In March 2014 the European Commission published Commission Recommendation on a new
approach to business failure and insolvency (the “Recommendation”). The objective of the
Recommendation was to ensure that viable enterprises in financial dificulty had access to
national insolvency frameworks which enable them to restructure at an early stage with a view
to preventing their insolvency. The Recommendation invited Member States to implement its
principles within 12 months as of its publication.
Bulgaria has prepared (with a delay) a draft law amending the Commerce Act. The aim of the
law is to implement the Recommendation and introduce additional amendments to the
Commerce Act. The amendments are still in draft and have not been approved by Parliament.
Amendments implementing the Recommendation
The proposed amendments introduce new stabilisation (restructuring) proceedings for
companies facing financial difficulties. Similar proceedings existied historically in Bulgarian
law prior to 1952 but were abolished thereafter. In 1993, after the adoption of the Commerce
Act, which restored the company and business law in post-communist Bulgaria, a draft of a new
Law on the Voluntary Bankruptcy Arrangements was prepared but its adoption failed in
Parliament.
In compliance with the Recommendation, the proposed new legislation envisages measures to
prevent the opening of insolvency proceedings of a company through reaching an agreement
between the company and its creditors on how company’s debts will be restructured and repaid.
Stabilisation proceeding may be opened in respect of a company, which is not insolvent, but
under an imminent threat of insolvency. Pursuant to the proposed amendments, an imminent
threat occurs where the debtor, with a view to the maturity of its debts within six months after
the date of filing the stabilisation petition, would be unable to meet these debts or is likely to
stop paying them. Debts which may result in an imminent threat of insolvency are the ones,
which may result in insolvency if not paid upon their maturity - matured monetary obligations
due under, or in relation to, a commercial transaction (including its validity, performance, nonperformance,
termination, invalidation or dissolution), or public law obligations to the state or
municipalities related to its commercial activity, or private law obligations to the state. The
imminent threat of over-indebtedness, which is the case where the assets of a limited liability
company, a joint-stock company, or a partnership limited by shares, are insufficient to cover its
liabilities, is not envisaged by the draft law as a reason for opening a stabilisation proceedings,
though the occurrence of such event is a reason for opening insolvency proceedings.
The proposed new rules set out a list of cases in which stabilisation proceeding is not to be opened:
- If the company has failed to submit in time to the Commercial Register its annual financialstatements for the last three years prior to the submission of the petition for opening
stabilisation proceedings; - If prior stabilisation proceedings have been opened in respect of the company within the
last three years; - If a petition for opening of insolvency proceedings has been filed before the submission
of the petition for opening stabilisation proceedings; - If over one-fifth of the debts of the company are to related parties or persons who, in the
last three years, have acquired such debts from persons related to the company.
Stabilisation proceedings are inapplicable to banks, insurance companies and some public
undertakings.
The law envisages mandatory recordation of all acts submitted and/or issued in relation to the
stabilisation proceeding with the Commercial Register.
A petition for opening of stabilisation proceedings may be filed only by the company, not by a
creditor. The petition is reviewed by the district court at the seat of the company. The petition
must contain, inter alia, a detailed stabilisation plan with a specific proposal on the manner,
time limits and the conditions for repayment to the company’s creditors, as the creditors which
are related to the company may be repaid in full only after all the other creditors are repaid in
full.
Participants in the stabilisation proceedings are all creditors of the company, including those to
which the company has given security on debts of third parties. The law introduces two specific
participants in the proceedings, trustee and verifier. The trustee is an individual, an auxiliary
body to the court, and must have a degree in law, as well as meet requirements for a trustee in
insolvency proceedings. The functions of the trustee include the power to propose the list of
creditors for approval by the court, supervise the activity of the company, support the company
and the creditors in clarifying the proposed stabilisation plan. The verifier must be a registered
auditor. Its role is to report to the court and the creditors if the stabilisation plan corresponds to
the financials and property of the company. The appointment of a verifier is mandatory in case
the stabilisation plan envisages transformation of the company or conversion of debt into equity.
Where the court has established that the required grounds exist, the court opens stabilisation
proceedings, appoints a trustee and, if necessary, a verifier, may impose attachment or other
security measures, and schedules a public session to examine and approve the proposed
stabilisation plan within three months as of the opening of the proceedings. As of the
recordation of the court ruling on opening stabilisation proceedings, the company is not allowed
to repay debts arisen prior to the submission of the petition for opening the proceedings (some
exceptions exist). The court ruling also restricts the activity of the company as it will continue
operating under the supervision of the trustee, or, the court may rule, only the trustee will be
entitled to manage the operations of the company.
Each creditor of the company may object to the inclusion or non-inclusion of a creditor on the
list of creditors. On the basis of all evidences received, including the opinion of the debtor, the
trustee drafts the final list of creditors, which is subject to approval by the court. Only creditors
included in the final list approved by the court have the right to vote on the proposed
stabilisation plan. The plan is voted by classes of creditors and approved or rejected by the
court. The court ruling is subject to appeal before the Supreme Court of Cassation by the company and by any creditor affected by the plan. After its approval, the plan becomes
mandatory for the company and its creditors, including creditors who voted against it, but the
plan has no effect with regard to creditors who have not been included in the list of creditors or
have been prevented from voting the plan. Upon approval of the plan the enforcement
proceedings against the debtor shall be suspended.
The advantages of stabilisation of viable companies in difficulty before they become insolvent
are indisputable, and the expectations of the effect of the proposed stabilisation proceedings
are, in general, positive. Unfortunately, this is not the case with other amendments to the
Commerce Act, proposed along with the new stabilisation proceeding.
Other amendments to the Commerce Act
Justifying these amendments as prevention of “companies’ theft”, i.e. criminal acts, usually
performed using forged documents, and resulting in disposal of assets, or changes in the owners
and managers, of companies, the Council of Ministers proposed that more complicated form
for validity of some commercial documents is introduced. Such documents are:
a) contracts for sale of a going concern;
b) contracts for sale of shares in limited liability companies;
c) resolutions of the General Assembly of limited liability companies about:
i) admitting/expelling partners;
ii) transfer of shares to a new partner;
iii) appointment of a manager of the company;
iv) sale, purchase and other disposal of real estate.
The proposal is these documents, which at this time are executed just in writing (the documents
as per item (c) above) or with a certified by a notary signatures of the parties thereof (the
documents as per items (a) and (b) above), in future to be executed with simultaneous
certification by notary of the signatures of the parties and of the contents of the document.
Pursuant to Bulgarian law, when such simultaneous certification is done, the notary shall keep
a copy of the certified document, and, according to the proposal, such copy will be used for
verification purposes when the certified document is filed for announcement with the
Commercial Register or used for completing of a real estate deal.
The Supreme Bar Council has issued an official letter opposing to the proposed amendments.
Negative opinions on the proposal of many attorneys-at-law have also been made public. In
summary, the main arguments against the proposal, are:
- The General Assembly will not be able to adopt resolutions in absence (where allpartners state in writing their consent to the resolution).
- The simultaneous certification of the signatures and of the content is a specific provision
of Bulgarian law and, most probably, not practiced, and may be even allowed, in other
countries, therefore, the adoption of the proposal would necessarily require certification
only/mainly in Bulgaria. - Many practical difficulties, which will result at least in delays for the business, are
expected with regard to the proposed verification of the documents presented to the
Commercial Register with the copy kept by the notary. - The proposal is not well justified, as it deals mainly with limited liabilities companies,
and not with other types of companies, such as joint-stock companies. Also, such
administrative and burdening measures are not the proper way of fighting criminal acts. - Last, but not least, the adoption of the proposal may leed to the European Commission
initiating proceedings against Bulgaria, as it is likely that the new measures limit the
free movement of capital within the EU.
Contact
Georgi Drenski
Senior Associate
T: +359 28 055 055