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.

Force

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.

 

Frequent question on management meetings is whether lending in group financing structures would be possible for parent companies or real estate funds for purposes of development or acquiring assets, following the amendment of the definition on group financing set forth in Act CCXXXVII of 2013 on Credit Institutions and Financial Undertakings (Hpt.) effective as of 26 December 2019. A number of articles have been issued according to which the amendment will make life easier for company-groups thinking in group financing, as it will provide an additional legal basis for the realisation of other – and broader – financing purposes in addition to ensuring the immediate solvency expected by both the legislature and the Supervisory Authority. However, the situation is not so simple, we will show the reasons.

Section 108 (a) of the Act CXVIII of 2019 on the Amendment of Certain Legislation Affecting the Financial Intermediation System, the Public Finances and Economic Stability amended the definition of group financing set forth in the Act No. CCXXXVII of 2013 on Credit Institutions and Financial Undertakings (Hpt) with effect of 26 December 2019. According to the amendment the term “in order to ensure liquidity” were replaced by the term “for purposes of liquidity or allocation” in point 11 of Section 6 (1) of the Hpt (the Financial Institutions Act). Often arises the question as to whether the amendment could provide a basis in group financing structures for lending for development or asset acquisition by parent companies and real estate funds. According to the opinion of the Supervisory Authority this was not permitted on the basis of the previous regulations: the joint operation carried out in order to ensure liquidity was essentially exhausted by ensuring immediate solvency, stemming from section 79. (1) of the Hpt. As the National Bank of Hungary explains in one of its related resolutions, loans providing source of asset for purchase, unless specifically related to the purchase of liquidity-enhancing assets, or various investment loans cannot be considered loans for liquidity purposes for several reasons. On the one hand, because they do not fundamentally assist to meet existing financial commitments on time, and on the other hand, because they do not ensure the maintenance of day-to-day business, solvency and liquidity, but create the financial conditions for additional commitments for which there is no otherwise sufficient capital. Thus, investment and asset-purchase lending has already fallen outside the scope of group financing, although there would still be a demand for it, in the case of free parent or subsidiary funding.

The new wording of the legislation, i.e.: “for purpose for allocation” turns to seem indeed permissive at first reading compared to the restrictive approach of the previous “in order to ensure liquidity”, wording  , however it is difficult to outline what this exactly means. (i) To the best of our present knowledge, the Ministry of Justice has not issued any legal interpretation relating to the above provision since the publication of this legislation (the “amendments in the term” seem to be a rather concise explanation for the practice) and (ii) no resolution is available on the Supervisory Authority’s website either, analysing the content/concept or practical boundaries of the concept of “allocation purposes”. The latter is understandable, as the National Bank of Hungary is not a legislator at the statutory level, therefore it cannot add an independent legal interpretation or explanation to the amendment of the law. A specific question, it seems, has not yet been received by the National Bank of Hungary in this scope.

Based on the above, the precautionary principle still seems to be the most rewarding, as it is not appropriate for market participants to develop practices that run counter to the strict licensing practice of the Supervisory Authority. According to this, if a company-group is thinking about financing that goes beyond the classic group financing activities (liquidity/ensuring of immediate solvency, cash-pooling, etc.), the best is to create a separate entity for this purpose, which obtains permission from the Supervisory Authority for performing the said activity. In this way they put their related funding(s)into a supervisory perspective, which significantly reduces the risk of infringement.

A further argument in favour of caution is that the Supervisory Authority’s powers for investigation in relation to group financing activities are still granted. The Supervisory Authority always carries out these investigations within the framework of the current legal environment and its legislative explanations, as well as the resolutions/interpretations developed in relation therewith. Therefore, until the relevant regulatory practice is developed, it is the responsibility of the market participants to take a position related to the amendment

Starting from the above summary, it seems that there is nothing left but a conservative approach, based on which it can only be assumed that practice will not interpret this rule as full liberalization of intragroup financings. Meaning that the group members will still not use the above addition for asset acquisition and investment purposes, because a literal interpretation of the term “for allocation purposes” does not seem fit/ sufficient for this.

In our opinion, therefore, a legislative explanation/commentary on the amendment would be useful for the Supervisory Authority, the market participants, as well as for the legal practice. This would greatly help to avoid the interpretation uncertainties outlined above and any potential future fines (not to mention other, additional legal consequences) that might be imposed in some cases as a result of the investigations performed by the Supervisory Authority related to group financing activities.

It is not yet widespread in Hungary, although common practice in Anglo-Saxon areas, that at the same time of purchasing a real property of higher-value, principally commercial and industrial ones, or a company owning the real property, buyers take out the so-called title insurance. What does this mean in practice? It will be summarized in the following article of the Kapolyi Law Firm.

By taking out title insurance, the buyer passes on to a third party, i.e. to the insurance company, in return for the payment of the insurance premium specified in the insurance contract, the risk that the title to the real property or the company owning the said property has been damaged, which limits or prevents the buyer from acquiring ownership thereof. In this case, according to the terms of the insurance policy, the title insurer indemnifies the buyer for the incurred damage. The question rightly arises that in Hungary, where the land registry is considered as an up-to-date, authentic public register, and the business register also provides comprehensive, reliable information, what hidden risks may arise, i.e. why may it be necessary to take out title insurance? The issue is further toned by the fact that, before purchasing a commercial or industrial real property of higher-value or the company that owns it, the buyer almost always entrusts a law firm before concluding a sale/transfer agreement in order to filter out all the legal risks associated with the real property/company and to identify any factors that may prevent or limit the buyer’s unencumbered acquisition of rights over the property/company. The buyer may, in the light of the risks identified, decide to enter into the transfer agreement on unchanged terms or for a possibly reduced purchase price, or with additional collateral included in the agreement. However, the buyer may also choose not to enter into the transaction.

Kapolyi Law Firm has been in a number of cases required by title insurance companies to assess the potential risks for the buyer (and indirectly for the insurance company) related to the sale and purchase of a real property of higher-value or the shares of company owning the property. Based on our experience in this field, we believe that although title insurance is primarily taken out by foreign investors who are new entrants to the Hungarian market and, therefore, do not yet know the relevant Hungarian legal provisions and official procedural rules, title insurance may still be justified for knowledgeable investors, too. Naturally, buyer’s risks are different when buying the real property itself (“asset deal”) or acquiring the company that owns the property (usually for tax optimization purposes) (“share deal”).

Generally, in the case of purchasing a real property, the authentic land register and the title deed of the real property – in general – provide reliable and complete information about the ownership and encumbrances of the real property or the litigations related thereto. Authenticity and reliability are ensured by the relevant provisions of the Civil Code and the Land Registry Act, according to which the ownership right on the real property as well as certain rights of third parties thereon (e.g. mortgage, call option right, pre-emption, judicial enforcement, easement rights, etc.) are created by the entry into the land register. This means, on the one hand, that before registration the competent land registry office checks the legality of the documents submitted, i.e. it exercises a certain degree of control over the contractual documentation. On the other hand, a real property is only encumbered by the encumbrances that have been registered/recorded in the land registry, basically. An important exception may be, however, the pre-emption right of third party that is based on law (e.g. in the case of many real properties located in Budapest, where the competent district municipality, the Budapest Municipality or the Hungarian State disposes on pre-emption right by law); this pre-emption right exists regardless of the land registry entry. Since a sale and purchase agreement concluded in breach of the pre-emption right may be challenged by the holder of the pre-emption right, the buyer may lose the ownership on the real property even if he had already paid the purchase price.

The situation is less clear, however, if the buyer does not purchase the real property itself but acquires partial or exclusive shareholding in the company that owns the real property. The vast majority of Hungarian companies operate as limited liability companies, therefore, in case of share deals, the buyer acquires the shares of the target company that owns the real property. However, the business register and the business register entry does not provide the same level of protection and real picture on the rights related to the business shares as the land registry does on real properties. In case of the transfer of a business share, the competent court of registration registers the change of ownership on the business share on the basis of the corporate documents submitted by the management of the target company. In this procedure, therefore, the court of registration does not examine the contract on the transfer of the business share; it carries out the above described control only for the corporate documents, but not for the contract on which they are based. It is rather the responsibility of the management of the target company to be acquired to examine whether the share transfer complies with the legal requirements. For example, whether the agreement on which the transfer is based has been duly signed or it contains any provision that may breach any legal prohibition. The management of the target company is also responsible for keeping the updated members’ list and notifying the court of registration on any changes made in the target company. Accordingly, it may imply a serious risk to the buyer if the management of the target company did not perform the above tasks in any previous change of ownership or did not exercise it with due diligence.

Due to the above, it is not revealed in the procedure on the registration of the new owner if the agreement on the share transfer suffers from an error which invalidates the transfer; therefore it might be very important in the case of a share deal to request and examine the share transfer agreements concluded after the establishment of the target company. In addition to the above, the business share may also be encumbered with contractual obligations (e.g. call option right, pre-emption right) that cannot be identified from the company register at all. Therefore, in order to offset his risks and exposure, the buyer, in practice, requires in the share transfer agreements highly detailed and extensive warranties from the seller on the fact that the share is free and clear of all liens, claims and encumbrances. Unfortunately, however, even a highly sophisticated and strict warranty structure might not provide sufficient security for the buyer if the business share is encumbered with unknown encumbrances or the transfer of the business share does not take effect due to a fault in the transfer chain. For example, when, as a result of the possible invalidity of a previous share transfer agreement, the beneficial owner of the share is not the seller. In many cases, however, investors focus mainly on tax optimization factors and “lose sight” of the financial and legal risks outlined above when deciding whether to acquire the given real property through an asset deal or share deal.

It is important to emphasize that even the authenticity of the land registry and business register, the proper legal due diligence of the real property or the company owning it, and the sophisticated warranty structure included in the sale and purchase/transfer agreement do not preclude a third party from challenging the sale/transfer agreement before court claiming the invalidity of a provision thereof. For example, a liquidator may challenge the agreement previously concluded by a company under liquidation on the ground that the seller under liquidation sold its real property at a purchase price that was significantly lower than the actual market value of the real property. Enforcing the buyer’s warranty claims can also be an extremely long, lengthy process if the seller does not cooperate with the buyer who has suffered damage. The buyer must prove that the seller has breached any of the warranties undertaken by the seller and the buyer must prove the extent of the damage resulting from the breach of the warranty, too.

The institution of the title insurance mentioned in the introduction might be a good guarantee for the uncertainties outlined above. The insurance company may indemnify the buyer, among other things, if the transferor of the real property/business share was not the legal owner thereof, the real property/business share is subject to unknown mortgage, call option right, pre-emption right or other third party’s rights, or the transfer of the real property/business share is invalid due to any transfer restriction. Title insurance can also be used in other cases. On the one hand, if due to the invalidity of a previous transfer agreement (e.g. a not dully signed agreement or an agreement signed without the approval of the general meeting), the transfer chain that apparently leads to the seller is not unbroken and therefore a third party may have a stronger title on the business share. Or, if the contractual or corporate documents related to the transfer of the business share are incorrect, and, therefore, the transfer cannot be registered into the business register. Title insurance can also be an appropriate tool for protecting the investor from damages arising from risks known or unknown to him (e.g. fraud, counterfeiting, invalid representation). By taking out the title insurance and paying a certain fee, the buyer can essentially outsource his risks, avoid higher losses and lengthy legal proceedings.

Subsection 1 of article 5 of Government Decree No. 484/2020 (XI. 10.) entered into force on 11 November 2020 according to which – with certain exceptions – it is forbidden to organize any event and it is forbidden to be present in person at the venue thereof regardless of the venue of the event.

The prohibition also includes so-called “private events” of more than 10 attendees in person, although the concept thereof is not defined either by this government decree or by other legislation. Nevertheless, from the provision of the Civil Code [Section 1 of Article 3:111.] according to which sessions of the supreme body shall not be public, it can be concluded that – until a specific regulation to this effect is provided – no general meeting may be held if the number of the attendees in person exceeds the above-mentioned number.

From this it also follows that, in the case of companies with a large number of owners, the already convened or announced general meetings cannot be held with attendance in person if the number of participants should exceed 10 persons. The prohibition applies in particular to public limited companies, since in their case no decision (resolution) shall be adopted without holding a general meeting on matters that fall within the general meeting’s scope of competence. Therefore, in the case of the supreme body, it is not possible to use electronic means of communication or adopt decisions (resolutions) without holding a meeting.

Given to the fact that the provisions of the government decree can be applied – at least for the time being – until 11 December 2020, a Plc., according to the current legal situation, may convene a general meeting by 14 December at the earliest and may hold it only if the provisions being in force on the scheduled date so permit it.

Therefore, in order to clearly regulate the operation of legal entities a specific government decree would still be needed such as it was government decree No. 102/2020 (IV.10.) in the spring of 2020. It would seem a practical solution if the government empowers again the executive body to decide on matters that would otherwise fall within the supreme body’s scope of competence.