The new Hungarian Civil Code (Act No. V of 2013) came into effect on 15th of March 2014. The Civil Code regulates the fiduciary asset management contract, a very similar legal institution to the Anglo-Saxon trust. The concept of the Hungarian trust was drawn up on the basis of the model of the trust in English law and that of the Treuhand in German law. The introduction of the fiduciary asset management on a legislative level is necessitated by strong, current demand in the economy. We have observed that several Hungarian investors chose legal regimes of other countries because the institution of the trust provided them with a better legal and economic solution. Now there is an opportunity to establish trust also in Hungary, a civil law country.
The new Hungarian Civil Code sets out a contractual arrangement and its validity is bound to a written contract. The regulation is of a general scope and several details are regulated in two further separate pieces of legislation. Such details are regulated in Act XV of 2014 on Trustees and the Regulation of Their Activity, and in Government Decree No 87/2014 (III. 20.) on certain rules concerning the financial security of fiduciary property management undertakings.
Chief features of the Hungarian trust
Under the fiduciary asset management contract, the trustee has the duty to manage the property transferred to his ownership by the settlor in his own name, for the benefit of the beneficiary, for which the settlor is obliged to pay a fee. The managed asset can be things, rights and claims as well. If the settlor and trustee are one and the same person, fiduciary asset management is established by the irrevocable unilateral declaration of the settlor set out in a public instrument. A legal relationship of property management settled by testament is established by the trustee’s acceptance of his appointment to such position, under the terms set out in the testament.
In the legal relationship of the asset management, it is also possible to set out other conditions, such as its duration, which is maximum 50 years, terms, right of unilateral termination, remuneration of the trustee, appointment of additional trustees, regulation of the delegation of other agents, and the beneficiary’s right to transfer. The settlor reserves the right to remove the trustee, appoint a new trustee, replace the beneficiary, modify given parts of the settlor’s declaration, and to determine or modify the duration of property management.
The settlor and also the beenficiary may monitor the activity of the trustee falling within the scope of property management, but the costs of such monitoring are incurred by the settlor. It is a mandatory rule that the settlor may not instruct the trustee. The settlor, however, may remove the trustee from office at any time, and simultaneously appoint another trustee.
Act XV of 2014 distinguishes professional and ad hoc asset management. An undertaking contracting on a regular basis for fiduciary property management at least twice annually, or for a property management fee in excess of one per cent of the value of the trust property on the date of the contract, or for any other financial gain, may carry out fiduciary asset management only in possession of the licence issued by the National Bank of Hungary prior to the start of such activity. The professional fiduciary asset managing company can be only a limited liability company or private limited company with a registered office in the territory of Hungary, or the branch – registered in Hungary – of an undertaking based in another contracting state of the Agreement on the European Economic Area.
The fiduciary asset management company may not carry out activity other than asset management, and its name must make reference to property management. The company must hold the licenses required for such activity. The fiduciary asset management company is required to fulfil strict staff and equipment requirements to receive the authorisation of the National Bank of Hungary.
The rights and duties of the trustee
Under the contract, the trustee may not be the sole beneficiary. The settlor and the trustee, however, may be one and the same person. The trustee has the duty to provide information, manage the property as instructed in the declaration of the settlor, avoid conflicts of interest and manage the property separately from his own. If the trustee is authorised to designate the beneficiary under the contract, the trustee has the right to determine the share of the beneficiary.
Due to stricter requirements arising from the fiduciary nature of the legal relationship, the trustee has the duty to act in utmost consideration of the interests of the beneficiary. The trustee has the duty to protect the trust property against foreseeable risks in a commercially reasonable manner.
The management of the property includes the exercise of rights arising from ownership, other rights and claims transferred to the trustee, and the fulfilment of obligations arising therefrom. The trustee may dispose of the assets belonging to the trust property under the conditions and within the limits sets out in the contract.
The trustee has a duty to keep confidential any fact, information and other data he becomes aware of during his appointment as trustee or in relation thereto. Such obligation is without prejudice to the establishment of the trusteeship and remains in effect after the termination of fiduciary property management. The settlor and his successors may grant exemption from the confidentiality obligation.
The trustee has the duty to inform the settlor or the beneficiary of the trust property upon their request. Upon request, the trustee has the duty to account for the trust property, and settle accounts with the settlor and beneficiary. Costs incurred in connection with the provision of information and the payment of invoices are borne by the settlor and beneficiary.
The trustee is liable for the fulfilment of the undertaken obligations with the trust property. The trustee assumes unlimited liability with his own property for the satisfaction of claims arising from commitments charged to the trust property, if these cannot be satisfied from the trust property, and the other party was not and could not have been aware that the commitments of the trustee exceed the limits of the trust property.
If the settlor appoints several trustees, the actions and decisions of the trustees are taken jointly. If the trustees are also liable with their own property for their commitments, they assume joint and several liability for joint decisions toward third parties. Several trustees assume joint and several liability toward the settlor and beneficiary for the breach of obligations arising from fiduciary property management.
The trust property constitutes property separate from the trustee’s own property and other property managed by him, which the trustee is obliged to register separately. The parties’ derogation from this rule is void. Assets registered as property managed separately from the trustee’s own property and other property managed by him are deemed to fall within the scope of trust property until proven otherwise. Any assets substituting the managed assets, insurance indemnities, damages or other value, and profits thereon, constitute part of the trust property, whether registered or not.
As a general rule, the creditors of the settlor may not lay claim to the trust property, unless the settlor is also a beneficiary. In respect of the contract between the settlor and the trustee, the creditors of the settlor may assert claims in accordance with the modern rules of actio Pauliana, under the general rules of the law of obligations. In exceptional cases, the aforementioned Act XV of 2014 also allowed the termination of the asset management contract in the execution procedure launched against the settlor.
Pursuant to regulation in the Civil Code, which corresponds to the rules of common law, in the event of the trustee’s insolvency, the creditors of the trustee may not lay claim to the trust property. This rule is also applicable to the spouse, partner and successors of the trustee. The trust property does not constitute part of the trustee’s inheritance either. This regulation provides asset partitioning for the trustee which resembles to the Anglo-Saxon trust rules.
The creditors of the beneficiary clearly have the right to take action against the trustee, quasi under the legal title of the beneficiary. This is possible only if the right of the beneficiary to receive from the asset managed is due. It is difficult to determine the claim of the beneficiary’s creditors in relation to the beneficiary’s claim in the trust property, if the trustee holds discretionary power with respect to the management of the property, because the claim of the beneficiary is also uncertain and unascertainable in such a case.
The settlor and the beneficiary have the right to take action against third parties to whom the trustee transferred property in breach of the asset management contract, gratuitously or in bad faith. Such regulation essentially corresponds to the rules of common law tracing in English law.
Is the Hungarian trust a real trust?
Overally yes, in minor details no. The Hungarian fiduciary asset management has the same function as the English trust, the asset partitioning, the tracing, the trustee’s office are regulated very similarly. On the other hand in the Hungarian regulations we can experience several smaller differences. Under the new Hungarian Civil Code, the fiduciary asset management contract mostly resembles the express trust. Conditions give rise to a resulting trust only in exceptional cases, while the constructive trust and charitable trust are not regulated. This is, to a certain extent, understandable, as under Hungarian private law, these legal situations are regulated with the institutions of unjust enrichment, foundations and public donations.
The fiduciary asset management contract must be made in writing, while the Anglo-Saxon trust may be created orally or by implied conduct. In view of the fact that fiduciary asset management is a new legal instrument in Hungarian law, we believe it is reasonable that the contract is bound to a written form to avoid any legal uncertainties.
The new Hungarian Civil Code does not set out expressis verbis that the settlor has the right to revoke fiduciary asset management, while in Anglo-Saxon law, the settlor retains this option during his lifetime, if he laid this down in the deed of trust.
Under the new Hungarian Civil Code, as a general rule, fiduciary asset management is a contract for consideration, while Anglo-Saxon law presumes gratuity, unless provided otherwise.
Under the new Hungarian Civil Code, the fiduciary asset management contract has a maximum duration of 50 years. A time limit is also applied in English law, with the exception of the charitable trust. International trends, however, increasingly suggest a loosening and elimination of time limits.
According to the principle derived from the Saunders v. Vautier case, the beneficiary is entitled to the distribution of the trust property if he is of legal age and does not breach the interests of other beneficiaries. This rule is not applied in the Hungarian law.
We have to come to the conclusion that the Hungarian regulation of fiduciary asset management contract is mainly convenient to the Anglo-Saxon trust. We have to emphasise that the Hungarian trust regulations functionally are in accordance with the English law principles. We can find high-level regulation of asset partitioning, the trustee’s office and the rules of tracing. Some critics may expressed on the obligatory registration of the trust, which can be explained by chariness of the legislators. Overall the Hungarian trust can fill out the main functions of the English trust in the economy.
I suppose that the Hungarian trust-like legal instrument will gain ground step by step in the near future, which will contribute to the economy and the international business relationships of Hungary as well.