The detailed regulations of the payment moratorium were published a week ago, but there are several issues that private and corporate clients are facing now. The experts of Kapolyi Law Firm have compiled a 12 question Q&A on the most important issues regarding the moratorium.

Actors in the credit market were also taken by surprise by the new coronavirus pandemic,  as a result the government has as of now issued two decrees in order to alleviate the burden of the crisis on the national economy and on credit market participants.  The second decree detailing new regulations was issued a week ago, on March 24, 2020 and Kapolyi Law firm made a 12-bullet point summary about how this will impact creditors, debtors and loan agreements between them.

1. What is the background of the payment moratorium?

The government decree stipulates (1. §) the general rules of the payment moratorium during the period of the state of emergency, that during the period of the emergency the debtor shall be granted a payment extension (hereinafter “payment moratorium”) for all principal, interest and fee payment obligations arising from credit, loan and financial lease agreements (hereinafter “agreement”). The government decree stipulates that the payment moratorium entered into force on March 19, 2020 and will be in effect until December 31, 2020, but this deadline can be extended by the government at anytime. The government decree with detailed regulations entered into force on March 25, 2020. According to the new rules, the moratorium shall be applied to all the loans disbursed before March 18, 2020 on the basis of already existing agreements.

• What happens with the deadline and term of contractual obligations?

Based on the regulations, the deadline and the term of contractual obligations shall be extended by the period of the payment moratorium. In case an agreement expires before the end of the state of emergency, the agreement shall be extended to December 31, 2020.

• What to do if somebody wants to use the extension allowed by the moratorium?

According to Kapolyi Law Firm, no action is required by the debtor. Based on the government decree all credit and loan agreements subject to the payment moratorium have been amended automatically. However, the financing banks will try to clarify the matter by obtaining statements (declarations) from debtors.

• Who is the moratorium applied to?

The effect of the government decree extends to all private persons, and – unless they do not fall under the exceptions stated in the decree – all legal persons, who are constituted as debtors on the basis of credit, loan or financial lease agreements concluded on a commercial basis.

According to the government decree the state, local municipalities and the enterprises which are defined by the acts set out in the Act on the National Bank of Hungary (Section 39. of Act CXXXIX of 2013.) are not considered as debtors, thus they are exempt from the payment moratorium, including – among others – credit and financial institutions, financial enterprises, mortgage banks and payment service providers, home savings type credit unions  that are supervised by the Hungarian National Bank (MNB).

However, the decree on the detailed rules provides otherwise. It states that in regard to the application of the payment moratorium, all financial enterprises governed by the law on credit institutions and financial enterprises shall be considered as debtors, as well as the investment funds under the Kbftv. Act.

Dr. Balázs Ferenczy, practice group leader of Kapolyi Law Firm says that it is important to highlight the addition included in the detailed rules stating that the regulations of the payment moratorium must be applied to employer loans as well.

• Is it possible to continue payment despite the moratorium?

Dr. Ferenczy thinks that such provisions are possible as the parties may deviate from the general rules of the moratorium by mutual agreement and the payment moratorium does not apply to the legal rights of debtors to continue payment in accordance with the terms of the original agreement. In the first case for the derogation from the main rule a mutual agreement of the parties is necessary, while in the second case the debtor can unilaterally decide on his own to continue his payment obligations in accordance with the original agreement.

• Is it possible to modify the declaration of the debtor to the creditor, meaning to request a payment moratorium later?

According to Kapolyi Law Firm if the debtor continues payment in accordance with the original terms of the agreement, it does not concern the effect of the payment moratorium. The detailed rules also state that if performance (payment) is done in accordance with Section 1. of the government decree, the settlement must be credited on the basis of the rules existing before the moratorium. The joint application of these regulations means that the debtor can in principle submit a partial repayment declaration too (which is valid for a given deadline or time period), or with regards to the later payment periods the debtor may maintain the scope of the moratorium, alternatively may submit a declaration later or may provide a different declaration than it might appear from an earlier made declaration (i.e. he can withdraw his declaration).

Based on the banking practices known by Kapolyi Law Firm, banks will endeavor to fully settle the above-mentioned cases with the debtor by requesting his declaration. Dr. Ferenczy also highlighted on this point that the debtor may use the above-mentioned options even in case the financing bank does not send any clear information thereof.

• What kind of declaration should you provide if you want to continue repayment or want to deverge from the original repayment schedule?

In case of a financing documentation set out in a public document the declaration on continuing repayment may also be submitted in the form of a private document. The expert of Kapolyi Law Firm adds however that in case the parties wish to modify the contractual terms regarding principal or interest payment as a result of the moratorium, or for any other reason, concerning terms that are not provided for by the government decree, the agreement can only be modified in an public document. This case is provided for by a clause in notarized credit and loan agreements that may be considered standard, according to which the aforementioned documents can only be modified in the form of a public document. If such an exception is not mentioned in the notarized document or the parties have agreed in a private document, it is sufficient to make modifications on the content not governed by the decree in a private document.

8. What happens with the interests and principal not repaid during the time of the moratorium?

The principal cannot be increased by the amount of the unpaid interest accumulated during the period of the payment moratorium. The interest accumulated during the period of the moratorium shall be paid annually in equal parts together with the amounts due within the remaining maturity of the loan. After the end of the moratorium the maturity of the loan will be extended in a way that the partial payment of the due interest accumulated during the moratorium and the actual amounts due should not exceed the payment amounts of the instalment amounts of the original contract, furthermore the rules applicable to the interest must be applied to all the fees as well.

9. Does the payment moratorium apply to the repayment of shareholder loans too?

According the interpretation of the Kapolyi Law Firm, it does not apply, because the government decree primarily applies to the loans granted on a commercial basis, in other words by banks and financial institutions. Shareholder loans – unless falling under the criteria of the commercial loans defined by Hpt. – are normally not commercial loans, therefore the payment moratorium detailed in the decree do not apply to those. However, the parties may – by way of a bilateral civil agreement – always agree that with regards to the pandemic situation they also agree on a moratorium with their own terms and conditions.

10. How does the moratorium concern the loans in case of property development companies if they want to sell a property during the moratorium secured by a mortgage?

It is important to state that selling a property secured by a mortgage without the previous authorization of the financing bank is considered as serious breach of the contract even during the time of the moratorium, therefore in each case when the debtor plans to take any steps with the financed properties, he must agree with the bank and initiate business discussions.

The question might arise whether the government decree includes that the payment moratorium is applicable for the incoming purchase price, in other words, if there is no early repayment obligation. The position of Kapolyi Law Firm is that normally the payment moratorium applies to all payment obligations, including any repayments of the loan before the end term arising from any kind of legal rights (i.e. early repayment, termination, etc.).

11. In connection to the above question, can the financing bank be obliged to disencumberment of the sold properties during the moratorium if the purchase price is not repaid earlier but it remains on the escrow (deposit) account designated by the bank? 

Dr. Ferenczy thinks that banks cannot be obligated to this, as the government decree states that any modification of the completion period of the agreement shall modify all ancillary and non ancillary obligations regardless of the fact that the ancillary obligation was established in any legal contract or unilateral legal declaration by the parties. The government decree also stipulates that the term of contractual obligations and the term of undertaking such obligations shall be extended by the time of the moratorium. Based on the above we can conclude that although payment obligations do not need to be performed during the time of the moratorium, any other ancillary obligations ensuring those obligations (mortgages, security deposits, individual guarantees, etc.) shall remain in effect during the total period of the moratorium, thus the financing bank may validly claim that it is not obliged to alleviate its system of securities – by cancelling certain securities during the time of the moratorium.

The Kapolyi Law Firm draws the attention to the fact that early repayment on any credit or loan agreement is always possible.  The debtor cannot be put into a position whereby it cannot execute a business scheme because of the moratorium that he could have executed or wished to execute regardless of the moratorium.

12. What kind of general conduct is proposed to be followed by the debtor during the moratorium?

In case of any credit, loan or financial lease agreements, it is always advisable to meet with the financing bank and discuss the mutual intentions during the moratorium. Dr. Ferenczy suggests that it is in the interest of both parties that – in order to prevent any contractual breech by the debtor –  each party is informed on any steps taken and viewpoints during the time of the state of emergency which has been thus far unknown in Hungary, and that the mutual trust should remain between the parties during the time of the moratorium. It is also advisable to refrain from any conduct or actions during the moratorium that might encourage the creditor to declare the lines of credit or the loan matured before the repayment deadline (after the end of the moratorium). In case these expirations coincide with the term of the moratorium, the repayment obligation of the debtor would have an immediate effect right after the end of the moratorium, which is manifestly not in the interest of the debtor.

 

Due to governmental measures taken to combat the coronavirus epidemic, small and medium-sized enterprises and even large enterprises are at danger of being unable to fulfill their contractual obligation to provide employment. Therefore, the possibility of having to terminate employment relationships may become a central question for businesses. Kapolyi Law Firm summarized how employers can – with reference to the coronavirus epidemic – lawfully terminate an employee’s indefinite or fixed-term employment contract.

Termination by the Employer: Indefinite Employment

Generally, the employer is entitled to terminate an employment relationship by (ordinary) notice, if it is appropriately reasoned (i.e.: true, transparent and factual). On their own, industry-wide concerns, or for instance, the lack of orders by customers does not exempt the employer from its contractual obligation to provide employment. In this case, the employer must handle the situation in a way which does not result in the termination of employment. Several solutions are already available, such as working from home or paying the absentee pay. Dr. Gábor Horváth, a Senior Attorney at Kapolyi Law Firm emphasizes that governmental epidemiological measures by themselves cannot constitute a reason for the dismissal of employees. This is because the measures bear no relationship with the employees’ behaviour, skills, health or the operation of the employer. However, if, because of the extraordinary measures taken by the government, the operation of the employer is rendered impossible, there is a relationship between the measures taken and the employer’s operations. Therefore, an exemption from the rules may be granted. If conditions caused by the coronavirus (i.e.: diminishing turnovers, the closure of stores, etc.) result in the employer’s financial situation deteriorating to an extent where the employer is unable to guarantee lasting employment, the employer may refer to the economic damage caused by the coronavirus as grounds for the termination of employment, since reorganisations and/or the dissolution of positions become inevitable. If the employee takes legal proceedings against the dismissal, he may not plead that the reorganization was inappropriate or economically inefficient, as these grounds are not examined by the courts.

Termination by the Employer: Fixed-term Employment

The Employer may terminate a fixed-term employment contract, with appropriate reasoning, if maintaining the employment relationship is no longer possible due to unavoidable external reasons. This criterion is fulfilled by a force majeure event affecting the employer (in a narrow sense), over which the employer has no influence. According to Kapolyi Law Firm, governmental measures taken to tackle the coronavirus epidemic may constitute a force majeure event, depending on the examination of every circumstance of the case and their results. It is important to highlight that if the employer dismisses the employee, the employee is entitled to his salary for the duration of the notice period. If the employment relationship lasted over 3 years, the employee is entitled to severance pay as well.

Termination by the Employer: Dismissal with Immediate Effect

With a sufficiently reasoned dismissal, the employer may dismiss an employee with immediate effect. This may be appropriate if the employee intentionally or negligently, grossly violates his/her employment obligations or behaves in a way which renders the employment relationship impossible. However, according to Kapolyi Law Firm’s Senior Attorney, these grounds for termination are associated with the behaviour of the employee. The adverse economic effects caused by the government measures intended to combat the effects of the coronavirus – which negatively affect the employer – cannot constitute as grounds for termination with immediate effect. However, in the case of fixed-term employment, the employer may terminate the employment relationship without notice. The employee in question is entitled to twelve months of absentee pay or, if the remainder of the fixed period is less than one year, absentee pay for that period.

Collective Redundancies

If the termination of the employment relationships concerns several employees, the employer must consider the provisions of the Labour Code on collective redundancies. If the employer intends to terminate employees at least in the numbers prescribed in the Labour Code for the termination to constitute a collective redundancy, the employer must negotiate with the works council to determine the possible ways of avoiding collective redundancies. Furthermore, talks must also be conducted on the means of the redundancy, its underlying principles, the options to mitigate its consequences and the possible reduction in the number of dismissed employees. The employer has a disclosure obligation towards the works council and the government employment agency.

“Suspension” of Employment

If the employer decides not to terminate the employee, the employment relationship essentially becomes “suspended” due to the force majeure event. As a result of said event, the employer is no longer obliged to provide employment as contracted, and the employee is not bound by the requirement of availability. Therefore, employees are not entitled to their base salary. For the sake of clarity, it is recommended for this to be recorded in writing. To retain employees, the employer may decide to pay their wage or at least a part of it, to ensure the normal, timely resumption of work, once the crisis caused by the epidemic is over. However, a binding agreement must be composed for this to happen, as the wage forms a compulsory part of an employment contract. Several Member States of the European Union have taken measures to ensure that unemployment benefits can still be claimed even if the employment relationship is not terminated.

Ringing the bse opening bell could be within reach through XTEND MARKET, Budapest Stock Exchange’S new trading platform launched in 2017 that aims to help promising companies go public.

On January 10^th of this year CyBERG Corp’s Chairman of the Board Balazs Rozsa and Deputy Chief Executive Officer Erik Szabo rang the bell to open the day’s trading session on Budapest Stock Exchange (BSE). At BSE the opening bell marks an event worth celebrating, like an initial public offering (IPO) when a company goes public and offers its shares to the general public for the first time. Usually the company’s chief executives are given the honor to ring in their company’s first day of public trading. Although it is not quite like hitting a Chinese gong as was the case in the late 1800’s and early 1900’s at the New York Stock Exchange (NYSE), it is still a very ceremonious and honorable moment, as well as a major milestone for any company.

CyBERG Corp – a Hungarian startup founded in 2015 – is the second company to have benefited from the new trading platform Xtend. Xtend market is commonly referred to as a multilateral trading facility (MTF) and is indeed an alternative trading platform to Hungary’s traditional stock exchange BSE. It differs from other MTFs in Europe in that its declared purpose is to help small to medium-sized enterprises (SMEs) smoothly and gradually transition into public trading. By default, it is also an appealing option for Startups, such as CyBERG, that are hungry for increased capital, wish to get better financially established and are determined to bring their ideas to life.

Xtend is part of Hungary’s recent strategy to increase activity on capital markets by making it possible for new companies to go public. And BSE is doing everything in its power to make it a success story including reshaping its listing category system to further strengthen Xtend’s position on BSE and to better emulate international stock exchange standards and practices. These changes have been underway since January 2019 and one of the most significant changes is that the infamous category T, known for unreliable and penny stocks, is being phased out leaving only the Prime and Standard categories. Therefore, companies that would have gone public through category T are now invited to enter through Xtend and the phasing out of category T should be fully completed by January 2020.

Companies entering the Standard category must have a minimum market capitalization of HUF 250 mln, and at least 10% public float (stocks that are in the hands of public investors), and at least one closed business year.

By boosting its capital markets which have traditionally been neglected, Hungary hopes to encourage increased investment in bonds and shares and enjoy a healthier balance between corporate and banking finance. This would ideally lead to a more diversified, and therefore, more competitive and stable economy: more diverse because of the entry of new and different kinds of companies into public trading through internal funding mechanisms, and more stable because of internally available funding even when banks slow down lending.

What does Xtend have to offer?

The advantages that Xtend offers are significant and mitigate the risk involved when a company attempts to go public. Xtend therefore acts as an “anteroom” of the bourse by offering lower costs, financial incentives, as well as exemptions and other forms of reliefs from otherwise onerous reporting and financial obligations.

1. Reliefs

Xtend offers reliefs from onerous reporting requirements. First of all, Xtend-listed companies are not obliged to comply with the burdensome International Financial Reporting Standards (IFRS). Second of all, companies with stock issuance under the amount of EUR 5 mln are not required to prepare a prospectus for approval by the National Bank of Hungary (the general authorization and regulation authority of financial and capital markets institutions and market operators). They are only required to draft an informational document which is much less complex and resource-intensive and only needs BSE’s approval.

Because Xtend market wants to attract and help promising companies with ambitious goals to eventually enter the BSE market, there is no minimum stock issuance requirement. This is significant given the HUF 5 bln and HUF 250 mln respective market capitalization (the total HUF market value of a company’s outstanding shares) requirements of the Prime and Standard markets.

Xtend also makes its stocks more attractive to investors by providing an opportunity to place them in long term investment accounts. If investors choose a minimum five-year investment account, they can collect interest, dividends and capital gains tax free.

2. Financial incentives

A number of financial incentives are offered to companies wishing to enter the Xtend market. A company may apply for partial funding from BSE. This funding is available thanks to an agreement concluded between BSE and the Ministry of Finance and has been made possible through the EU Economic Development and Innovation Operational Program.

The National Stock Exchange Development Fund is another funding source which was recently launched in the first quarter of 2018. It provides capital and private investors to companies wishing to list on Xtend and prepare for future public offerings. Investors typically invest HUF 1 Bln and in exchange they acquire a minority stake in the given company.

Listing on Xtend can be a great alternative to taking out traditional bank loans when a company needs external financial aid for expanding and growing business and in some cases it may be the only option for increasing capital.

3. Public image

One of the main reasons that companies wish to go public is to gain more exposure, power and build up their reputation. Xtend provides companies the opportunity for an easier conversion into a public limited company (PLC). The PLC legal designation is instantly indicative of the company’s size and reputation. As such, it is good for marketing, it improves public and corporate image and constitutes a quantifiable asset which is calculated as part of the company value.

What does entering and trading on Xtend market entail?

The first thing a company needs before jumping on the Xtend bandwagon is a good lawyer, preferably a capital markets expert with interest and knowledge of Xtend and its twists and turns. In addition to this, an advisor is required for companies getting listed on the Xtend platform and will be assigned by BSE. The advisor’s task is to support the company during the listing and ultimately the trading process. The advisor also protects the investors’ interests by regularly monitoring the issuing company’s financial status

In order to enter Xtend, a company must undergo a formal change from private limited company to a PLC. The conversion occurs in two partially overlapping parts: first deciding to become a PLC and preparing the necessary internal changes by the effective date, and second, registering the stocks on Xtend.

i) Conversion into a PLC

In order to be eligible for conversion into a PLC, a company must be a private limited company and it must meet the requirements for PLCs prescribed by laws. Most significantly there is a minimum registered capital requirement of HUF 20mln. In addition, the company must make a series of internal changes including appointing a Board of Directors and a Supervisory Board, or the company can opt to appoint a Board of Management which is a mix of the two and drafting new bylaws for the PLC.

All corporate documents related to the conversion (e.g. shareholders’ resolutions, bylaws, etc.) have to be submitted to the Court of Registry for registration. Once this steps has been fulfilled to the satisfaction of the Court of Registry, it will issue a conversion order. In order to initiate the process of stock registration, the conversion order must be submitted to BSE who will make a final decision on whether to grant an effective date, the date as of which the PLC officially comes into existence and trading can begin. During the transitional period, up until the effective date, the company continues to exist and operate as a Private Limited Company.

ii) Stock registration

BSE’s decision to grant an effective date for the registration of a company’s stocks on Xtend, thereby concluding the its conversion into a PLC, is conditional upon receipt of either an information document or a prospectus according to the company’s stock issuance.

In the case of companies with a stock issuance under EUR 5 mln, the submission of an information document for BSE’s approval is sufficient. The information document should include the company’s basic information and should be drafted with the assistance of the designated advisor.

In the case of companies with a stock issuance above EUR 5 mln, a prospectus must be prepared which is much more complex than the information document and requires knowledge and experience in corporate and capital markets, as well as knowledge and understanding of accounting and finance. It should include a brief history of the company, a due diligence report outlining the company’s major contracts in effect, the company’s future plans and prospects as well as a description of the offering, description of the underwriting, financial information, risk to buyers, etc.

The transition from being a private company to a public one is a challenging one. Despite the reliefs and exemptions Xtend provides to facilitate a smoother transition, there still remain numerous obligations that are not imposed on non-listed companies. These can include annual and biannual reporting and submitting corporate governance reports. A company might also be required to prepare extraordinary publications or disclosures under circumstances such as when price-sensitive information arises which could directly or indirectly affect the value of or the yield on the issuer’s securities or could be relevant to for the market participants’ investment decisions.

Public companies are also obliged to comply with European Union laws on market abuse, which do not apply to private companies. Market abuse encompasses issues such as insider trading, unlawful disclosure of inside information, and market manipulation. On the plus side, complying with these laws provides and ensures greater transparency.

Xtend-listed companies have the opportunity to gradually warm up to the changes and newly imposed obligations by not taking them all on at once. As they get comfortable enough or sufficiently increase their capital, they can decide to “go the whole hog” and upgrade to BSE’s Standard bourse category – which ultimately is the intented purpose of Xtend and would contribute to boosting the capital markets. Nevertheless, there is no obligation to upgrade, nor is there a limit to the amount of time a that a company can remain listed on Xtend. In addition, companies that decided to test the waters of public trading through Xtend but end up drowning can leave the platform voluntarily through the delisting process.

As of today, there are two companies listed on Xtend with a third oneon the way. GOPD Zrt. has already registered its stocks on Xtend, but the bell has yet to be run to launch its public trading. And hopefully others will have the opportunity to ring the BSE opening bell too. It is an opportune moment for eager and hopeful companies to take advantage of the unique opportunity that Xtend is offering. Without Xtend, CyBERG might not have been able to go public at all let alone so quickly. By ringing the BSE bell, you might just be part of the ringing in of a new and hopefully a buoyant chapter in Hungary’s economy. BSE is Xtending a helping hand, so grab a hold and enjoy the ride!

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