Bulgaria: New Court Decision Confirms That Enterprise Pledges Under Bulgarian Law Remain An Efficient Tool For Lenders

Last Updated: 19 January 2018
Article by Katerina Kraeva and Rebeka Kleytman

In its decision of 3 January 2018, the Sofia City Court followed Wolf Theiss' argumentation and confirmed that the privilege of first ranking creditors under enterprise pledges extends over each and every asset forming part of the pool without the need for enforcement.

The amendments to the Bulgarian Registered Pledges Act1 (the "RPA") introduced in 2017 opened a number of discussions and raised considerable doubt of the practicability of floating charges under Bulgarian law, including enterprise pledges.

Under Bulgarian law, an enterprise pledge is a form of floating charge over all assets forming part of the enterprise. It is an efficient form of security, in particular, for companies from the trading, manufacturing, leasing and other similar sectors where the company's assets change dynamically and cannot be listed. Along with the many advantages this type of security has compared to traditional mortgages, its main weakness is that in case an asset leaves such pool (e.g. by way of a sale) it is also released from the pledge. The discharge does not apply to assets which have been listed as specifically pledged (i.e. by means of their identification as an individual asset in the pledge agreement and the registration of the pledge with the registry for such assets). Such individualization can be cumbersome and ineffective as it depends on the pledger's disclosures. A floating charge extends over each non-individualized asset forming part of the pool ("crystallization of the pledge") only after the pledgee has commenced enforcement by taking the formal measures prescribed by law2.

This led to a number of attempts by unsecured creditors to claim that the freezing order of an unsecured creditor over individual assets shall be considered as ranking higher than enterprise pledges, even if such an order was registered only after the enterprise pledge. Thereby, the claims of such unsecured creditors shall be settled prior to the claims of the secured creditors as the enterprise pledge has not yet crystalized in relation to such individual assets. Moreover, it was argued that a pledgee under an enterprise pledge shall commence enforcement in order to be able to benefit from the security.

Although this position had some support from other courts, Wolf Theiss argued against it. Our argumentation was confirmed by the Sofia City Court which resolved that

Unsecured creditors may commence enforcement but they may not have privilege over a first ranking enterprise pledge which is registered prior to the enforcement

While the 2017 amendments to the RPA restricted the malpractices of junior ranking creditors, which had the right to jeopardize the senior ranking enforcement prior to the amendments, there were no similar boundaries introduced for unsecured creditors. A secured creditor with a lower ranking pledge may only commence enforcement: (i) with the consent of the senior ranking creditors or (ii) after having settled the senior ranking claims. Such a restriction was not provided for unsecured creditors; leaving considerable room for discussion concerning the balance of interest in the legislative decision. Unsecured creditors may commence enforcement at any time at their sole discretion and force secured creditors into enforcement. Despite the fact that such actions by unsecured creditors are still permitted, the argumentation that their claims shall have privilege over first ranking secured creditors under enterprise pledges is not substantiated, even considering the deficiencies of the current law.

Article 21 RPA indeed states that an enterprise pledge is valid vis-à-vis third parties acquiring rights over assets forming part of an enterprise pledge only if the pledge has been created explicitly over such assets. However, as per a court decision by the Sofia City Court dated 3 January 2018 (the "2018 Sofia City Court Decision") it was correctly confirmed that Article 21 is a special provision for the benefit of third parties such as buyers of the assets and may not be applied by unsecured creditors. Unsecured creditors' right shall remain lower ranked irrespective of whether an enterprise pledge has been created with or without a list of specifically identified assets and registered in all competent registries.

No commencement of enforcement of the enterprise pledge is required by the secured creditors in order to preserve their ranking and ensure payment of enforcement proceeds in their favour

Several court decisions issued also after the amendments to the RPA from 20173, as well as the 2018 Sofia City Court Decision, confirmed that creditors secured by an enterprise pledge are not required to commence enforcement proceedings in order to be entitled to receive enforcement proceeds, as argued by some unsecured creditors.

The right to enforce a pledge is a right granted to secured creditors, but this does not correspond to an obligation thereto. Moreover, the debtor may have complied with its obligations to the secured creditor and be in breach only in relation to the unsecured creditor who has commenced enforcement. This, however, does not mean that the secured creditor must sit and watch as the unsecured creditor initiates enforcement over assets forming part of the enterprise, thus eventually decreasing the enterprise value.

Furthermore, this question has been resolved in the RPA itself which states that a secured creditor is deemed an (automatically) joined creditor to the enforcement proceedings whereby the secured claims are considered due immediately up to the amount of the enforcement proceeds to be distributed4. This was also confirmed by the 2018 Sofia City Court Decision and is the preferred approach as creditors shall not be forced by law to declare all their claims immediately due, as this would put borrowers into a worse financial position driving them into insolvency.

Secured creditors' claims retain their undisputed higher ranking as per the Law on Obligations and Contracts5

Privileges are regulated in Article 136 of the Bulgarian Law on Obligations and Contracts and this is also the relevant statutory provision to be applied to the distribution of enforcement proceeds. Claims secured by pledges have undisputed higher ranking compared to claims of unsecured creditors of third parties6. The law does not differentiate between claims secured by enterprise pledges or other forms of floating charges and pledges over individual assets. Such an interpretation of the law is ungrounded and not justified and shall, therefore, be rejected. The RPA regulates priorities between creditors under different types of registered pledges, but by no means aims at putting unsecured creditors in a better position compared to secured creditors. This has been confirmed by the 2018 Sofia City Court Decision but also directly by Article 16 RPA, which explicitly refers to Article 136 of the Bulgarian Law on Obligations and Contracts in relation to the regulation of the priority of secured claims.

The 2018 Sofia City Court Decision, thus, closed a number of open questions concerning floating charges; the resolution of which was crucial for the future use of enterprise pledges. Wolf Theiss was also happy to contribute to a further positive development of case law in favour of dynamic commercial relations; highlighting the economic rationality behind the legal provision and differentiating from the predominately formalistic approach of the local courts.

Footnotes

1 The Registered Pledges Act ("Закон за особените залози"), promulgated in State Gazette issue 100 dated 22 November 1996 as amended from time to time.

2 Filing an application for registration of formal commencement of enforcement with the competent registries as prescribed under Art. 32 RPA.

3 Decision 420 dated 26.9.2017 by the Regional Court Veliko Tarnovo, Decision 6124 dated 25.8.2017 by the Sofia City Court

4 Article 10 (3) RPA

5 Law on Obligations and Contracts ("Закон за задълженията и договорите") promulgated in State Gazette, issue 275, dated 22.11.1950 as amended from time to time.

6 Other than the enforcement costs, the claims of the state for taxes due in relation to real assets in case of enforcement over those real assets, etc.

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