Restructuring and insolvency law in Bulgaria

Pursuant to Annex A to Regulation (EU) No. 2015/848 of the European Parliament and the Council of 20 May 2015 on insolvency proceedings (recast) (the “Regulation”), the corresponding Bulgarian procedure is the insolvency procedure (производство по несъстоятелност). The insolvency and restructuring legislation is stipulated in Part IV (Insolvency) and Part V (Stabilisation) of the Bulgarian Commercial Act.  

There are special provisions with respect to the insolvency of banks in the Banks Insolvency Act and insurance companies in the Insurance Code, and the  recovery and resolution of banks and investment firms in the Recovery and Resolution of Credit Institutions and Investment Intermediaries Act (the latter being the local legislation transposing the provisions of the BRRD in Bulgaria).  We have responded to the questions below from the perspective of the general legislation (i.e. the provisions of the Commercial Act) and regardless of the special regimes applicable to banks, insurance companies and investment firms, and certain other exceptions from the general regimes such as monopolies and state enterprises. 

Insolvency proceedings are governed by the court and are initiated by a petition in writing submitted to the court. The petition must be submitted by the debtor itself or, respectively, by the liquidator (in the event of voluntary liquidation) or by a creditor. It can also be submitted by the national tax authorities or the labour authorities. 

Stabilisation proceedings under Part V of the Commercial Act are initiated by the debtor.

Under Bulgarian law, there are two triggers for insolvency proceedings: insolvency and over-indebtedness. These triggers are not cumulative; it is sufficient that a company is either insolvent or over-indebted for it to be obliged to enter insolvency proceedings or its creditors to be entitled to enforce the same. 

A company is insolvent when it is unable to meet: 

• a due and payable payment obligation caused by or related to a commercial transaction, including its validity, performance, non-performance, termination, invalidity and rescission or the consequences of its termination
• a public obligation to the state and municipalities related to its commercial activity (such as tax)
• an obligation under ‘private state receivables’, such as receivables of the state under contractual agreements, or
• an obligation to pay wages to at least one third of its employees, which has not been discharged for more than 2 months. 

There is a legal presumption in favour of insolvency if the company: 

• has not applied for publication in the Commercial Register of its annual financial statements for the past 3 years
• has ceased to make due payments, or 
• the claim of the creditor who has filed for insolvency has remained outstanding for more than 6 months under enforcement proceedings. 

A company may also be insolvent if it is able to pay only some of its debts and such difficulties are not temporary in nature. 
A company will be considered over-indebted if its assets are insufficient to cover its monetary (payment) obligations. The definition provided by law is very broad, but in accordance with prevailing case law, the most common test is whether the total value of the company’s cash, cash equivalents and fast liquid assets is lower than the total value of the company’s short-term liabilities, i.e. liabilities which are expected to mature within 1 year. 

However, even if the company is deemed insolvent or over-indebted, the court shall not commence insolvency proceedings if it is of the opinion that the company’s distress is of a temporary nature or the company’s assets are sufficient to cover all of its liabilities without endangering the interests of creditors. 

The insolvency proceedings may either proceed as a rehabilitation of the debtor through the adoption of a rehabilitation plan, or as a liquidation of the insolvency estate and dissolution of the debtor. 

Rehabilitation

In the first case, the rehabilitation plan may be proposed by the debtor itself, the insolvency administrator, as well as shareholders, creditors, and employees of the debtor above certain thresholds. The main aim of rehabilitation proceedings is the continuation of the business activity of the debtor (if still viable) while all the creditors receive satisfaction of their claims to a certain extent. 

Liquidation

In the second scenario, all of the assets of the insolvency estate are being sold for the purposes of satisfaction of the creditors’ claims to the extent possible. Then, the insolvency administrator distributes the proceeds between the creditors based on their ranking and the company of the debtor goes into dissolution.

Stabilisation

Stabilisation is an option available whenever a debtor is not yet insolvent but in imminent threat of insolvency (subject to certain other conditions set out in the Commercial Act). 

The main distinction is made between creditors with secured claims and those with unsecured claims. As a general rule, secured creditors shall be entitled to receive priority satisfaction from the sale of the secured asset. Further, article 722 of the Commercial Act stipulates the ranking of the creditors’ claims within the insolvency proceedings on the basis of their claims; the distribution of proceeds from the insolvency estate shall be made by applying the ranking.

Additionally, when adopting a rehabilitation plan, creditors vote for or against the proposed plan by forming different classes which can be identified as:

• secured creditors
• unsecured creditors
• the state
• employees
• other unsecured creditors that are entitled to receive satisfaction only if all other claims are satisfied. 

The interests of creditors of the same class are considered as one and the same when adopting a rehabilitation plan. 

The legal representatives of the debtor have an obligation to file the petition for the initiation of insolvency proceedings within 30 days after the date on which the company became insolvent or over-indebted. The application which shall be filed on behalf of the debtor may also be filed by the liquidator. The procurator has the obligation to notify the debtor about the insolvency/over-indebtedness within 7 days of its occurrence. 

In case the debtor fails to file the application for the initiation of insolvency proceedings, the responsible persons shall be jointly liable to the creditors for the damages caused by delayed filing. 

Also, under the Bulgarian Criminal Code, the directors shall be criminally liable if they do not file for insolvency within 30 days as of cessation of payments. The penalty which may be imposed is imprisonment up to 3 years or a fine of up to BGN 5,000 (EUR 2,556). 

The main duty of the representative bodies is to file a petition in writing for the initiation of insolvency proceedings. Additionally, the representative bodies of the debtor have an obligation to cooperate with the insolvency administrator. In particular, within 14 days as of the date of the court decision for the opening of insolvency proceedings, the legal representatives of the debtor shall present to the court and to the insolvency administrator assigned all documents and information about the economic activity of the debtor and its property, including information about recent cash and bank transactions and pending receivables. 

Failure to fulfil this obligation may be subject to an administrative sanction which may be up to BGN 5,000 (EUR 2,556).

The restructuring and insolvency proceedings are led by an insolvency/restructuring administrator, while the involvement of the representative bodies of the debtor company is very limited (such as filing the application for the opening of insolvency or restructuring proceedings with the court and appealing certain court orders and decisions). Depending on the phase of the proceedings and the decision of the court, the representative and management functions are either restricted and subject to the administrator’s prior consent and supervision, or entirely stripped from the company’s representative bodies and replaced by the functions of the insolvency/restructuring administrator. The insolvency administrator may be temporary (assigned by the court) or permanent (appointed by the creditors’ meeting), while the restructuring administrator is always appointed by the court.

There are no obligations for shareholders with regard to restructuring/insolvency proceedings. 

No. The only possible involvement of shareholders is for shareholders who own at least one third of the shared capital to propose a rehabilitation plan which shall be adopted by the creditors’ meeting and approved by the court.

The distinction between liquidation proceedings and regular insolvency proceedings shall be made on the basis of the financial health of the company. If the company is solvent and has sufficient assets for the satisfaction of its creditors’ claims, the termination of the company shall be pursued by way of liquidation proceedings. Alternatively, provided a company is over-indebted or insolvent, insolvency proceedings shall be followed. If during ongoing liquidation proceedings it is determined that the company is insolvent or over-indebted, the liquidation proceedings shall be suspended and bankruptcy proceedings shall be initiated upon written petition filed with the court by the liquidator. Once the insolvency proceedings are opened by the court, the liquidation proceedings shall be terminated.

Bulgaria has not yet transposed Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on the discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning the restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency). However, Bulgaria has adopted in its national legislation stabilisation proceedings (производство по стабилизация) pursuant to Commission Recommendation 2014/135/EU of 12 March 2014 on a new approach to business failure and insolvency. 

In contrast with insolvency proceedings, stabilisation proceedings can only be initiated by the company, not by the creditors. The purpose of restructuring proceedings is to avoid the initiation of insolvency proceedings by an agreement reached between the company and its creditors on the settlement of the company’s debt. The procedure aims to enable viable companies in financial difficulty to restructure their debt at an early stage and continue in business. 

Successful restructuring plans in the course of insolvency proceedings are rare in our experience.  Insolvency proceedings in general are lengthy and expensive, and are the least favoured option for creditors, companies and shareholders alike.  

Information about the average success rate after completed restructuring/insolvency proceedings is not publicly available.