For a while now there have been discussions and urges to undertake legislative changes in the Registered pledges act in order to ensure legal certainty and better protection of the interests of creditors and debtors at the same time. The new amendments, promulgated in the State Gazette, issue 105 of December 30, 2016, also reflect the general trend towards making administrative services more transparent and moving forward with the implementation of the e- government. The question is however, whether the legislator did not go too far in protecting the first creditor in turn at the costs of making the procedure more burdensome and complicated.

       I.            What is a registered pledge – importance for the business

The registered pledge is a type of security provided by the debtor to its creditor over a certain type of asset, without physically giving the asset itself to the creditor.

There are two key features of the registered pledge that distinguish it from the traditional assets pledge and that make it so widely spread and convenient for the business.

1. The physical possession over the pledged asset remains with the pledger, thus allowing him to continue using the asses for his/hers business needs and generate future profits (to eventually offset his/hers obligations)

2. The pledgee on the other hand is entitled to receive with priority the price of the pledged asset or the compensation for it without having to engage in prolonged and inefficient court proceedings. He or she can sell the asset and collect the price complying with a simplified out-of-court procedure.

    II.            Amendments regarding the establishment of a registered pledge and the entry into the Special register

1. The Central register – a centralized electronic database

An important step forward towards legal certainty and lessening the administrative burden has been the decision to create a publically available online register of the registered pledges. In analogy to the Commercial register, the Online Central Register will be administrated by the Registry agency and will represent an electronic database containing facts and document for every pledger in individual files in electronic form.

It will be possible to file Applications for establishing registered pledges electronically, subject to a 50 % reduced state fee. Any inquiries about facts, certificates and copies of relevant documents will be available online. Courts, public authorities and other bodies, specified in a special act, will have free access to information in the Register for the performance of their official duties.

The Central register will be fully implemented in September 2018 and until then the registering proceeding develop under the old regime (para. 50 of the Transitional and final provisions to RPA).

2.  Constitutive effect of the entry into the Register

The new amendments achieve better protection of the interest of both parties further by making the entry of the registered pledge in the Register a necessary prerequisite for the establishment of the registered pledge. Until now the general rules was that the contract containing the stipulations for the registered pledge had to be executed in writing and the entry into a Special register served only to make the rights of the pledgee opposable to the rights of third persons, but not as a prerequisite for those rights to arise as a whole.

The constitutive effect allowes for a more effective review on the lawfulness of the registered pledge and the legal facts, on which it is based. This is because of the review conducted by the employee of the Registry Agency when an application is filed. Chapter VI of the RPA contains the rules regarding the filling of the application for entry, the grounds for refusing it and the appealing procedure. More detailed rules are to be drafted by the Minister of Justice in an ordinance for the keeping, storage and access to the Central Registry of Special Pledges.

3. Information, subject to entry into the Register

Under the previous regime few facts and circumstances were subject to mandatory entry or announcement in the existing Special register. The new amendments however require more information to be made publically available and provide for additional legal duties on the part of the pledger.

3.1 For entering a registered pledge under the new rules – art. 27, para. 4 of the RPA, applicants will now have to present to the Central Register not only the written consent with a notarized signature of the pledger, but also the text of the contract, in which the registered pledge has been agreed on. As the administrative procedure of entry into the Central register is entirely in Bulgarian, the question is whether there would be a requirement to foreign creditors to use either bilingual contracts or bear an additional financial burden for translation costs in order to enter the contract into the Register.

3.2. Subject to entry into the Register is also the explicit consent of the pledge creditor under Art. 8, para 3 RPA.

According to the previous regime as well as under the new rules in order for the pledger to be able to dispose of the pledged asset outside the scope of his /her ordinary activity, the consent of the pledge creditor is required.  In other words if a silk merchant has pledged the company car and wants to sell it, he or she has to obtain the explicit consent of the pledge creditor first. Now that consent has to be entered into the Central Register and in the absence of such consent the pledge is transferred together with the asset to the acquirer. The pledge is transferred also to any subsequent acquirer unless conduct in good faith on part of the latter has been established. This provision of Art. 8, para. 4 PRA allows the pledge creditor to enforce its right against any third person, who has acquired the assets and shifts the burden of proof on the acquirer to establish his or hers good faith.  Upon application by the pledge creditor the registered pledge can be even entered in the personal file of that third person in the Central register (art. 10, para 5 RPA).

3.3. Another important novelty is the provision of Art. 9, para 4 RPA referring to the prohibition for the pledger to dispose of the pledged asset after commencement of the execution.

 As stated earlier one of the most distinctive features of the registered pledge is that the assets remains in possession of the pledger which creates greater uncertainty and risk for the creditor and his/hers ability to be compensated.  Therefore, the law has always envisaged a prohibition for the pledger to dispose of the asset once the creditor has directed the enforcement towards the pledged asset.

Previously the starting date for the prohibition to dispose was the receipt of the notification under Art. 33 RPA. This allowed however for the pledger to try to avoid and postpone receiving the notification and lawfully dispose of the pledged asset to the detriment of the creditor. Now the starting date is the entry into the Central register of the commencement of execution. Thus, any transactions conducted after that entry are not opposable to the rights of the pledge creditor. He or she will have the right to receive the value of the asset and the compensation for it from any third person who has acquired the asset afterwards. In this sense is also the new rule of Art. 10, para.1 , point 3 RPA.  

 III.            Amendments with regard to enforcement proceedings

 1.  Consent of the pledge creditor

A positive development has been the requirement to enter the consent of the pledge creditor before disposing of the asset by a transaction, falling outside the scope of the ordinary business activity of the pledger.

2. The new position of the first pledge creditor

 On the other hand, not so single –sided are the new position and rights of the firstly entered pledge creditor. His/her position has become stronger and might conflict with the rights of any subsequent creditors with regard to the same asset.

2.1. For example, according to Art. 14 RPA in order to enter any subsequent pledge on the same property the consent of the previous pledgee is required. The practical importance of this rule is evident if we imagine that for developing his production line for example the pledger needs to apply for another credit, but he/she can provide as collateral only the property already pledged. Thus, under the new rules the first pledge creditor can easily obstruct this intention and prevent the debtor for obtaining new fresh money. Previously it was up to the second creditor to decide whether to take the risk and be second in the list of registered pledgees, but now the discretion is given to the first creditor.

According to the travaux preparatoires to the Act for amending the Registered pledges act art. 14 in this redaction serves the purpose of resolving the competition between a pledge on the materials and such on the goods, produced from these same materials. Further, another argument in favor of the new provision stems from some known examples of misconduct  on the part of the subsequent creditors who in the insolvency proceedings for instance can act in concert and take majority decisions to infringe the interest of the first creditor.

2.2. Another interesting moment in the regime is the revocation of the possibility of the subsequent pledge creditor to commence enforcement if the first creditor has not soled the pledged asset within 6 months – previously envisaged in art. 37, para 1 RPA. This development may be deemed as positive as depending on the asset its sale in only 6 months is not always possible and efficient. In theory there are no reasons for the first creditor to procrastinate and to delay unnecessary execution over the property. Further, in the absence of consent from the previous pledgee, the creditor with a subsequent pledge may commence execution only after having satisfied all previous creditors. In this case, he/she shall assume their rights.

3.  Enhanced publicity

Expected positive impact will have the enhanced publicity and accountability in the process of commencing execution over the pledged property.

Now, upon commencement of execution the pledge creditor must state the minimum price for the asset sold, as well as the enforcement proceedings he/she has chosen.  The initial sales price may not be lower that the insurance value (if applicable). On the one hand, this approach blocks the opportunity to conduct a disadvantageous sale at a very law price and to harm the subsequent creditors, but on the other - such a condition may be unfavourable to a creditor seeking a quick execution on an asset, which insurance value is higher than the real market value in the particular moment.

Further, the new RPA envisages special announcement about the commencement of execution to be made in a Special bulletin no later than 14 days before the anticipated sale.

4.  Competition between creditors and different proceedings

There has been significant uncertainty and inconsistency in the courts’ practice arising out of the competition between different creditor and proceedings under the Civil Procedure Code, the Tax Insurance procedure code and the RPA. The provisions of the RPA so far have been scant and unclear. With the last amendments the legislator has tried to shed more light on the rights of different creditors by introducing one simple principle.

The question in this context is what the rights of the pledge creditor are if another creditor has obtained an enforcement title over the property of the pledger under a different law. As stated at the beginning, the biggest advantage of the RPA is that enforcement is more efficient, quick and does not follow complicated and burdensome procedures. However, if the same asset is subject to enforcement under the RPA and concurrently under the Civil Procedure code or the Tax insurance procedure code, which procedure should be observed?

The principle reinforced by the new amendments to the RPA (art. 32) offers an elegant solution: the enforcement goes and continues under the procedure which has been initiated first. Thus, art. 32 RPA provides that the pledged property, upon which execution is directed under the Civil Procedure Code or the Tax-Insurance Procedure Code prior to entry of commencement of execution under this Act, shall be sold by the bailiff or by the public executor.

According to the new art. 10, para 3 RPA the pledge creditor shall be deemed joint claimant by law in the enforcement proceedings under the Civil Procedure Code and the Tax Insurance Procedure Code.  This means that you as a secured creditor simply need to show an excerpt from the Central register and can join the enforcement actions initiated by another creditor under a different law. Further, you will receive the amounts equivalent to the sum of the registered pledge (based on a certificate from the registry for a recorded pledge and a declaration with notarized signature for the actual amount of his claims).

  IV.            Registered pledge of commercial enterprise

Very often subject to registered pledges are commercial enterprises. There are a number of amendments with regard to the pledge of commercial enterprise, which eliminate long existing inconsistencies and gaps in the existing legal framework.

4.1. Sale of immovable property when part of the commercial enterprise

One of the most disputed questions has been whether the sale of immovable property under PRA extinguishes mortgages on the property if such are entered before or after the entry of the pledge of the commercial enterprise. There is even an interpretative case before the commercial and corporate division of the Highest Supreme Court (commercial case № 1/2015) on this question. The new provision of Art. 37, para 8 solves this issue by providing that “following a sale by the pledgee, only the pledges established under RPA are extinguished, and all other securities on the sold property, as well as the imposed security measures on it shall remain.” Thus, in order to sell an asset free of pledges and mortgages the pledge creditor has to opt for the procedure under the Civil Procedure Code (see also 175, al. 1 ZZD).

4.2. Especially problematic has been the wording of Art. 21, para. 3 regarding the opposability of the rights of the pledge creditor over the commercial enterprise as a whole and over its separate elements. The new regime stipulates a simpler rule in this regard, providing that the rights of the pledge creditor over the enterprise and its elements are opposable to third parties’ rights if the pledge over the elements has been entered in the respective registers for these elements, without the need to describe them in the text of the contract. Despite being clearer, the new rule does not offer a better protection and can even have the opposite effect. Separate Special registers exist only for immovable property and dematerialised shares, which means that rights of the pledge creditor over all the other elements of the commercial enterprise cannot be protected by a follow-up entry in a special register. As the descriptive method in the text of the contract has been abandoned, in order to ensure opposability the pledger creditor must enter separate pledges into the Central register with respect to each of the separate assets.

4.3. Appointing a manager to the company and receiving the generated company profits under Art. 52

The new provision of Art. 52 envisages new forms of enforcement over a pledged commercial enterprise, which pose more legal questions than solutions. Now the pledge creditor is also entitled to receive the profits generated by the operation of the company and furthermore, to appoint a new manager to the company and take control over the business of his/her debtor. As of this point there are no clarifying rules and additional requirements with respect to this provision and it remains unclear how these enforcement mechanisms will be applied in practice.

Worth pointing out is the fact that the changes in the chapters regarding enforcement have already entered into force, whereas the establishment of the new Central electronic register, which is supposed to ensure higher legal certainty and predictability and to balance the strengthen position of the creditor against the position of the debtor, is postponed for 2018. Of course, part of the reason is the technical time required to develop all the mechanisms and to prepare the administration to operate with the new register, however it is questionable whether the new enforcement mechanisms should be applied from an earlier point in time.

Take away- summary:

1. General advice, applicable for both parties:

- the entry into the Central Register is a prerequisite for establishing the pledge, not for its opposability

- many more entries into the Register and notarized documents are required;

- describing explicitly the elements of the commercial enterprise in the pledge contract will not make the pledge right over those elements, for which no additional registers exist, opposable to third persons;

- in case of enforcement over a pledged property the minimum starting price has to be…  

 2. For the pledge creditor:

- always check the Central Register for previously entered registered pledges;

 - commencement of execution under RPA must be announced in the Central register first and it must be specified what form of enforcement has been chosen by the creditor;

3. For the pledger /debtor/

- the consent of the first pledge creditor is required to dispose of the asset if outside the scope of the regular business activity; for the establishment of a subsequent pledge, for the reorganization of the company;

- the disposal of the asset outside the scope of the regular business activity without the consent of the pledge creditor transfers the pledge rights to the acquirer;