Although the new Civil Code that took effect in 2014 made it impossible to use a good few commonly used types of loan security, since then the legislature has gradually restored them to their rightful place. Indeed, the amendments to the Bankruptcy Act coming into effect on 1 July will go further than the previous rules, giving security options and security assignments, the same priority status as mortgages. This case is a good example of the effective cooperation between the legislature and the banking industry in Hungary.
The two years of exile
The new Civil Code that took effect more than three years ago caused a thorough shake-up of the system of loan securities. Among other novelties, in 2014 the security option and the security assignment effectively disappeared from the radar. Thus all agreements under which the borrower granted the bank a purchase option in respect of an asset (such as a property) to be exercised in the event of insolvency became null and void. The assignment of receivables as a form of loan security was similarly ‘blacklisted’.
The banks’ credit departments reacted to the new rules by developing various new forms of loan security. But security option and security assignment were sorely missed.
The period of rehabilitation
In response to the unceasing demands of the market, the legislature decided, last July, to change the Civil Code’s rules on security. As a part of this, from last year it again became possible to request a call option or assignment of receivables from borrowers as security for their loans. This meant that, in addition to the classic mortgage-type securities, the previously used securities could be used once more. However, such securities were still not supported by other statutory provisions closely related to lending, such as the bankruptcy-law rules.
The ball is rolling on
You could say that July is the month of change... as this July will see more changes to the rules on loan security. Pursuant to the recently passed amendments, the beneficiaries of security assignments and security options will be judged on an equal footing with the beneficiaries of mortgages in case of a liquidation procedure.
Claims that are secured with a mortgage have always enjoyed priority in the event of a borrower’s insolvency: the beneficiaries of the mortgage would get their money before the other creditors. The legislation entering into force in July also grants this special status to the beneficiaries of security options and security assignments: if the debtor goes into liquidation, the beneficiaries of these rights will have their claims met before the other creditors of the bankrupt company (including the tax authority).
It is important to bear in mind, however, that even from July not just any security options or security assignments will behave like a mortgage in the course of insolvency proceedings. In order for the beneficiaries of such rights to have priority, it is necessary for the beneficiary of the security option or security assignment (usually the bank) to be registered in the register of loan securities (in the case of a property, the land registry). Registration puts these loan securities permanently in the public domain, as the register of loan securities is accessible by anyone, so third parties can also be notified of the establishment of such securities.
Conclusion
It does not take much research to understand what a major role an upturn in lending can play in the economic life of a country. From this perspective the recently passed amendments are certainly to be welcomed, as they give banks a greater sense of security, thus making them more willing to lend. An even more positive message, however, is sent out by the cooperation that this case exemplifies: the sensible recommendations of the banking industry were given a fair hearing by the legislature.