A long-awaited new insolvency regime on the Hungarian horizon

In Germany, the number of insolvency proceedings broke a ten-year record in 2025, and the numbers continue to rise. According to certain forecasts, insolvencies may increase by 20% among large corporate entities in 2026. While no precise Hungarian data for 2025 is available at the time of writing, the number of insolvency proceedings has been increasing dramatically in recent years. Historical data anyway shows that the Hungarian market typically follows trends in the German market. Among our clients, certain banks hold stronger fears for the upcoming year, while others take a less pessimistic view, but no one realistically expects a significant decrease in the number of insolvent companies.

Perhaps inspired by this economic situation, the Hungarian government has drafted a new bankruptcy law alongside a new law introducing compulsory dissolution procedure — a new procedure intended to replace the simplified liquidation procedure and compulsory liquidation procedure. The draft laws have not yet been adopted but were circulated among key stakeholders at the end of last year, and the market expects their adoption soon. The sooner the better, one might say, as despite various major amendments in recent years, everyone agrees that there is room for improvement in the efficiency of Hungarian insolvency proceedings. According to a 2024 country study by the World Bank, the Hungarian insolvency regime received only 65.8 points out of a possible 100, finishing closer to North Macedonia (60.1) than to the Slovak Republic (72.6). Before analyzing the most important changes in the draft laws, let us examine the current state of the insolvency regime.

Since the change of regime, the Hungarian insolvency framework has been built on two pillars: the liquidation procedure, aimed at termination, and the bankruptcy procedure, aimed at business continuation. The bankruptcy procedure was never very popular and shortly after its introduction became rather exceptional (only 15 bankruptcy procedures were initiated in 2023).

Against this background, banks and other large creditors have always been motivated to find contractual solutions with their troubled debtors rather than initiating court-driven procedures. This interest became more pronounced in response to the 2008 financial crisis, when the so-called Budapest Rules were developed based on the London Approach.

The Budapest Rules are non-mandatory principles that parties may voluntarily apply in a restructuring scenario. The fundamental premise of the Budapest Rules is that financial distress need not be a zero-sum game. When creditors and debtors approach difficulties cooperatively rather than adversarially, both sides can achieve better outcomes than through rigid statutory procedures. Formal insolvency proceedings, such as the bankruptcy procedure, inevitably destroy value: public announcements stigmatize the debtor, triggering panic among other creditors and business partners, while legal costs and procedural delays consume assets that could otherwise be used to satisfy creditor claims.

Under the Budapest Rules framework, creditors — particularly banks financing the same debtor through syndicated loans -appoint a single coordinator to negotiate with the debtor. This streamlined approach eliminates the chaos of multiple creditors pursuing independent enforcement actions, which typically results in a destructive race to seize assets. The coordinated approach preserves the debtor’s operational capacity while creditors collectively develop the most advantageous solution.

Unlike formal proceedings published in official gazettes, negotiations under the Budapest Rules can remain confidential. This prevents the cascade effect where announcement of financial difficulties triggers immediate demands from all creditors simultaneously — often the final blow that destroys otherwise salvageable businesses. Creditors voluntarily agree to standstill periods during which they refrain from enforcement actions, allowing time for considered solutions rather than panicked asset grabs.

The framework permits tailored solutions that would be impossible in formal proceedings: selective asset sales that preserve the debtor’s core operations, rescue financing to bridge temporary liquidity gaps, or restructured payment terms reflecting commercial realities. The Hungarian National Bank has endorsed these principles, recognizing that immediate enforcement of security interests should be a last resort rather than a first response.

Banks and other sophisticated creditors widely adopted the Budapest Rules in 2010 because experience demonstrates that cooperative restructuring typically yields higher recoveries than formal insolvency. A functioning business retains value that evaporates upon liquidation – customer relationships, supplier networks, skilled employees, and operational know-how all disappear when enforcement actions force closure. By maintaining mutual trust and working within flexible contractual frameworks, creditors protect their ultimate interest: maximum recovery of amounts owed.

To summarize, until 2022, black-letter law governed the liquidation procedure, but restructuring was almost exclusively driven by contractual arrangements.

Since 2022, the Hungarian legislator has implemented the EU directive on preventive restructuring procedures – not instead of, but rather in addition to, the rarely used bankruptcy procedure – hence three procedures became available. While in our practice financial restructuring is still largely based on agreements between the parties, we see more and more preventive restructuring procedures in practice. The procedure is relatively popular due to its flexibility, and in our experience, most debtors are genuinely willing to find a solution to their distressed situation (contrary to the bankruptcy procedure, where the intention is often simply to delay the inevitable). Pursuant to the new draft law, preventive restructuring procedures would remain essentially intact, as the legislator has again chosen to keep them separate from the other procedures.

With this background, let us examine the proposed new regime that is expected to come into effect in 2028. The proposed new bankruptcy law represents a comprehensive reimagining of how the country handles business failure, drawing extensively from German and Austrian models while anticipating forthcoming European Union harmonization requirements.

For the first time in Hungarian insolvency law, the new draft law explicitly codifies four guiding principles that courts and practitioners must consider throughout the proceedings.

The continued operation principle establishes that maintaining business operations – where viable – serves important interests beyond mere asset preservation. Operating businesses retain value that disappears upon cessation; they maintain employment relationships and preserve supplier and customer networks.

The cooperation principle recognizes that insolvency proceedings require good-faith participation from all parties (debtors, creditors, insolvency professionals, and courts) to achieve optimal outcomes.

The creditor interest protection principle confirms that while various interests merit consideration, the fundamental purpose of insolvency proceedings remains the satisfaction of creditor claims to the greatest extent possible.

The procedural efficiency principle requires that proceedings be conducted without unnecessary delay or expense, recognizing that prolonged insolvency destroys value and diminishes recoveries for all stakeholders.

Perhaps the most significant change in the proposed new law is the unification of insolvency procedures. Practical experience has demonstrated that the rigid separation between liquidation procedure and bankruptcy procedure is not useful. The proposed new law abandons this terminology entirely. It no longer uses the term “bankruptcy”, instead establishing a single unified insolvency procedure that can be conducted with either a reorganization purpose or a liquidation purpose. This is not merely semantic rebranding, it reflects a fundamental structural change. The unified procedure would allow for more flexible movement between rescue and liquidation objectives based on actual circumstances rather than the initial procedural choice.

The proposed new law introduces a structured three-phase approach that does not exist under the current system. The preparatory phase would involve preliminary asset assessment to determine whether the debtor possesses sufficient assets to justify formal proceedings. This automated preliminary examination, conducted through a new electronic insolvency system, would prevent the waste of resources on cases where no meaningful distribution to creditors is possible.

The opening phase is where the court determines the appropriate direction for the case. Using information from the application, the preliminary asset examination, and, where necessary, a comprehensive asset and viability assessment, the court decides whether to proceed with reorganization or liquidation,. This expert assessment evaluates both the debtor’s assets and its operational viability, enabling economically grounded judicial decisions rather than purely formalistic determinations.

The substantive phase then proceeds according to either reorganization or liquidation rules. Crucially, only liquidation results in the business being removed from economic life. The procedural design explicitly aims to preserve viable businesses wherever possible.

The reorganization concept represents a substantial advancement over the current bankruptcy settlement procedure. Under the current regime, the bankruptcy procedure essentially sought creditor approval for a settlement agreement — a relatively limited objective that often proved inadequate for genuine business rescue. The new reorganization framework requires development and approval of a comprehensive reorganization plan with a maximum execution period of three years.

This plan must address how the debtor’s long-term operational capability and solvency will be restored. It may involve continued operation under the plan, or it may involve the sale of the business (or parts thereof) as a going concern with subsequent creditor distribution. The reorganization plan provides creditors with realistic prospects for recovering their claims while allowing viable businesses to continue operating — an outcome beneficial for employees, business partners, and the broader economy.

The shift from settlement-focused to plan-focused reorganization reflects lessons learned from more successful insolvency regimes, particularly the German Insolvenzplanverfahren and applies an approach similar to the logic used in the preventive restructuring procedure. Rather than simply negotiating payment terms with creditors, the debtor must demonstrate a credible path to restored viability.

The restructuring of creditor priority represents one of the most significant substantive changes. The legislative reasoning explicitly states that the reform follows the German model, aiming to ensure that creditors ranked lower under the current system can receive proportional satisfaction from the insolvency estate.

Under the current regime, the rigid priority hierarchy often meant that once higher-ranked creditors were satisfied, nothing remained for lower tiers. The proposed new law would maintain a clear priority structure — reclamation rights, secured creditors with separation rights, privileged claims, ordinary claims, and subordinated claims — but would introduce a fundamental proportionality principle within each tier.

When the insolvency estate cannot fully satisfy all claims within a particular category, distribution occurs proportionally among creditors in that category. If privileged claims can only receive sixty percent satisfaction, all privileged creditors receive sixty percent. This prevents the arbitrary outcomes where minor differences in timing or classification resulted in complete recovery for some creditors and total loss for others similarly situated.

The new draft law also provides secured creditors with a meaningful choice that did not clearly exist before. Creditors holding security interests may elect to enforce their rights independently outside the insolvency proceedings, or they may participate within the proceedings. This choice has significant consequences: independent enforcement preserves their priority position but may require them to bear procedural costs if the remaining estate proves insufficient; participation within proceedings converts their claim to privileged status and places the secured asset within the estate for orderly realization.

The current insolvency rules contain liability provisions for company leadership, but the new draft law significantly strengthens and clarifies these rules. The legislative structure now prominently features liability provisions that apply unified tort law standards (specifically, the rules governing liability for damages caused outside contractual relationships) to both directors and shareholders with limited liability.

This liability attaches to creditor claims that remain unsatisfied in liquidation proceedings. The reasoning explicitly connects these provisions to protecting creditor interests and maintaining integrity in commercial life. Directors who fail to properly manage the company’s affairs as insolvency approaches, and shareholders who abuse the protection of limited liability, face personal exposure for creditor losses.

The concept of “shadow directors” receives attention as well; individuals who exercise actual control over management decisions without formal appointment may face the same liability as officially designated officers. This prevents the use of nominee directors to shield actual decision-makers from responsibility.

The proposed new law introduces comprehensive provisions addressing environmental damage in insolvency proceedings-an area that the current rules handle inadequately. Practical experience has revealed significant problems when insolvent companies leave behind contaminated sites or unaddressed environmental obligations.

The new framework requires environmental status assessments at the outset of proceedings when environmental concerns are present. Reserve funds must be established for environmental remediation. Where environmental issues exist, the proceedings follow accelerated, simplified procedures to prevent prolonged uncertainty and further environmental degradation.

As a measure of last resort, the law provides for state ownership of contaminated properties when no other solution proves viable. This prevents the worst outcome under the current system – abandoned contaminated sites with no responsible party and no resources for cleanup.

The new draft law establishes a state early warning system designed to identify businesses at risk of insolvency before crisis becomes unavoidable. This preventive orientation reflects contemporary European thinking about insolvency that earlier intervention produces better outcomes than waiting until collapse is imminent.

The system would promote accounting awareness and encourages businesses to address financial difficulties proactively. Rather than viewing insolvency procedures purely as end-stage interventions, the new framework positions them within a broader continuum of business support and restructuring options. We note that the introduction of such system was already decided simultaneously with the introduction of the preventive restructuring procedure, but the system did not start to operate.

Alongside the draft insolvency law, a new draft law has been prepared introducing compulsory dissolution proceedings, a streamlined procedure for removing unlawfully operating or non-functional business organizations from the market. This proposed new framework would replace both the previous compulsory liquidation procedure and the simplified liquidation procedure. This is an important aspect, as the above-quoted, unfavourable ranking of the Hungarian insolvency regime is largely due to lengthy procedures originating in a high number of “zero asset companies” to be eliminated. This decreases transparency and is detrimental to overall efficacy as well. Under the proposed new regime, courts would initiate proceedings ex officio or upon request from other authorities. Business organizations would retain the opportunity to restore lawful operation by settling due debts, providing security to creditors, and paying procedural costs. A key innovation is the stricter sanctioning liability system: courts would examine the culpability of directors and members in creating and maintaining unlawful operations. Persons subject to disqualification would bear unlimited and joint liability for undisputed creditor claims-a significant departure from the current regime, where such liability was more limited. The draft law forms part of the broader insolvency reform package and shares its underlying philosophy: protecting creditor interests while ensuring procedural efficiency. By enabling swift removal of non-viable entities and imposing meaningful consequences on those responsible for unlawful operations, the legislation aims to improve the integrity of Hungarian commercial life and reduce state costs associated with lengthy dissolution proceedings.

In the legislative reasoning for the draft insolvency law, the legislator explicitly acknowledges that Hungarian insolvency law must evolve in anticipation of European Union harmonization. The EU has been developing common frameworks for preventive restructuring, second chances for entrepreneurs, and measures to increase the efficiency of insolvency proceedings. By drawing from German and Austrian models — systems that heavily influenced EU-level thinking — Hungary positions itself for smoother adaptation to forthcoming European requirements while immediately improving domestic outcomes.