Bankruptcy is initiated for traders who are insolvent. In addition, bankruptcy proceedings are also opened in case of indebtedness of a limited liability companies, companies limited by shares,or partnerships limited by shares. According to Art. 608 of the Bulgarian Commerce Act (CA), insolvent is any trader who is unable to meet:
- a monetary obligation arising from or regarding a commercial transaction, including its actuality, execution, termination, revocation or repudiation, or
- a public law obligation to the state or municipalities related to its commercial activity;
- a private state obligation.
Pursuant to Art. 742 CA, a commercial company is deemed over-indebted provided its assets are insufficient to cover its debts. Bankruptcy proceedings on grounds of over-indebtedness can also be initiated by a member of the commercial company's managing body and by the liquidator.
Bankruptcy proceedings in Bulgaria are instituted pursuant to an application in writing submitted to the court by the debtor, respectively by the liquidator or the debtor's creditors under a commercial transaction, as well as by the National Revenue Agency, for a public obligation to the state or municipalities related to the commercial activity of the debtor (Art. 625 CA). A debtor who becomes insolvent or over indebt is obliged within 30 days to request the opening of insolvency proceedings, such that the application is filed by the debtor, their successor, the governing body or a representative or respectively a liquidator of a company or a general partner.
The insolvency procedure in Bulgaria aims to ensure fair satisfaction of creditors and the possibility of rehabilitation of the debtor. In essence, insolvency proceedings represent a universal enforcement against traders who are in insolvency or over-indebtedness. One of the legal remedies available to creditors in bankruptcy proceedings according to Bulgarian law are claims for completion of the bankruptcy estate, which are inspected by the debtor committed legal action. These include claims under Art. 646, para. 2 CA and revocation claims under Art. CA 647, which will be addressed in this article.
In addition to the claims for protection to be examined below, the Bulgarian legislature has provided the opportunity for protection in connection with offsets made by the debtor, namely, Art. 645 para. 4 CA states that an offset is void with respect to the bankruptcy creditors, except for the part where the creditor would have received in distribution of the liquidated property, where it has been carried out by the debtor after the date of insolvency, resp. over-indebtedness, but not earlier than 1 year prior to the application for opening of insolvency proceedings, regardless of when the two reciprocal obligations occurred.
I. Claims under Art. 646, para. 2 CA
Pursuant to Art. 646 para. 2 of the Bulgarian Commerce Act, the following actions and transactions performed by the debtor after the date of insolvency, respectively over-indebtedness can be invalidated with respect to the bankruptcy creditors, namely:
- long-term monetary obligation, regardless of the manner of execution, carried out within 1 year prior to filing the application for opening of insolvency proceedings under Art. 625 CA;
- a mortgage or pledge to secure the obligation, unsecured by the debtor, carried out within 1 year prior to filing the application for opening of insolvency proceedings under Art. 625 CA;
- repayment of the due obligation of the debtor, regardless of the manner of execution, carried out within 6 months prior to filing the application for opening of insolvency proceedings under Art. 625 CA.
Art. 646, para. 7 CA provides protection for bona fide third parties, stating that invalidity shall not affect the rights which bona fide third parties acquired for consideration prior to the registration of the application. It introduces a rebuttable presumption that bad faith is presumed until proven otherwise, if the third party is related to the debtor or to the person with whom the debtor negotiated.
With regard to the knowledge of the creditor, the Bulgarian legislature has introduced three presumptions under Art. 646, para. 4 CA. First, the knowledge of the creditor is presumed when he and the debtor are related parties. These may be spouses, lineal relatives, relatives on collateral line of descent - up to and including the fourth degree, by marriage - up to third degree; partners; persons, one of whom participates in the management of the company of the other; persons who jointly control or are controlled directly or indirectly by a third party; persons, one of whom is a commercial agent of the other, and others. (§ 1 of the Supplementary Provisions in the CA). This circumstance must be assessed at the time of implementation. According to the assumptions referred to in Art. 646, para. 4, pt. 2 CA, bad faith of the creditor is presumed when he knew or could have objectively known the circumstances on which to make a finding of insolvency or over-indebtedness of the debtor. Bad faith in this case must be assessed at the time of the transaction and not at the time of fulfillment.
The claims under Art. 646, para. 2 CA are also called "preferential" by the Bulgarian law doctrine, because these claims demand declaring the actions and transactions performed by the debtor after the date of insolvency, respectively over-indebtedness as relatively invalid because one of the creditors, through receiving performance or security is treated as preferential, i.e. placed in a more favorable position than other creditors.
A. Preferential implementation of monetary obligation - Art. 646, para. 2, pt. 1 and pt. 3
The claims cover actions and transactions performed by the debtor during the so-called "suspicious period" - this is the period extending back to the time of filing the application for opening of insolvency proceedings. Depending on the chargeability of the claim, the terms are six months for current liabilities and 1 year for long-term liabilities. However, if the creditor is aware of the insolvency or over-indebtedness of the debtor, the terms are extended to 1 year for current liabilities and 2 years - for long-term liabilities (Art. 646, para. 3 CA).
B. Preferential collateral
According to Art. 646, para 2, pt. 2 CA, relatively void can also be a pledge or mortgage to secure the liabilities unsecured by the debtor by that point. The obligations must be old, because if they occur simultaneously or after the pledge/mortgage, they are beyond the scope of this claim. The secured obligations, unlike the claims under Art. 646, para. 2, pt. 1 and pt. 3 can be both monetary and non-monetary. The preferential collateral is assessed at the time when the interlocutory effect against third parties occurs, the deadline in this case being 1 year, if the creditor acted in good faith, respectively 2 years if they acted in bad faith. The assumptions referred to in the preceding paragraph are also relevant to the bad faith of the creditor in this case. Outside the scope of the claim under Art. 646, para.2, pt. 2 remains the pledge and mortgage, when they are established prior to or simultaneously with the provision of credit to the debtor; when they substitute other property collateral, which is immune from this claim; and finally - when a pledge or mortgage secure a credit granted for the acquisition of the object of pledge or mortgage. Those exceptions are designed to protect the rights of credit institutions.
II. Actions to repeal
According to Art. 647 CA, in addition to the cases provided by law, the following acts and transactions effected by the debtor may be declared invalid with respect to the bankruptcy creditors:
- gratuitous transactions, with the exception of an ordinary donation, to the benefit of a party related to the debtor, effected within 3 years prior to the institution of bankruptcy proceedings;
- gratuitous transactions in favour of third parties, effected within 2 years prior to the institution of bankruptcy proceedings;
- transactions against payment, where the items given exceed considerably in value the items received, effected within 2 years prior to the institution of bankruptcy proceedings, but no earlier than the date of insolvency, resp. the over-indebtedness;
- mortgaging, pledging or providing another security in favour of a claim not secured till that time, effected within 1 year prior to the institution of bankruptcy proceedings, but no earlier than the date of insolvency, resp. the over-indebtedness;
- mortgaging, pledging or providing another security in favour of a claim of a partner or shareholder not secured till that time, effected within 2 years prior to the institution of bankruptcy proceedings;
- a transaction effected within two years prior to the institution of bankruptcy proceedings which jeopardized the creditors, with a party related to the debtor being a party thereto.
Void may also be transactions performed by the debtor in the period between the request for the initiation of proceedings under Art. 625 and the date of the opening of bankruptcy proceedings.
Actions for repeal, provided for in Art. 647 CA, serve to defend the interests of creditors in their dealings with the debtor, as they facilitate proof of wrongfulness of the conduct of the debtor. According to the Bulgarian legal doctrine, these claims comprise three groups of legal actions:
- Transactions whose equivalence is impaired - donations, with the exception of the usual donation executed by a person related to the debtor; donations and onerous transactions in which the value of what was given exceeds the value of what was received.
- Personal and property security of foreign debt - a mortgage, pledge or personal security for foreign obligations; a mortgage, pledge or personal security for foreign obligations in favor of a creditor who is related to the debtor.
- Other transactions that are harming creditors by reducing the bankruptcy estate - a deal harmful to creditors, executed by parties related to the debtor. This opportunity provided by the CA is in connection with the Pavlov claim as set out in Art. 135 of the Obligations and Contracts Act. Under this provision, the actions of the debtor can be declared relatively invalid, if the debtor knew of the damage. If the deal is effected for consideration, the person with whom the debtor concluded the contract must also be aware of the damage, as knowledge is presumed if the debtor and creditor are related parties.
III. Active legitimacy
According to Art. 649 CA, actions under Art. 645, 646 and 647 of the CA as well as the claim under Art. 135 of the Bulgarian Obligations and Contracts Act (OCA), regarding the bankruptcy proceedings, may be brought by the trustee and in his absence - any creditor of the bankruptcy within one year of the opening of insolvency, respectively from the date of announcement of the decision under Art. 632, para. 2 CA (i.e. resumption of production at the request of the creditor within one year after its termination on the basis of Art. 632 para. 1 CA). If the offset occurred after the date of the opening of the insolvency proceedings, the period runs from the offset.
The trustee, respectively the creditor, may also bring reprehensible actions conditioned by such claims such that where the claim is brought by a creditor, the court officially constitutes the assignee as a co-claimant. The amendment of Art. 649, para. 1 CA, adopted by the Law on Amending and Supplementing the Commerce Act - Prom. SG. No 20 of 28.02.2013 introduced a mandatory requirement for official constitution of the trustee as co-claimant in the cases where a creditor has brought actions under Art. 645, Art. 646 and Art. 647 CA. The common action by co-claimants, whose participation in the proceedings is necessarily, is an absolute positive procedural prerequisite.
In order to avoid burdensome court procedures, the Bulgarian legislator has provided that in an action brought by a creditor on the basis of Art. 645, 646 and 647 of CA and a claim under Art. 135 OCA, another creditor has no right to bring the same claim, but may enter as a co-claimant no later than the first hearing of the case.
The claims under Art. 645, 646 and 647 CA and the application of Art. 135 OCA in connection with the bankruptcy proceedings are brought before the bankruptcy court, and the relevant state fees for all instances are not paid in advance. If a claim is successful, the ensuing state fees are collected by the convicted party, and if the claim is rejected, the state fees are collected by the bankruptcy estate.
The effective decision has direct implications for the debtor, the assignee, as well as all creditors.