A look at corporate, personal and, where relevant, partnership insolvency proceedings in Bulgaria, with a brief description to explain key features, as part of our Dictionary of Insolvency Terms in EU Member States. In particular, we highlight who controls the procedure and whether it is likely to be accompanied by a moratorium to prevent enforcement.
Производство по стабилизация
- For companies under imminent threat of insolvency (within six months will become unable to pay their debts).
- The debtor files a petition containing a detailed stabilisation plan with repayment proposals. If the court establishes that the required grounds exist, it will open a stabilisation procedure, appoint a trustee (to supervise the activity of the company) and, if necessary, an auditor (to report to the court whether the stabilisation plan corresponds with the financials and property of the company), and may impose attachment or other security measures.
- The plan is voted on by creditors and approved or rejected by the court. Creditors are divided into five classes (one for secured creditors). More than 50% of the debts in each class (where at least 75% of the class participated in voting) must vote in favour of the plan, which is considered approved if creditors holding more than 75% of the total debts voted in favour of the plan (with votes of related parties not being counted).
- If approved, the plan binds all creditors, regardless of whether they participated in the proceedings unless they were not given an opportunity to vote on the plan.
- Upon the opening of the stabilisation procedure, any enforcement proceedings against the debtor will be suspended. The stay is terminated if the plan is not approved, or not fulfilled.
Производство по несъстоятелност
- If a debtor becomes insolvent or over-indebted, formal insolvency proceedings must be initiated.
- The insolvency procedure is a single entry, multiple-exit procedure commenced by the filing of a petition to the competent court by the debtor or one of its creditors.
- Once insolvency/over-indebtedness is established by the court, possible exit routes from the insolvency procedure are as follows:
- Restructuring plan: may be proposed and prepared by the debtor, by a receiver or by certain percentages of its creditors, shareholders or employees. Creditors are again divided into five classes and the plan must be approved by creditors holding more than 50% of the debts in each class but may not be adopted if creditors whose debts form more than 50% of the total debts voted against it. If approved, the plan binds all creditors whose debts existed before the date of the court’s decision to open insolvency proceedings. If the debtor fails to perform its obligations under the approved restructuring plan, the insolvency procedure may be resumed at the request of creditors.
- Declaring the debtor insolvent: if a restructuring plan is not proposed or adopted, or the debtor fails to perform its obligations under the restructuring plan, or if the court considers that the continuation of the business activity of the debtor may carry the risk of damaging the insolvency estate, the court declares the debtor insolvent and the insolvency procedure ends with the sale of the debtor’s assets in order to satisfy the claims of creditors (to the extent possible). A court-appointed receiver manages the sale. Where the debtor has insufficient assets to cover the initial expenses of the insolvency proceedings, the court will invite the creditors (or other petitioners for insolvency) to fund those expenses. If they decline to do so, the court will stay the insolvency proceedings. The proceedings can be revived if the requisite funding is provided within one year, failing which the court will close the insolvency proceedings and deregister the debtor from the Commercial Register.
- Out-of-court composition with all creditors: all creditors may agree to an out-of-court restructuring plan put together within the context of the insolvency procedure. The agreement must be executed in writing by all creditors. Upon execution of the plan, the insolvency procedure is terminated. While the approval by the court of the plan itself is not required, the court will ensure that any legal requirements for the conclusion of the agreement have been met and, if so, will terminate the insolvency procedure. If the debtor fails to perform its obligations under the plan, the insolvency procedure may be resumed at the request of the creditors.
- All judicial and arbitration proceedings in civil and commercial cases brought against the debtor (except labour court proceedings for monetary claims of employees), as well as all enforcement proceedings against the debtor, are stayed upon the commencement of insolvency proceedings.
- The effect of the commencement of insolvency proceedings on the management of the debtor is determined by the court. As a general rule, the managers/directors may continue to conduct the debtor's business, however a new transaction may only be entered into with the receiver's prior consent. The court may fully divest the managers/directors of their powers and grant the receiver the sole power to manage the debtor's business and dispose of its assets. Once the debtor has been declared insolvent, only the receiver is entitled to act in respect of the insolvency estate.
Ипотеки и залози
Mortgages and possessory pledges
- A mortgage over real estate is a security interest that becomes valid upon the registration of the mortgage deed in the Real Estate Register.
- A possessory pledge over movables is a security interest that is created by the delivery of the relevant movable to the secured creditor. A possessory pledge is usually further evidenced by a signed written agreement between the parties, but need not be so.
- Mortgages and possessory pledges are enforced through a court foreclosure procedure that requires the sale of the secured assets through a public auction, which is supervised by a state enforcement officer or private enforcement agent.
- Special pledges are non-possessory pledges that can be created over movables, machinery and equipment, shares in limited liability companies and partnerships, intellectual property rights, entire enterprises, receivables, and future-acquired assets. Special pledges become valid upon registration of the security in the relevant register (e.g. Commercial Register, Special Pledges Register) for the type of asset pledged. The pledge is void and unenforceable if it is not registered.
- A secured creditor is entitled to enforce its pledge through an out-of-court foreclosure procedure under which the secured creditor may sell the pledged assets by private contract without the involvement of a court enforcement officer.
- If insolvency proceedings are opened in respect of the pledgor, the secured creditor would only be able to carry out a private enforcement over the pledged assets if the creditor had registered the commencement of the private enforcement of the special pledge in the relevant register (e.g. Commercial Register, Special Pledges Register) before the opening of the insolvency proceedings. Special rules exist in respect of the enforcement of special pledges.
Anticipated changes in the next two years
A Bill in relation to the protection of over-indebted natural persons was submitted to the Bulgarian Parliament in July 2017 to introduce a new legal framework to address personal insolvency.
The EU Directive on Restructuring and Insolvency1 requires Member States to incorporate minimum common standards into their national restructuring and insolvency laws by 17 July 2021. The intention of the Directive is to reduce barriers to the free flow of capital stemming from differences in Member States’ restructuring and insolvency frameworks, and to enhance the rescue culture in the EU.
Notable features required to be included in Member States’ national laws include:
- An effective preventive restructuring framework to enable debtors experiencing financial difficulties to restructure at an early stage, with a view to preventing insolvency and ensuring their viability.
- A stay of up to four months extendable to up to 12 months to support negotiations of a restructuring proposal, which should prevent individual enforcement action and include rules preventing the withholding of performance, termination, acceleration or modification of essential contracts.
- An ability to cram down dissenting classes of creditors.
- Adequate protection for financing needed to allow the business to survive or to preserve the value of the business pending a restructuring, and for new financing necessary to implement a restructuring plan.
- Provision for honest, insolvent entrepreneurs to have access to a procedure that can lead to a full discharge of their debts (subject to limited exceptions) within three years.
With thanks to Nedyalka Novakova of Boyanov & Co. for writing this chapter of the dictionary.
1 Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132.