Call options as security under the Hungarian law

Oct 10, 2016 | Insight

Although the current Hungarian Civil Code does not expressly provider for a call option as a security, it does not prohibit such a security.

The first question this raises, therefore, is whether Hungarian law permits the use of a call option as security? While the Supreme Court of Hungary has not issued any binding general guidelines on call option as security, several legal papers have been published by high-ranking judges and one court of appeal even published a civil law opinion in this issue (Civil Law Opinion no 1/2008 of the Court of Appeal of Szeged; the “Opinion”).

A call option can be used as security. It is reasoned that just because a call option is used as security, it does not automatically render the agreement on the establishment of the call option null and void. As any owner can dispose on its own assets, it may therefore also provide an asset as security to the creditor. When it comes to establishing a call option as security, the agreement must comply with certain mandatory provisions of the Civil Code (i.e. the call option as security may not be exercised in order to circumvent the mandatory provisions applicable to pledges). Thus, a provision pursuant to which the creditor may unilaterally acquire the ownership title to the encumbered asset before the due date of the claims in the event that the debtor fails to fulfil his obligations is null and void.

A further question is how the creditor is required to settle accounts. If a call option is used as security, the creditor may satisfy his claim (principal amount and interest) out of the amount received as a sales price for the asset encumbered with a call option. It is essential that the creditor does not receive more than he is entitled to. If there is a provision in the agreement on establishing a call option as security pursuant to which the creditor may acquire the asset at a purchase price equal to the amount of loan resulting in the creditor acquiring also the difference between the purchase price and the actual value of the asset, such provision is null and void. There is no need to determine the value of the asset (i.e. the purchase price), but it is satisfactory to determine the purchase price by using a formula, a specific method for calculating the actual market value of the asset that will be equal to the purchase price.

However, in case that call option may be rendered null and void, there is an alternative to this, namely, if the reason for invalidity (i.e. the unlawful method of calculating the purchase price) can be eliminated, the court can convert the call option agreement into security. Thus, if a call option is established on property, the call option agreement will qualify as a mortgage agreement and the court may order the registration of the mortgage with the land registry.

As there is currently no relevant judicial practice on this, the issue of challenging the call option agreement or the purchase agreement remains for the judge chairing the case to decide.