The collection of the insolvency estate is one of the important phases of insolvency proceedings. The Bulgarian Commerce Act (Issue No. 48 dated 18 June 1991, as amended) (the “Act”) provides certain tools to facilitate the collection of funds and other assets in order to “maximise” the insolvency estate. One such tool is the ability of the insolvency administrator, or the creditors to the insolvency estate, to challenge the validity of acts and transactions performed by the insolvent company after the insolvency trigger date.
- Legislative overview
Bulgarian law provides mechanisms by which an insolvency administrator or an insolvent company’s creditors may challenge acts or transactions entered into by the insolvent company.
Generally, the acts and transactions which may be deemed null and void vis-à-vis the creditors of the insolvent company may be split into two groups, depending on the period in which they were performed or entered into:
1.1 Acts or transactions performed or entered into after the date of commencement of insolvency proceedings
Under the Act the following actions, if undertaken by the company after the commencement of insolvency proceedings and in violation of the provisions of the Act, are null and void against the insolvent company’s creditors:
- payment of monetary obligations that existed before the insolvency proceedings commencement date;
- granting a contractual mortgage or a pledge over assets of the insolvency estate; or
- a disposal of rights or assets of the insolvency estate.
1.2 Acts or transactions performed or entered into after the initial date of the insolvency trigger
During the insolvency proceedings, the court determines the initial date of the insolvency trigger. The court is entitled to backdate the initial trigger, to the extent that that it may precede the commencement of the insolvency proceedings by two or more years.
The following transactions concluded after the initial date are considered null and void against the insolvent company’s creditors:
- the discharge of monetary obligations;
- transactions with assets of the insolvency estate made for no consideration;
- the creation of any security interest in assets of the insolvency estate; and
- any transactions at an undervalue concerning the assets of the insolvency estate.
Although the Act provides that the acts and transactions listed under paragraphs 1.1 and 1.2 above are null and void against the insolvent Company’s creditors, they will only be null and void when declared so by the competent court ruling on the insolvency proceedings.
A key question relates to the filing of claims for invalid acts and transactions and, in particular whether this claim may be made in running court proceedings or in a specific proceedings dealing with this issue.
The Courts have been quite consistent in applying the Act in this respect. As per the specifics of the procedure and the correlation with other claims in the insolvency proceedings, the court tends to declare acts/transactions vis-à-vis a creditor, null and void in specific court proceedings.
Such court practice is mainly based on the effect of the court’s decision and its binding power. If the nullity is proclaimed ad hoc, the insolvent company may be deprived of the possibility to rescind the challenged transaction and claim reinstatement of the assets or rights in question under the invalid acts/transactions. Where an act or transaction is successfully declared void, the other party to the challenged act or transaction shall become a creditor of the insolvent company.
- Proposed amendments to insolvency proceedings
Recently, there have been discussions regarding amendments to the Act and, in particular, to the sections regulating insolvency proceedings. In order for any amendments to be implemented, they will have to be passed through, discussed and adopted by the Bulgarian Parliament and further promulgated in the State Gazette. The proposed amendments are currently in an early stage.
The draft amendments to the Act provide quite significant amendments to the insolvency position, as stated above. For example, they limit the possibility of creditors to challenge acts/transactions performed/entered into by the insolvent company. One of the amendments provides that creditors may challenge the validity of acts/transactions under 1.2 above only if they have been performed/entered into no later than six months prior to the date of filing for the initiation of insolvency proceedings. Such a period is longer in the case of related party transactions.
Further, the draft of the amended text provides that creditors will not be entitled to challenge the validity of acts or transactions if security (a mortgage or pledge) has been granted in relation to credit for the acquisition of the subject of the security; or if the insolvency estate will not increase as a result of the act or transaction being declared invalid and void.