Project companies are usually set up in the form of a limited liability company (korlátolt felelősségű társaság, KFT), but companies limited by shares (részvénytársaság, RT) may also serve as project companies.

Limited liability companies are not eligible to be listed on stock-exchange and have a minimum capital requirement of HUF 3,000,000 (approx. EUR 7,500).

Companies limited by shares could be established in two format (i) as private limited company which are not eligible to be listed on stock-exchange and have a minimum capital requirement of HUF 5,000,000 (approx. EUR 12,500), or (ii) as public limited company which are eligible to be listed on stock-exchange and have a minimum requirement of HUF 20,000,000 (approx. EUR 50,000).

Both form of the companies (limited liability companies and companies limited by shares) has legal personality and owe their debt towards their creditors.

The industry sector does not usually affect the decision regarding the form under which the project company shall be established.

The general rules of corporate governance and duties of directors are laid out in the Hungarian Civil Code (Act V of 2014 on the Hungarian Civil Code), furthermore Act V of 2006 on Public Company Information, Company Registration and Winding-up Proceedings regulates the operation of companies.

In Hungary, Act LVII of 2018 on the monitoring of foreign investments endangering the security interests of Hungary and the connecting Governmental Decrees (246/2018 (XII.17.) Governmental Decree and 561/2022 (XII.23.) Governmental Decree) (together FDI rules) shall be taken into account by foreign investors, which definition is defined therein. According to the applicable FDI rules in some cases the approval of the relevant minister shall be obtained for practicing activities of acquiring ownership.

Hungarian accounting regulations and the annual report requirements for companies are set out in Act C of 2000 on Accounting. Such Act also contains provisions for independent auditing. According to the Hungarian Act on Accounting, if certain conditions are met, the companies may prepare and present their separate financial statements in accordance with International Financial Reporting Standards (“IFRS”).

According to the market practice in Hungary, the sponsors usually provide credit support to the company, e.g. in form of shareholder loans or corporate guarantee or in other form of security interest like pledge over their shares in the company.

According to the Hungarian laws, two main categories of the security interests are available and suitable for the purposes of project financing: (i) personal security (in form of suretyship (kezesség), guarantee (garancia)) and (ii) in rem security (in form of pledge (zálog), deposit (óvadék), assignment (engedményezés) or option right (vételi jog)).

In Hungary, for project financing the most common type of security interest are pledges over bank accounts and receivables, but other assets are usually also included: movables assets (defined by general description or specific assets), real properties, shares/quotas. Security interest over IP is rare in project financing.

To establish a valid security interest, an agreement and an act of perfection (ie, an act of publicity) are required.

These agreements are:

• movables pledge agreements, account pledge agreements, receivables pledge agreements, quota or share pledge agreements, pledge on assets identified by a detailed description (floating charge) and mortgage agreements; and
• guarantee agreements and surety agreements.

Depending on the security interest, the act of perfection may be one or more of:

• the registration of the security with the respective registry;
• the notification of the debtor;
• the transfer of the respective collateral to the secured party.

In case of a guarantee or surety (personal security interests), the act of perfection is the signing of the security agreement.

Pre-insolvency / Bankruptcy:

The beneficiary of the security interest would be able to enforce it only if it has an overdue monetary claim against the debtor under the secured finance documents. In the case of an event of default other than non-payment, in order to enforce its security, the secured creditor must first terminate the secured loan agreement and accelerate the borrowers’ payment obligations thereunder, in accordance with the terms of the particular loan agreement. etc. The method in which a lender may enforce its security will vary depending on the type of security and the terms agreed by the parties.

The enforcement of the security rights may pursued with court enforcement or with out of court enforcement methods, which is in the discretion of the secured parties. Important to note that the relevant security agreement defines the terms of the enforcement methods, which the secured shall follow and choose from.

Post-insolvency / Bankruptcy:

If insolvent liquidation (felszámolási eljárás) is ordered against a debtor, all of its assets are placed under control of the liquidator appointed by the court (if any enforcement procedure is ongoing at that moment, it will be terminated). Claims against the insolvent company and security interests created over its assets may be enforced only within the framework and rules of the liquidation proceeding. The creditors must register with the liquidator within strict statutory deadlines in order to be able to assert their claims against the debtor and achieve due priority in the order of payments made by the liquidator to the creditors. The liquidator strictly follows the priority order laid down in the Insolvency Act. The creditors have minimal influence only over the procedure.

In addition, in the bankruptcy proceedings (csődeljárás) initiated against the security provider (which aims at restoring the solvency of the security provider), enforcement of security is not possible under a moratorium applicable to the debtor company.

As to the security agreements, notarial deed form is a solid market practice as it ensures direct enforcement to the security beneficiary; i.e. there is no need to litigate first, the security beneficiary may either directly turn to the bailiff in case of a default or may start the enforcement itself by way of self-help.

Self-help is generally available on the Hungarian market. Its general rules are stipulated by the Civil Code; however, it is advisable that detailed rules of the procedure are laid down in the security agreements as well.

Self-help is the dominant enforcement method in case of receivables pledges (thus, assignment with security purposes are unnecessary); in case of other type of assets (except of bank accounts) the land scape is more variable, and it rather depends on the strategy of the security beneficiary if it wishes to enforce via self-help or turn to a bailiff. Pledge over bank accounts may only be enforced via court enforcement which unfortunately renders this type of security interest practically useless; thus, various techniques emerged on the market to make pledges over bank accounts work.

Lenders face the same risks in Hungary as in any other jurisdiction of the European Union and the same risk mitigating mechanisms work in Hungary as well. However, it must be noted that authorities, especially courts, work slower than in other jurisdictions of the European Union; thus, enforcement of security interests will take longer than usually. Also, sector specific taxation is common in Hungary, which may have an impact on the projects and their financings.

Financing documents do not require any governmental regulatory consents, except for when the FDI rules are applicable (please see at point 2 and 10).

Hungary has adopted regulations for foreign direct investment, requiring obligatory filings for various types of transactions in sensitive economic sectors.

FDI clearance is required if:

1. the security provider (i.e. the Hungarian SPV) is considered as a strategic company;
2. a pledge over movable assets is to be established over assets, which are essential to the company’s activities; and
3. if the beneficiary of the security (foreign investor) (natural or legal person or organisation) is:
   1. citizen of/registered in a country which is outside of the EU, EEA or Switzerland; or
   2. a legal entity registered in the EU, EEA or Switzerland, if it is under the majority control of (natural or legal) persons or organisations citizens of/registered in a country which is outside of the EU, EEA or Switzerland (EU entity controlled by non-EU investor).

Without having obtained the relevant FDI clearance, the pledge over movable assets agreement is considered as null and void from the perspective of Hungarian law and the lenders will not have a valid security over such movables assets.

A company is considered as a strategic company if any of its business activities falls under the activities listed in the relevant Hungarian (and EU) FDI rules, such as activities related to transportation, production of energy, communication, IT technology, etc.

On 1 January 2024, Act CVIII of 2023 on the Rules of Environmentally Conscious and Societally and Socially Responsive Corporate Social Responsibility Reporting Promoting Sustainable Finance and Unified Corporate Responsibility (ESG Act) became effective in Hungary.

The ESG Act transposes the Corporate Sustainability Reporting Directive 2022/2464 (CSRD) into national law and establishes a national Environmental, Social and Governance (ESG) framework to comply with EU obligations. In addition, as from 1 January 2024, the detailed provisions on the content of the sustainability report, the publication of the report, the publication of the consolidated sustainability report and the relevant assurance report were introduced into the Hungarian legal system as an amendment to Act C of 2000 on Accounting (Accounting Act).

Such implementation may result additional reporting requirements.

In Hungarian law, there is no official definition of public-private partnerships (PPPs), no clear distinctions can be made when categorising a project as a PPP project.

Hungary does not have a separate PPP law establishing the framework for PPP projects. Before the 2009 crisis, PPP project were common in Hungary, however since then the frequency of such projects has decreased.

The civil or commercial law judgements made in the EU/EEA are automatically recognized in Hungary without any intermediary procedure on the basis of the Regulation No 1215/2012 of the European Parliament and the Council of 12 December 2012 (Brüssel Ia Regulation (Recast))

Hungary has concluded several international treaties, most importantly the (i) the Lugano Convention on Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters and (ii) Hague Convention on Choice of Court Agreements 2005,  with other states which enables, under the conditions laid down in the treaties in question, the enforcement of the foreign civil law judgments in Hungary.

However, if the EU regulation or the bilateral treaties are not applicable to determine whether a foreign judgment can be recognized in Hungary, the provisions of the Hungarian International  Private Law Act provide guidance.

Awards issued outside Hungary are enforceable in Hungary pursuant to the provisions of multilateral conventions and bilateral treaties ratified by Hungary or on the basis of reciprocity. The most significant arbitration convention to which Hungary is a party is the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

Submission to the jurisdiction of foreign courts is generally effective and enforceable, it can be, however, subject to the interpretation of Hungarian courts.

The waiver of immunity may be effective,  however it must adhere to special immunities such as diplomatic ones, or the general rules of international law.

According to EU legislation, Hungary has accepted its National energy and climate plans. In the framework of this Hungary aims to reduce GHG emissions by at least 40 % by 2030 over the year 1990. One of the key decarbonisation tasks is the conversion of the lignite-fired Mátra Power Plant based on low carbon technologies, thereby the phasing out of coal and lignite from national power generation by 2030.

The Effort Sharing Regulation (ESR) was adopted in May 2018. It sets national emission reduction targets for Member States for the 2021–2030 period, relative to the base year of 2005. Pursuant to the Regulation, Hungary’s reduction target is 7 % between 2021 and 2030, i.e. during the ESR period. GHG emissions may be reduced by decreasing the quantity of consumed energy, more efficient energy consumption, increasing the use of renewable energy sources and by maintaining nuclear capacities.

Hungary plans to increase the share of renewable energy sources to at least 21 % within gross final energy consumption. Within the heating and cooling sector the share of renewable energy – with additional measures – may approximate 30 % in 2030. Hungary also plans to increase the share of renewable resources within gross final electricity consumption to at least 20 % by 2030.

Hungary has set out to increase the share of electric (road and railway transport) and hydrogen-based (road transport) transport to 9 percent and that of the share of biofuels to 14 percent by 2030.

Hungary has yet to implement the Renewable Energy Directive III of the European Council and the Parliament, which aims to boost the proportion of renewable energy in the EU’s total energy consumption to 42.5% by 2030. To this end, the directive targets strategic sectors such as transportation or industry with setting specific targets for them, taking into account the specificities of each member states.

However, with the continuous up to date amendment of the 299/2017 (X. 17.) of the Government Decree on the mandatory purchase and premium support of electricity produced from renewable energy sources, Hungary is making a major contribution to the promotion of the renewable energy sources, among service providers on a nationwide level.

Implementation of the Green District Heating Programme plays a key role in the replacement of natural gas, the increase of using renewable energy sources on the heat market, and the supply of as many individually heated buildings as possible with renewable energy sources.

Beside the usual tax considerations that are common in any jurisdiction of the European Union, it must be noted that sector specific taxation is common in Hungary, which may have an impact on the projects and their financings.

The typical funding structures in Hungary consist of the followings elements:

• debt, bank loans,
• equity via capital or shareholder loans,
• intragroup loans,

Hungarian Development Bank and the Hungarian Export and Import Bank are the two main players on the local and regional market. Their core activities include the provision of preferential loans for domestic businesses and private individuals, the fulfilment of development requirements and fund management tasks in relation to the country’s European Union membership.

Regarding the respective finance documentation for project financing, the respective agreement could contain obligations of the borrower/project company to enter into (a number of) insurance policies with respect to the project assets (such as buildings, machinery, etc.). The risks covered by such insurance policies are typically property damage, own or third-party liability and business interruption.