These are the effects of the payment moratorium on debtors due to the Coronavirus in Hungary
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.
- 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.
- 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.
- 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.
- 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.).
- 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.
- 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.