INSOLVENCY OF COMMERCIAL COMPANIES
April 9, 2020
The economic conditions in the various business sectors in
Bulgaria have always gone through peaks and downturns. Today, when the world is
overwhelmed by the Covid-19 pandemic, business is facing even more ambiguity
about its existence.
There are many businesses that have already been
significantly affected by the current situation and that are even considering
to terminate their operations altogether. Most often, termination occurs when a
company is unable to meet its obligations. The solution to this unpleasant
situation is to find “fresh funds” that can flow into the company’s
operations. Or, alas, to proceed to insolvency proceedings.
The insolvency proceedings (bankruptcy) are intended to
ensure fair satisfaction of the creditors’ claims and the opportunity for
recovery of the debtor’s enterprise. The procedure takes into account the
interests of the creditors, the debtor’s company and its employees.
The insolvency proceedings of a company can be defined as a
last resort for collecting debts that a company has towards third parties,
whether natural or legal persons, and very often towards the State (National
Revenue Agency and other state bodies).
Legal grounds for initiating insolvency proceedings
The insolvency proceedings are regulated in detail in Part
IV of the Commercial Act.
The grounds for initiating proceedings are that the company
is insolvent or over-indebted.
The Bulgarian legislator has clearly and accurately defined
the concept of “insolvency” by declaring that a company is insolvent when it is
unable to fulfill its obligations:
1. pecuniary obligation arising from or relating to a
commercial transaction, including its validity, performance, non-performance,
termination, invalidation, or the consequences of termination and, or
2. public obligation to the State and the municipalities
related to its business activity, or
3. obligation on a private state claim, or
4. obligation to pay wages to at least one third of the
employees, which has not been fulfilled for more than two months.
In addition, the Bulgarian legislator also introduced
several presumptions for insolvency of a company:
– If, prior to filing the application for insolvency
proceedings, the company has not submitted its annual financial statements for
the last three years to the Commercial Register;
– Where the debtor company has suspended payments or paid in
whole or in part only to certain creditors;
– If enforcement proceedings have been instituted against
the debtor company and the obligation remains wholly or partly unpaid within 6
months of receipt of the invitation or the notice of voluntary execution.
It is irrelevant what the amount of its debt may be in order
to be able to claim insolvency
proceedings for a company. It is important that there is a pecuniary obligation
that has not been paid because it is
objectively impossible for the company to pay it.
If the debtor company has funds in its accounts, but refuses
to pay the debt for whatever reason, then the creditor should claim their rights
in another way through the means provided for by the Bulgarian legislation.
The second grounds for initiating insolvency proceedings are
that the company does not have sufficient assets to cover its obligations. This
is called “over-indebtedness”.
In order to assess the existence of these legal grounds, a
full assessment of the assets of the company, which includes not only the
availability on its bank accounts but also the availability of property
(movable and immovable), should be made. When the assets of the company are
less than the value of the liabilities to creditors, then this second ground is
assumed to be existing.
Initiation of insolvency proceedings
Insolvency proceedings are initiated and brought before relevant district court at the registered office of the debtor company.
The initiation of the proceedings shall be made by an application filed by the debtor, respectively
by the liquidator or by the creditor of the debtor in a commercial transaction,
by the National Revenue Agency for a public debt obligation to the State or
municipalities, related to the debtor’s commercial activity or a private
government debt obligation. Initiation may also be requested by the Executive
Agency “General Labor Inspectorate” in case of due and unpaid wage
obligations for more than two months to at least one third of the employees of
the debtor company.
Most often, in practice, insolvency proceedings are
initiated at the request of the debtor
themselves, at the request of creditors or at the request of the
National Revenue Agency. The Bulgarian legislator has provided an obligation
for the debtor to request the institution of proceedings within 30 days from
the occurrence of one of the two grounds – insolvency or over-indebtedness.
The application for insolvency proceedings filed with the
court by the debtor company is subject to announcement at the Commercial
Register on the file of the company itself.
The idea behind this announcement is for the company’s creditors
to know about the actions taken and to be able to organize the protection of
their rights and legitimate interests.
An application for initiation of bankruptcy proceedings
filed by a creditor shall be considered by the court in a closed-door session,
summoning the debtor and the applicant, not later than 14 days after filing the
application. The court shall initiate the case on the day the application is
filed and announce the case for decision no later than three months after its
When certifies insolvency, respectively, over-indebtedness,
the court by its decision declares insolvency, respectively over-indebtedness,
and determines the starting date thereof. By
that decision, the court institutes insolvency proceedings, appoints a
temporary insolvency administrator (trusted assignee), allows security by way
of attachment, foreclosure or other precautionary measures, and determines the
date of the first meeting of creditors no later than one month after the ruling
If the debtor’s available assets are not sufficient to cover
the initial insolvency expenses, the court shall determine the amount to be
paid by the persons under Article 625 of Commerce Act or by another creditor to
initiate insolvency proceedings.
If neither the debtor, nor any of their creditors prepays
the initial insolvency costs set by the court, the court orders the termination
of the activity and declares the debtor bankrupt, and then suspends the
The suspension of the proceedings shall be for a period of
up to one year from the entry of the decision in the Commercial Register. Upon
payment of costs, the proceeding shall be resumed and continued with the
subsequent actions provided for by law. However, if the costs determined by the
court are not paid, the court orders the termination of the insolvency
proceedings and the termination of the company.
Submission of the claims of creditors
Creditors should file their claims with the insolvency court
in writing within one month of entering in the Commercial Register the decision
to initiate insolvency proceedings. In their application for the claim, the
creditor should state the basis and amount of the claim, privileges and
security, court address and provide written evidence to prove the existence of
the claim against the debtor company.
The Bulgarian legislator has provided an opportunity for
creditors who have failed to meet the time period under Article 685 of the
Commercial Act (one-month period), to file their claims at a later stage, but
not later than two months after the expiry of the initial one-month period.
After the expiry of this period, claims that have arisen up
to the date of institution of the bankruptcy proceedings cannot be brought.
On the basis of the applications received from creditors,
the temporary trustee, appointed by the court, shall draw up several lists – a
list of accepted claims, filed within the period set forth in Article 685 of
the Commercial Act, list of unaccepted claims, filed within the period set
forth in Article 685 of Commercial Act, a list of accepted claims, filed within
the deadline for additional filing under Article 688 of Commercial Act and a
list of unaccepted claims, filed within the deadline for additional filing
under Article 688 of Commercial Act.
Contestation of accepted and unaccepted claims. Establishment of a claim
The lists of accepted and unaccepted claims, drawn up by the
temporary trustee, are announced at the Commercial Register in the file of the
debtor company. Within 7 days of their announcement, any creditor or even the
debtor may file their objections on the lists of accepted and rejected claims.
The objections are filed with the court with a copy to the
temporary assignee, who must submit a statement on each of these objections.
The court schedules an open hearing on any objection (maybe even within one day)
to which the debtor, the assignee and the creditors are summoned.
Within 14 days of the hearing, the court should give a
ruling rejecting or accepting the objections received. If there are any
objections, the court shall make changes to the lists prepared by the receiver.
The court’s decision to approve the lists is not subject to appeal.
If any of the creditors is not satisfied with the court’s
ruling, they may file a declaratory claim for the existence or non-existence of
their claim under Article 694 of the Commercial Act.
The filing of the claim shall take place within 14 days from
the date of the ruling of the court’s order approving the lists at the
It should be noted that in the proceedings for the
consideration of the objections before the bankruptcy court, and in the case
for establishing a declaratory claim under Article 694 of Commercial Act,
parties are entitled to present the full scope of evidence (to request expert
opinion, to present new documents, etc.).
Depending on the outcome of the proceedings initiated under
Article 694 of the Commercial Act, changes may be made to the lists of
creditors: for example, to include new creditors (if their claims are upheld)
or to exclude creditors’ claims (if successful establishing actions are carried
out against the existence of their claims).
Recovery of the debtor company. Recovery plan
It is not necessary to continue the insolvency proceedings
and terminate the trader’s business activity. Within the proceedings, but no
later than one month after the approval of the list of creditors, each
participant (debtor or creditors) may propose a recovery plan.
A recovery plan may be proposed, although it is not common
in practice, by the assignee or employees of the debtor company.
The main objective of the recovery plan is to enable the
company to overcome its difficulties and to restore to a certain extent a
normal working regime, which will subsequently seek and pay off debts to
creditors. The plan may provide for the postponement or rescheduling of
liabilities, debt forgiveness, reorganization of the company.
The recovery plan is presented and discussed at a meeting of
creditors who vote on whether or not to accept it. Several recovery plans, submitted
by different parties to the proceedings, may be presented for discussion. Once
the plan has been voted on, the insolvency court should approve it.
Declaring the debtor company insolvent
If none of the parties to the proceeding submits a recovery
plan or the submitted plan is not accepted by the creditors, the court has no
choice but to dissolve the company and declare it insolvent.
With the decision on bankruptcy, the court declares the
debtor insolvent and orders the winding up of the enterprise.
In the same decision the court decrees a general restraint
and attachment on the debtor’s property, terminates the powers of the debtor’s bodies,
deprives the debtor of the right to manage and dispose of the property included
in the bankruptcy estate, orders the initiation of redeeming, included in the
bankruptcy estate, and distribution of the redeemed property.
In the insolvency proceedings, the role of the trustee is
particularly important, who should take care of the interests of the debtor
company and ensure that the obligations towards the creditors are met. For this
purpose, the trustee has a variety of options to fill in the bankruptcy estates
(the sum of the debtor’s assets).
The law provides for, through various claims, that the
assignee could challenge transactions or claims, respectively obligations,
cancel contracts, etc.
The redemption of the property is carried out through the
public sale of the assets and the distribution of the received among the
creditors with accepted claims.
The assets of the company are valued as often appraisers are
appointed, who make the valuation according to a method determined by the
assembly of creditors. Once the valuation is available, the court authorizes
the assignee to commence the sale of the property, in accordance with the
decision of the creditors’ meeting.
The proceeds from the property sale are subject to
distribution among the creditors with accepted claims. The Bulgarian legislator
has provided for a certain order of distribution referred to in Article 722 of the Commercial Act.
The payment of creditors’ claims shall be made in the
1. receivables, secured by pledge or mortgage, or attachment
or foreclosure, entered in accordance with the procedure of the Special Pledges
Act – from the amount received during the realization of the security;
2. receivables for which the right of retention is exercised
– from the value of the retained property;
3. bankruptcy costs;
4. claims arising from employment relationships that arose
before the date of the decision to open bankruptcy proceedings;
5. support money, due legally by the debtor to third
6.public law claims of the state and municipalities, such as
taxes, duties, fees, compulsory social security contributions, etc., which have
arisen up to the date of the decision to open bankruptcy proceedings;
7. claims arising after the date of the decision to open
bankruptcy proceedings and unpaid at maturity;
8. other unsecured claims that arose before the date of the
decision to initiate bankruptcy proceedings;
Where funds are insufficient to fully satisfy the claims,
they shall be distributed among the creditors in the appropriate order in
proportion . After the creditors’ claims in one row are satisfied, the trustee
goes on to the next. When the bankruptcy estate is exhausted or all creditors’
claims are satisfied, the proceedings are terminated and the debtor company is
stricken off the Commercial Register.
What our law office can offer you in case of insolvency
Yossifova, Ivanov & Petrov Law Firm has extensive
experience in representing clients during insolvency proceedings.
– advise you on all matters relating to insolvency
– prepare and file an application for initiation of
proceedings (no matter if you are a debtor or a creditor);
– represent you throughout the entire procedure: to file
your claim, to appeal against bankruptcy court acts, to file declaratory
claims, to challenge claims of other creditors.
If necessary, do not hesitate to contact us through the emails and telephones listed in our „Contacts” section.
Financial institution registration in Bulgaria
Financial institution registration in Bulgaria