Legal background
The capital increase by an in-kind contribution is a comprehensively regulated and regularly used legal method by which receivables, real estate ownership rights, limited property rights, copyrights and other rights are subject to valuation and converted into the companies' capital.
A branch of a foreign entity may be registered under the rules of Article 17a of the Bulgarian Commercial Act ("CA"), provided that the respective foreign entity is duly registered under the legislation of its national law and, respectively, is entitled to carry out commercial operations. A branch is an aggregate of rights, obligations and factual relations but it does not have a separate legal personality and is, thus, not a separate entity. Nevertheless, it is considered as a type of incorporation under certain special acts, e.g. it is recognized as an independent employer.
The branch of a foreign entity is, by its essence, a separable part of the foreign entity's commercial enterprise. Such part is a functionally detachable and measurable set of rights, obligations and factual relations. In addition, it possesses economic, territorial, organizational, accounting and functional autonomy, which makes it suitable for an in-kind contribution that can be valued using the relevant accounting methods.
The commercial enterprise of the branch is subject to a valuation by three independent experts within the meaning of Art. 72 (2) of the CA, for which, in addition to the primary accounting documents, a business development plan is required and taken into account when applying the valuation methodology.
A challenge is such types of procedures is the fact that the transfer of the commercial enterprise of a branch of a foreign entity represents a conventional capital increase with an in-kind contribution, on the one hand, and has the attributes of a transfer of a separate part of a going concern, on the other hand. This leads to a cumulative application of the rules for in-kind contribution and transfer of a going concern. This specific feature leads to a number of practical considerations and the need to interpret the statutory provisions with a view to their application in this particular case.
Capital increase and transfer of a commercial enterprise in cumulation
The cumulative application of the rules for a capital increase by a contribution in-kind with those for a transfer of a commercial enterprise is necessary in view of the imperative nature of the provisions, the protection of the commercial turnover and the commercial activities of the transferor and the transferee.
A capital increase involving a separate part of a commercial enterprise is carried out following the standard rules for this, with a valuation by three independent experts and a decision on the capital increase, together with the signing of additional documents relating to the increase, such as articles of association. As Art. 73, Para. 3 of the CA stipulates that the valuation in the articles of association may not be higher than the valuation given by the experts, the increase may be carried out by a lesser amount, but not by a value greater than that stated in the valuation.
The capital increase becomes effective upon its entry in the Commercial Register and the Register of Non-Profit Legal Entities. This, in turn, does not override the application of the provisions of Art. 15 et seq. of the CA concerning registration of the enterprise transfer, requirements in the case of employees, etc. The argument for this assertion is the imperative nature of the provision of Art. 16 of the CA concerning registration, as well as the need for disclosure with a view to protecting the commercial turnover and business activities the transferor and the transferee.
Form of validity
The articles of association may be signed in simple written form.
Pursuant to the rules of Art. 15, Para 1 of the CA, the enterprise may be transferred by virtue of a contract with a notary certification of the signatures and the content performed in parallel. In case of an in-kind contribution, the effect of the transfer occurs with a capital increase by a contribution in-kind and a full description of the contribution in-kind in the company's articles of incorporation.
Moreover, according to Art. 73 of the CA, the contribution of a legal right for the incorporation or transfer for which a notary form is required (as under Art. 15, Para. 1 of the CA) is effected by the company's articles of incorporation, i.e. in simple written form.
The capital increase shall be deemed to be an initial and primary registration. Consequently, the provisions relating to the form of validity of a contribution in-kind shall be deemed to be special to those regulating the transfer of a commercial enterprise. The company's articles of association shall be signed in a simple written form (i.e. without a notarial certification of signature and contents).
Grounds for the entry
Based on the existing practice a transfer of a commercial enterprise can be effected through various legal methods, including in-kind contribution. In the case of capital increase by in-kind contribution of the enterprise of the branch, it seems reasonable to assume that the provisions of Art. 16 CA concerning transfer of a going concern, in general, shall also be observed.
In this case, by its essence, the capital increase by a contribution in-kind also represents a transfer of a commercial enterprise.
According to the provision of Art. 16, Para 1 of the CA, the transfer of a commercial enterprise shall be recorded in the files of both the transferor and the transferee. It seems hard to dispute the unambiguous provisions of Art. 16 CA which state that any (i.e. form of) transfer is subject registration, regardless of whether it is a purchase, an in-kind transfer or there is another transferable legal right.
Nevertheless, controversial practices of the competent authorities exist.
The transfer of the commercial enterprise by way of in-kind contribution means that all rights, obligations and factual relations of the commercial enterprise have been assigned to the transferee. This transfer neither results in the closure of the branch nor in its deregistration, and therefore, if the foreign entity continues to carry on business through the existing branch, this would result in the formation of a new commercial enterprise.
Protection of the creditors in the transfer process
According to the CA, the transfer of a commercial enterprise is entered simultaneously in both the files of the transferor and the transferee. This is aimed at protecting the interests of the creditors.
The purpose of the law, incorporated in Art. 16 of the CA, which requires registration in both the files of the transferor and the transferee is also the protection of creditors. In general, greater protection is due to the transferor's creditors to the extent that certain assets leave its custody. Giving credit to the contrary (i.e. that additional registration is not required) would mean that the transferor's creditors would have no way of receiving information about the transfer of the commercial enterprise of the branch by a regular check with the Commercial Register and their potential rights to seek protection by disputing the transfer would be limited in a way.
Practical issues related to the in-kind contrition
- Simultaneous entry in the files of the transferor and the transferee with the Commercial Register
Pursuant to Art. 16 of the CA, the transfer shall be registered in parallel in the file of the transferor and the transferee.
- Technical difficulties for entry in view of the foreign origin of the legal entity – transferor
The transferee in this case is the principal of the branch of a foreign entity and not the branch itself. Hence, the main complication, as the provision could not be applied directly, but to a large extent should be adapted to the new needs of the commercial turnover.
- The Practice of the Commercial Register and the Register of Non-Profit Legal Entities
The Commercial Register in some cases has considered that the registration of the transfer of the commercial enterprise is completed with the completion of the capital increase.
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.
