New regulation on contribution in kind in Hungary
New legal rules will come into force in Hungary on 1 January 2004
regarding the contribution in kind at private and public limited companies,
which results in relatively broad liberalization in this field.
1. Object and proportion of the contribution in kind
According to the new regulation contribution in kind may be any object of
pecuniary value, intellectual property, right representing pecuniary value or
any receivable acknowledged by the debtor or based on a final court decision.
Essential novelty of this regulation is that undisputed or undisputable
receivables are accepted as object of contribution in kind.
There were two reasons why the scope of contribution in kind had to be extended
to receivables. First that in comparison to the regulation in Europe the
effective Hungarian Company Act excludes receivables from the scope of
contribution in kind, which restriction results in serious and unjustified
disadvantage for competition purpose at Hungarian companies. Second the Company
Act shall fully be harmonized with Second Council Directive 77/91/EEC.
Rendering of any service including performance of work or personal assistance
by shareholders shall not constitute contribution in kind as this is prohibited
by Second Council Directive. This is to add, however, that this categorical
prohibition is under revision in the EU.
It is not required in the future that the objects of contribution in kind shall
be marketable, executable and transferable without the permission of third
parties. Thus, these aspects shall be taken into consideration with the
evaluation of the contribution in kind only. This is explained by the fact that
even the Company Act in force allows that a company may acquire during its
operation such other objects instead of the object of contribution in kind,
which are not in conformity with the current requirements of contribution in
kind (marketability etc.). Therefore, the aim of this provision (protection of
creditors) shall be deemed in several cases as fiction only and the maintenance
of these restrictions was unnecessary.
The mandatory proportion of cash and contribution in kind will also be deleted
at private and public limited companies, since it is obvious that the solvency
of the company and the protection of creditors are hardly depending on this
factor. It indicates, however, the caution of Hungarian legislation that this
rule shall come into force 1 year later than the other changes i.e. on 1
2. Deadline for the performance of contribution in kind
Due to current rules the contribution in kind shall be made available to the
company before the submission of the application for registration. As of 1
January 2004 the deed of foundation of the limited company may allow that the
contribution in kind could be put at the company's disposal until the end of
the 5. year counted from the registration provided that the proportion of
contribution in kind in the subscribed capital is less than 25%. Although
Second Council Directive allows to make the contribution in kind within 5 years
available irregardless of the proportion of the contribution in kind in the
subscribed capital, the recent Hungarian modification did not go so far
presumably in order to avoid any "shock".
3. Evaluation of the contribution in kind
The mandatory audit of the contribution in kind cannot be performed as of 1
January 2004 by the appointed auditor of the company. Furthermore, the
auditor's report shall also be published in the official Firm Bulletin in
conformity with 77/91/EEC.
It will be still prohibited to evaluate the contribution in kind over the value
assessed by the auditor's report although it is not provided for in the Second
Council Directive. In our opinion this shall remain unchanged in the future as
Basically the above provisions are applicable for both establishment and
capital increase. Should, however, the issuance value and the nominal value of
the shares differ from each other at capital increase, the full difference
shall be made available for the company simultaneously with subsription.
The above changes will apply to limited companies only but an extension to
other company forms (limited liability company, limited partnership etc.) is
expected in 2005 in the frame of the complex revision of the Company Act. The
recent modification can be deemed as a further step for liberalization and
harmonization of the Hungarian Company Act with EU legislation.
Dr. Gyula Gábriel
Attorney at Law
Bogsch & Partners