The general objective of bankruptcy proceedings
under the Bulgarian Commerce Act is to ensure fair satisfaction for creditors
and opportunities to reorganize a debtor's enterprise. The Commerce Act aims to
balance the interests of creditors and debtors and to take into account the
interests of employees. This article provides readers with a general overview
of the rules regulating the complex relationships within bankruptcy proceedings
in Bulgaria, with a focus on presenting the key aspects of the legal framework
as seen from a creditor’s viewpoint.
Commencing bankruptcy proceedings
Bankruptcy proceedings under Bulgarian law may
be commenced at a creditor’s initiative or on the basis of an application by
the debtor.
The Commerce Act provides two separate grounds for commencing bankruptcy
proceedings: insolvency and over-indebtedness.
The definition of insolvency has been amended
several times and currently its main hypothesis refers to the situation where a
debtor is unable to fulfil a pecuniary obligation which has become due under a
commercial transaction. Although the law contains a presumption of insolvency
in cases where payments have been suspended, creditors should be aware that court
practice normally requires a careful analysis of the debtor’s current financial
status. This presupposes the involvement of experts to verify key indicators
such as general and immediate liquidity and financial autonomy.
The court will reject an application to
commence proceedings if it finds that the debtor’s difficulties are of a
temporary nature and it has sufficient assets to cover its liabilities without
threatening creditors’ interests.
The burden of proving the existence of these conditions is on the debtor.
Over-indebtedness constitutes a state in which a
company’s assets are insufficient to cover its liabilities. It applies to
capital companies and is more
rarely seen in practice as a ground for commencing insolvency proceedings.
Effects of commencing bankruptcy proceedings
Following the decision, which is immediately
enforceable, the debtor generally continues operating but under the supervision
of a trustee. Where creditors’ interests are threatened, the court may deprive
the debtor’s bodies of management and representative functions. Unfortunately,
the law and court practice are not sufficiently clear on the standard which
must be met in each case for such a conclusion to be reached by the court.
One of the key elements for creditors when
deciding to commence bankruptcy proceedings is the determination by the court
of the date of the insolvency or over-indebtedness, as this can at a prior date
and has some important legal implications related to the invalidity of certain
transactions with the debtor’s property. This issue is further analyzed below.
Another legal consequence of this decision,
which is of particular interest to creditors, is the general suspension of court
and arbitration proceedings against the debtor.
The claims of those creditors who had already initiated court proceedings
should then be claimed within the bankruptcy proceedings, which are a method
for universal enforcement.
Similarly, all pending enforcement proceedings
are suspended and the relevant claims should be claimed from the trustee. It is
worth mentioning that there are two important exceptions to this principle. First,
the suspension does not cover property which is already the subject of
enforcement within forced collection of public receivables under the Tax and
Social Security Procedural Code, that is, bankruptcy creditors can rely on this
property only if something is left after public creditors have been paid.
Secondly, commencing bankruptcy proceedings does not suspend the enforcement
already commenced by creditors under the Registered Pledges Act, which allows them
to proceed with forced execution of their receivables over the pledged property
in conformity with a special procedure under this Act.
Finally, a decision to commence bankruptcy
proceedings has the effect of convening the first creditors’ assembly, which
should take place no later that one month following the date of the court
decision.
Complementing the bankrupt property
Being an instrument for universal forced
collection, bankruptcy proceedings should first ensure the protection and completion
of the bankruptcy estate. Bulgarian
law contains some important tools to this end.
As mentioned above, the Commerce Act invalidates
certain operations with the debtor’s property effectuated after the insolvency date defined in the decision to commence
proceedings. These transactions include:
(i) executing a pecuniary obligation;
(ii) gratuitous deals with a right from the bankruptcy estate;
(iii) deals with a right from the
bankruptcy estate where what was given exceeded significantly what was received;
(iv) creating a security over property in the bankruptcy estate.
Another provision lays down the possibility for
claiming the invalidity
of certain transactions depending on their type and the time when they were
carried out with reference to the date the insolvency proceedings commenced. Such
claims may reach as far as declaring the invalidity of a gratuitous deal in
favour of a related person effectuated three years before the date the
insolvency proceedings commenced.
Both categories of claims may be submitted to
the insolvency court by the trustee or by a creditor if the trustee fails to
act. The outcome of these claims may significantly affect the course of
bankruptcy proceedings with regard to what the bankruptcy estate will include,
who the creditors will be and what their rights are if the estate is sold and
subsequently distributed.
Submission of claims
Once the decision to commence insolvency
proceedings has been announced in the Commercial Register, a one month period
starts during which creditors are allowed to submit claims to the trustee.
Those failing to do so have a second chance to claim receivables within an
additional period of two months starting after the expiry of the initial one
month period. Creditors in this case, however, are not entitled to challenge
the claims of other creditors which have already been accepted or to challenge
the distribution which has already taken place (if the proceedings have reached
this phase in the meantime). Where both of these opportunities have been
missed, creditors’ rights expire.
Following the submission of the claims, the
trustee compiles a list of accepted claims which is then announced in the
Commercial Register together with some financial reports. Creditors and debtors
have the right to object to the acceptance or non-acceptance of any receivable
before the insolvency court which approves the list of accepted claims. This
list cannot be considered final as creditors (or the debtor) who have raised
objections may further initiate a separate action before the insolvency court
to ascertain the existence or non-existence of a particular claim and the list
may be subsequently amended in accordance with the decision in such actions. The
same route is open to creditors whose claims have been excluded from the list
by the court due to the objections filed against it being upheld.
Position of creditors’ bodies in proceedings
The Commerce Act envisages the functioning of a
creditors’ assembly and creditors’ committee.
The creditors’ assembly is a compulsory body whose
most important functions are to nominate the trustee and determine their
remuneration,
to vote on a possible recovery plan, and to decide on the manner of selling the
bankruptcy estate and the methods for its evaluation.
The creditors’ committee is a facultative body
chosen by the assembly. Its functions are confined to supervising the trustee’s
actions and monitoring the operation of the debtor’s enterprise.
Recovery plan
As mentioned above, Bulgarian law aims to
balance the interests of the parties to the insolvency proceedings and open the
door to possible solutions other than simply winding-up the debtor.
A recovery plan may be suggested by the debtor,
the trustee, a certain majority of members or shareholders and at least 20 percent
of employees.
As far as creditors are concerned, creditors holding 1/3 of the secured or 1/3
of the unsecured receivables are also entitled to offer a recovery plan.
Solutions which could be contained in the plan
are quite broad, and include sale of the whole enterprise or a part of it,
conversion of assets into capital, total or partial remittance, renegotiation
of obligations or other transactions, and structural measures. The approach of
the Commerce Act in this respect is as open as possible.
In any case, the plan should arrange the conditions
and modalities of payment to each class of creditors; the guarantees envisaged
in relation to accomplishing the plan; the guarantees provided for unaccepted claims
disputed within pending proceedings on the date on which the plan is proposed;
all management, technical, financial and other measures concerning the plan’s implementation;
and the effect of the plan on employees.
Following approval by the creditors
the plan must also be approved by a court decision which may appoint a
supervisory body to monitor the plan’s implementation. The adoption of the
decision approving the recovery plan simultaneously terminates the insolvency
proceedings.
Where the
debtor does not comply with the recovery plan, creditors whose claims have been
modified with the plan and constitute more than 15 percent of the total debts
may ask the insolvency court to reopen the insolvency proceedings without the
need to prove insolvency again.
This time there will be no possibility for another reorganisation plan.
A similar but alternative solution
to the recovery plan is the conclusion of an out-of-court agreement between a
debtor and their creditors. Unlike the recovery plan, which should be suggested
within a month of publication in the Commercial Register of the list of
accepted receivables, this opportunity is available throughout insolvency proceedings.
The agreement is also subject to approval by the court and the court ruling
terminates the proceedings. The rules
on recommencing proceedings are identical to those described above.
Sale and distribution of the bankrupt estate
If no recovery plan has been
approved or out-of-court agreement concluded, or insolvency proceedings have
been recommenced due to non-compliance with the plan or agreement, the court will
declare the debtor bankrupt and order the termination of their activity.
During this phase the sale of the debtor’s
assets and the distribution of the property sold takes place. The sale is
carried out by the trustee in line with the law and a decision of the creditors’
assembly adopted to this end.
The insolvency proceedings are
terminated by a court decision when all liabilities have been settled or the
debtor’s assets have been depleted. In the latter case, the court orders the
deletion of the company.
This article is for information purposes only and under no account can
it be considered a legal opinion. Should you need any further information on
the issues addressed in this article, please contact PETERKA & PARTNERS Law
Offices.
