"Banks may now agree to collect pledged receivables
prior to accelerating the secured debt under floating charges like
The most popular Bulgarian security interests under credit transactions are special pledges, resembling English floating charges.
Problems under the statutory framework until recently
Under special pledges over receivables in Bulgaria, collateral providers until recently retained their right to collect the receivables until collateral takers registered the commencement of enforcement in a special public register and the collateral provider was notified thereof. Collateral takers could notify debtors under pledged receivables and start collecting them in an out-of-court procedure to satisfy the debt due to them only after these formalities. As prerequisites for rerouting payments under pledged receivables, these formalities used to be a concern for banks, which typically act as collateral takers under receivable pledges. When banks decide to resort to pledged receivables, they wish to reroute payments as quickly as possible. Major foreign banks have often asked us to make such arrangements so they could start collecting receivables immediately. This was impossible under the former framework, as it did not allow banks to reroute payments merely via unilateral notice to the debtor instructing it to start making payments to the banks. Banks also had to contend with the rule that payments could only be rerouted upon commencement of enforcement, which requires the acceleration of secured debt, as collateral takers should specify the amount of payable secured debt they enforce when registering commencement of enforcement. This may block pre-insolvency resolution measures for collateral providers and be expensive for banks, as holding accelerated bad debt triggers the need to make provisions for such bad debt.
New statutory framework and options for collateral takers
Such concerns have been alleviated by a statutory amendment that came into force at the beginning of 2017, allowing different arrangements regarding the moment at which rerouting payments under pledged receivables takes place. As commencement of enforcement is no longer the only prerequisite for rerouting payments, the statutory amendment allows pledge agreements to stipulate that collateral takers may start collecting pledged receivables simply by a unilateral notice instructing the debtor to reroute payments. The possibility of rerouting payments upon unilateral notice is binding on the debtor if it is communicated to it at the outset in the perfection notice on the establishment of the pledge. Although there is no limitation on the parties' arrangements as to when a unilateral notice may be served on the debtor, collateral providers would normally request that there be at least an event of default (short of acceleration) so the possibility of service is triggered.
Collateral takers' rights after rerouting of payments via unilateral notice
Following a rerouting of payments upon a unilateral notice, the collateral taker would have a security right over the proceeds collected from the pledged receivables, i.e. the pledge would be "transformed" from a security interest over receivables (due by a third party) into a security interest over proceeds collected by the collateral taker itself. Under a statutory rule, the collateral taker may enforce such proceeds collected from the pledged receivables, but the general requirement for acceleration would be a prerequisite to commence enforcement. The fact that creditors would have full possession and control over proceeds from the pledged receivables prior to enforcement would make them more willing to postpone acceleration (as holding bad debt is expensive) and agree on debt restricting if collateral providers are in distress. Banks have welcomed the unilateral notice arrangements, as they have always striven to be able to reroute payments immediately when structuring receivables pledges. We have implemented such arrangements in several major financings in 2017 and 2018.
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.