Group financing: despite legislative changes conservative approach is recommended

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.