The extended deadline for the implementation of the Directive (EU) 2019/1023 has expired on July 17, 2022. More than a year later, in August 2023, the amendments to the Bulgarian Commercial Act concerning, among other things, insolvency and restructuring rules and procedures were finally published in the Bulgarian State Gazette. Apart from pure alignment with the European legislation, the amendments are aimed at certain long-standing shortcomings of the Bulgarian insolvency and restructuring regime.
Amendments to the Insolvency Regime
An important change concerns the legal concept of over-indebtedness as a ground for the opening of insolvency proceedings. Over-indebtedness now encompasses the inability of a company to meet not only its monetary obligations but all its liabilities, thus introducing the negative equity balance-sheet test.
The procedural rules for the insolvency process are also amended. In particular, the competent court to hear the case will be determined based on the debtor’s seat, provided that it has not been changed in the previous six months. This is aimed as a measure against so-called “forum shopping” practices where debtors change their seats shortly before insolvency proceedings.
In the past, the first meeting of creditors, based on those listed in the trading books of the debtor and held in the early stages of the insolvency proceedings, has proven to be inefficient. As a result, this step is eliminated altogether, allowing creditors with accepted claims to meet and decide on the appointment of the permanent insolvency administrator.
One of the main reasons for delays in the insolvency process under the previous regime was the variety of grounds for suspension of the proceedings. Now, the use of suspension grounds is refined, bringing the insolvency framework closer to achieving efficiency.
Important changes are introduced also in the process of liquidation and sale of assets from the insolvency estate. Insolvency administrators are now required to prepare a liquidation plan with specific content, including a quarterly forecast of the anticipated disposals of assets. Further, it is now possible to organize the tender for the sale of such assets electronically. This is expected to increase the transparency of the liquidation procedure and lead to a higher collection rate for creditors.
Amendments to the Restructuring (Stabilization) Regime
The latest amendments refine the options available to entities seeking to avoid insolvency. Protection for new and interim financing is introduced, incentivizing creditors to provide much-needed funding.
The period during which the debtor must be at risk of not meeting its obligations is extended from six months to 12 months, and the range of entities that are allowed to benefit from the stabilization proceedings is expanded to include entrepreneurs.
The latest amendments also introduce a number of changes related to the content, submission, and approval of stabilization plans.
Insolvency Proceedings of Entrepreneurs
A major change is the insolvency proceedings for natural persons – entrepreneurs, i.e., craftsmen, self-employed persons, etc., who are not traders. Prerequisites for repayment of debts are introduced, as there are no restrictions or limitations on the subsequent conduct of business activity. For this purpose, a special procedure has been established to verify the prerequisites.
Early Warning Tools
Together with the major changes in the Commercial Act, a new ordinance on insolvency early warning tools has been proposed by the government.
The ordinance aims to provide tools to help businesses assess their current financial situation and be informed about the likelihood of insolvency proceedings being initiated. It also provides for certain support to address the current or future financial distress of companies. The tools under the ordinance include: (a) a free online self-assessment system for enterprises at risk of insolvency; (b) general guidance on options for identifying the likelihood of insolvency and for taking appropriate preventive measures; (c) the use of special consultants in the field of finance, law, accounting, and management that have the required education and professional experience; and (d) educational courses.
Traditionally, insolvency proceedings in Bulgaria have been lengthy, lasting over three years on average, which makes them more costly. Separately, the pre-insolvency restructuring (stabilization) introduced in 2016 has been largely ineffective and very rarely used. It still remains to be seen to what extent the latest amendments to the insolvency and restructuring regime will improve the process to not only save time and costs for the parties involved but also ensure greater efficiency, greater use of restructuring options, and preservation of viable businesses.
By Svilen Issaev, Co-Head of Restructuring & Insolvency, Kinstellar
This article was originally published in Issue 10.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
