Powers of Creditors and Shareholders
This update identifies the circumstances in which the courts will order the termination of business activities performed by an insolvent merchant upon the institution of bankruptcy proceedings. It also asks whether it is possible during open bankruptcy proceedings for the creditors or major shareholders of an insolvent company to halt the commercial activities of that company.
The Commercial Code envisages two major stages of the bankruptcy proceedings: the institution of bankruptcy proceedings and the declaration of bankruptcy. These stages do not usually coincide - first, the court will ascertain the insolvency of the debtor and deliver a decision on the institution of bankruptcy proceedings. Once the bankruptcy proceedings have commenced, it will then issue a declaration of the debtor's insolvency and appoint an official receiver. It may also obtain security through attachment, lien or other security measures. The court must appoint a date for the first meeting of creditors within one month of delivering its decision on the institution of insolvency proceedings.
During the bankruptcy proceedings the debtor carries on its business activities under the supervision of the trustee in bankruptcy. The debtor may only conclude new transactions with the consent of the trustee in bankruptcy and in compliance with the measures stipulated in the decision to institute bankruptcy proceedings. The court may divest the debtor of the powers of administration and disposition of its property, and assign them to the trustee, if it determines that the debtor's actions may jeopardize the creditors' interests. In addition, any financial debts due to the debtor may be discharged only with the approval of the trustee in bankruptcy.
During the bankruptcy proceedings all court and arbitration proceedings relating to civil and commercial actions against the debtor's property will be suspended. The court will also declare a stay of any execution levied against property included in the bankruptcy estate.
All creditors must submit their claims within five months of the date on which notice of the institution of bankruptcy proceedings is published in the State Gazette. If a creditor fails to submit its claim within this term, it cannot be paid.
The court declaration of the debtor's insolvency is usually made after the bankruptcy proceedings have commenced. Upon institution of the bankruptcy proceedings, the debtor may carry on its business activities as long as it observes the restrictions mentioned above. The court can declare insolvency during the proceedings in any of the following cases:
- if no rehabilitation plan is presented before the court. This plan must be submitted at least one month before the court hearing at which the register of claims proposed by the trustee in bankruptcy will be approved;
- if a rehabilitation plan is presented before the court but is not approved by the meeting of creditors;
- if a rehabilitation plan is presented before the court and approved by the meeting of creditors, but is not confirmed by the bankruptcy court (the respective district court); or
- if a rehabilitation plan is presented before the court, approved by the meeting of creditors and confirmed by the bankruptcy court, but the respective court of appeal overturns the first instance decision.
It is thus apparent that there is a hiatus between the court's decision to institute bankruptcy proceedings and its declaration of the insolvency of the debtor. During this period the most important task of the bankruptcy estate (ie, the trustee in bankruptcy together with the court) is to accept submissions of creditors' claims and prepare a prioritized list of allowed claims. This task is crucial, since the meeting of creditors can only be held once the list has been approved by the court. At this time the trustee in bankruptcy must also draft a rehabilitation plan and submit it to the court and to the meeting of creditors. The following people have a right to propose a plan:
- the debtor;
- creditors holding at least one-third of the secured claims;
- creditors holding at least one-third of the unsecured claims;
- partners or shareholders holding at least one-third of the capital of the debtor;
- a group of at least 20% of the debtor's employees; and
- any general partner.
The practice in Bulgaria shows that this transitional period can take from between six to 24 months. During this time there are no legal obstacles to prevent the company from performing its usual business activities in accordance with the specified restrictions.
However, there are two exceptions to the typical bankruptcy procedure, whereby the court decision to institute insolvency proceedings and the declaration of insolvency do not coincide. First, where the continuation of business activities would obviously impair the bankruptcy estate, the court - acting on a motion by the debtor, the trustee in bankruptcy or any creditor - may declare insolvency and terminate all business activities simultaneously with the decision to institute bankruptcy proceedings, before the time limit for submission of a rehabilitation plan has expired (Article 630(2) of the Commercial Code). The court shall apply this provision only in certain circumstances.
Second, if the available property is not of sufficient value to cover the costs of the bankruptcy proceedings, the court shall declare the insolvency, determine the date of the commencement thereof, declare the debtor bankrupt and dismiss the case, unless any interested party pays the required sum in advance (Article 632(1) of the Commercial Code).
Powers of Creditors and Shareholders
A related issue is whether creditors or major shareholders can hinder the commercial activities of an insolvent company. Under the Commercial Code a debtor may continue to carry on its business activities under the supervision of the trustee in bankruptcy and the court as long as this does not adversely affect the creditors' interests. The law thus entitles each creditor to submit to the bankruptcy court that the debtor's actions jeopardize its interests, and request the court to divest the debtor of the powers of administration and disposition of the property and vest these rights in the trustee (Article 635(2) of the Law on Commerce). However, this does not imply the termination of the debtor's activity, unless the court declares the debtor to be insolvent.
A majority shareholder is not entitled to claim bankruptcy, or to petition the court to divest the debtor company's management body of its powers and dispose of the debtor' s property. However, by exercising its corporate rights the majority shareholder can change the members of the governing body and during the bankruptcy proceedings it has the power to propose its own rehabilitation plan. Thus, a majority owner can control the debtor company only by exercising its corporate rights (eg, voting rights in the general meeting, right of convening the general meeting, right to elect and be elected by the managing body, and right of information), but it has no special rights within the bankruptcy proceedings themselves.
However, it is a different issue when the major shareholder is a creditor of its affiliate company. The greater the creditor's claims, the more it can impose its decisions in the meeting of creditors, as the right to make decisions is proportionate to the amount of the claim. In this case a majority shareholder may petition the bankruptcy court to:
- divest the debtor of its right to manage and dispose of its property and assign these rights to the trustee in bankruptcy, where the debtor's activities jeopardize the majority shareholder's position;
- change the trustee in bankruptcy;
- issue a declaration of bankruptcy, where the debtor's activities jeopardize the creditors' interests;
- refuse approval for the adoption of a rehabilitation plan for the debtor company; or
- initiate so-called 'cancellation claims', obliging third persons to return sums they received from the debtor before the insolvency date or initiation of the bankruptcy proceeding.
They may also petition the relevant court of appeal to repeal approval of the rehabilitation plan granted at first instance.
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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