowdfunding platform, grants loans or acquires transferable securities or admitted instruments for crowdfunding purposes;[7]
  • crowdfunding service providers shall not have any participation in any crowdfunding offer on their platforms.[8] Crowdfunding service providers shall not accept as project owners in relation to the crowdfunding services offered on their platform any of the following: (a) their shareholders holding 20 %, or more, of share capital or voting rights; (b) their managers or employees; (c) any natural or legal person linked to those shareholders, managers or employees by control as defined in point (35)(b) of Article 4(1) of Directive 2014/65/EU.[9]

Crowdfunding service providers that accept as investors in the crowdfunding projects offered on their crowdfunding platform any of the above referred persons shall fully disclose on their website the fact that they accept such persons as investors, including information on the specific crowdfunding projects invested in, and shall ensure that such investments are made under the same conditions as those of other investors and that those persons do not enjoy any preferential treatment or privileged access to information;

  • the Regulation distinguishes between sophisticated and non-sophisticated investors: sophisticated investor means any natural or legal person who is a professional client by virtue of point (1), (2), (3) or (4) of Section I of Annex II to Directive 2014/65/EU or any natural or legal person who has the approval of the crowdfunding service provider to be treated as a sophisticated investor in accordance with the criteria and the procedure laid down in Annex II to this Regulation. Non-sophisticated investor means an investor who is not a sophisticated investor;[10]
  • financial products traded on crowdfunding platforms are not identical either in type or in risk to traditional investment or savings products. The Regulation therefore requires service providers to subject their prospective non-sophisticated investors to an entry-level knowledge test in order to identify and understand the higher risks associated with crowdfunding Providers should explicitly warn prospective non-sophisticated investors with insufficient knowledge, skills or experience that the crowdfunding service they provide may not be suitable for them. Crowdfunding service providers may only accept investments from non-sophisticated investors who have explicitly acknowledged that they have red and understood these warnings;[11]
  • as there is a significant risk that non-sophisticated investors will lose most, or even all amounts, originally invested, their excessive exposure to such projects should be avoided. The Regulation therefore provides for that in each case, when the non-sophisticated investor’s targeted investment exceeds a certain limit, set out in the Regulation, the crowdfunding service provider – among others – shall ensure that such investor receives a risk warning, and provides explicit consent to the crowdfunding service provider;[12]
  • however, the Regulation also states explicitly that “Prospective non-sophisticated investors and non-sophisticated investors shall not be prevented from investing in crowdfunding projects”[13] by which it places the responsibility for the risk of any particular investment primarily on the investor;
  • the service provider shall provide for a pre-contractual reflection period, during which the prospective non-sophisticated investor may, at any time, revoke his or her offer to invest or expression of interest in the crowdfunding offer without giving a reason and without incurring a penalty. This reflection period shall start at the date of the offer to invest, or the expression of interest by the prospective non-sophisticated investor, and shall expire after four calendar days;[14]
  • service providers shall provide prospective investors with a key investment information sheet drawn up by the project owner for each crowdfunding offer. The key investment information sheet shall be drafted in at least one of the official languages of the Member State, whose competent supervisory authority granted the authorization in accordance with Article 12, or in another language accepted by the authority;[15]
  • crowdfunding may be provided in the form of cross-border services;[16]
  • service providers shall have in place, continuously, prudential safeguards, equal to an amount of at least the higher of the following: (a) EUR 25 000; and (b) one quarter of the fixed overheads of the preceding year, reviewed annually;[17]
  • the authorizing supervisory authority has wide and extensive powers of control over the activities of the crowdfunding service providers.[18] The sanctions can range from the suspension of the financing offer announced by the project owner for several days, through the imposition of a fine, to the revocation of the license, granted to the service provider. In the latter case, the authority shall even have the power, with the consent of the clients and the accepting, other crowdfunding service providers, to transfer existing contracts to another crowdfunding service providers.[19]
  1. The Hungarian regulation

It is further encouraging that Act LVIII of 2021 on the amendments to the law related to the regulation of covered bonds and other legal harmonization measures affecting the financial intermediation system, which bring the above into line with Hungarian legislation has already been published on 28 May 2021 in the Hungarian Gazette No. 98.

The amendment of the law follows the path paved by the Decree: the crowfunding service is defined as independent activity to be performed under the Capital Markets Act, which is not subject to either the Act on the Investment Firms and Commodity Exchange Service Providers, or the Credit Institutions Act. For those who intends to provide the services from a Hungarian headquarter, the authorizing and supervisory authority shall be the National Bank of Hungary.

The amendment to the laws, implementing the crowdfunding services will enter into force on 10 November 2021.[20] The main provisions are as follows:

  • Capital Markets Act:
  • in the Hungarian legal system, the provisions of Act CXX of 2001 on the Capital Markets Act (Tpt.) shall apply to the crowdfunding service;[21]
  • devotes the full Part Eighth/A. to the rules on crowdfunding, in which it states, inter alia, that “provision of credit that may be mediated within the framework of Crowdfunding as defined in Regulation (EU) 2020/1503 of the European Parliament and of the Council, shall be construed as lending as defined in Section (40) (b) (ba) of Article 6 (1) of the Hpt.”[22] In addition, it is specified that “The project owner and its executive person shall be jointly and severally liable for the accuracy and completeness of the information precluding a different interpretation contained in the key investment information sheet set forth in Article 23 of Regulation (EU) 2020/1503 of the European Parliament and of the Council[23]
  • Article 400 of Tpt. is supplemented with applicable measures and sanctions related to violations of legislation detected by the Supervisory Authority (the National Bank of Hungary) in connection with the crowdfunding service;[24]
  • according to the new paragraph (9) of Article 405 of the Tpt. “The maximum fine that may be imposed in the event of a breach of the obligation to provide a crowdfunding service amounts to
  1. twice of the profit arising from the infringement, if the profit can be quantified,
  2. b) if the profit cannot be quantified, then
  3. ba) in the case of a legal person, up to HUF 179,010,000 or up to 5% of the previous total annual turnover according stated in the last available financial statements approved by the decision-making body; if the legal entity is a parent company or a subsidiary of a parent company that is required to prepare consolidated financial statements under the accounting legislation, then the annual turnover to be taken into account is the annual turnover according to the latest consolidated accounts approved by the decision-making body of the parent company or the corresponding revenue according to the accounting legislation,
  4. bb) in the case of a private person, a maximum of HUF 179,010,000.
  • Act CXXXVIII of 2007 on Investment Firms and Commodity Exchange Service Providers and the Rules on the Activities they may carry out (Bszt.):
  • the amendment to the law states that Community funding service providers defined in Section (1) (e) of Article 2 of the Regulation (EU) 2020/1503 of the European Parliament and of the Council of 7 October 2020 on European crowdfunding service providers for business, and amending Regulation (EU) 2017/1129 and Directive (EU) 2019/1937 are not subject to the Bszt.[25]
  • Act CXXXIX of 2013 on the National Bank of Hungary (MNBtv.):
  • The following par. (37) is added to Article 40 of the MNBtv.: “Within the scope of its tasks specified in Section (1) (h) of Article 39 the National Bank of Hungary shall perform the tasks related to the implementation of Regulation (EU) 2020/1503 of the European Parliament and of the Council of 7 October 2020 on European crowdfunding service providers for business, and amending Regulation (EU) 2017/1129 and Directive (EU) 2019/1937”;
  • the amendment to the law further states that (This Act) “ together with the Act CXX of 2001 on the Capital Market and Act CCXXXVII of 2013 on Credit Institutions and Financial Undertakings lays down the necessary provisions for the implementation of Regulation (EU) 2020/1503 of the European Parliament and of the Council of 7 October 2020 on European crowdfunding service providers for business, and amending Regulation (EU) 2017/1129 and Directive (EU) 2019/1937[26]
  • Amendment of Act CCXXXVII of 2013 on Credit Institutions and Financial Undertakings. law
  • The following Section 6a is added to Article 6 of Act CCXXXVII of 2013 on Credit Institutions and Financial Undertakings (Hpt.): “(6a) Community funding services as defined in Regulation (EU) 2020/1503 of the European Parliament and of the Council shall not constitute financial intermediation.[27]
  1. Conclusions

Two obvious conclusions can be drawn from the above, at least: (i) the fact that those service providers already present in EU Member States are entitled to convert their current, national authorisations to licenses granted under the Regulation and, to provide the services as cross-border activity in the designated/authorized Member States paves the way to the full European market. This offers huge growth opportunity for the already licensed and experienced service providers, which will certainly be exploited. (ii) On the other hand, the one-year transition period between November 2021 and November 2022 provides opportunity for those wishing to launch their service now to obtain their license in order to follow in the footsteps of those before them. Whatever happens, the forthcoming years will certainly be exciting in terms of crowdfunding, and we can only hope that the outcome of the competition will be positive for all parties.

[1] REGULATION (EU) 2020/1503 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 7 October 2020 on European crowdfunding service providers for business, and amending Regulation (EU) 2017/1129 and Directive (EU) 2019/1937

 [2]„(76) In the interest of legal certainty and in view of the replacement of national rules by the rules set out in this Regulation insofar as types of crowdfunding services are concerned which are now included within the scope of this Regulation, it is appropriate to make transitional arrangements allowing persons providing such crowdfunding services in accordance with national law preceding this Regulation to adapt their business activities to this Regulation and to have sufficient time to apply for an authorisation thereunder. Such persons should therefore be able to continue to provide crowdfunding services that are included within the scope of this Regulation in accordance with the applicable national law until 10 November 2022. During that transitional period, Member States can put in place special procedures to enable legal persons, which have been authorised under national law to provide crowdfunding services included within the scope of this Regulation, to convert their national authorisations into authorisations under this Regulation, provided that the crowdfunding service providers meet the requirements set out in this Regulation.

(77) Crowdfunding service providers who have failed to obtain authorisation in accordance with this Regulation by 10 November 2022 should not issue any new crowdfunding offers after that date. To avoid a situation whereby the raising of target capital in relation to a particular crowdfunding project is not completed by 10 November 2022, the calls for funding should be closed by that date. However, after 10 November 2022 servicing of the existing contracts, including collecting and transferring receivables, providing asset safekeeping services or processing corporate actions, can continue in accordance with the applicable national law.” as well as Article 3. clause (1).

[3] Article 12. clause (1).

[4] Article 15.

[5] Article 14.

[6] Article 32.

[7] to points (i)-(v): Article 2

[8] Article 8 (1)

[9] Article 8 (2): DIRECTIVE 2014/65/EU OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (recast) (Text with EEA relevance)

(35) ‘close links’ means a situation in which two or more natural or legal persons are linked by:

(a) participation in the form of ownership, direct or by way of control, of 20 % or more of the voting rights or capital of an undertaking;

(b) ‘control’ which means the relationship between a parent undertaking and a subsidiary, in all the cases referred to in Article 22(1) and (2) of Directive 2013/34/EU, or a similar relationship between any natural or legal person and an undertaking, any subsidiary undertaking of a subsidiary undertaking also being considered to be a subsidiary of the parent undertaking which is at the head of those undertakings;

(c) a permanent link of both or all of them to the same person by a control relationship;

[10] Article 2

[11] Article 21, in particular par. (4)

[12] Article 21 (7)

[13] Article 21(6), second sentence

[14] Article 22 (2) and (3)

[15] Article 23

[16] Article 18

[17] Article 11 (the latter must include the amount of credit management costs for a period of three months if the Community funding service provider also mediates lending)

[18] Article 30 (2)

[19]Article 30 (2) (i) (if the licence of a Community funding service provider has been withdrawn pursuant to point (c) of the first subparagraph of Article 17 (1) of the Regulation)

[20] Article 139. (2) of the bill T/15973

[21] Article 24.: the new par. 78a. and 78b of Articles 1/B. and 5 (1) of the Tpt.

[22] Article 26.: according to Article 296/A. of the Tpt. and clause 40 of Article 6 (1) of the Hpt.: provision of credit and loans

  1. b) lending of loan: […] ba) making available an amount on the basis of a credit or loan agreement concluded between the creditor and the debtor that the debtor is obliged to repay on the date specified in the contract, with or without interest,

[23] Article 296/B. (1) of the Tpt.

[24] Article 30.: Article 400. (3b) of the Tpt. (in line with Article 30. (2) of the Regulation)

[25] Article 46. (2): new clause m) of Article 2. of the Bszt.

[26] Article 88.: new par. 22. of Article 185/A. of the MNBtv.

[27] Article 90.§.

Panel discussion with dr. József Kapolyi at the Legal Fest Arsboni Stories about his experience of professionalism, perseverance and legal career paths

This year, the founder and head of our law firm, dr. József Kapolyi was one of the guests at a panel discussion of the Legal Fest organized by Arsboni between 10 and 14 May, where recognized executives in the legal profession shared their experiences, opinions on their field of expertise, the operation of legal representations, law firms, career paths and opportunities.

The other guests were dr. Zoltán Novák, Taylor Wessing’s partner and dr. György Viktor Radics, DLA Piper’s Hungarian partner and head of the dispute resolution group. The head of our firm, dr. József Kapolyi, shared his experiences and advice on professionalism, decisions, perseverance, ambition, entrepreneurship, and his legal career at the panel discussion. Among other things, he talked about how he got a career in the field of law, started his professional career as a lawyer, and how he built and made his own law firm, Kapolyi Law Firm, successful.

Information on a newly introduced restructuring procedure to prevent insolvency

The bill on restructuring and amending certain laws for the purpose of legal harmonization was prepared to transpose the content of the Titles I-II of Directive 2019/1023/EU into the Hungarian law. The Directive aims to increase the competitiveness of the Member States and the EU, which the Directive aims to achieve in two phases: restructuring of the legal persons in financial difficulty but not insolvent yet, and the debt settlement and debt relief proceedings of insolvent self-employed individuals. The proposal concentrates exclusively on the fulfilment of the first step (the rules of the debt settlement of private individuals are covered by Act CV of 2015 on the debt settlement for natural persons, so that in their case the provisions of the Directive are transposed by amending this Act).).

The legislative background of the bill is Government Decree No. 179/2021. (IV. 16.)on reorganisation procedure for emergency situations similar to the restructuring procedure, which aims to restore the financial situation of companies in imminent insolvency under Act XLIX of 1991 on bankruptcy and liquidation proceedings (“Bankruptcy Act”). However, there are also substantial differences between the two procedures.

The purpose of the bill is to ensure that the economic activities of the companies is sustainable even if they struggle with financial difficulties and to avoid bankruptcy or insolvency for these companies. It is worth mentioning that the personal scope of the bill does not cover financial institutions, private entrepreneurs and public bodies, however, capital owners and other third persons are entitled to join the restructuring plan. During the procedure, the court may appoint a restructuring expert at the request of the debtor or the creditors, whose job is to assist the debtor in, among others, communicating with creditors, drafting, voting on and implementing the restructuring plan.

A restructuring procedure may be initiated by any legal person or civil law entity engaged in economic activity, but the bill defines item by item the types of debtors who may not initiate the procedure, furthermore, it strictly stipulates that public burdens related to employment, VAT related to the debtor’s activity and the assets subject to criminal law measures may not be included in the proceedings. The decision on initiating the procedure is taken by the decision-making body of the debtor (the sole member in the case of a single-member company), but the non-litigious procedure may be requested exclusively from the Regional Court of Budapest, as the court with exclusive competence and jurisdiction. Legal representation is obligatory in the procedure. The starting date of the procedure is set by the decision of the debtor’s decision-making body and the closing date is the date of full implementation of the measures adopted in the restructuring plan, or the date of failure. As a basic rule, it is not possible to carry out more than one restructuring at the same time.

A fundamental characteristic of the procedure that it starts as a trust procedure and only turns public if the debtor requests a general moratorium. During the restructuring, a restructuring plan must be drawn up and accepted, which must be suitable for preserving the viability of the debtor and must also be capable of restructuring the company’s debt composition and repayment conditions to bring them into line the debtor’s ability to pay. The restructuring measures are not itemized in the bill but are merely defined in a framework.

The approval of the written restructuring plan, which has been voted by the creditors is referred to the court’s competence according to the bill, which approval has legal effect. It is the court’s duty to examine the formal and legal accuracy of the plan during the procedure and, if they are in order, approve the plan. If the debtor decides to initiate the procedure, the owners have a duty to co-operate to successfully advance the process. Otherwise, if restructuring is unsuccessful, the moratorium is lifted, however, the court will not be entitled to declare the insolvency of the debtor on that basis alone.

The proposal regulates in detail the so-called procedure for granting a so-called moratorium on debt enforcement and the creditors’ rights during the moratorium (the restrictions during the moratorium only apply to creditors involved in the moratorium). The moratorium only refers to claims that have become due before the start of the moratorium, the debtor is obliged to perform all other debts. A general (covering all creditors) or a limited moratorium (covering only creditors who are part of the restructuring) may be ordered, the period of which can be up to four months, which may be extended to a maximum of twelve months in a well-reasoned cases. During the procedure for granting the moratorium or during the moratorium, no liquidation proceedings may be opened against the debtor. The general moratorium is valid from the date of publication, while the limited moratorium is valid from the date of receipt by the debtor of the court’s order granting the moratorium. The court decides whether to grant or terminate the moratorium, as well.

The moratorium on enforcement of claims ensures that creditors may not take enforcement actions against the debtor during the restructuring procedure and that insolvency proceedings may not be initiated against the debtor, either, thus ensuring that the restructuring procedure does not impose an undue risk on the debtor. However, in the creditors’ interests, the moratorium should be ordered for a fixed term only and, in special cases, such as in the event of the debtor foreclosing on collateral or if the moratorium causes the creditor to become insolvent, the moratorium may be terminated before the expiry of the 90-day minimum period.

The bill limits the scope of legal remedies against court decisions and their legal consequences. Thus, of the refusal decisions, only decisions based on discretionary points of law may be appealed. An appeal against an order approving the restructuring plan does not affect the rights and obligations relating to the implementation of the plan until the second instance decision pronounces a modification of the first instance order to such an extent that refusal to approve the plan becomes necessary. No extraordinary remedy is available during the proceeding.

The bill also requires the amendment of Bankruptcy Act and the clarification of the relationship between bankruptcy proceedings and restructuring proceedings, as these proceedings may not be carried out in parallel and the debtor must choose which procedure he wishes to initiate. The bill is expected to enter into force on 1 July 2021.

The Government plans to amend the Civil Code and reform the registration of legal persons

The Government has recently submitted two bills concerning legal persons, T/16206 and T/16207, amending the provisions of Act V of 2013 on the Civil Code („Civil Code”) regarding legal persons and introducing a unified register of legal persons (companies and NGOs).

According to the Minister’s explanatory memorandum, the amendment of the Civil Code is necessary because, while maintaining the dispositive approach of the law of legal persons, it has become timely to take into account the success of the incorporation of certain provisions of the Civil Code and the regulatory proposals developed by case law. In addition, the revision of the Third Book of the Civil Code will further strengthen the coherence, stability and competitiveness of the law of legal persons and, in particular, of company law. The amendments, which are expected to enter into force on 1 January 2022 (with certain exceptions), will affect, among other things, the following:

  • The rules on the invalidity of a legal person’s instrument of incorporation and the review of its organs’ decisions will change.
  • The correction generalises the institution of supplementary payment, which is currently regulated for limited liability companies, by placing the relevant regulations among the general rules for companies so that it will apply to all types of companies (although this is currently possible due to the dispositive nature of the Civil Code). The positioning of supplementary payment as a general company law instrument provides companies and their members with an effective and rapid means of providing for a capital injection in the event of a loss of solvency.
  • The bill eliminates the statutory dissolution of general partnerships, limited partnerships and cooperatives due to the absence of a minimum membership requirement, which imposes an unjustifiably severe consequence on the legal entity.
  • The proposal reformulates the section on business shares in limited liability companies. The reason for this is that, although the case law is unanimous on the substantive issues relating to business shares, it is not possible to derive a unanimous interpretation of the law from the current rules without reservations.
  • The rules on public limited companies (PLCs) will also be amended on several points. Firstly, it is made clear that not all shares of a PLC need to be listed on a stock exchange. The stock exchange and securities market rules require that at least one series of shares must be listed. Another change relevant for public limited companies is that the amendment stipulates that, where the public limited company does not have a management board ensuring single management, the corporate governance report can only be submitted to the general meeting with the approval of the supervisory board.

More important than the amendment to the Civil Code is the proposed law on the single registry of legal persons, which is expected to enter into force on 1 July 2023. The Civil Code regulates not only classic civil law relationships but also company law and the main private law legal persons and, unlike the previous Civil Code, also regulates, for example, associations and foundations. From the general provisions of the Civil Code on legal persons, it follows that a single register of legal persons is required. This is also confirmed by the fact that the Civil Code does not distinguish between different types of legal persons regarding the general provisions defining the most important guarantee rules (establishment, dissolution, registration, name, seat, organisation, representative, etc.). Examples of uniform registration of companies and NGOs can currently be found in several EU countries (e.g., Austria, Belgium, Denmark, Poland).

For legal persons whose legal supervision is not exercised by the court (e.g., a law firm), the registration procedure is not carried out by the court but by the body designated in the substantive law governing the legal person (bar association, treasury, etc.), which enters the result of the registration and the data to be registered not in a separate register, but this single register.

The single register will bring several benefits, including uniform procedural rules, speedy procedures, standardisation of enforcement practices, increased accuracy of the data in the register, and further reduction of the clients’ administrative burden.

The bill introduces a major change of approach (both in procedural and IT terms) in the regulation of non-litigious proceedings before the courts, which cannot be accommodated within the framework of the existing company registration and civil registration laws. The concepts of private law registration (formerly company law) have been harmonised and will become applicable to the registration of all legal persons. Civil non-litigious proceedings relating to companies and civil and other entities that do not qualify as companies (currently named in the NGO registration act) are uniformly referred to as registration procedures and are subject to common general rules. The current procedures for registration (incorporation), registration of changes and registration of transformations, mergers and divisions are referred to as registration procedures, which will simplify cross-references.

The court’s primary task will be the constitutive registration of the creation and dissolution (cancellation) of the legal person and keeping the public register of the legal person and its data. To this end, according to the ministerial explanation, the approach of the court will have to be changed to ensure that the registration procedure and the registration of changes to the articles of association only cover those elements that are of material importance and that the members retain competence for matters that, under the dispositive provisions of the Civil Code, fall within the autonomy of the members. The court does not ’authorise’ the members to form a legal person or amend its articles of association but examines whether the legal conditions for registration are fulfilled.

The proposal introduces automatic decision-making in the vast majority of registration cases along the latter lines. To simplify the work of the courts and reduce the caseload in automatic registrations, the proposal places greater emphasis on the review procedure, so that the control function of courts, which are relieved of a significant caseload by the introduction of automatic decision-making, can be shifted to review procedures. To ensure the public authenticity of the register, review procedures may also be opened ex officio based on a signal from the IT system. As in the case of the automatic registration procedure, the aim is to speed up the procedure, shorten the procedural time limits and automate the administrative steps that the automatic system can take.

The bill introduces new special legality supervision procedures (e.g., legality supervision procedure in case of lack of official contact under the e-administration act or failure to publish the accounts under the accounting act) and regulates in more detail certain existing special legality supervision procedures (e.g., organisation concerned by the cancellation of its tax number, legality supervision procedure for convening the supreme body).

Uniform rules for the winding-up procedures of companies and NGOs will be set out in a separate law, which will also include rules on the winding-up and compulsory winding-up of these organisations by the courts. Insolvency rules will, however, continue to be treated separately.

Beneficial ownership register is introduced

A bill has been submitted on the establishment and operation of a reporting framework for the identification obligations of financial and other service providers, which aims to transpose the provisions of the EU Money Laundering Directives 4 and into national law. The bill provides, inter alia, for the establishment of a central register of beneficial ownership data, to which authorities, prosecutors, courts and supervisory bodies have unrestricted access.  The introduction of the register will impose a number of obligations on the service providers subject to the obligation, such as lawyers and law firms.

The bill, tabled on 20 April 2021, establishes the beneficial ownership register. Following the directives, the bill provides for the creation of a central register of beneficial ownership (‘ultimate beneficial owner’) data (not a public register) which must contain adequate, accurate and timely information on all economic and non-profit organizations. The data stored there will be accessible without restrictions (from different dates) to authorities, prosecutors, courts and supervisory bodies, however, access to the data will be necessary for the sole purpose of due diligence by the obligated service providers, including, inter alia, lawyers and law firms.. The public will only have access data to the name and nationality of the beneficial owner, as well as the nature and extent of the beneficial ownership against payment of a fee.

Service providers are obliged to monitor and report to the registration body (the National Tax and Customs Office) withing five working days if they detect any discrepancy between the beneficial ownership data known to them and the data recorded in the register. No new notification of discrepancy with the same beneficial ownership data may be sent within thirty days. To report a discrepancy, the service provider must at least start costumer due diligence in accordance with Act LIII of 2017 on the Prevention and Combating of Money Laundering and Terrorist Financing (‘AML’). In case of an indication of a discrepancy, the service provider is obliged to disclose the discrepancy recorded by it and the date of recording. It is important to emphasize that it is only necessary to report a discrepancy if it affects the identity of the beneficial owner or the nature of the beneficial interest held. If the discrepancy has no material effect on the identification or determination of beneficial ownership, there is no need to report it.

In case of doubt as to the identity of the beneficial owner, service providers are obliged to take all further measures until the identity of the beneficial owner is ascertained. Furthermore, within ninety days of entry into force, they are obliged to draw up internal regulations for the performance of duties falling within the scope of the obligations specified in the bill, which may form part of the internal regulations specified in the AML. The internal regulations shall be subject to the rules of the AML.

The bill also amends the provisions of the AML on costumer due diligence. In this context, the use of non-public registers for verification purposes will be allowed as a complement to the verification of the identity of customers, with the supervisory authorities providing guidance on the registers to be used. The service provider will be entitled to use the registers only for the verification of identity as a complementary measure and will be obliged to make copies of documents or to record and register requests from the public registers during the costumer due diligence. It is possible to use data obtained from the beneficial ownership register, however, it is not possible to rely solely on this data to record the costumer’s beneficial ownership data. Once measures have been taken, the service provider is also obliged to record the date of recording the beneficial ownership data in its register. Costumer due diligence measures may be carried out in other ways in addition to the usual methods: on the basis of copies of documents and declarations sent from the costumer’s identified e-mail address or uploaded to the online interface operated by the service provider, or based on electronic documents. The internal regulations must specify the cases in which the costumer is allowed to send documents from the costumer’s e-mail address or upload them to the online platform.

In addition to the above, the bill allows for more flexibility in the provisions of AML on simplified and enhanced costumer due diligence. In the case of simplified costumer due diligence, a distinction can be made between data that service providers are obliged to record (‘minimum data set’) and data that can be recorded in addition on the basis of a risk-sensitive approach (‘maximum data set’). For a significant proportion of wholly and majority state-owned companies, the executive officer is considered to be the beneficial owner. However, enhanced costumer due diligence (with some exceptions) is only required where the executive officers of the majority state-owned company are also considered to be politically exposed persons.

A new rule introduced to the AML is that the service provider is obliged to carry out the identification and verification of the identity of the costumer, as well as the procedures related to the identity of the beneficial owner and the determination of the politically exposed character before establishing the business relationship. These measures may be taken in the course of the business relationship if the probability of money laundering or terrorist financing is low and no indications of such a possibility have been identified. In this case, the service provider is obliged to take the measures not later than during the periodic data verification obligation imposed on existing customers.

In addition to the above, the bill deals thoroughly with the definition of the qualifications of the data provider and its beneficial owners, the legal consequences that may be derived from certain data discrepancies and the rules applicable to the complaint handling in the event of their occurrence.


Kapolyi Law Firm is ranked again by Legal 500 as a top tier business law firm in Hungary

Kapolyi Law Firm is very pleased that its Banking, Finance and Capital Markets Law practice has again achieved a Tier 1 ranking in the latest edition of Legal 500. We are also happy about the further strengthening of our Real Estate and Construction Law team’s position, now being awarded by a Tier 2 rating in the publication for 2021. Based on independent evaluations, Legal 500 also recognised the professionalism of our staff in personal categories: in the Next Generation Partners category Viktor Krezinger, head of our Capital Markets team is mentioned among the best practitioners, while Sándor Habóczky among the Leading Individuals in the field of Real Estate Law. These recognitions encourage us to continue improving the quality of our services and satisfaction of our clients. We are grateful to our clients for their positive feedbacks and continued trust!


On the latest measures of the Government regarding the epidemiological situation

The 36th issue of the Hungarian Gazette, 2021 containing the Government Decree 104/2021 (III.5.) on the temporary aggravation of protection measures (hereinafter: Decree), has been published on the 5 March, 2021. The Decree has entered into force on 8 March 2021, and its principal measures are the following.

General rules

The Decree, as a general rule, set out that each person shall limit the number of meetings in public areas and places to the narrowest personal circle and keep at least 1.5 meters distance from each other, if possible.

Within the settlements, on the street and in public areas – except for certain cases – everyone shall wear mask covering both the nose and mouth, however, the legislator did not restrict the type of masks to be worn. Medical, safety, or even a mask made of textile or other materials can be worn. Children under the age of 6 and people with disabilities are still not required to wear a mask, as exception.

Sport activities may be performed alone or with household members, during which to wear a mask shall not be required.

The Decree stipulates that in unincorporated area, and in parks, arboretums and forests found in clear, may continue to be visited in accordance with the provisions of the legislation in force.

Rules relating to shops

Outside the curfew, until 22 March, shopping and staying is allowed in the following shops:

  • in a grocery shop, selling daily consumer goods,
  • in other shops (particularly perfumes, drugstores, household cleaners, chemicals and shops selling sanitary paper products),
  • shops selling work, professional duty, materials and equipment essential for carrying out economic, agricultural and forestry activities (particularly in the shops selling vehicles, machinery, components, construction materials and equipment) excluding the shops, where the main activity is selling entertainment and consumer electronics,
  • in pet food and feed shops,
  • in agricultural shops, including fertilizer shops and butcheries,
  • in horticulture, and tree nursery,
  • in the market, in the local producer market, excluding shops that are closed according to the present list,
  • in the shops selling medicines, medical devices, optical and optics equipment,
  • in the veterinary pharmacy,
  • at the petrol station,
  • in the national tobacco shop, and
  • at the newsstand.

Shops not listed above are required to be closed.

The operator, manager of the shop shall ensure the observation of the security measures.

Restaurants do not have to be closed, however to stay at the shop is only allowed during the time necessary for the provision and delivery of the food for takeaway.

The Decree provides for that, in light of the International Women’s Day, shops selling ornamental plants may be open on 8 March 2021 outside the time period of the curfew, as an exception.

Service sector

The Decree sets out, in general, that premises or venues for services requiring personal appearances shall be kept closed until 22 March. Only certain service providers, covered by the Decree, shall have been exempted from this obligation. Thus, in harmony with the previous press releases, transport and delivery service, as well as private health care providers, including spectacle manufacturers, and also premises providing

  • social service,
  • postal, mail order and home delivery service,
  • toto (football pool) and lottery service,
  • vehicle service, agricultural and industrial machinery service, household appliance service, building-engineering service,
  • IT, communication device repair service,
  • funeral service,
  • veterinary service,
  • veterinary, phytosanitary, food testing laboratory service,
  • food processing service,
  • communal catering service,
  • animal husbandry service,
  • legal (attorney) service,
  • security service,
  • building management and office service,
  • vehicle rental and machine rental service,
  • laundry and cleaning service, and
  • financial service in accordance with the legislation specified in the Decree.

Furthermore, only professional athletes can visit ice rinks, swimming pools, gyms, and other sport facilities.

In harmony with the rules applying for the shops above, the operator or manager of the place or venue shall ensure the observation of the above measures.

The Decree emphasizes that it is forbidden to visit and stay in casinos, and card rooms (except for those working there).

Accommodation services will continue to be governed by the rule that only people arriving for business, economic or educational purposes, as well as law enforcement and health workers shall be accommodated.

Legal consequences 

Observation of the rules shall be jointly controlled by the police and the Hungarian Defence Forces. The police may impose fines ranging from HUF 100,000 to HUF 1,000,000 in case of violation (i) the obligation to keep shops, service providers, and casinos closed, as well as (ii) the restrictive provisions relating to accommodation providers. Also, in case of breach, the places mentioned above can be closed for a period of one day to one year. The police shall carry out the inspection continuously therefore more than one visit in a day can be performed, with repeated legal consequences.

The Decree, as an exception, provides for the case where the operator, manager has called the offender to leave the place and, in case of resistance, notified the infringement to the police.

Violating the prohibitions on staying in shops, service providers, casinos and in accommodation outside the purposes set out in the Decree, the offender commits an infringement, with the possibility of imposing a fine between HUF 5,000 and HUF 500,000.

Schools are closing

Public education and vocational training institutions will switch to digital work schedule until 7 April, and as regards to kindergartens, the legislator provided for an extraordinary break. Student residences may continue to operate at the discretion of the supervisor of the institution.

Exams cannot be organized in adult education; exams announced or already started and in progress, must be postponed.

Mandatory home office in the public administration 

Employees in the public administration shall work from home with their own devices. Office work can only be ordered, if it is absolutely essential, especially for those involved in epidemic control, and if working from home cannot be solved due to the nature of the actual work.

The Decree requests the operators in the economic sector to strive for working from home.


The main rules of the Decree remain in force until 22 March, however, the temporary protection measures related to public education (§ 11) shall be applied until 7 April.


Interactive Brokers Central Europe opens its regional headquarters centre in Budapest with the professional support of Kapolyi Law Firm.

The international brokerage firm Interactive Brokers opened its Central European headquarters in Budapest. Kapolyi Law Firm has played an active role in the authorization process in Hungary as a legal counsel. Interactive Brokers Central Europe is the tenth subsidiary of an international brokerage firm that will manage an ever-growing portfolio of client accounts in Central Europe. Our firm provided professional support to create the legal background for costumer due diligence and service. On the 12 December 2020, the Hungarian National Bank issued the decision authorizing the activity of Interactive Brokers Central Europe.

More details on Interactive Brokers’ market entry can be found here