What to expect from the proposed major reform in insolvency proceedings?

The Bulgarian Ministry of Justice's Draft Amending and Supplementing Act of the Bulgarian Commerce Act (the ‘Draft Act’), which has been launched for public discussion, aims to improve the legal framework for insolvency in Bulgaria. It is also in fulfilment of Bulgaria‘s commitments following its accession to the Exchange Rate Mechanism II (ERM II) and in view of its aspirations for future euro area membership. Furthermore, the Draft Act complies with , which must be transposed into Bulgarian legislation by 31 July 2021.

The Draft Amending and Supplementing Act of the Commerce Act reflects on a number of weaknesses in the implementation of legislation related to insolvency proceedings – long duration, low efficiency, high costs, rare overall satisfaction of creditors and others.

In this context, we have outlined its key takeaways:

No choice of insolvency court

An amendment to Article 613 of the Bulgarian Commerce Act (CA) would terminate the possibility for the debtor to choose an insolvency court by changing its registered office. The Draft Act proposes that the local jurisdiction of the insolvency court be tied to the debtor‘s registered office - registered 6 months prior to the submission of the application for initiation of insolvency proceedings, not as of the moment of the submission of the application.

Standardised templates

The introduction of standardised templates with regards to the application for presentation of receivables, the lists of receivables, the reports of the insolvency trustee, and the distribution accounts is also part of the proposals of the Draft Act. The templates must be approved with an Ordinance of the Minister of Justice. It should be noted that similar standardised templates are applied in Germany.

In connection with the above, the Draft Act proposes that Article 685 of the CA provides for the explicit regulation of the application for presentation of receivables and its mandatory details.

An increase (from 7 to 14 days) of the term for the preparation of the lists of admitted and unadmitted receivables by the insolvency trustees is also envisaged.

Binding the deadlines for appealing judgments of the court with their entry in the Commercial Register

The deadlines for appealing some judgments of the court during different stages of the insolvency proceedings are envisaged to be linked to the announcement of the judgments in the Commercial Register. The Draft Act proposes that Article 613a, para 1 of the CA explicitly states that the term should be 7 days "from the entry, respectively from the announcement in the Commercial Register". The purpose of this change is to inform the interested parties about the judgment more quickly, using the publicity and the public confidence that the entry in the Commercial Register presupposes.

In addition, the amendments to Article 613a of the CA would introduce general rules for the deadlines for filing appellate and cassation appeals against judgments in insolvency proceedings. It is further regulated those appellate judgments will be subject to appeal before the Supreme Court of Cassation within 14 days of their entry in the Commercial Register. The appeals will be considered served with their announcement in the Commercial Register and the deadline for response will be:

7 days for a response to an appeal; and
14 days for a response to a cassation appeal.

Claims for the invalidity of transactions of the debtor cease to be conditioned on the date when the debtor is found to be insolvent

The initial date of the insolvency, respectively of the over-indebtedness, is envisaged to be irrelevant for the claims under Article 646, para 2 and Article 647, para 1 of the CA for the declaration of transactions and actions of the debtor as invalid vis-à-vis the creditors.

The Draft Act also proposes changes to Article 646, para 2 of the CA. In accordance with the current regulation, actions and transactions listed in the provision of the Article, performed by the debtor in the period after the initial date of insolvency, respectively over-indebtedness, within the specified in the provided deadlines before the submission of the application for initiating insolvency proceedings, may be declared invalid with respect to the insolvency creditors. The Draft Act proposes that the actions and transactions listed in the provision of Article 646 para 2 of the CA, performed by the debtor in the period between the submission of the application under Article 625 of the CA and the date of the judgment for initiating insolvency proceedings may be declared invalid with respect to the insolvency creditors.

This is aimed at speeding up the insolvency proceedings and their accompanying special claims. The purpose of the shortened terms for appealing the judgment for initiating insolvency proceedings is to rapidly make it not subject to appeal (in most cases this judgment is appealed only when it comes to the initial date of insolvency/over-indebtedness). In the event of a dispute concerning the initial date of insolvency/over-indebtedness, the proceedings regarding claims for filling the insolvency estate are significantly delayed as they are suspended pending the resolution of the preliminary dispute on the initial date of insolvency/over-indebtedness. If, following an appeal against the preliminary execution judgment to initiate insolvency proceedings, a later initial date of insolvency/over-indebtedness is determined, the claim for filling the insolvency estate, which is in accordance with the date of insolvency/over-indebtedness initially determined by the court may be dismissed. Thus, creditors suffer damages in the amount of the costs incurred in the proceedings, which are at the expense of the insolvency estate.

At the same time, with amendments to Article 628 of the CA, the debtor will be obliged to indicate the initial date of insolvency or over-indebtedness in the application for initiating the proceedings.

Amendments to the rules of Article 629 of the CA related to the examination of the application for the initiation of insolvency proceedings, allowing the debtor and the creditors to be examined in one proceeding are also envisaged.

For this purpose, the creditor's application must be submitted within 7 days of the announcement of the application submitted in the Commercial Register by the debtor. If the application of the creditor under Article 625 of the CA is submitted after the expiration of this 7-day period, the proceedings on it will be suspended until the completion of the proceedings on the application of the debtor under Article 625 of the CA with an effective act. In the present regulation, if proceedings have been initiated at the request of the debtor, they are suspended if by the date of issuance of a judgment on them a creditor submits an application for initiating insolvency proceedings.

Lower fees and a longer term for the submission of claims for filling the insolvency estate under Article 649 of the CA

The Draft Act proposes that the fee for claims under Article 649 of the CA be reduced to a quarter of the claim’s price. This also decreases the costs at the expense of the insolvency estate, and hence the damage to creditors when the claims are dismissed. As a result, insolvency trustees will be more encouraged to file claims.

The exemption from preliminary payment of a state fee is envisaged to be extended and to apply to the court orders for filling the insolvency estate.

In addition, the amendments increase the term for filing claims under Article 649 of the CA from one to two years as from the initiation of the proceedings. The aim is to ensure that insolvency trustees can obtain information and evidence of all actions and transactions falling within the factual composition of special claims before the expiry of the preclusive period for filing them, which in most cases is hampered by the debtor's bad faith actions.

Conclusion

The aforementioned takeaways are only part of the Draft Amending and Supplementing Act of the Commerce Act. Amendments are also envisaged regarding the recovery plan and the suspension of enforcement and arbitration proceedings. Additionally, requirements for insolvency trustees are being increased.

The texts of the Draft Act are prepared by a wide range of experts and representatives of the Supreme Court of Cassation, the Supreme Judicial Council, the Supreme Bar Council, district courts, the National Union of Insolvency Trustees, the academic community and the Ministries of Finance and Economy.