Bulgaria: Bulgarian Legislator Introduces New Preventative Restructuring Mechanism

Last Updated: 26 January 2018
Article by Angel Ganev and Simeon Simeonov

The Bulgarian Parliament has recently adopted important amendments to the Law on Commerce, establishing, among others, a completely new tool for early restructuring for traders and commercial enterprises in financial distress – the so-called 'business stabilisation procedure'. The amendments concerning the stabilisation procedure will become effective as of 1 July 2017. The new procedure has been adopted as a result of the recommendations of the European Commission and the Council of the European Union for adoption of expedited debt restructuring and second chance frameworks, as well as in response to critics that state that Bulgaria is the only EU Member State whose legislation does not provide a nearly restructuring tool.

The purpose of the stabilisation procedure is to create a viable option where traders and commercial enterprises are not yet insolvent, but the danger of insolvency is imminent – to achieve restructuring and, where possible, partially discharge debts and prevent insolvency.

Key features of the new procedure

Applicability

The new stabilisation procedure applies only in cases where the trader is solvent, but there is an imminent threat that it will become insolvent. An 'imminent threat' is deemed where the trader, with a view of maturity of its debts for the next six months as from the date of the application for opening stabilisation proceedings, will not be able to repay due payments or is likely to stop payments.

The amendments provide for an exhaustive list of cases where the stabilisation procedure is not permitted, including, inter alia: (1) the cases when the trader has failed to submit its annual financial reports to the Commercial Register for the three years prior to the application for stabilisation proceedings;1 (2) where the stabilisation procedure has been opened for the same trader within the three years prior to the application; (3) if an application for opening insolvency proceedings has already been filed against the same trader; and (4) when over one-fifth of existing debts are to related parties or persons who have acquired receivables from parties related to the trader. The stabilisation is also not applicable to public undertakings holding a state monopoly or those established under a special law.

Initiation and administration of the procedure

Only the incumbent trader has the right to ask for the opening of stabilisation procedures. There are a number of specific requirements and attachments to the application for opening a stabilisation procedure, so it can be admitted for a review by the court. The applicant has to specify, inter alia, the type, amount and maturity of all its debts, together with detailed information on any existing security and enforcement measures, to provide data about all its assets and details of any judicial, arbitration or foreclosure proceedings opened against it, including any action for out-of-court settlement with creditors.

The key feature of the application is the detailed reorganisation plan, containing the deadlines, conditions and means of repayment of debts, as well as the figured level of satisfaction of creditors and the securities offered to them.

The stabilisation under the new amendments is a court-administered procedure – the body competent to decide on the application and to open and supervise the stabilisation procedure is the district court at the registered seat of the trader.

Parties to the stabilisation procedure are all creditors, including those to which the trader has given security on debts to third parties. In the case of non-cash debt, all non-cash debts of the trader are converted to cash ones at their market value as of the date of the application for stabilisation. The creditors retain their rights to the existing security, while those that are related to the trader are considered chirographic (unsecured) vis-a-vis all other creditors, thus being satisfied last.

The new amendments introduce new legal bodies, playing an important role in the stabilisation procedure – a trusted party (fiduciary) and a verifier (optional). The trusted party (fiduciary) is an auxiliary body to the court and is required to have a degree in law, as well as to meet the requirements for a trustee in bankruptcy. The powers of the trusted party are very similar to those of the appointed trustee in bankruptcy and include, inter alia, the power to propose the list of creditors to the court and to control the business activities of the trader under the supervision of the court. The verifier could be a chartered auditor and their appointment is optional. However, if the reorganisation plan provides for reorganisation of the business or conversion of debt into equity, the appointment of a verifier is mandatory.

Where the required grounds exist, the court will open the proceedings, appointing a trusted party and, if necessary, a verifier. The court determines their remuneration and it also has the discretionary powers to decide whether it is necessary to secure the debt. If the court admits the application, it is required to schedule a public session within three months to examine and eventually to approve the proposed stabilisation plan.

Consequences of the opening of stabilisation procedures

The effect of the opening is that the trader is restricted in its operations either partially (ie, they could be carried under the supervision of the trusted party) or fully, when the trader is divested of its rights to manage and dispose of its assets. The latter restriction could be imposed if the court decides that the trader seriously hampers the creditors' rights and interests. The opening of the proceedings also imposes a ban over the trader to repay debts that occurred prior to the date of the application and have not been paid on the maturity date, except for public payments (eg, value added tax, excise duties, local taxes or mandatory social security contributions). Another consequence is the suspension of forcible execution proceedings against the trader and any proceedings under the Registered Pledges Act. If the proposed plan is not approved by the court within four months, the suspension is lifted and the execution proceedings are resumed. The court may also allow termination of contracts where the trader is a party to, as far as the contract has not been fulfilled at the time of termination and its future fulfilment will render difficult the implementation of the reorganisation plan and the termination will not cause losses to the other party greater than the normal ones in similar cases.

Similar to insolvency proceedings, the court also has the right to impose interim relief (conservatory) measures on the trader through imposition of attachments, freezing orders and any other appropriate interim measures.

Opening of stabilisation proceedings alone has no effect on the debts of the trader. In contrast to insolvency proceedings, the obligations do not become due and payable, nor are they converted into Bulgarian currency as in the case of opened insolvency proceedings.

Development of the procedure

The court rejects the application if it does not contain the necessary prerequisites and attachments or the grounds for opening are not present. Specifically, the court would reject the application if it finds that the trader is already insolvent, if the proposed stabilisation plan does not correspond to the requirements of the law or if it apparently contravenes to the factual property and financial status of the trader. Another group of grounds for rejection concerns the situation when the trader does not act in good faith in the process of requesting opening of stabilisation procedures (eg, if the information provided in the application is false, or the court finds that the imminent danger of insolvency is solely due to the trader's bad faith or lack of due diligence in conducting its commercial activity). The court will also reject the application if the rules for granting state aid have been infringed.

The core stage of the stabilisation procedure is the review and approval of the proposed stabilisation plan. It is reviewed in an open court hearing where the presence of the trader is mandatory. The right to vote and approve the plan has only those creditors that have been included in the final list of creditors, prepared by the trusted party on the basis of the information, provided by the trader with the application for opening the stabilisation procedure and finally approved by the court. Similar to the insolvency proceedings, each creditor has the opportunity to raise objections to the inclusion or non-inclusion of a creditor in the final list of creditors. The trader, in turn, has the right to express its position regarding the objection.

The plan is voted by classes of creditors. It is adopted by each class of creditors by a majority of more than half of the debts in the relevant class, provided that at least three-quarters of the creditors of the relevant class have voted. The court holds a session to rule on the approval or rejection of the plan voted in that way. The court ruling is subject to appeal by the trader and by any creditor affected by the plan before the Supreme Court, whose decision is final. After it is approved, the plan becomes mandatory for the trader and for the creditors, the debts to which occurred prior to the date of the ruling on the approval. In contrast to the rehabilitation plan in the insolvency proceedings (where it has effect towards all creditors of the insolvent debtor), the approved stabilisation plan has effect only with regard to creditors who took part in the stabilisation procedure, irrespective of whether they cast their vote for the plan.

If the trader does not fulfil the approved plan, the respective creditor has the right to obtain a writ of execution and launch foreclosure proceedings against the debtor, based on the plan. In such case the debtor loses the advantages of the plan (eg, reduction of obligations) and shall pay the full original amount of the debt. In order for the creditors to effectively realise this possibility, the new amendments provide for a special rule for the terms of limitation with regard to the trader's debts. All terms of limitation are deemed suspended during the stabilisation procedure. If the stabilisation procedure is successful, new terms of limitation start for the obligations transformed by the plan. In case the procedure is terminated, the suspended terms are resumed.

The stabilisation procedure is terminated if the stabilisation plan has not been approved by the court within four months as of the date of application for opening, regardless of any suspension. Each creditor affected by the plan may request its invalidation because of threat or fraud, within the time limit for realisation of the plan.

Critical notes

The main goal of the newly adopted procedure is to create a preventative restructuring mechanism and a framework for traders and commercial enterprises in an attempt by the local legislator to overcome the current negative situation in Bulgaria, where the length and recovery for insolvency proceedings are well above the average level for the EU.

However, in terms of technical realisation, the legal practitioners are rather sceptical about the effectiveness and viability of the stabilisation procedure in its current mode.

The first impression is that the amendments have been adopted in a very formal manner, repeating the onerous regulation of the restructuring within the framework of insolvency proceedings to a great extent. The amendments again set up the leading role of the state, as the stabilisation plan needs to be explicitly approved in advance by the Minister of Finance, which itself creates conditions for the unequal treatment of the rest of the private creditors vis-à-vis the state. Another serious procedural shortcoming is that the amendments do not provide for detailed regulation of the interconnection and possible collision between the stabilisation procedure and potential insolvency proceedings opened afterwards, as well as with the Registered Pledges Act and the independent procedure for creditor's satisfaction, set out there.

There are also certain issues in terms of the expedition and costs of the new procedure. Some of the most important characteristics of such measures, in order for them to be economically viable, are the low costs and promptness, allowing for control over the debtor's minimum costs. However, the amendments do not provide for any preferable cost regime for the stabilisation procedure in comparison to the existing rates of the common state fees for standard court proceedings. This also includes the costs for the newly presented bodies of trusted party and verifier, who are appointed solely by the court and whose remuneration is mandatory. At the same time, failure of the trader to pay the remuneration of the trusted party or the verifier is an ultimate ground for termination of the stabilisation procedure, irrespective of the reasons for the lack of payment (eg, refusal of the trader to pay due to excessive remuneration, set by the court). Such legal approach ruins the effectiveness of the new procedure and renders it difficult to implement, especially for small and medium enterprises seeking low-cost restructuring procedure. The excessive number of prerequisites and attachments to the application for the opening of stabilisation procedures additionally increases the costs of the procedure as the trader is requested to provide, inter alia, market evaluation of its assets and evaluation of the securities provided, which is normally connected with the appointment of independent experts and high legal costs.

Another procedural failure is the omission of the legislator to set up legal grounds for the trader to appeal the interim measures and the restrictions of its powers, if necessary. Such measures and restrictions – imposed by the court in the process of implementation of the stabilisation procedure, in the absence of the trader's ability to challenge them – might appear excessive and inappropriate, thus leading to the economic collapse of the trader rather than to its stabilisation.

Conclusion

The critical analysis of the new amendments for adoption of stabilisation procedures leads to the general conclusion that it is unlikely the new amendments will achieve its goals, mainly due to non-conformity with the principles of equal treatment and economic effectiveness, which are of ultimate significance for early restructuring and second-chance mechanisms. The new amendments conform with most of the common principles on the use of preventative restructuring frameworks – set out in the new proposal of the European Commission for a Directive on preventative restructuring frameworks, the second chance measures to increase the efficiency of restructuring, insolvency and discharge procedures. Despite this, the newly adopted stabilisation procedure could not overcome the number of procedural and substantive law oversights and shortcomings, merely leading to problems rather than solutions.

Previous publisher: IBA Insolvency Committee Newsletter, Insolvency and Restructuring International Vol 11 No 1

Footnote

1 The new amendments also introduce the trader's failure to submit its annual financial reports to the Commercial Register for the last three yearsas a new ground for opening of insolvency proceedings.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions