7 February 2019

Bulgaria's Supreme Court Of Cassation Issues Interpretative Judgement Strengthening The Equal Treatment Of Creditors And Expediting Insolvency Proceedings



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February 2019 – On 3 December 2018, Bulgaria's Supreme Court of Cassation ("SCC") issued Interpretative Judgment No 1 (the "Judgement") on interpretative proceedings No 1/2017
Bulgaria Insolvency/Bankruptcy/Re-Structuring
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February 2019 – On 3 December 2018, Bulgaria's Supreme Court of Cassation (“SCC”) issued Interpretative Judgment No 1 (the “Judgement”) on interpretative proceedings No 1/2017 of the General Assembly of the Panel of Commerce. The Judgement provides guidance to certain issues concerning insolvency proceedings that in the past have been adjudicated differently by the courts. In particular, courts have reached different interpretations of certain provisions of Bulgarian law directly relating to the participation of creditors in insolvency proceedings and the satisfaction of their claims. The Judgment provides increased clarity and guarantees to a large extent the equal treatment of all creditors participating in insolvency proceedings. Another positive impact of the Judgement is its attempt to provide a more timely resolution of disputes stemming from claims against a debtor that have been raised in the course of insolvency proceedings.

We analyse below some of the more important issues resolved by the SCC's Judgment.

Proceeds from the sale of mortgaged or pledged assets may not be used to cover preliminary expenses relating to the opening of insolvency proceedings or other expenses incurred in the course of the insolvency when such proceeds are not sufficient for the full satisfaction of the creditors secured by a mortgage or a pledge.

Mandatory provisions of the Bulgarian Commercial Act regulate the terms under which the claims of creditors in insolvency proceedings are satisfied. In the absence of a specific provision providing for the preferred satisfaction of creditors who have paid expenses in advance or for the remuneration of the insolvency administrator, such claims qualify as third-tier (after the claims secured by a pledge or mortgage and the claims in relation to which retention rights are exercised). Claims for expenses may not be satisfied with proceeds from the realisation of the collateral (mortgage or pledge) established in favour of a creditor, if such realisation is insufficient to cover the secured claim. The Judgment ensures that the claims of creditors secured by a mortgage or pledge in all cases will be satisfied before any other claims, including those relating to expenses incurred to open insolvency proceedings.

Creditors may use all evidence to prove their claims in the course of proceedings to challenge the list of accepted claims (Art. 692 of the Commercial Act).

In order to identify the persons whose claims will be subject to satisfaction within the insolvency proceedings, the court should consider any contest made against the list of accepted claims before approving it. The SCC has ruled that when considering contests, all manner of evidence—and not just documentary evidence—is acceptable, e.g. accounting or other types of expert opinions. The Judgement has the potential to accelerate insolvency proceedings and contribute to the stabilisation of the debtor's obligations at an earlier stage. Creditors should also be spared additional expenses to prove the existence of their challenged receivables in separate proceedings.

The requirement under Art. 673, para. 3 of the Commercial Act to provide conclusive documentary evidence of their claims applies to all creditors with challenged claims in order to be eligible to vote at the meeting of creditors.

As a general rule, only creditors with accepted claims that have not been challenged by the debtor or by other creditors can participate in the meeting of creditors with a voting right. The Bulgarian Commercial Act, however, provides for the possibility for the court to grant voting rights to three categories of creditors with challenged (accepted or not) claims, specifically:

(i)  creditors whose receivables against the debtor are subject to court or arbitration proceedings on-going upon the opening of insolvency proceedings. These proceedings are put on hold with the opening of insolvency proceedings, but should be resumed if the receivables subject thereto are not accepted by the insolvency court, or if these are accepted but have been challenged by the debtor or by another creditor;

(ii)  creditors with unaccepted claims who have initiated proceedings to establish the existence of their receivables; and

(iii)  creditors with accepted claims that have been challenged as non-existing by the debtor or another creditor.

The literal wording of the law provides for an additional requirement for creditors under item (i) above—to provide conclusive documentary evidence for the existence of their receivable. According to the SCC, in line with the principle of equal treatment, this requirement must apply to all three classes of creditors. The SCC's view is that all three are in the same legal position, which implies the application of the same requirements to have a voting right at the creditors' meeting.

The Judgment introduces the equal treatment of creditors with unaccepted claims or with accepted but challenged claims concerning their eligibility to receive a voting right at the creditors' meeting, irrespective of the moment when the proceedings for the establishment of the existence or non-existence of such claims began.

The creditors' meeting cannot elect a new insolvency administrator unless the court has approved the list of accepted claims.

The Judgment secures the participation of all creditors with accepted claims in the election of a new insolvency administrator. This is of high importance, as the insolvency administrator has significant powers to preserve or increase the insolvency estate, as well as to enforce recovery. In the future, the creditors' meeting may elect a new insolvency administrator only after the approval of the list of accepted claims, i.e., upon participation of all creditors with accepted claims. In this way, the opportunity for persons who in fact may not have claims against the debtor to decide on the election of a new insolvency administrator is impaired. Only creditors with unequivocally established claims or challenged (accepted or not) claims for which conclusive documentary evidence has been provided can affect the election of a permanent insolvency administrator and thus indirectly influence the recovery process.

The term for proposing a restructuring plan starts running from the moment the court ruling on approval of the list of accepted claims submitted within the additional two-month term (as per Art. 688, para. 1 of the Commercial Act) has been published at the Commercial Registry.

According to the SCC, creditors who have submitted their claims in the additional term may not be barred from participating in restructuring proceedings, as otherwise this would lead to the unequal treatment of creditors. Furthermore, under the Judgement the approved restructuring plan is now mandatory for the debtor and for creditors with claims that arose before the start of insolvency proceedings. As a result, there is an opportunity for more creditors to propose restructuring plans, which should have a positive effect on the recovery of their receivables. There is also an increased chance to rescue the debtor's business.

The Judgment comes in response to the increasing number of insolvency proceedings in Bulgaria and the growing body of judicial rulings on diverse issues arising around insolvent companies. The interpretations given by the SCC also apply to currently on-going insolvency proceedings. We anticipate that this will expedite the stabilisation of creditors' claims and guarantee the more complete participation of creditors in insolvency proceedings, which in turn should ensure higher recovery rates of creditor claims. The Judgment should also have a positive effect on the non-performing loan market in Bulgaria, given that a large percentage of exposures that are not serviced are related to insolvent debtors.

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.

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