The general legal framework of existing Bulgarian insolvency law covers the core features recognised by the international insolvency community and takes account of EC Regula-tions and Directives. On the other hand, it does not always achieve the proper balance between the need to address the debtor’s financial difficulty as efficiently as possible and the interests of the creditors.
This article highlights some inefficiencies of the existing Bulgarian insolvency regime compared with international best practices.
No collective insolvency proceedings are in place with respect to natural persons unless they are operating as sole proprietors. Individuals that do not conduct economic activities by themselves may not be discharged from their liabilities in order to have a fresh start.
Issues related to insolvency proceedings
There are no clear rules specifying the over-indebtedness test in Bulgarian insolvency law. This creates some uncertainty for creditors who have become aware that the debtor is in financial distress but has not yet ceased paying its debts (ie, the other available test, insolvency, is not met). Such uncertainty, coupled with civil liability on the part of creditors for negligently filing an application for commencement of insolvency proceedings, may force creditors to refrain from filing. This may defer the commencement of insolvency proceedings at a time when it is possible to preserve the debtor's assets and when there are real prospects for the debtor to recover.
Once insolvency proceedings commence, secured creditors cannot enforce their security. Their priority is not affected but they are only entitled to the proceeds of the sale of the collateral asset if and when such collateral is sold by the administrator. Thus, the general rules regarding the staying of enforcement proceedings are equally applicable to unsecured and secured creditors. Bearing in mind the usually lengthy insolvency proceedings in Bulgaria, the stay on individual enforcement of secured claims in the event of insolvency may undermine the value of security given by a debtor who becomes insolvent.
Claims that arose (ie, due, whether payable or not) before the date when the court decision for commencement of insolvency proceedings was made public but were not lodged within three months thereafter are timed-barred in the insolvency proceedings. In this respect, the law does not distinguish between secured and unsecured creditors. This total bar of creditors’ claims upon expiry of the statutory term is not justified and does not correspond to international best practices. The fair and equal treatment of all creditors should allow the claims of belated creditors to be accepted in insolvency proceedings where good reasons exist.
Further, neither the administrator nor the debtor is obligated to notify known creditors about the commencement of insolvency proceedings. Given the time-barring character of the statutory term for filing of creditor's claims within the insolvency proceedings, it is ra-ther possible that (even secured) creditors learn about the insolvency only after their claims are time-barred.
Issues related to rehabilitation proceedings
Bulgarian law does not provide for out–of-court rehabilitation procedures. The court shall decide whether the company is insolvent and/or over-indebted, announce the com-mencement of insolvency proceedings and ultimately approve a pre-packaged reorgani-sation plan. In many cases this approach can be unnecessarily burdensome, cause delay and be an obstacle to a successful reorganisation.
Two formal rehabilitation procedures are available: one for approval of a reorganisation plan and one for a composition agreement. Both require the court's approval and may be launched only after formal insolvency proceedings have been commenced. There is no legal means for the debtor to unilaterally apply for protection and obtain a moratorium when insolvency or over-indebtedness is imminent but has not yet occurred.
Although a reorganisation plan may envisage the sale of the debtor's enterprise as a going concern, there is a requirement that the proposed sale always be accompanied by a draft sale agreement signed by the prospective purchaser. Given that the statutory deadline for submission of the reorganisation plan is only one month following the commencement of insolvency proceedings, it is not realistic to expect that a third party purchaser would be able to adequately evaluate the debtor's business and negotiate the structure and other terms of the transaction. Thus, the sale of the debtor's enterprise would be rarely carried out, although in many cases such sale may be the best option for creditors and company employees.
At no stage of the insolvency proceedings are creditors entitled to receive a full and detailed disclosure statement of the business and financial situation of the debtor. This lack of access to information renders the adoption of a plan more unlikely since creditors are not able to make an informed decision about a proposed plan. Further, they are not in a position to propose a realistic and feasible reorganisation plan themselves.
The court is not authorised to extend the abovementioned one-month limit for submission of a reorganisation plan. Little consideration seems to have been given to the need, especially in large cases, for adequate time for consultations and negotiations between creditors, which would increase the chances of the plan being approved.
This article was originally published in the schoenherr roadmap`11 - if you would like to receive a complimentary copy of this publication, please visit: www.schoenherr.eu/roadmap