by Dr Eva Hegedus (1)

The relevant provisions (Sections 251-269) of the Hungarian Civil Code regarding security interests have been amended by the Hungarian Parliament by way of Act XXVI of 1996 ("Act") April 9, 1996. The Act entered into effect May 1, 1996 with the exception of the amendment of sections 254, 256 (3) and 260 (2) established by section 1 of the Act and all of the sections established by section 2 of the Act. The latter sections will enter into effect only May 1, 1997. Although all of the sections on security interests have been substantially reorganised and amended, only the most significant changes have been summarised below.


A serious handicap of Hungarian security interest law has been terminated by the Act by the deletion of the requirement of pledgees having to obtain and keep possession of pledged personal property items during the term of the pledge in order for the pledge to be valid and binding. Under the Act pledgees must merely enter into pledge of personal property agreements in the form of notarial deeds and file such agreements with the newly established Registry at the Hungarian Chamber of Notaries in order to have valid security interest in personal property items of the pledgor. Previously only financial institutions regularly extending loans and entering into pledge of personal property agreements had the right to establish a pledge over personal property items of the pledgor, without taking actual possession of such items.

An additional requirement established by the Act is that the pledge of personal property agreement must be included in a notarial deed to be prepared by a Hungarian notary public. This additional formality has been known prior to the Act, as well, because including the pledge of personal property agreement in a notarial deed has enabled and continues to enable pledgees to obtain execution of the pledge, i.e. to obtain satisfaction from the pledged personal property without filing a claim (suing the pledgor) in a court of law to that effect. With a pledge of personal property agreement included in a notarial deed execution on the pledge agreement continues to be possible by merely having the execution office of the court with jurisdiction and venue provide the pledge agreement with an execution clause.

An additional novelty provided by the Act is that the pledgor and the pledgee may agree in writing to jointly sell the pledged property of the pledgor, if the pledgor fails to comply with his other payment obligations. In this case, the written agreement of the parties must contain the lowest sale price acceptable to both parties and the deadline for affecting such joint sale.

The cost of notarial deeds is relatively high as it is established in relation to (in % of) the contract value, even if the actual pledge agreement is drafted by an attorney and is merely retyped and amended by the notary public. In high value transactions, Hungarian notaries have been known to negotiate their fees although the act on the fees of notaries is compulsary and is not subject to amendments by the parties involved. It remains to be seen whether the amendments brought about by the Act and the official establishment of the Registry at the Hungarian Chamber of Notaries will have any effect on notary fees. Prior to the Act only mortgage agreements were subject to filing at the land registry, there was no official registry for pledge agreements. The Registry at the Hungarian Chamber of Notaries will now serve this filing purpose with respect to pledge agreements pursuant to which the pledgor does not release possession of the pledged items of personal property.

In accordance with the above amendments, the terminology of this area of law has also changed: all pledged personal property items the possession of which is not released to the pledgee are now called mortgaged items rather than pledged items. The agreement regulating their pledge is a mortgage rather than a pledge agreement. Even after the amendments it continues to be possible to establish a pledge over personal property items of the pledgor by the pledgor releasing possession of such item to the pledgee. Such pledge agreement, even if it is entered into in writing does not have to be filed with the above Registry kept at the Hungarian Chamber of Notaries.


The Act also created the institution of "floating charge" in Hungarian law. Previously it was impossible for the pledgor to pledge all of his property (currently existing or future acquired) to the benefit of the pledgee, only existing property items were subject to a pledge. Inventories of the pledgor were also difficult to pledge, as the assets within such inventory were subject to change at all times. The Act made it possible for pledgors to pledge all of their property (including their inventory) independantly of whether such property was already established or was to be acquired in the future.

The amendments also made it possible to pledge conditional or future rights currently not in existence, but to be acquired.

The pledge agreement relating to the pledge of all of pledgor's property must also be included in a notarial deed and filed with the Registry kept at the Hungarian Chamber of Notaries (similarly to the pledge of personal property items of the pledgor), whereas a simple written pledge agreement is sufficient without any further filing obligation, with respect to future and/or conditional rights.


In light of the fact that the Act continues to make it possible for certain personal property items to be kept in the possession of the pledgor, pledgees were given additional rights with respect to the protection of their security interests against the deterioration of the pledged personal property items. Accordingly, should the pledgee be put on notice of the pledged personal property items being in danger of deterioration, the pledgee may require the repair or restitution of such pledged personal property items or the provision of additional securities by the pledgor. Should the pledgor or anybody else keeping the pledged personal property item in his/her possession fail to comply with the above request, the pledgee has the right to request satisfaction of his claim out of the pledged personal property without further delay. Pledgees may also be given the right to control the business of the pledgor, if a pledge is given over all of the pledgor's property.

The above amendments have significantly updated Hungarian security interest law, although additional more detailed regulations would be needed to bring Hungarian security interest law in line with Western European standards and requirements.


1. The author is an associate with Beiten Burkhardt Mittl & Wegener in Budapest, Hungary

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