Alarming increase in SME bankruptcies due to economic crisis

After a significant slowdown in April 2010, the rate of company liquidations in Hungary rebounded in May back to the level seen in the first quarter of the year, with small and medium-sized enterprises (SMEs) being particularly affected by the economic downturn. Significant differences in numbers of bankruptcies remain between Hungarian regions. New bankruptcy legislation is intended to help struggling companies but few have so far applied under the new procedure.

Long-term trends

The number of companies in Hungary going into liquidation has increased dramatically since the beginning of the global financial and economic crisis. The first quarter of 2009 also saw an alarming new trend: companies in financial difficulties going into liquidation as quickly as possible to get rid of their debts with a view to starting up again with a new business.

According to the Hungarian Central Statistical Office (KSH), there were 1,686,351 companies registered in Hungary in 2009 of which 128,503 were new, and the number of ceased businesses was 82,372. The number of company closures was 17% higher (11,000 businesses) in 2009 compared with the previous year. Trade, transport and accommodation services (4,350 cases) and the construction sector (2,323 cases) were particularly affected by creditors initiating the winding-up process. In 2009, the number of medium and large enterprises wound up was 250%–300% more than in 2008, and by the end of the year there were around 12,500 company liquidations. Liquidation proceedings were initiated primarily in micro-enterprises which constituted 85% of all procedures. Only in the education and healthcare sectors was the number of liquidations in 2009 about the same as in 2008. The real estate sector experienced the largest increase (66.1%) (KSH, 2009).

There was no slowdown in the first months of 2010: only in April was there a significant relief, the month of the election of the new parliament, but in May the rate of companies winding up rose again.

An increasing number of owners are deciding to liquidate their company to escape winding-up procedures. In May 2010, 1,512 company owners initiated voluntary termination of their business; this is 245 (8.7%) more than in May 2009 (Index.hu, Megugrott a csődök száma májusban, 9 June 2010).

Significant differences between regions

There has been a more significant increase in bankruptcies among companies in the central and eastern regions of Hungary. Because the central region has a major impact on the Hungarian economy as a whole, the increase in announced bankruptcies of 16% (in May 2010) made the average for the entire country worse. In the southern Great Plain and northern regions there was a 22%–23% increase in insolvency procedures initiated by company creditors compared with the same period last year. In the western regions, which saw a general slowdown in liquidations in the first quarter of 2010, there was a slower rate of increase; in the first four months of 2010 the rate was 0.7%, but this had risen to 10.9% by the end of May.

Issues impacting on SME suppliers

An analysis of the distribution of companies according to revenue reveals that, in 2009, most of the liquidity proceedings were carried out against micro-enterprises with yearly revenues of €71,330 (HUF 20 million as at 6 August 2010) and businesses with yearly revenues of between €71,330 and €1,069,960 (HUF 20–300 million). The most stable sectors were education and healthcare.

Hungary’s economy depends strongly on transnational companies, especially in the automotive, construction and steel industries which remain the most vulnerable. In a move towards rationalisation and cost efficiency, many of these companies have relocated production from Hungary to Asian and Middle Eastern countries. This has had a negative impact on Hungarian small and medium-sized enterprises (SMEs) supplying these sectors.

Gridlocks and accounting disputes have challenged the solvency of enterprises especially in the construction sector and, at the end of the supply chain, subcontractors often do not get paid.

Most of the SMEs are less profitable because they face strong competition from transnational companies, high interest rates and a complex taxation system. This hinders research and development, the adaptation of new technologies and innovation to encourage growth and job creation.

Swing in start-up mood

In May 2010, there was an increase of 6.8% in the number of new companies registered – a total of 3,516 – compared with the same month in 2009 . In April 2010, there were 91 more newly registered companies than in April 2009. Altogether, 33,283 companies were registered by the end of the first quarter of 2010, 6,145 (16%) more than at the end of the fourth quarter of 2009. However, this was 12% less than at the end of the first quarter of 2009. The number of companies employing between 20 and 49 people and between 50 and 249 people dropped slightly, but the number of bigger companies dropped significantly, by around 10%, and the number of smaller companies increased slowly during the first quarter of 2010.

Measure of precaution

A new bankruptcy law was introduced in September 2009 which simplified and rationalised existing legislation. It also provided an alternative form of protection against bankruptcy for companies with economic difficulties rather than simply winding up the business. The latter often has no real result and ends up with the creditors losing assets.

The newly introduced grace period of 90 days allows reorganisation of a company’s operation and finances. Until the regulation was introduced, debtors could only initiate the winding-up procedure with the agreement of their creditors. Now they can ask for the grace period which can be granted in a day. However, payments, wages, employees’ charges, public utility fees, bank charges and value-added tax (VAT) must be paid during the grace period. To reduce these expenses and support employees, there is legalised wage guarantee support (Law 1994, LXVI) which was modified and introduced in 2007, and is still applicable. Not only the debtor but also the creditors can now initiate the bankruptcy or winding-up procedure if the debtor does not do so. The former procedure takes longer due to the administration involved and passive debtors are charged administrative costs, which make the procedure more complex and expensive.

A new rule is that the court can terminate the winding-up proceedings if the debtor has repaid all debts.

The new law has also rationalised winding-up proceedings. The liquidator is now appointed by random selection by computer rather than by a judge. It is anticipated that electronic filing of all bankruptcy and liquidation proceedings will be in place by mid 2011.

Although the amended bankruptcy law is now simpler, the response to its general bankruptcy rules suggests that company owners have not yet appreciated the new opportunities or that they are finding it difficult to deal with them. Between September 2009 and February 2010, only 42 companies applied for the new procedure. One reason is that owners/managers do not want their brand to be stigmatised and their bankruptcy to be recognised by the banks and public as prescribed by the law (HVG online, Hiába van új csődtörvény, közel annyi a felszámolás, 11 March 2010).

In April 2010, a law was introduced to avoid gridlocks in payments. It states that at the moment of contracting for an investment of more than €5.1 million, the investor has to deposit that amount with an independent third party agency. When the subcontractor has completed its contractual duties, the agency will disburse the agreed amount on the investor’s behalf. These security measures aim to ensure that subcontractors receive payment on time and can remain solvent. A disadvantage of the procedure is the added cost of the third party’s services. Remarkably, it has not yet been decided which institution will take the responsibility of being the independent third party agency (HVG online, Új szabályozás a körbetartozás ellen, 29 March 2010).

Reference

Kozponti Statisztikai Hivatal (KSH), A regisztrált társas vállalkozások száma létszám-kategóriák szerint, A regisztrált gazdasági szervezetek száma, Budapest, KSH, 2009, available online at

Zsuzsanna Rindt and Ildikó Krén, Solution4.org

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