Szerző: Gárdos Péter
Financial Regulation International, 2015/3.
It is common to blame securitisation for being one of the major causes of the 2007-2008 financial crisis, because pooling and repackaging the assets of the originators made it possible to conceal the real assets behind the security issued by SPVs. Despite its bad name, securitization could be an important tool for the economy. The Bank of England and the European Central Bank published a joint discussion paper on securitization, which “explains how a well-functioning securitisation market can deliver a variety of benefits to issuers and investors, whilst also supporting the provision of credit through indirect channels.” In October 2014, the European Commission adopted delegated acts under the Solvency II Directive and the Capital Requirements Regulation in order to help promote high quality securitization.Furthermore, the European Banking Authority published a Discussion Paper on simple standard and transparent securitisations.
The situation in Hungary also seems to reflect these changes. Currently there is no specific legislative regime for securitisation in Hungary. Therefore, the transfer of receivables is regulated by the Civil Code (Act V of 2013), and the rules on assignment apply to the transfer of receivables by way of securitisation. However, the Ministry of National Economy in co-operation with the Hungarian National Bank (“HNB”) is currently working on a draft, which is planned to be submitted to the government for consideration.
The present article summarises how securitisation is feasible under the general rules of the Civil Code. The article focuses on two main questions: what rules apply to the establishing of the SPV and how the receivables are transferred to the SPV.
Rules relating to the SPV
Establishing the SPV
As no special regulation exists in relation to securitisation, the general corporate rules of the Civil Code apply to SPVs. The initial capital of a limited liability company must be at least HUF3 million. In companies limited by shares the initial capital must be at least HUF5 million in a private company and HUF20 million in a public company. The form and the initial capital requirement of the SPV are also influenced by the question whether the SPV requires licence. Purchasing receivables generally qualify as financial service, typically as factoring. Providing financial services requires a licence from the HNB. To obtain this licence, the company needs to fulfil certain criteria, e.g. its initial capital must be at least HUF50 million.
Issuing the securities
The type of securities that can be issued by the SPV is not regulated either. Shares can only be issued by companies limited by shares. Bonds can be issued by almost all types of legal entities.
The Civil Code significantly changed the rules relating to securities. Before 2014 there was a closed list of securities, but under the Civil Code any document may qualify as a security if it fulfils certain general conditions.
The insolvency remoteness of the SPV’s assets is crucial to securitisation. This requires that the originator and the SPV are treated as separate entities and that the receivables are transferred to the SPV (true sale). This can be achieved under Hungarian law.
If the originator becomes insolvent, only the assets owned by the originator can be used to satisfy the creditors. If the receivables were transferred to the SPV, except for fraudulent transfers, assets of the SPV do not belong to the insolvency assets of the originator. The two companies are handled separately even if under the applicable accounting rules the two companies must prepare consolidated balance sheets.
The well-functioning of the system also requires that the SPV does not become insolvent. As securitisation is not specifically regulated in Hungary, the general insolvency rules apply to SPVs. This means that, if the SPV does not meet its obligations, enforcement and insolvency procedures may be initiated against the SPV. Therefore, it remains the shareholders' duty to ensure that the SPV is operated on a solvent basis.
Transferring the receivables
Method of transfer
Receivables are usually transferred under Hungarian law by assignment. Novation, although legally possible, is rarely used. The reason for this is that it also requires the participation of the debtor. A declaration of trust is also possible since the Civil Code entered into force in 2014.
The Civil Code requires a legal cause for the transfer of receivables. The two most relevant legal causes are sale and purchase and factoring. In the first case, the receivables are transferred permanently, and the purchaser pays purchase price for the receivables. In the latter case, the receivables are transferred merely as security. The underlying transaction qualifies as loan provided by the factor to the assignor. The parties agree that repayment of the loan will primarily take place by the payment of the debtors of the assigned receivables, provided that if the debtors of the assigned receivables fail to pay, the assignor will be obliged to repay the loan. For this reason factoring cannot be used in a securitisation transaction, as it will not qualify as true sale of the receivable.
Although the legal cause is different, the method by which the receivables are transferred is the same (assignment). Assignment is regulated as a contract in the Civil Code, the purpose of which is to fulfil the obligation arising from the agreement which serves as the legal cause of the transfer (mainly sale and purchase agreement or factoring agreement). The receivable is transferred to the assignee by the mere agreement of the assignor and the assignee.
Notification and payment instruction
Notification of the debtor is not necessary to transfer the receivables. However, following from the principle of debtor protection, the assignment in itself does not have any effect on the obligations of the debtor. To make the transfer effective against the debtor, the debtor must be notified of the assignment. After the debtor is notified of the assignment, the amendment of the contract between the debtor and the assignor are not effective vis-à-vis the assignee. A further consequence of notification is that the debtor can only raise any defence against the assignee and can set-off any counterclaim which already existed at the time of receiving the notice. Notice, in itself, does not amend the debtor’s obligation to pay to the original creditor, i.e. the assignor. For this, a payment instruction is necessary, which contains the information necessary for the debtor to pay in accordance with the instructions of the assignee.
In case of sale and purchase transactions, there is no registration. However, if the receivables are transferred in a factoring transaction, the factoring agreement has to be registered in the online securities registry. Lack of registration does not affect the validity of the contract, but the receivables will not transfer to the factor: the factor will obtain a mere in personam right against the debtor.
What claims can be transferred
Claims are transferable, unless they, by their nature, are tied to a specific person or the transfer is prohibited by law. This means that the receivables usually transferred by way of securitisation (e.g. loans, trade receivables) can be securitised under Hungarian law as well.
Future receivables can also be transferred. The only requirement is that the legal basis from which the receivable will arise (in case of receivables arising from contracts, the contract) already exists at the time of the assignment. This does not render a sale and purchase agreement or a factoring agreement, which provides for the obligation to transfer receivables even if the legal basis does not exist, invalid. Such agreement creates a legal obligation to assign receivables in the future, but the assignment itself cannot take place and the receivable will not transfer to the assignee. This can make securitisation burdensome in cases where the receivables to be transferred by the originator do not arise from long term contracts (e.g. motorway fees).
Non-assignment clauses do not hinder securitisation either; as such clauses are ineffective against third parties. This means that assignment will be effective, even if the assignor and the debtor of the assigned receivable agree that receivables arising from their contract cannot be assigned. Such an assignment would be a breach of contract between the debtor and the assignor, but would not affect the transfer of the receivables to the assignee. Before the Civil Code entered into force, non-assignment clauses were not regulated, and the courts interpreted such clauses so that such assignments were null and void. Because the Civil Code, as a general rule, only applies to contracts concluded after 15 March 2014, non-assignment clauses in contracts concluded before this date could hinder securitisation.
In an assignment, accessory security rights securing the assigned claims automatically transfer to the assignee, without any specific agreement or other act. Registration of the new mortgagee in the Land Register or in the security register is still advisable. The importance of registration is that any bona fide third party can rely on information registered, and as long as the new mortgagee is not registered, the registered mortgagee can allow the mortgage to be terminated. If the obligation was secured by surety, the surety also automatically follows the receivable but, similarly to the assignment, it is advisable to give notice to the surety about the assignment of the debt.
Choice of law
Choice of law clauses are recognised. However, in relation to an assignment of receivables, the choice of law is only recognised in relation to the internal relationship between the assignor and the assignee, and does not affect the rights and obligations of the obligors and other third parties. The law governing the assigned right applies to these external relationships (see Article 14, Regulation (EC) 593/2008 on the law applicable to contractual obligations (Rome I)).
The substantive rules necessary for securitisation exist in Hungary. The Civil Code provides a solid basis for Hungarian and international securitisations. One can only hope that the new rules will build on this basis and will help the establishing and operation of SPVs in Hungary.
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