18 April 2023

The aim of the liquidation procedure is to dissolve an insolvent debtor without legal succession and satisfy its credits, not to recover claims. However, creditors in Hungary use liquidation applications instead of or as well as classical court procedures (i.e., orders for payment and civil litigation) to recover monetary claims from debtors. How to recover a claim by way of a liquidation procedure and why to choose this procedure instead of the above-mentioned classical procedures?

1. Liquidation procedure as a recovery procedure

This liquidation procedure can be used as a debt collection procedure as the Hungarian Liquidation Act provides that the court will declare a debtor insolvent if the debtor:

- has not paid or has contested its uncontested or acknowledged contractual debt within 20 days of its due date; and

- has not paid its debt in response to the creditor's final written notice letter.

In this case, the debtor company can only avoid liquidation if it pays the creditor's claim.

Based on the above, the Hungarian Liquidation Act provides an efficient recovery technique for creditors to collect claims from "silent debtors" in a relatively fast, formalised procedure.

2. How can you start liquidation?

To threaten your debtor with insolvency based on non-paid invoices, the following conditions must be met:

- having a written contract with the debtor is a must;

- the invoice issued in conformity with the contract must be due, moreover, you should send it to the debtor in a verifiable manner;

- a notice letter must be sent to debtor after 20 days from due date;

- the debtor acknowledged the invoice or at least failed to raise any objection against the invoice until he received the notice letter.

Your notice letter should contain at least the legal title, the amount, and the due date of the claim and you shall set a final payment deadline. Given that a poorly drafted notice letter does not produce any legal effects, before sending it, we strongly recommend consulting a lawyer.

3. Why business owners tend to pay in such a situation?

If the above-mentioned conditions are met, the court declares the debtor insolvent and appoints the liquidator.

In addition, it is common that in commercial contracts the liquidation triggers the right of immediate contract termination by the business partner, sometimes together with the payment obligation of liquidated damages.

Risking corporate goodwill, long-term contracts and business relations because of a non-paid invoice is not an option for most business owners.

To escape this scenario, most business players tend to pay the creditor’s claim even if they find it unfounded. Why? Because the payment of the debt will demonstrate that the company is not insolvent, and the judge will immediately terminate the liquidation procedure before the appointment of the liquidator.

This is the reason why liquidation procedure is the most popular debt collection tool among creditors, who have a well-founded claim and want fast results, without starting a costly and longer litigation.