The Hungarian National Bank clarified several questions with regards to the repayment moratorium

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author: dr. Balázs József FERENCZY

The National Bank of Hungary (NBH) has published a prospectus on its website in the form of Frequently Asked Questions regarding the repayment moratorium and the supervisory measures related to the pandemic (Prospectus). The purpose of the Prospectus is to adjust questions, arising in the practice to the main provisions of the Government Decree on the payment moratorium and its implementing regulations from the Supervisory Authority’s point of view, including – among others –the so-called opt-out right, delegated into the client’s sphere of competence and authority for the purpose of its exemption from the automatically applicable payment moratorium in case of credit, loan and financial leasing agreements.

In this review we are reflecting some selected findings and recommendations of the NBH for the corporate sector.

  1. If the customer does not wish to apply the payment moratorium provided by law, he/she must inform the creditor in order to enable it to deduct the repayment (e.g. by direct debit) in time. It can take several days to process customer statements and set them up in the systems. Please let us know about the NBH’s guidelines for this case.

In the NBH’s view, it is natural due to the institutional operational system that the processing of statements takes some time. It is the interest of all parties to keep this period as short as possible. Therefore the NBH expects the institutions to strive at all times to apply solutions that ensure the processing of the declarations as quick as possible, performed within a maximum of 5 working days. The NBH expects furthermore the institutions to apply the content of the declarations in accordance with the debtor’s intention by that date, too. In addition, the NBH also expects the institutions to draw debtors’ attention to the time-consuming nature of the declarations’ processing in their general prospectuses, as well as immediately after the notice on the debtors’ repayment intention. If the customer repays, even with delay, the instalment due in a given month by bank transfer or cash deposit, the NBH also expects the institutions to consider such action as fulfilment of the repayment obligation and waiver of the moratorium in that month.

  1. How to deal with the case if the debtor has already declared for not applying the moratorium (i.e.: it is in opt-out status) but then it fails to pay when the actual payment becomes due, or, in case of direct debit, there is no enough fund in its bank account?

The relevant government decrees do not contain provisions for this case. Therefore, in the NBH’s view, in case of direct debits the provisions of the contractual environment (business regulations, GTC, etc.) must be followed. In practice, for example, if the institution used to automatically collect the instalment within 10 days after its monthly due date pursuant to these provisions, it shall continue to do so by attempting to debit the given monthly instalment until the due date of the next monthly instalment, at the latest. If this period expires without success, the debtor shall again be considered to fall under the payment moratorium and default interest, fees may not be charged for such instalment during the period of the payment moratorium, either.

If the contractual provisions do not provide guidelines in connection with the above, it is good practice according to the NBH if the institution provides grace period of 1-2, but maximum 5 working days for the payment of monthly instalments, meaning that if the customer pays the monthly instalment within this grace period, the payment obligation shall be considered completed in due time by the institution. According to the NBH’s recommendation, it is also a good practice for the institution to contact the consumer during this period regarding its intention on repayment. In the event of non-performance requiring the customer’s active behaviour (e.g. bank transfer, cash deposit), the contract will automatically fall under the payment moratorium.

  1. What is the situation with the securities (guarantee, pledge/mortgage) under the payment moratorium? Is it an obstacle to requiring additional collateral, if necessary?

The NBH emphasizes that Article 1 (2) of the Government Decree No. 47/2020 on the mitigation of the impact of the coronavirus pandemic on the national economy sets forth that the modification of the maturity for the completion of contractual obligations also modifies the ancillary and non-ancillary obligations, securing the contract. This provision also applies if the guarantee contract expires before the end of the year: its duration is also extended by the moratorium. It also applies mutatis mutandis to inventory/stock financing: the creditor shall not cancel its pledge, redeem a warehouse receipt until the debtor has fulfilled its payment obligation. In addition to the above and in the NBH’s view it is also important that, if the creditor (for reasons independent of the moratorium) determines the need for additional collateral, the moratorium does not prevent it from demanding the same from the debtor.

  1. Is it expected to set forth detailed rules on how to proceed with the determination of non-performance and restructuring in the case of clients falling under the moratorium?

According to the NBH the payment moratorium announced by the Government Decree No. 47/2020. shall not result automatically the reclassification of the relevant exposures into (i) the default category under the CRR, (ii) non-performing and/or restructured debts in accordance with the NBH Decree No. 39/2016 (X. 11.) on prudential requirements for non-performing exposures and restructured receivables, nor (iii) the obligatory determination of increased credit risk in accordance with the IFRS 9 standards, the reclassification into Stage 2. In relation to all these, the need for reclassification for each exposure must be determined individually. This was formulated in the Communication issued by the European Banking Authority on 25 March 2020, as well as, partly, in its Recommendation issued on 2 April 2020. This position will be confirmed in the management circular to be issued by the NBH in the near future, expected by the end of the second quarter of 2020, with further detailed rules.

  1. Do customers who withdraw from the payment deferral during the period of the payment moratorium (i.e.: the opting-out debtors) and fulfil their payment obligation late, bear the legal consequences of the delay?

In the NBH’s view during the period of the payment moratorium customers do not bear the legal consequences of the delay, so there are no legal consequences for late payment either during the so-called grace period or independently thereof.

  1. Can intermittent loans, where drawdowns adjust to the phases of the construction and the stage of completion, be managed in a way that the institution allows the payment moratorium for instalments not yet disbursed at 24:00 on 18 March 2020, too?

Pursuant to the Government Decree No. 47/2020, the payment moratorium shall not apply to loan instalments disbursed following to 24:00, 18 March 2020, nor to payment obligations arising from them. Nevertheless, the NBH considers as good practice if the institution allows payment moratorium to customers in respect of loan instalments not yet disbursed at 24:00 on 18 March 2020, too, thus providing for the uniform and transparent management of the contracts.

  1. In addition to principal and interest payments, does the moratorium apply to fees only, and not costs?

In the NBH’s view, according to the Government Decree No. 47/2020, the moratorium applies to capital, interest or fee payment obligations, arising from credit, loan or financial leasing agreements, therefore payment deferral affects the above-mentioned payment obligations only, stipulated in the contracts, it does not apply to costs passed on to debtors. According to the NBH their interpretation is supported by the fact that Article 17/E of the Act no.: CLXII of 2009 on consumers loans refers and names the costs, incurred in connection with the service provided by third party, which can be passed on to the consumer, separately from fees.

  1. The settlement logic for interests and fees, set forth in Article 2 of Government Decree No. 62/2020, is applicable only in the case of credit transactions with final maturity date, and not for revolving type products with no maturity. In case of these products, neither the extension of maturity, nor the determination of even instalments, or fixing the instalments (due to withdrawal from the available facility in random amounts) can be set. Is it appropriate for interest on overdraft facilities and credit cards, unpaid during the moratorium, to be settled within 12 months from the final maturity date of the moratorium?

The payment moratorium shall apply only to loans already disbursed under contracts existing at 24:00 pm on 18 March 2020. The NBH therefore considers important to emphasize that in case of loans to be disbursed or drawn down in instalments, the amounts disbursed or drawn down after 18 March 2020 shall not fall under the rules of the payment moratorium.

The provisions set forth in Article 2 (2) of the Government Decree No. 62/2020 apply for constructions with duration period only. In case of credits with no duration, the NBH interprets that repayment becomes immediately due after the last day of the moratorium.

Nevertheless, in harmony with the legislator’s approach, the NBH expects in case of products with no maturity also, that the unpaid interests should not be settled in bullet once the moratorium ends. Instead, it should be spread over a longer period in order not to impose disproportionate burden on borrowers. The instalment payment option can be provided for based on Article 279 (16) of the Credit Institutions Act. However, customers must be informed on this non-unfavourable, unilateral amendment of contract in accordance with the applicable legal or contractual provisions. In the NBH’s view it can be considered a good practice for institutions to provide a 12 months instalments payment option for these type of transactions too. The unilaterally determined duration of the repayment option may be shortened by prepayment, or the parties may also deviate from such a period by their mutual agreement.

In addition to the above, the NBH created a separate webpage, dedicated to the measures for economic and financial responses relating to the coronavirus situation. The site’s constantly updated database provides additional and up-to-date information on key regulatory responses affecting the retail, corporate and financial sectors.

 

Competition law in the age of Coronavirus: state-owned venture capital and private equity funds may acquire companies more easily

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author: dr. Katinka TÖLGYES

Significant relief was granted to directly or indirectly state-owned venture capital and private equity funds which, individually or jointly with another company, acquire management rights in a company for investment protection purposes. During the period of the emergency, for transactions in which the acquired company was in a difficult situation as a result of the pandemic, there is no need to notify and gain approval from the Hungarian Competition Authority (GVH). The pandemic will result in several changes in the economy and market structure, raising several issues in competition law, such as the prohibition of the abuse of a dominant position or significant market power or the authorization of mergers. Kapolyi Law Firm’s competition law expert summarised the most important information and what measures may be expected from the authorities.

As a result of the pandemic, customer and consumer needs are changing so rapidly and drastically in several sectors, that adapting to them poses serious challenges for most companies. The necessity of the changes affects nearly all economic actors to a certain extent, given the effects of the pandemic, and the legal regulations and amendments aimed at preventing and managing it. Furthermore, with regards to the method of adaptation – taking into account the necessary epidemiological measures – companies are not entirely free to choose and implement their own measures (e.g.: the opening of commercial catering units is restricted, and the holding of certain events is prohibited). Many businesses will therefore not be able to cope with the challenges posed by the pandemic and the ensuing expected economic recession, or will find it far more difficult to do so. Concurrently, there will be some who will be able to prepare for the forthcoming period, by maintaining their previous position or even strengthen it, increasing their market share. According to Dr. Katinka Tölgyes, Kapolyi Law Firm’s competition law expert, this is likely to affect market structures, which will presumably become more concentrated for a while. The market position of a company may change with respect to its competitors or suppliers. This means that with the marginalization or even disappearance of competitors, companies in a weaker position may become dominant, or companies in a dominant position may find themselves in an even more favourable position. Additionally, the market power of companies in relation to suppliers may strengthen, or significant market power may shift to companies that previously did not have any. Kapolyi Law Firm’s competition law expert highlights the fact that neither competition nor commercial law prohibits a dominant position and significant market power, but the laws sanction their abuse. Therefore, businesses which are more successful than others in coping with the current economic crisis must be careful not to violate regulations. As consumers may be more vulnerable to the negative externalities of market abuse in the current pandemic situation and the forthcoming economic recession, the Hungarian Competition Authority can be expected to be more stringent.

Dr. Katinka Tölgyes emphasises that a further consequence of the changes in the market structure, and a presumed concentration is an increase in the number of mergers and acquisitions of companies. This is because businesses in a difficult situation are less likely to be able to maintain their independence, and for more successful enterprises, acquiring a company may entail a new business opportunity. When certain revenue thresholds are met, mergers must be approved by the GVH, in the absence of which the merger may not be executed. The GVH may also make its approval subject to conditions (e.g.: the sale of a certain part of the business within a specified period of time). However, per the Competition Act, it is also possible for the GVH to authorise the execution of a merger prior to the completion of the authorization procedure upon a separate application, if this is necessary to preserve the value of an investment. Given the impending economic recession, it is expected that the number of these applications will likely increase, as maintaining the survival and viability of distressed, therefore acquirable companies, and protecting the investment of acquiring businesses, will justify the submission of applications more frequently than in a prosperous economic period. In an earlier communication, the GVH asked companies to consider postponing the notification of planned mergers. The authority also highlighted that given current circumstances, it is more difficult for the GVH to collect information (e.g.: from competitors, suppliers) that may be necessary to assess the merger, which may result in complications for involved parties.

Dr. Katinka Tölgyes emphasises that concurrently, the Government exempted certain enterprises from their notification and authorisation obligations in view of the emergency situation. Therefore, by derogating from the provisions of the Competition Act, and in accordance with the Government Decree’s provisions for specific credit, capital and warranty products within the framework of the Economic Protection Action Plan, the GVH does not have to be notified about mergers involving, a directly or indirectly state-owned venture capital or a private equity fund which are executed through a financing transaction necessitated by the pandemic, through a capital program set up for that purpose. The same applies for directly or indirectly state-owned venture capital and private equity funds which, individually or jointly with another company, acquire management rights in a company for investment protection purposes. However, this only applies until the cessation of the emergency period.

Coronavirus: companies can receive state aid in these five categories according to the European Commission’s resolution

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author: dr. Katinka TÖLGYES

With respect to the economic damage caused by the coronavirus pandemic, the European Commission has mitigated its position related to state aid and has temporarily amended the framework in the light of the crisis. The competition law expert of Kapolyi Law Firm summarized the most important information in this regard and the opportunities available to companies under EU regulations.

Although, under normal economic conditions, the general rule is that the granting of state aid in favour of certain products, services or undertakings is prohibited, the Commission changed its position due to the deteriorating economic situation caused by the coronavirus pandemic. Dr. Katinka Tölgyes, competition law expert of Kapolyi Law Firm, recalls that, usually, only state aids that are compatible with the European Union’s internal market are authorized, such as non-discriminatory social aids granted for a product or aids for repairing damages caused by extraordinary events. Nevertheless, aids to promote the economic development of certain least-developed areas or to promote the development of certain economic activities or certain economic areas, without prejudice the common market and the common interests of the European Union, may also be authorized. Compliance with the rules related to aid is constantly monitored by the Commission, which checks whether they are compatible with the internal market and that they are not being misused in an abusive manner.

The main frameworks have been laid down in the light of normal economic conditions and they are not applicable, or the application thereof is rather difficult to unexpected, negative and eventually long-term processes affecting the economy, such as those caused by the coronavirus pandemic in certain economic sectors (e.g. tourism, hospitality) – said dr. Katinka Tölgyes. Following this logic, the Commission has also taken the view that changes to the application of the framework need to be done, and has defined five categories of aid under which Member States may grant aid to remedy the serious disturbance in the economy if other conditions set forth in the transitional regime are also met.

Five categories of aid defined by the European Commission

  1. Non-refundable direct aids, selective tax incentives and repayable advances

Member States may grant aid up to a maximum of EUR 800 000 (EUR 120 000 for the fisheries and aquaculture sector and EUR 1 000 000 for primary agricultural production) to satisfy the urgent liquidity needs of an undertaking. The aid is conditional on the economic difficulties of the beneficiary company being caused by the coronavirus pandemic or its consequences, and that the company has not been considered to be in difficulty for any other reason before 31 December 2019. Where an undertaking operates in more than one sector and is subject to different maximum amounts, Member States should ensure that the ceilings are met, for example by means of accounting separation.

  1. Providing a loan guarantee

Member States may provide preferential state guarantees to ensure that banks and other financial institutions can continue to provide credit to customers who need it.

  1. Subsidized lending rates

Member States may, as a general rule, grant loans to enterprises at reduced interest rates for a maximum of 6 years. These loans can help to the enterprises to provide immediate working capital and satisfy investment needs.

  1. Guarantees and loans provided through financial institutions and credit institutions

Member States may also grant the aid referred to in points 2 and 3 to help undertakings, in particular small and medium-sized enterprises, through banks or other financial institutions. According to the European Commission, such aid shall be considered as aid granted directly to banks’ customers and not as aid granted to banks.

  1. Short-term export credit insurance

In the event that the hedges of marketable risks are temporarily unavailable in some countries, the European Commission allows short-term export credit insurance for the state.

Dr. Katinka Tölgyes points out that the European Commission specifically mentions aids for relevant research and development, production of products as well as testing and scaling infrastructures aiming to combat the coronavirus pandemic. In these cases, the aids are considered as aids to promote the development of certain economic activities or certain economic areas, without prejudice the common market and the common interests of the European Union. The European Commission also sets a deadline, meaning that aids to remedy the serious disturbance in the economy of a Member State can only be granted until 31 December 2020. The competition law expert of the Kapolyi Law Firm recalls that the elaboration of detailed rules in relation with the provisions set forth by the European Commission has already started in the Hungarian legislation in the meantime.

Force majeure and MAC/MAE clauses during the period of Covid-19 in Hungary

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author: dr. Balázs József FERENCZY

  1. What force majeure means?

Force majeure (in the Hungarian legal language: “vis maior”) is a legal institution dating back to Roman law, and “means a force or event that human weakness cannot resist.”[1] The legal literature includes both overwhelming natural forces, such as earthquakes, floods, shipwrecks, other natural disasters, and certain human/social movements, such as wars, revolutions, or other extraordinary social events of extreme force. According to Roman law, “no one is generally liable for force majeure”[2], unless (i) it has been undertaken by someone in a contract (such as in the case of ancient “insurances”, like the pecunia traiectitia or the lex Rhodia de iactu mercium), or, for example, (ii) if the person was liable for (i.e. it was attributable to him) that the asset has been affected by force majeure.

Force majeure – although it has classical roots and a fairly widespread contractual practice – does not have a normative basis in the current Hungarian legal system. This legal institution can be deduced indirectly from certain provisions of the Civil Code and their explanations (cf. the system of exemption from contractual liability according to § 6: 142 of the Civil Code),[3] and in practice, the exact meaning and content thereof are set forth by the parties in their contractual clauses and in the judgments developed by case law.

  1. Can the current epidemiological situation be considered as force majeure and can we invoke it in our contractual relations?

In our contractual relations force majeure may be invoked mainly in cases where the parties have made the vis major cases, and among them the epidemiological situation, part of their contractual agreement. These clauses are most often included in medium- and long-term contractual schemes (e.g. construction and installation contracts, credit line contracts), but it is important to note that the contract must be examined each time (i) to find out if it contains any additional force majeure clause, on the one hand, and if this exist (ii) what is the exact content thereof, on the other hand. These provisions usually provide a clear indication of the contractual obligations the parties are liable to meet in the event of force majeure (e.g. the obligation to notify in writing on the occurrence of force majeure event and the nature thereof), the duration of such a situation (the parties generally allow the application of force majeure event for a transitional period) and what should and/or can be done after this transitional period (withdrawal or termination if the force majeure situation does not cease during the transitional period or resumption of contractual obligations).

The provisions on the payment moratorium set forth in the Government Decree Nr. 47/2020 (III. 18.) on the immediate measures necessary to mitigate the impact of the coronavirus pandemic on the national economy, as well as in the Government Decree Nr. 62/2020. (III. 24.) on the execution of the former one (hereinafter collectively referred to as the “Government Decree”) in Hungary, for example, contain an exemption from the fulfilment of contractual obligations for the debtors of credit, loan and financial leasing contracts disbursed on a commercial basis, which, in fact, prevented the risk of mass insolvency resulting from the epidemiological situation and, therefore, the risk of mass litigation procedures, which was likely to place a heavy burden on the economy as a whole and on the judicial sector, too.

Force majeure may also be applied even without a contractual clause, for example, if the party relying on it can properly prove that he was unable to meet a contractual obligation specifically due to the epidemiological situation or for a reason directly attributable to the epidemiological situation, he did not foresee the occurrence of this event, neither could he be expected to assess/foresee it in advance. In this respect, for example, an important and decisive issue may be the date of conclusion of the contract as well as to what extent and in what manner the given business was affected by the possible shutdown of foreign suppliers around this date, for example.

  1. In which cases could difficulties arise in relation to force majeure event?

Despite the above, there are many systems of contractual relations where reference to force majeure event is likely to cause difficulties, such as, for example, lease contracts for retail units and shops. As our colleague, Mátyás Rada explained in his previous article “since force majeure in lease contracts usually means events beyond the control of the parties that damage or destroy the building or part of it rendering the leased property unavailable or unusable (such as fire, flood, or even war events), a new interpretation of ‘un-usability (unavailability)’ may emerge in the context of a coronavirus pandemic.”

  1. Is there causing of damage in case of force majeure?

If the defaulting party properly alleges and proves that he was unable to meet his obligation due to force majeure event, therefore his conduct or his omission resulted from a cause beyond his control, he can be relieved of his liability for breach of contract and thus for causing damages.

It is important to note that, on the basis of a regulation developed for this purpose[4], a so-called certification of force majeure can be required from the Hungarian Chamber of Commerce and Industry (HCCI) in respect of non-performance of an obligation (or obligations) specified in a particular contract, which is an institution rather foreign from the until now existing Hungarian legal practice. At the same time, HCCI underlines in its abovementioned regulations that “The concept of “force majeure” has not been defined neither by Hungarian law, nor by EU legislation and judicial practice. The purpose of the Chamber’s certification of force majeure is to avoid possible lawsuits, to promote civilized economic co-operation between enterprises, to simplify the proof in lawsuits that may still be initiated, and to reduce the duration of lawsuits.”

A major question of judicial practice following the coronavirus epidemic is the direction in which the case-law related to force majeure will be further developed, based on a simultaneous examination of the above elements, in a forward-looking manner.

  1. What does MAC/MAE clause mean?

If the contract cannot be terminated due to force majeure, the contracting partner may have to seek other clause(s)/legal grounds for terminating the contract.

As impact of the Anglo-Saxon legal system and international model contracts, the use of the so-called MAC/MAE (that is to say: Material Adverse Change/Material Adverse Effect) clauses is widespread also in Hungarian contractual practice, that can typically be found in credit and loan agreements and in the documentation of M&A transactions. The main source of the MAC clauses – similarly to force majeure – are the provisions mutually agreed upon by the parties in the contract. The legal background for this legal institution does not currently exist in the Hungarian legal system.

For example, in a loan agreement standardized by the LMA, any fact, event, or circumstance, or a series thereof, shall be considered as material adverse effect that has occurred to the borrower which, according to the creditor’s reasonable opinion, have or may have a material adverse effect on

(a) the economic (financial or other) situation of the borrower;

(b) the management and business of the borrower;

(c) the ability of the borrower to meet any obligation under the financing agreement or the collateral contract securing thereof; or

(d) the legality, binding force, validity, enforceability, ranking of any transaction document to which the borrower is a party.

A MAC/MAE’s

  • lack (as expected by the creditor) may, for example, serve as a precondition for the financing party to meet its financing obligation under the credit facility agreement; or
  • occurrence (unauthorized by the creditor) may, for example, result in the breach of the borrower’s obligation undertaken in respect to the lack of MAC/MAE, which may lead to an event for breach of contract; or
  • occurrence/existence (not permitted by the creditor) may also result directly (sui generis) in an event for breach of contract.
  1. When can we speak about the occurrence of a “material adverse effect” under the MAC clause?

In this matter – in lack of Hungarian judicial practice and legal provisions – it is worth relying on the results of Anglo-Saxon legal development. According to them, a material adverse effect, for example,[5]:

  • must continue existing for long-term: the change cannot be only temporary, it must be for long-term and permanent in terms of the company’s ability to generate revenue (“over a commercially reasonable period, measured not in months but years.”);[6]
  • must be quantitatively significant: a waiver based on the MAC clause could be successfully invoked, for example, in the case of a 50% reduction of two consecutive quarterly revenues,[7], in another case the court considered a reduction of 64% of the quarterly revenue to be a close case,[8] while a decrease of 86% of EBITDA was considered as an undoubtedly significant and substantive change („short-term hiccup should not suffice”);[9]
  • externalities affecting the whole industry concerned, given that they affect all participants of that industry, do not normally fall within the scope of the MAC clauses. If a material adverse effect affects the given contracting party only, regardless of the industry concerned, the termination on the basis of the MAC clause may provide an appropriate basis thereof; however, if the effects affect the whole industry in the same way, the contract cannot normally be withdrawn under a MAC clause.

The above only sets the framework for Anglo-Saxon case law (drawn with rather inaccurate lines) and does not mean that minor revenue losses cannot lead to a decision respecting MAC/MAE clauses (with special regard to the existence of other important circumstances), nor they mean that even in the case of a higher loss of revenue, the court could not decide against the application of the MAC/MAE clause. However, it can be stated in general, the courts interpret the MAC/MAE rather strictly and narrowly. They usually exclude the applicability of the MAC/MAE clauses in the event of, for example, war, natural disasters or force majeure, placing the systemic risks on buyers/creditors, essentially. As the pandemic became global, the Covid-19 epidemic also began to appear in MAC clauses as a specific circumstance being an explicit exemption from the causes of withdrawal[10] (a substantially similar trend was observed after the events of 11 September 2001, when the terrorist attack was included among the events of force majeure). However, it is important to underline that specific circumstances referred to in the MAC/MAE clause (including the Covid-19 epidemic, too) can only constitute an exemption if they affect the given industry or activity, including all market participants, in general. If the impact on a given company is (significantly) more severe than on the industry in average (“except to the extent that the target was disproportionality impacted compared to other industry participants”), the systemic risk thesis may be overturned and the application of the MAC/MAE clause against the target company/borrower may legally be founded, taking into account all the factors of the case.

  1. Can the current epidemiological situation justify withdrawal from the contract or refusal to financing by reference to the MAC/MAE clause?

In each case, extensive and thorough contractual interpretation is needed in order to determine whether the epidemiological situation caused by the Covid-19 virus and the resulting economic and legal circumstances fall within the scope of the MAC/MAE clauses set out in the contracts. In our view and in the light of past experience, it can be said in general that the MAC/MAE clauses relate specifically to the individual financial, economic or legal situation of the debtor/contracting partner. The fact that both the world economy and the Hungarian economy have to face a global epidemiological situation as a result of the Covid-19 virus does not in itself provide a sufficient legal basis for the contracting party to exercise its right to terminate the contract under the MAC/MAE clause.[11] Nevertheless, special consideration in the risk analysis should be given to the possible disproportionate impact on a given company caused by the current situation referred to above.

  1. Are there other contractual rules under which a credit institution may, for example, consider terminating a loan agreement?

As we explained in one of our previous articles, the payment moratorium (at least, concerning Hungary) only grants, temporarily and not permanently, exemptions from the rules of the loan agreements related to the repayment of capital and interest. This is a very important, but by no means a single set of borrower obligations. In addition to capital and interest repayment rules, loan agreements commonly used in the legal practice impose obligations on borrowers to comply with certain financial ratios (DSCR, LTV), to provide financial information on an ongoing basis, or to maintain collateral value (listing only the most important ones). Borrowers are obliged to fully comply with these obligations, even during the payment moratorium set out in the Government Decree and the existence of the force majeure situation. Should any of these obligations be breached, these may allow the credit institution to consider the termination of the relevant contract, which is not in the borrower’s interest during the moratorium period, either.

  1. What is the solution?

In the current situation, both (legal) force majeure (Government Decree on the declaration of an emergency and its execution) and the MAC/MAE clauses can provide an appropriate basis for the contracting parties to negotiate and resolve disputed issues reassuringly and for long term. It is clear that in this way parties are primarily facilitating to relaunch the various sectors of the economy after the emergency will cease, which already seems to be a huge, but mutual task, trying and testing people and the market.

_______________

[1] History and Institutions of Roman Law (András Földi and Gábor Hamza), Institute for Educational Research and Development, Budapest 2015. Brósz-Pólay: Roman Law, Textbook Publisher, 1974, p. 351 .: “cui humana infirmitas resistere non potest” – D.44.7 .1.4. – Gaius.

[2] D. 50.17.23. – Ulpianus, 1.

[3] Section 6:142. of the Hungarian Civil Code

[4] https://mkik.hu/vis-maior-igazolas-kiallitasa

[5] https://corpgov.law.harvard.edu/2020/04/04/covid-19-as-a-material-adverse-effect-mac-under-ma-and-financing-agreements/

[6] Akorn, Inc. v. Fresenius Kabi AG https://courts.delaware.gov/Opinions/Download.aspx?id=279250

[7] Raskin v. Birmingham Steel (Del. Ch. 1990)

[8] IBP Shareholders Litig. (Del. Ch. 2001)

[9] Akorn, Inc. v. Fresenius Kabi AG https://courts.delaware.gov/Opinions/Download.aspx?id=279250

[10] Morgan Stanley-E*TRADE merger agreement: https://news.bloomberglaw.com/bloomberg-law-analysis/analysis-morgan-stanley-e-trade-merger-excludes-coronavirus

[11] https://www.ashurst.com/en/news-and-insights/legal-updates/is-coronavirus-covid-19-a-material-adverse-change/

Kapolyi Law firm is among the best Hungarian law firms in 2020 according to Chambers and Partners and The Legal 500 legal guides

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We are honoured to have been top ranked among the best Hungarian law firms in the 2020 edition of The Legal500 EMEA and Chambers and Partners legal guides.

The meetings of governing bodies of legal entities during the Coronavirus pandemic

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author: dr. Adrienn MILD

Based on Parliament’s authorisation, the Government enacted Decree 102/2020. (IV.10.) on diverging provisions concerning the operation of partnerships and capital companies during the state of emergency (hereinafter: “Decree”). The decree was issued on 11 April 2020 and will remain in effect until the state of emergency ceases according to government Decree 40/2020 (III. 11.).

The Decree set forth special provisions for the operation of legal entities’ corporate bodies (e.g.: members’ meeting, general meeting, board of directors, supervisory committee, etc.) during the emergency period. It is important to note that the Decree’s provisions apply for deadlines already expired before the Decree’s enactment, but after the declaration of the emergency. It also applies to persons whose mandate, appointment or elected office expired after the declaration of the emergency but before the enactment of the Decree and no other person has been appointed or elected to replace them.

This piece summarises provisions on legal entities regulated by the Civil Code. Special provisions for publicly listed companies (plc.) were summarised in our earlier article.

Meetings of a corporation’s governing bodies (members’ meeting, general meeting, etc.) may not be held by attendance in person (this applies to a meeting already convened by the time when the Decree was enacted). If possible, members may attend meetings through electronic communication devices or make a decision without holding a meeting – unless this does not violate any laws and it is initiated by the management -. According to the Decree this is permitted even if the legal entity’s articles of association (hereinafter “Articles of Association”) do not contain any provision for the processes and conditions of decision-making without holding a meeting.

If the Articles of Association contain provisions for holding a meeting through electronic communication devices and for decision-making without holding a meeting, those provisions prevail. If not, the management is entitled to establish them, but certain rules for warranties must be observed:

  • Members must be informed about the agenda, and the proposals for resolutions must also be disclosed to them,
  • In case of attendance the meeting through electronic communication devices, the devices and IT applications must be specified, as well as the means of the process of identification (unless the management of the legal entity personally knows the members or their representatives),
  • In the event of decision-making without holding a meeting: (a) at least 15 days must be allowed for the member to vote. The vote is valid only if it clearly identifies the member (name, address/seat, the name of its representative – in the case of an organization -), the indication of the draft resolution to vote on, its serial number and the vote cast; (b) the decision-making process shall be considered effective if at least as many votes are sent to the management as the number of members with voting right required to attend for a quorum if the meeting was in fact held in session; (c) the management shall determine the outcome of the voting within three days following the last day of the deadline set forth for voting, or, if the votes of all members are received previously, within three days from the day when the last vote is received, and shall convey the results in writing to the members within an additional three days; (d) the member may not propose to convene the governing’s body meeting or to hold it by electronic means; (e) subject to compliance with prescribed formalities, a member may cast its vote through e-mail, too.

The designated executive officer of the legal entity is to chair the meeting of the governing body and record its minutes, indicating the circumstances of the meeting and the personal details of the members participating by electronic means. The minutes shall be signed by the chairman of the meeting and no attendance list is required.

A member of the supervisory board and the permanent auditor may participate in the meeting of the governing body the same way as the members of the legal entity (essentially by electronic means).

If it is not possible for members to participate in the meeting through electronic communication devices or to make a decision without holding a meeting, the management decides on the approval of the annual report, dividends as well as issues belonging to the competence of the governing bodies and necessary to maintain the legal entity’s lawful operation and the management of the emergency situation, as well as on urgent matters unless the majority objects to the proposal. However, the management (i) may not amend the Articles of Association unless required by law; (ii) may not dissolve the company without a legal successor; (iii) may not decide on the transformation, merger or division of the legal entity, nor may it decide on ongoing issues related to transformation, merger or division that belong to the competence of the governing body; (iv) may not decide to reduce the registered capital of limited liability companies and private companies limited by shares; (v) may decide on additional payments or other capital injections only with the prior written consent of the parties obliged to provide them.

In case of limited liability companies and private companies limited by shares, if the convening of the members’/general meeting and the reduction of the share/registered capital is mandatory according to the Civil Code, those companies are obliged to decide on the necessary measures on members’/general meeting to be convened no later than on the 90th days after the cessation of the emergency.

The decisions of the management are considered as a decision of the governing body (meaning that these decisions must be published and submitted to the court of registration) and are enforceable. The management must make every effort to inform members about these decisions. The management is liable for its decisions to the legal entity on the basis of the rules on liability for a breach of contract. The audit of the annual report may be carried out on the basis of the decision of the management, however, the management may only decide on the annual report if it has previously been approved by the supervisory board, in case it operates.

The decision of the management made on the basis of the above rules shall be placed on the agenda of the extraordinary meeting of the governing body to be convened to be convened no later than on the 90th days after the cessation of the emergency. However, if the decision is amended or repealed by the governing body, it does not affect the rights and obligations arising from previous decisions of the management.

The corporate bodies of the legal entity (executive board, supervisory board, audit committee, or further corporate bodies established by law or the Articles of Association) may hold meetings through electronic communication devices, or through other electronic devices which permit the identification of attendees. Alternatively, corporate bodies may conduct written consultations, and make decisions in writing. In lack of relevant, approved procedures for the above, the rules and processes of the meeting and decision-making are determined by the chairman of the body which must be communicated to members involved. Written consultations and decision-making may also take place through electronic messages (i.e.: through e-mail).

A further temporary rule is that shall the term of the appointment of a member in the above corporate body or the appointment of the permanent auditor expire during the emergency period (even if their appointment expired after the announcement of the emergency, but before the publication of the Decree and no other person has been appointed to replace them), their mandate will remain effective until the 90th day after the cessation of the emergency period and they are obliged to continue to perform their duties. Exceptions arise if the appointment of said person ceases due to death, recall, restriction of his legal incapacity or upon the occurrence of an event which provides grounds for exclusion or a conflict of interest.

If during the period of the emergency the number of members in the abovementioned bodies decreases below the number set forth by law or the Articles of Association, or if a member is unable to act due to the coronavirus pandemic, the remaining members are entitled to pass resolutions. In this case, the rules on the quorum of the said body shall be determined by the number of members available to decide. Even in this case, resolutions must be passed by simple majority; however, even one member is entitled to pass resolutions if all the other members of the relevant corporate body are unavailable.

Dr. Balázs Ferenczy’s Interview on the Repayment Moratorium on Klubrádió

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Kapolyi Law Firm’s Head of Banking and Finance Department, dr. Balázs Ferenczy was invited to Klubrádió’s ‘Vállalkozók Klubja’, where the show’s host, Iván Kárpáti, interviewed him on how the repayment moratorium affects the credit market participants. You can listen to the full interview in Hungarian on klubradio.hu.

https://www.klubradio.hu/archivum/vallalkozok-klubja-2020-aprilis-06-hetfo-1430-9803

Credit Card and Current Account Debts in Light of the Loan Repayment Moratorium

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The moratorium on loan repayments introduced as a result of the coronavirus pandemic essentially ‘reversed’ regulations on payment obligations arising from credit and loan agreements. With regards to the moratorium, the question of how the payment of debts from credit cards and overdraft facilities are affected arises. These credit products are revolving (i.e.: they do not have maturity date) and unsecured (i.e.: there is no mortgage collateral behind), however, the government decree on the repayment moratorium lays down provisions for credit facilities with a maturity date only. The issue was examined by Kapolyi Law Firm’s experts.

According to the Hungarian National Bank’s (MNB) interpretation published last week, the repayment moratorium enacted by the government also applies to credits with no maturity dates, such as credit card and overdraft facility products, provided that the credit amount was drawn down by the 18th of March 2020. Pursuant to the general rule of the repayment moratorium, debtors of these facilities can defer repayments until the 31st of December 2020, too. But what does this mean for loans withdrawn after the 18th of March 2020 under the same agreements?

  • If the customer drawdown loan after the 18th of March 2020under these products, neither the capital nor the interest debts are covered by the repayment moratorium, resulting in, that these amounts must be repaid to the bank under the original terms set out in the applicable facility agreement (in other words, in these  cases the loan functions as it usually does);
  • the same applies to loans drown dawn before the 18th of March 2020, if they are repaid (at least partially) by the customer to his credit account after the 18th of March 2020. The repaid amount in those cases becomes withdrawable again, but it is no longer covered by the repayment moratorium. They are to be repaid to the creditor according to the original provisions of the relevant contract.

It is important to underline that for purchases made with a credit card during the moratorium, interest-free repayment is only available if the amount of the closing balance is repaid to the credit account by the preferential repayment deadline specified in the relevant contract. If the debt is repaid later, the higher interest amount specified in the relevant contract will be charged by the bank instead of the reduced interest rate.

The repayment moratorium is applicable for all credit and loan agreements by the force of the law, automatically. However, its use is not mandatory, therefore customers, opting to repay debts from credit cards and overdraft facilities during the moratorium should notify their creditors accordingly. It is important that the debtor is aware of how his/her/its bank – for credit card and/or overdraft facility products – expects him/her/it to inform of their intention to repay (in the most general case it is not necessary to make a separate declaration, for amounts appearing on credit accounts are automatically used to repay loans).

When the repayment moratorium expires, unpaid capital, interest and fees become due pursuant to the original rules of the credit facility agreements. According to MNB, the timeframe for debtors to repay the relevant amount to the creditor must be based on a mutual agreement between the parties. Although for credit card and current accounts products the outstanding obligations usually relatively low, MNB expects – in harmony with the legislator’s objectives – that payment for products without maturity dates, instead of bullet, should take place in equal portions divided over a twelve-month period (in line with the banking sector’s proposal), in order to avoid repayment obligations becoming disproportionate burden to debtors.

Concerning unpaid interest during the moratorium, it is important to emphasise that for credit card and overdraft facility products, alike in case of non-recurring debts, no additional interest can be charged either, i.e.: no compound interest can accrue if the customer pays his/her/its debt to the creditor within the agreed timeframe and instalments. If the customer fails to meet its interest payment obligations within the deadline set for a date falling after the moratorium’s final deadline (which is 31st of December, 2020, as of today), interest may be charged on these amounts too.

Furthermore, with regards to the APR ceiling of 39.9% for unsecured consumer loans prior to enactment of the repayment moratorium, the APR following to that date may not exceed the central bank’ base rate by 5 percentage points, which could prove sensitive to the market. In the short run, this may lead to a decrease in the number of unsecured retail consumer credit products.

The Hungarian Parliament adopted a law extending the extraordinary legal order

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The Hungarian Parliament adopted the Act XII of 2020 („Coronavirus Act”) on March 30, which extends the extraordinary power of the Hungarian Government for the duration of state of danger (declared almost two weeks ago). The Act retains the right and authorization for the Government to govern by way of government decrees, furthermore, during the state of danger the Government may suspend the application of certain laws, derogate from the provisions of laws and take other extraordinary measures.

In the event of a natural or industrial disaster endangering lives and property, the Fundamental Law of Hungary enables the Government to introduce emergency measures and govern by way of government decrees for a period of 15 days.

Government decrees issued during this extraordinary and special „constitutional situation” may remain in force after the expiration of the 15 days long term only if the Parliament has given its authorization to the Government to maintain and extend the effect of these decrees.

By adopting the Coronavirus Act the Parliament has given to the Government the above authorization.

The Government may only exercise this extraordinary power to prevent, mitigate and eliminate the pandemic and its detrimental effects and in accordance with the principle of proportionality, however, the question remains as to what role the Parliament will have in legislation in the coming weeks and months.

The Coronavirus Act requires the Government to report to the Parliament on a regular basis and to inform the President of the Parliament and the faction leaders in case the Parliament does not hold a meeting.

The Parliament may revoke the above authorization at any time.

The Act temporarily eliminates the possibility of initiating national and local referendums and the holding of interim elections, it postpones the already scheduled polls and elections for the duration of state of danger, furthermore, the decisions on the dissolution of municipal councils enter into force only following the end of this period.

The Act amends the Criminal Code and adds a new criminal offense thereto. According to the amendment, any person who commits the following activities is punishable for obstructing the efforts to combat the pandemic:

  • violating various measures against the pandemic;
  • scaremongering at the scene of public danger or in connection with public danger, which activity can cause disturbance or unrest in a large group of people and prevent or obstruct the effectiveness of the efforts to combat the pandemic.

The Act enters into force as of March 31.