Secured Transactions in a Country of Transition: The Hungarian Experience

Penn State International Law Review Volume 27 Number 3 Penn State International Law Review Article 10 5-1-2009 Secured Transactions in a Country of Transition: The Hungarian Experience Attila Harmathy Follow this and additional works at: http://elibrary.law.psu.edu/psilr Part of the International Law Commons Recommended Citation Harmathy, Attila (2009) "Secured Transactions in a Country of Transition: The Hungarian Experience," Penn State International Law Review: Vol. 27: No. 3, Article 10. Available at: http://elibrary.law.psu.edu/psilr/vol27/iss3/10 This Article is brought to you for free and open access by Penn State Law eLibrary. It has been accepted for inclusion in Penn State International Law Review by an authorized administrator of Penn State Law eLibrary. For more information, please contact . Secured Transactions in a Country of Transition: The Hungarian Experience Attila Harmathy I. PERIOD PRIOR TO WORLD WAR II Over several centuries, the lack of capital has been one of the serious problems of the Hungarian economy. Consequently, credit was an important element of economic life. Until the second half of the 19th century, the conditions under the still-prevailing feudal system were unfavourable for establishing a credit system. In the second part of the 19th century, however, an economic boom changed the conditions. As a result of the new economic situation, new legal rules were needed. In 1875, a Commercial Code was enacted and the drafting of a new Civil Code started. For historical and economic reasons, Austrian and German law was influential. Several drafts of a Civil Code were produced and presented to the Parliament, but none of them were voted on until 1959. In other words, until World War I the Civil Law as a whole remained uncodified and a special kind of judge-made law prevailed. Nevertheless, some Acts of Parliament regulated specific fields of social and economic life.' One of the fields that needed specific rules was credit and credit securities. For example, Act XXXV of 1927 specified rules for mortgages. The basic concept underlying the credit rules was similar to that of the law of most European countries: mortgages covered immovable items and lien, pledge addressed movable goods. An exception to this system was created by Act XXI of 1928, which regulated a special security on industrial enterprises as a going concern without possession by the creditor and a system of special registration. 1. See generally INTRODUCTION TO HUNGARIAN LAW 11-14 (Attila Harmathy ed., 1998) (providing a historical overview). PENN STATE INTERNATIONAL LAW REVIEW [Vol. 27:3,4 The exceptional security was, to some extent, 2similar to the floating charge, otherwise unknown in the Hungarian law. II. PERIOD OF PLANNED ECONOMY After World War II a democratic government was established in Hungary but, as a result of the pressure of the Soviet army, a slow change of the economy started. It was accelerated from 1948 when the Communist Party came to power. A new political and economic system was introduced. The characteristic features of the new economic system were the nationalisation of the overwhelming majority of the means of production, replacement of the market system by a centrally-directed system of economy, central allocation of resources, and state monopoly of a much of the economy. In this system, credit was also the monopoly of the state. Banks were functioning as a special type of state authorities by administering the centrally allocated financial resources. Contracts in general, and secured transactions specifically, had a different meaning and regulation than in a market economy,3 although some traditional legal forms were maintained in civil law rules. The system mentioned above determined the rules of the Hungarian Civil Code of 1959. By the time of the enactment of the Civil Code, the strict system of plan instructions had changed. Nevertheless, the state monopolies (including the monopoly of crediting) prevailed and state ownership played a decisive role in the economy. Likewise, the banking system was different from that of a market economy. The drafters of the Civil Code managed, however, to maintain in the framework of the Code the most important rules of the pre-World War II Hungarian Civil Law. This included the rules on secured transactions, although they were practically not applied. At the end of 1960s economic reform occurred and a form of market economy emerged. Hidden forms of private economy were slowly permitted. Thus, there was a slow transformation of the economic system but it was restricted by the political system. 2. See Attila Harmathy, Ungarischer Linderbericht, Das Recht der Mobiliarsicherheiten, in MOBILIARSICHERHEITEN, VIELFALT ODER EINHEIT 75-78 (K.F. Kreuzer ed., 1999). 3. See generally Attila Harmathy, Kreditsicherheiten im sozialistischen System, in SYSTEMTRANSFORMATION IN MITTEL-UND OSTEUROPA tJND IHRE FOLGEN FGR BANKEN, BORSEN UND KREDITSCHERHEITEN 306-14 (U. Drobnig, K. J. Hopt, H. K6tz & E.-J. Mestmicker eds., 1998). 2009] SECURED TRANSACTIONS IN A COUNTRY OF TRANSITION 759 III. PERIOD SINCE THE POLITICAL CHANGES New Regulation of Secured Transactions A. After the elections of May 1990, a new Parliament and a new government started to transform the political and the economic system. The market economy was re-established. After the planned economy, accumulating a great amount of foreign debts capital was badly needed. Many poorly-run state enterprises carried huge debts and the creditors were usually banks. As a result, the banking system was to be reorganised. Debts were covered from State budget, which deteriorated the budgetary situation. It was clear that credits played a crucial role for the economy and the regulation of secured transactions received a significant attention. The elaboration of the new rules for secured transactions followed a few years after the transformation of the political system. At that time the legislature was very busy-the whole legal system had to be changed. This task has not facilitated fast development in the rather complicated field of credit securities. The rules on mortgage, liens, and pledges were incorporated into the Civil Code, but many rules connected with them were to be remained in other Acts-such as the Acts on land registration or enforcement of claims-or appropriate rules were practically missing. For example, no rules existed to regulate insolvency or the winding up of companies. The task of drafting a coherent new efficient system was, therefore, not an easy one. The new rules were developed in co-operation with the European Bank for Reconstruction and Development and in consultation with German, French, English, Swiss, and American experts. The new rules were promulgated by Act XXVI of 1996 on the amendment of the Civil Code.4 The new rules have changed some of the traditional basic concepts. Thus, the distinction of mortgage (concerning immovable) (...truncated)