MNB Position Statement on Borderline Cases of Intra-Group Financing

In our earlier articles, we already discussed in detail the rules on intra-group financing, as well as the cases in which a capital advance agreement can offer a solution when the conditions for intra-group financing are not met. In practice, however, borderline cases keep arising for which the wording of the law gives no clear answer — for this reason, our office submitted a request for an official position statement to the Central Bank of Hungary (MNB) on several legal questions that recur repeatedly among our clients. Below we summarize the response we received from the MNB.

The Underlying Facts

The request was based on a fact pattern in which a company had granted loans to several companies belonging to the same group, at a time when the conditions for intra-group financing were satisfied. The lending company subsequently came into the ownership of a professional trustee under a trust management agreement — which, at least on our original interpretation, eliminated the ownership-based circumstances that had previously formed the basis for intra-group financing. In light of this fact pattern, we requested the MNB’s position on three sets of questions: the interpretation of the concept of joint control in two different organizational configurations, and the assessment of what happens when the conditions for intra-group financing cease to exist while a loan relationship is still outstanding.

The MNB’s Preliminary Remark on Trust Management

Before addressing the questions raised, the MNB made an important clarification regarding the fact pattern. In its view, the mere fact that a company comes into the ownership of a professional trustee under a trust management agreement does not automatically mean that its ownership relationships with its former subsidiaries cease to exist.

For the parent-subsidiary relationship to cease, it is the subsidiary itself that must be placed into trust management — if the transfer of assets occurs at the other end of the chain, on the parent company’s side, group membership does not in itself cease. The MNB interpreted the applicant’s questions as in fact relating to the scenario in which the parent-subsidiary relationship ceases, and based its answer on that premise.

Joint Control: The Relationship Between Management and the Supervisory Board

The first question concerned whether joint control within the meaning of Section 6(1)(18)(c) of the Hungarian Credit Institutions Act (Hpt.) can also be established where the management or the supervisory board of the companies concerned — rather than both bodies jointly — has a composition that constitutes or is identical to the majority required for decision-making.

Referencing the analogy of Section 3(2) of the Hungarian Accounting Act, the MNB confirmed this interpretation. It pointed out that the relevant provision of the Hpt. merely lists management and the supervisory board without using the conjunction “and,” indicating that the legislator did not intend to require the simultaneous, identical composition of both bodies. Accordingly, joint control can also be established on the basis of the relevant composition of the management alone or of the supervisory board alone.

Joint Control: Overlap Between a CEO and Board Membership

The second question examined a specific organizational situation: whether joint control can be established where the CEO appointed at one privately held company limited by shares is simultaneously also a member of the board of directors of another company limited by shares, and — under the deed of foundation — may independently make decisions falling within the board’s competence, without the presence or agreement of the other board members.

According to the MNB’s answer, the Hpt. does not distinguish between whether the management of a company limited by shares is carried out by a board of directors under Section 3:282 of the Hungarian Civil Code or by a CEO under Section 3:283 of the Civil Code. If the deed of foundation provides that board members may independently make decisions falling within their competence, this decision-making authority can, in substance, establish the identical composition constituting the majority required for decisions under the Hpt. — meaning joint control can be established in such a case as well. On this point, too, the MNB thus shared the legal interpretation put forward in the request.

The Timing of the Conditions for Intra-Group Financing — the Key Takeaway

The third question carried the greatest practical significance: what happens if the conditions for intra-group financing were satisfied at the time a loan or credit agreement was concluded and the funds disbursed, but subsequently cease to exist while the legal relationship remains in force, and the parties keep the agreement in force without amending its content.

On this point, the MNB’s answer reflects a stricter approach than the one proposed in the request. In the MNB’s view, the conditions for intra-group financing must continue to be met throughout the entire duration of the legal relationship. If the controlling influence between the parent company and the subsidiary ceases before the contractual relationship terminates, the conceptual elements of intra-group financing under the Hpt. are no longer satisfied, and with them the licensing exemption under Section 5(2) of the Hpt. also lapses. In such cases, it also becomes necessary to separately examine, in respect of the remaining legal relationship, whether the elements of “conducting business on a commercial basis” are met, in order to be able to rule out the continuation of a licensable lending activity.

According to the MNB, the pursuit of licensable activity can be excluded with full certainty only if the former group member company settles its obligations arising from the contractual relationship — typically through prepayment — before or simultaneously with the termination of its group membership, and the parties close out the contractual relationship. The mere fact that the parties do not amend the agreement and do not carry out any new lending transaction does not, in itself, automatically guarantee that the licensing exemption continues to apply.

Practical Recommendations

Based on the position statement, corporate groups should bear the following in mind:
● When structuring intra-group financing arrangements, it is not necessary — when assessing joint control — for both the management’s and the supervisory board’s composition to meet the statutory criterion; it is sufficient if the required identity of composition exists for one of the two bodies.
● If a restructuring of the ownership or control structure is anticipated (for example, a transfer into trust management), it is advisable to assess in advance whether this would affect existing intra-group financing relationships.
● If the termination of group membership is foreseeable, it is advisable to arrange for the prepayment of outstanding loans and the closing-out of the contractual relationship before or simultaneously with the termination of group membership, in order to avoid the risk of conducting a licensable activity.