Creditors' Settlement or When Is It Advisable to Deviate from the Absolute Priority Rule

Abstract

Bankruptcies carry important information for the market. Bankruptcy rules in crisis become even more relevant since the reason of insolvency then is often not caused by the company's failure or inefficiency, but by external impacts like chain debts or the loosing of markets. So it happened in 2008 too. The balancing in the bankruptcy rules in these cases should be designed to guarantee the return of the expectations developed by the interested parties -debtors and creditors -at the time of the investment. This is the way to protect the trust of the participants in the financial markets and in the businesses. Despite many amendments the efficiency of these bankruptcy rules in Hungary, however, is not very promising. The country is ranked in the 24th place out of the 28 Member States in the EU in a World Bank survey in 2018, in which the efficiency of the solutions to the problem of insolvency was compared. This study summarizes the results of a primary research which investigated that, although the Hungarian rules are seemingly in line with the international and regional standards and the EU regulations in reorganization matters, why is there, however, no such efficient capital allocation as it should be expected by the investors and would be necessary to reinforce the trust in the market. The main statement of the article is that the Hungarian bankruptcy rules fail to promote the efficient capital allocation because the stakeholders have no information or are not interested -for the costs may be too high -in those financial data or parameters, which are necessary for a deliberated settlement in a bankruptcy procedure.