On 24 March 2015, the Bulgarian parliament promulgated an emergency insolvency law that makes almost all of the major effects of insolvency proceedings applicable to Corporate Commercial Bank, even as the court proceedings on the application for commencement of insolvency against the bank continue. In accordance with the new law, on 25 March 2015 the court appointed temporary insolvency administrators to that bank vested with broad powers to recover assets of the bank.
On 20 June 2014, the Bulgarian National Bank (BNB) placed the country's fourth-largest bank – Corporate Commercial Bank (CCB) - under special supervision (специален надзор) due to CCB's inability to meet its obligations. Special supervision is not a type of insolvency proceedings, but rather a reorganisation procedure whereby the BNB terminates the powers of the managers of the respective bank, replacing them by conservators (квестори), appointed by the BNB, who take charge of all of the bank's day-to-day business activities. In this particular case, alongside appointing conservators to CCB, the BNB suspended all of CCB's payment obligations and prohibited CCB from undertaking any banking activity (Moratorium).
On 6 November 2014, following an audit of CCB's assets, the BNB reported that CCB's own capital was negative (i.e. the bank was balance sheet insolvent) and therefore revoked its banking license and brought an application before the court for commencement of insolvency proceedings against CCB. However, due to ongoing appeals against the BNB resolution on revoking CCB's banking license, the proceedings on the application for commencement of insolvency have been stopped and remain pending. As it appears that these appellate proceedings may be delayed, the Bulgarian parliament promulgated an emergency insolvency law on 24 March 2015 (the law entered into force on the same day) whereby almost all major effects of insolvency proceedings are made applicable to CCB, even as it remains under a Moratorium.
- Appointment of a Temporary Insolvency Administrator
The new emergency law now allows the appointment of a temporary insolvency administrator to a Bulgarian bank as a protective measure while the proceedings on the application for commencement of insolvency against such a bank are still pending due to appeals against the revocation of its banking license (Administrator). The new law will apply not only to cases in the future, but also to proceedings that are pending at the time of its entry into force, i.e. the law also embraces the CCB case. Therefore on 25 March 2015, in accordance with the new law, the Bulgarian Bank Deposits Guarantee Fund proposed the appointment of two Administrators to CCB and their appointment was approved by the court on the same day. The Administrators of CCB will exercise their powers always jointly.
Most importantly, the powers of the Administrators will be extremely broad, exceeding those that have so far been exercised under any insolvency law in Bulgaria.
In the CCB case, the Administrators may bring the whole range of avoidance claims against preferential transactions and transactions at undervalue to which CCB is a party as if the insolvency proceedings against CCB had actually already been commenced. The suspect periods under such avoidance claims will be calculated by reference to the date when the BNB placed CCB under a Moratorium – i.e. 20 June 2014.
Apart from that, the Administrators may directly recover from third parties any property purchased with financing extended by CCB in a manner that deviates from the market standards for credit facilities. In other words, this would include interference with transactions to which CCB was not formally a party, but where CCB initially provided the financing for the respective transaction. This amendment has been provoked by the fact that CCB allegedly extended certain amounts of money to borrowers in violation of the good banking practice. As the recipients of such amounts may have invested them in valuable property, the Administrator will now be able to claim such property directly. In particular, the statutory amendments provide that the Administrators may bring proceedings before a court to return into CCB's estate any property originating from the bank received by a third party where (1) that third party has not performed its obligations or the value of the consideration provided by such third party is significantly less then what the third party received; or (2) the asset received by the third party is in the form of a monetary or non-monetary contribution to its capital. "Property originating from a bank" is in turn defined as any monetary resources or other proprietary rights initially provided by a bank to any debtor that have become a property of a third party, in the same or in whatever modified form, irrespective of any intermediate transfers or the form of such transfers.
The Administrators may furthermore bring a new special set-off avoidance claim whereby all set-off operations effected either by CCB or its counterparties after the date of the Moratorium (20 June 2014) are declared void, subject to certain exceptions. This new rule has been provoked by allegedly numerous assignments made after 20 June 2014 of receivables under deposits held with CCB to debtors of CCB (e.g. borrowers under credits extended by the bank) where after the assignments the borrowers set-off their debts to CCB on account of the receivables assigned to them.
The above emergency rules - on recovery of assets originating from CCB and on invalidation of any set-off after the date of the Moratorium -- do not pose any requirement for bad faith on the part of the defendant or any intention to harm CCB's other creditors as a prerequisite for the Administrators to take a recourse to these rules, so arguably affecting the enjoyment of proprietary rights of bona fide defendants. Furthermore, the rules will apply retroactively, impacting transactions performed before their entry into force. Due to these aspects of the new law, the first comments published by some experts have raised certain concerns about its compliance with the Bulgarian Constitution. What in our opinion is crucial with respect to this new law is how it is applied to the facts of particular cases. As they were supported by all major parties in the Bulgarian Parliament, the chances that the rules might be challenged soon before the Constitutional Court of Bulgaria (i.e. before their application to particular cases) by the authorities who have the right to do so directly are minimal. Individuals, on the other hand, may not directly address the Constitutional Court of Bulgaria, but the Supreme Courts in Bulgaria may do so in the course of particular proceedings pending before them. Thus, the manner in which the Administrators choose to apply the new law to particular cases may prove to be crucial.
- Appointment of Forensic Insolvency Experts
The Administrators will furthermore be able to appoint forensic insolvency experts who have the "relevant international expertise in investigating bank insolvency cases". The forensic insolvency experts will be mandated to trace CCB's assets and advise the Administrators on the steps that would need to be taken to recover such assets. This amendment has been provoked by certain reports on the benefits of appointing such experts in bank insolvency cases abroad, and the considerable assets that have successfully been recovered upon their advice.
- Recognition of the new law in other EEA/EU Member States
If the respective EU/EEA jurisdiction has properly implemented the EU Winding up Directive for Credit Institutions 2001/24/EC (Directive), then the new Bulgarian emergency law outlined above and any act of a local authority under it may be subject to recognition in the respective jurisdiction. An important issue to note is that under the Directive, a reorganization procedure or insolvency procedure is subject to recognition in other EU/EEA Member States only if the respective procedure has been opened by an administrative authority or a court, so insolvency-like proceedings opened on the basis of emergency legislation (i.e. directly by the Parliament) should not be subject to recognition. However, another EEA Member State has already provided a case resembling the new Bulgarian emergency law: the Parliament of Iceland passed emergency legislation whereby with respect to Landesbanki (formally in reorganization procedure, i.e. a case similar to the situation of CCB), all insolvency law consequences were made applicable to the bank although no insolvency proceedings had yet been opened by a court in Iceland. In connection with that approach, a dispute arose in France, where a domestic court held that insolvency proceedings commenced by statute rather than a court or administrative decision did not come within the Directive (this was followed by similar judgments refusing to recognize the special Icelandic law in the United Kingdom). However, a reference to the European Court of Justice (ECJ) was made by France's Supreme Court in the course of the appellate proceedings against the French judgment. In what has proven to be a controversial judgment, the ECJ held that what appeared to be commencement of insolvency by means of a legislative act was in fact no such thing. The ECJ considered that the statutory change in Iceland merely brought into effect the features of insolvency proceedings into the pre-existing moratorium that had been opened by the Icelandic courts. Given the ECJ's stance that the insolvency consequences made applicable to Landesbanki directly under the emergency legislation were subject to recognition within EU/EEA, the same must apply to the new Bulgarian emergency law outlined above.
- Recognition of the new law outside the EEA/EU
In contrast to EEA/EU jurisdictions, in which the new Bulgarian emergency law may be recognized and enforced under the Directive, recognition and enforcement may be refused outside EEA/EU (e.g. in the USA).
Despite such refusal, if the defendant has any property located within EU/EEA, a Bulgarian judgment under the new emergency law may be enforced over that property irrespective of the fact that the defendant's home jurisdiction is outside EU/EEA. Bearing in mind that large multinational companies, banks or other financial institutions (i.e., the typical international counterparties of a large Bulgarian bank) normally have some property in EU/EEA (e.g. bank accounts), enforcement over the defendant's property in EU/EEA may effectively replace the lack of enforcement in the defendant's home jurisdiction, should that be outside EU/EEA.
Irrespective of the possibilities for recognition and enforcement of the new emergency law outside Bulgaria, the concerns around its retroactive effects and its impact on the right to property may translate into arguments for defendants abroad that enforcement would violate the local public policy (ordre public) of the jurisdiction in which enforcement is being sought. However, the public policy exception is not meant to turn into a review in an abstract manner of Bulgarian laws' compliance with certain overriding principles of the foreign jurisdiction. Normally, the public policy is an instrument to refuse enforcement only where the effects of the enforcement of particular court judgements or acts of other authorities would be manifestly contrary to some overriding principles in the foreign jurisdiction. Thus, the manner in which the law is applied by the Administrators and Bulgarian courts in each particular case may be crucial in recognition proceedings abroad.