As the sun set on Thursday 6 November 2014, so too disappeared the last rays of hope for Corporate Commercial Bank ("KTB"). One of Bulgaria's smallest banks in the early 2000s, KTB has since expanded rapidly to become its fourth largest lender, only to have its licence withdrawn. The Bulgarian National Bank ("BNB") took this step on 6 November 2014 and simultaneously applied to the Sofia City Court to initiate bankruptcy proceedings.[1] 

KTB has been shrouded in controversy since its management board were interrogated by the Prosecutor's Office at the start of June 2014. Rumours about the bank's financial state sparked a massive bank run, which saw hundreds of panicked depositors lining up outside KTB premises in Sofia, and the withdrawal of more than one-fifth of deposits in a week. KTB's majority stakeholder, Tsvetan Vassilev, was later indicted and accused of embezzling US$140 million from the bank. This culminated in KTB being forced to request "special supervision"[2] from the BNB on 20 June 2014 to prevent any further depletion of its liquidity. 

The liquidation of KTB is a heavy blow for Bulgaria, which has not witnessed a bank collapse since the late 1990s. Perhaps a heavier blow yet may have been dealt to investors. While depositors will have their investments protected to some degree through the depositor guarantee scheme, the same is not true of bondholders, shareholders and lenders. The bank's default on bonds held by international investors has already provoked them to write an open letter to the Bulgarian government, which warned of years of litigation and significantly increased expense should KTB be permitted to fail rather than be rescued. 

However, a bailout now seems unlikely. While the Ministry of Finance and the BNB granted state aid to the tune of BGN 1.2 billion[3] to another Bulgarian bank, First Investment Bank, after it too suffered bank runs in June 2014, no such support has been offered to KTB. Moreover, discussions with EPIC, the State General Reserve Fund of the Sultanate of Oman (an indirect holder of 30 percent of the voting stock of KTB) and Gemcorp (collectively the "Consortium"), to restructure KTB have come to nothing.

Many questions are likely to be raised in the wake of the financial and political fallout, including: how did KTB's metastatic balance sheet[4] remain unnoticed by the BNB, particularly given its approval of KTB's acquisition of CB Victoria (previously Credit Agricole Bulgaria) in May 2014; what, if any, "rehabilitation" measures were explored by the BNB during its conservatorship; and why does BNB appear to have adopted such different approaches towards banks in similar positions?

One thing seems inevitable: KTB's failure will provoke a number of those affected to seek redress, ranging from contractual, fraud and/or company law claims by creditors and shareholders to treaty arbitration by international investors. In the first case, some claims may find their way in the English or the New York courts as well as the Bulgarian courts, depending on the dispute resolution and choice of law clauses in underlying contracts and creative lawyering. This may include actions for declaratory relief or relief from payment obligations procured by any alleged fraud, as well as claims by investors arising out of alleged misstatements or misselling. In the latter case, much will depend on the stakeholders' success in establishing that Bulgaria, acting through BNB and other organs such as the Prosecutor's Office or the police, failed to discharge its duties under investment treaties offering protection to international investors. Such duties include the obligation to provide fair and equitable treatment and not to discriminate between investors and investments in like circumstances. International law imposes responsibility on states both for their actions and omissions.