Legislative Framework
Commencement of Proceedings
Presentation of Creditor Claims
Restructuring Plan
Declaration of Bankruptcy
The existing bankruptcy procedures were introduced to Bulgarian legislation in 1994 through the adoption of Chapter Four (Bankruptcy) of the Commercial Act of the Republic of Bulgaria.
Pursuant to this legislation, the procedures are applicable to all merchants: sole businesspersons, companies and other legal entities. However, the general provisions that regulate insolvency do not apply to business agents that exercise a government monopoly or that have been established by operation of a special law. Neither do they apply to banks and insurance companies; these are subject to special regulation by the Banking Act and the Insurance Act respectively.
A commercial company can be declared bankrupt if it is determined that the company is insolvent or excessively indebted. A merchant is deemed to be insolvent if it is unable to pay a debt arising from a transaction, while a merchant is excessively indebted if the value of its debts exceeds the value of its assets.
Whether a merchant is insolvent or excessively indebted will be decided by the courts (in Bulgaria the district courts have competence to decide on these matters), following notification on behalf of the debtor itself or its creditor under a business transaction. Although a debtor is subject to criminal liability if it fails to take steps to commence bankruptcy proceedings within 15 days of a debt falling due, the practice in Bulgaria shows that in most cases proceedings begin at the request of a creditor. The process of proving insolvency or excessive indebtedness is impeded by an ambiguous legal framework and by court practice in cases where the debtor disputes its creditor's claim. The court practice is contradictory because it requires that (i) the bankruptcy court must examine the facts as stated and presented by the creditor, and estimate whether the debtor is unable to pay the obligation, but also that (ii) the fact that the debtor is unable to pay the sums due to a specific creditor must be indisputably determined in separate court proceedings.
Within the bankruptcy proceedings the court must make two basic adjudications: an adjudication for the opening of the bankruptcy proceedings and a declaration of bankruptcy. The proceedings will also be terminated by court decision, once the debtor's property has been sold.
The court may declare the debtor bankrupt at the opening of the proceedings if the company's continued operation could detrimentally affect the bankruptcy estate.
All decisions, adjudications and rulings of the district courts can be appealed before the respective courts of appeal, while court of appeal decisions can be further appealed before the Supreme Court of Cassation.
In practical terms, the commencement of bankruptcy proceedings has the following implications:
- The company continues its operations under the supervision of a receiver (administrator) and can effect new transactions only with the prior approval of the receiver (administrator);
- All litigation on claims in rem against the company is suspended; and
- A general attachment and garnishment is imposed on the property and bank accounts of the company.
Presentation of Creditor Claims
The initiation of bankruptcy proceedings launches several procedures that are executed simultaneously, and in some cases are dependent on one another. The first basic stage involves the presentation of creditor claims. All creditors must file their claims against the indebted company in accordance with the procedure provided for in the Commercial Act, and a list of approved claims will subsequently be compiled. Claims must be filed within one month of the commencement of the bankruptcy proceedings, which will be notified by publication in the State Gazette.
The list of approved claims is drawn up by the receiver (administrator), who must complete it within 14 days of the deadline for filing claims. The receiver will inform the creditors that the list has been prepared through publication of a notice in the State Gazette. Creditors that disagree with the receiver's findings then have 14 days in which to file their objections to the list. The receiver will consider and examine these objections and grievances in a procedure involving all affected parties: the debtor, the creditors that have made the objections and the creditors whose claims are objected to. Following these discussions the receiver will draft the final list of approved claims, which will be endorsed by the bankruptcy court. Company creditors that have filed objections with the receiver which have not been honoured have the right to challenge the receiver's rejection of these objections before the bankruptcy court, and later before the appellate court and the Supreme Court. Meanwhile, the bankruptcy proceedings continue. The claims of these creditors will eventually be included at a later stage in the list of either approved or rejected claims, depending on the court's decision.
Creditors can present their claims within five months of the expiry of the initial one-month term. The receiver will consider their claims in the above manner. However, these creditors do not have the chance to participate in the meeting of creditors and will receive no money from the sale of the debtor's property until their claims are approved.
One of the major stages in bankruptcy proceedings is that of improving the financial health of the enterprise. The governing bodies of the company, the receiver (still functioning as administrator at this stage) and the major creditors and shareholders are entitled to propose a restructuring plan.
The plan must be tabled within one month of the date on which the district court endorses the final list of approved claims. As regards the contents of the plan, the Commercial Act is open-ended. The plan may contain conditions for actions such as:
- reduction or rescheduling of the liabilities to creditors;
- sale of assets;
- transfer of equity shares to obtain financing for the company; and
- management buy-out.
However, the plan must provide guarantees for creditors.
In order to become effective, a plan must first be approved by the minister of finance if it envisages a reduction, rescheduling or phased schedule of payment for public collection claims. In the case of plans with reduction or rescheduling terms, the minister of finance will not grant approval if the relevant terms are less favourable than those for other creditors. No reduction of principal outstanding on public claims is allowed, and a reduction of interest payments is permissible only in return for assuming the obligation to repay the principal within a specific time period determined by the minister of finance. The bankruptcy court does not allow the restructuring plan to be considered by the creditors prior to receiving approval from the minister of finance (Article 153 of the Code of Tax Procedure).
Before becoming effective, the plan must also be presented for consideration at the meeting of creditors. The bankruptcy court will refer the plan to the meeting of creditors only if the plan includes all necessary information as stipulated by Article 700 of the Commercial Act, which is as follows:
- the extent to which the creditors' claims will be satisfied;
- the manner and time frames for payment to the creditors within each class;
- guarantees for the performance of disputed and unapproved claims which are the subject of pending court proceedings as of the date on which the plan is proposed;
- the terms and conditions under which the partners in a general or limited partnership are relieved from their commitments in full or in part;
- the extent of satisfaction received by each class of creditors as compared with what it would have received if the assets were distributed under the terms and procedures provided by law;
- the guarantees provided to each class of creditors in relation to the implementation of the plan;
- the managerial, organizational, legal, financial and technical aspects of implementing the plan; and
- the impact of the plan on the employment status of the debtor's employees.
The bankruptcy court will schedule a date for convening the meeting of creditors, which must not be more than 45 days from the date of its ruling.
At the meeting of creditors the plan will be put to the vote class by class. Article 703(2) of the Commercial Act enumerates the five classes in a meeting of creditors that will vote on the plan as follows:
- first class - secured creditors;
- second class - employees;
- third class - state receivables;
- fourth class - unsecured creditors;
- fifth class - interests raised after the date of the insolvency procedure opening.
Each class adopts the plan through a simple majority of the claims for the respective class. Any dissenting creditors may file their objections to the plan within seven days of the date of voting. More than half of all receivables should vote for the plan.
Once the meeting of creditors has approved the plan the bankruptcy court endorses it with a court decision, as long as the requirements of the Commercial Act have been met. The court's decision may be appealed before the respective court of appeal, and in the final instance before the Supreme Court. The plan is deemed endorsed once the court's decision on such endorsement takes effect.
The endorsed plan transforms creditor claims that arose prior to the date of the court's adjudication on the commencement of bankruptcy proceedings as provided in the plan. The entry into effect of the court's decision on the plan's endorsement terminates the bankruptcy proceedings, and the debtor company is no longer considered bankrupt.
The declaration of bankruptcy is a stage of bankruptcy proceedings that generally follows the restructuring stage if this has ended without endorsement of a restructuring plan. This stage involves proceedings to sell off the company's assets in accordance with the procedures established by the Commercial Act and the Code of Civil Procedure, usually through conducting tenders.
For further information on this topic please contact Dimiter Smilenov at Novel Consult by telephone (+359 2 988 3041) or by fax (+359 2 986 3955) or by e-mail ([email protected]).
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