Restructuring Laws and Regulations in Bulgaria

1. Overview

1.1. What domestic pieces of legislation and international instruments apply to restructuring and insolvency matters in your jurisdiction?

National insolvency and restructuring matters are codified in Part Four and Part Five of the Bulgarian Commerce Act. They cover almost all aspects of insolvency and restructuring matters, both from a material and procedural point of view. For procedural matters not covered by the Commerce Act, the Bulgarian Civil Procedure Code applies (except for provisions the application of which is explicitly excluded by the Commerce Act).

Some specific questions related to insolvency procedures are governed by other pieces of legislation like the Employees Guaranteed Receivables in the event of Employer’s Insolvency Act or Ordinance № 3 of 27.06.2005 on the rules for selection, qualification, and monitoring of insolvency administrators.

Cross-border insolvency proceedings in turn are governed by Regulation (EU) 2015/848 of the European Parliament and of the Council of May 20, 2015, on Insolvency Proceedings.

1.2. Do you have a well-established legal regime governing restructuring and insolvency, or do you have rather frequent legislative changes in the area?

Bulgaria does not have a well-established legal regime governing restructuring and insolvency matters. As an example, the Bulgarian Commerce Act has been amended more than 20 times in the last 10 years, whereas many of these amendments concern insolvency and restructuring proceedings. These frequent changes are a result of constant attempts of Bulgarian legislators to balance the interests of the insolvency creditors, the rights of the debtor, and the speed of insolvency proceedings (thus far, largely unsuccessful). 

1.3. Are there any special regimes applying to specific sectors?

Banks are the only commercial enterprises whose insolvency is regulated not by the Commerce Act, but by the Bank Insolvency Act. Its provisions largely follow the structure of the Commerce Act with some specifics considering the large implications of the insolvency of a bank for the Bulgarian economy.

There have been plans for adopting a special legislative act for the insolvency procedure governing licensed energy suppliers, but no legislation has been adopted on the matter thus far.

While generally the insolvency procedure provisions of the Commerce Act are being applied, companies operating in some specific sectors, such as (but not limited to): pension funds, insurers, collective investment schemes, payment services providers, etc. fall within the scope of specific legislation which governs the effect of insolvency proceedings opened regarding them.

1.4. Were any changes to restructuring or insolvency laws adopted in response to the COVID-19 pandemic? If so, what were they?

By virtue of the Act on the Measures and Actions during the State of Emergency declared by a Resolution of the National Assembly on March 13, 2020, on addressing the consequences of the state of emergency, most court proceedings, including insolvency proceedings, were stayed for the period of the declared state of emergency, i.e., between March 13, 2020, and May 21, 2020. All deadlines under such court proceedings were suspended and deadlines expiring during the state of emergency were extended by one month as of the end of the state of emergency.

After the effect of the above measures expired, no further changes to restructuring or insolvency laws were adopted in response to the COVID-19 pandemic. On several occasions thereafter, Bulgarian courts (as a whole or in the respective regions where the pandemic situation was worse at the given time) suspended open court hearings (including insolvency hearings) for several weeks.

1.5. Are there any proposed or upcoming changes to the restructuring insolvency regime in your country?

Yes, there are such proposed changes. A big overhaul of the insolvency and restructuring regime was prepared by the Bulgarian Ministry of Justice and judges and sent for discussion and adoption by the Bulgarian Parliament. Unfortunately, due to a political crisis, the Bulgarian Parliament was dissolved and early elections were called prior to the adoption of the amendments. Nevertheless, these changes do not seem to be of controversial nature and will most probably be voted on by the next Parliament.

In short, these are the main anticipated changes:

•  Changes to the insolvency proceedings: New guarantees against insolvency “forum shopping” by the debtor, improvement of the over-indebtedness definition (one of the alternative criteria to declare a debtor insolvent), multiple deadline changes, decoupling of invalidation claim deadlines and the accepted initial date of insolvency of the debtor (to speed up such invalidation claims, since often disputes about the exact insolvency date can take years), new claim templates, lower fees for certain claims and actions. In addition, the amended Commerce Act shall include a new obligation of the managers, shareholders, and employees of a company that is at imminent risk of insolvency – to take all necessary actions to avoid insolvency and over-indebtedness of the company, as well as not to endanger the viability of the company intentionally or via gross negligence;
•  Special insolvency proceedings for a new category of debtors – entrepreneurs, to become effective after January 1, 2025, (currently, only traders, i.e. – companies and sole traders, may apply for the opening of insolvency proceedings). The definition of entrepreneurs encompasses “any natural person exercising an economic activity, trade or profession, insofar as his enterprise in terms of subject and volume does not require the conduct of business in a commercial manner.” Such natural persons include most categories of self-employed persons under Bulgarian law – lawyers, notaries, enforcement agents, architects, artists, artisans, etc. The proposed changes include an option for the debt forgiveness (in certain circumstances) of the obligations of an entrepreneur and a sole trader, against whom insolvency proceedings were terminated due to insufficient assets to satisfy all creditors;
•  A major overhaul of restructuring proceedings – These changes aim to implement the provisions of Directive (EU) 2019/1023 of the European Parliament and of the Council of June 20, 2019, on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt. Major changes include – the appointment of a restructuring practitioner be proposed by the debtor and the necessity of his/her appointment be assessed by the court (as opposed to his/her current ex officio appointment by the court), abolishing of the supervisory body of the creditors appointed under the current regime by the court at the proposal of the meeting of the creditors, lowering of the majority thresholds among the creditors, necessary to approve the restructuring plan, along with an option for the court to approve a restructuring plan even if such majority thresholds are not met (in certain circumstances), etc. 

1.6. Has your country adopted or is your country considering the adoption of the UNCITRAL Model Law on Enterprise Group Insolvency?

As of August 2022, Bulgaria has not adopted the UNCITRAL Model Law on Enterprise Group Insolvency. We are not aware of any public or legislative discussion for amendment of Bulgarian insolvency legislation in order to implement elements of the aforementioned UNCITRAL model law.

2. Insolvency

2.1. Is there an insolvency test that triggers certain obligations for directors or officers of the debtor company? If so, what is the test and what are the consequences for failure to meet these obligations?

In Bulgaria, insolvency proceedings are opened against a trader (company or sole trader) that is insolvent or over-indebted. The sole trader or the management of the company is obliged to apply for initiation of insolvency proceedings within 30 days of the occurrence of the relevant circumstance. Should they fail to do so:

•  The management of the company becomes jointly liable with the company for all damage caused to creditors due to the delay in the initiation of the insolvency proceedings;
•  The management of the company bears criminal liability and may face up to three years of imprisonment (although such inaction is rarely prosecuted).

According to the Commerce Act:

•  a company is “over-indebted” if its total assets are insufficient to cover its liabilities;
•  a sole trader or company is “insolvent” if it is unable to pay:

•       an outstanding monetary obligation, related to a commercial transaction, including the validity, performance, non-performance, termination, annulment, and voidance of such a transaction or the consequences of its termination;
•      public receivables (e.g., taxes, social security contributions, custom duties due to the state and municipalities);
•      private state receivables (e.g., sums due under agreements with the state such as public procurement contracts);
•      an obligation to pay salaries to at least one-third of its employees which remains outstanding for more than two months.

As in certain cases, it may be hard to prove such inability to pay (as opposed to unwillingness), there are certain insolvency presumptions that may be employed in the insolvency application. The insolvency is presumed if:

•  prior to the filing of an application for initiation of insolvency proceedings, the trader has failed to submit for publication with the Bulgarian Commercial Register its financial statements for the last three years;
•  the debtor has suspended payments. A debtor is deemed to have suspended payments even if it has fully or partially paid its debts to certain creditors;
•  a creditor’s receivable has remained unsatisfied six months after initiation of enforcement proceedings initiated to collect a sum awarded under an effective court/arbitration decision.

The court may reject the application for initiation of insolvency proceedings if the difficulties described above are not present or if they are only temporary. Usually, the assessment of the court is assisted by an accounting expert who calculates the following financial coefficients of the company: overall, current, quick, and absolute liquidity and financial autonomy.

2.2. What types of insolvency procedures are established by law in your jurisdiction?

Although it may be initiated either by a creditor or by the debtor itself and has different potential outcomes, Bulgarian law establishes only a single type of insolvency procedure (and a single restructuring procedure to be reviewed in Section 3 below).

2.3. Who has the right to initiate insolvency proceedings?

Insolvency proceedings may be initiated by:

•  The debtor, its successors, management bodies, liquidators, or general partners. Company shareholders which bear limited liability cannot initiate insolvency proceedings against the company (if they are not creditors);
•  A creditor of the debtor under a commercial transaction (non-commercial creditors such as employees are not eligible);
•  The National Revenue Agency – the Bulgarian central tax authority;
•  The General Labor Inspectorate – if salaries to at least one-third of the employees of the trader have not been paid for more than two months.

2.4. What are the consequences of commencing insolvency proceedings, in particular:

2.4.1. Does management continue to operate the business and/or is the debtor subject to supervision? 

The insolvency proceedings in Bulgaria have three phases (to be described in more detail in Section 2.5 below):

•  Preliminary phase – for the court to review whether the insolvency application is grounded – initiated after the filing of the insolvency application;
•  Opened insolvency proceedings phase – initiated after the court has ruled to open the insolvency proceedings; and
•  Sale of insolvency estate and distribution of assets phase – initiated after the court has declared the debtor insolvent.

During the preliminary phase, the management of the trader usually retains unfettered rights to operate the business of the company. However, at the request of a creditor (whose claim against the debtor has been supported by sufficient evidence or who is willing to provide a guarantee to secure potential damage to the debtor’s business) or ex officio, the court may introduce interim measures to safeguard the insolvency estate. One of these measures is the appointment of a temporary insolvency administrator who supervises the business of the debtor. In such cases, the management bodies of the debtor may conclude new agreements only with the approval of the temporary insolvency administrator and in compliance with any additional interim measures approved by the court. The temporary insolvency administrator also represents the debtor in court proceedings (together with the management bodies of the debtor), retains the accounting documents of the debtor, and holds other specific powers related to the insolvency proceedings.

During the opened insolvency proceedings phase, the court is obliged to appoint a permanent insolvency administrator for the debtor. Usually, he/she has the same powers as the ones of the temporary insolvency administrator described above. However, should the court deem that the debtor, with its actions, endangers the interests of the creditors, it may deprive the management of the debtor of the right to manage its business and dispose of property and hand over these rights to the insolvency administrator.

With the decision to declare the debtor insolvent by which the last phase of the insolvency proceedings is initiated, the court shall terminate the commercial activities of the debtor and terminate the representative powers of its management bodies. Thereafter, the insolvency administrator remains the single legal representative of the insolvent debtor.

2.4.2. Does a moratorium or stay apply and if so, can it have an extraterritorial effect? 

In general, no moratorium or stay applies during the preliminary phase of the insolvency proceedings. However, as noted above, at the request of the creditor or ex officio the court may impose interim and precautionary measures against the debtor. In addition to the appointment of a temporary insolvency administrator mentioned in Section 2.4.1 above, such measures may include:

•  Distraint or attachment over assets of the debtor;
•  Staying of enforcement proceedings against debtor’s property;
•  Sealing of premises, equipment, vehicles, and other places, wherein the debtor’s property is stored.

After the opening of insolvency proceedings, in addition to the powers of the court to order additional precautionary measures as the ones described above, some measures are applied by virtue of the law:

•  All court and arbitration proceedings against the debtor are stayed. Some of them may be terminated if a certain creditor’s claim has been accepted in the insolvency proceedings without objections or resumed if a creditor’s claim has not been accepted/has been accepted with objections from the debtor/another creditor;
•  All enforcement proceedings against the debtor are stayed for good. Further enforcement on the debtor’s assets is conducted only pursuant to the initiated insolvency proceedings;

With the decision to declare the debtor insolvent, in addition to the above moratorium, the court:

•  Terminates the business of the debtor (no further commercial transactions can be concluded or performed except in order to safeguard the insolvency estate);
•  Imposes a general distraint and attachment over the whole insolvency estate of the debtor;
•  deprives the debtor of the right to manage and dispose of the property included in the insolvency estate.

Bulgarian law does not differentiate between court cases initiated in Bulgaria or abroad and contracts with Bulgarian or foreign counterparties of the debtor. Naturally, such extraterritorial effect of the Bulgarian insolvency proceedings is effective only if the acts of the Bulgarian insolvency court are recognizable and recognized in the respective countries.

2.4.3. How does it impact the existing contracts (e.g., is the counter-party free to terminate them, can the debtor’s pre-insolvency transactions be challenged)?

The opening of the insolvency proceedings does not lead to the termination of existing contracts by virtue of the law and does not allow counter-parties to terminate them solely on the basis of the initiation of the insolvency proceedings. Naturally, the counter-party is allowed to terminate such contracts if the debtor defaults on its obligations (which is highly likely) or if the contract has specific provisions that allow the counter-party to terminate the agreement in the event the debtor becomes insolvent.

The insolvency administrator is entitled to terminate any existing agreement to which the debtor is a party to (in this case – the debtor being liable for the damage caused to the counter-party). Additionally, any counter-party may inquire whether the insolvency administrator intends to keep or terminate a certain contract. Where the insolvency administrator does not respond to a request, the contract is deemed to have been terminated. The decision of the insolvency administrator to keep an existing agreement with a counter-party does not oblige the insolvency administrator to pay the obligations of the debtor which have become due prior to the date of the decision of the court to open insolvency proceedings.

Additionally, there are certain categories of agreements entered into by the debtor that are considered invalid by virtue of the law and another category of agreements which can be invalidated by the court pursuant to the filing of an invalidation action.

Pursuant to the Commerce Act, the following actions and transactions of the debtor performed after the date of the court decision opening the insolvency proceedings shall be considered null and void with respect to insolvency creditors:

•  Performance of an obligation of the debtor incurred prior to the date of the court decision opening the insolvency proceedings;
•  Establishment of a pledge or mortgage over an element of the insolvency estate;
•  Any transaction with a right or an asset part of the insolvency estate.

The following actions and transactions of the debtor may be declared invalid with respect to the insolvency creditors if (i) performed/concluded after the date the debtor turned insolvent as determined by the insolvency court; and (ii) performed/concluded at the respective period of time prior to the filing of the insolvency application which initiated the proceedings:

•  Performance of an obligation of the debtor which was not yet due – one year prior to the application (two years prior, if the counter-party was aware that the debtor is insolvent at the time);
•  Establishment of a pledge or mortgage for a previously unsecured obligation or for a third-party obligation – one year prior to the application (two years prior, if the counter-party was aware that the debtor is insolvent at the time);
•  Performance of a due obligation of the debtor – six months prior to the application (one year prior, if the counter-party was aware that the debtor is insolvent at the time);
•  A transaction where the debtor has received consideration significantly below the fair market value – two years prior to the application;

The following actions and transactions of the debtor may be declared invalid with respect to the insolvency creditors if performed/concluded at the respective period of time prior to the filing of the insolvency application which initiated the proceedings and irrespective of whether performed/concluded after the date the debtor turned insolvent as determined by the insolvency court:

•  Gratuitous transactions to a related party – three years prior to the application;
•  Gratuitous transaction to an unrelated party – two years prior to the application;
•  Establishment of a mortgage, pledge or guarantee for collateral of an obligation to a related third party – two years prior to the application;
•  Transactions that are harmful to creditors concluded with a related party – two years prior to the application.

The invalidation actions described above shall be filed by the insolvency administrator or, if the insolvency administrator is inactive – by any insolvency creditor, within one year of the date of the decision opening the insolvency proceedings, before a different panel of judges at the insolvency court.

2.5. Which steps do insolvency proceedings normally include and what are the roles of the courts and other key stakeholders (such as debtor, directors of the debtor, shareholders of the debtor, secured creditors, unsecured creditors, etc.)?

As described above, insolvency proceedings normally include three phases:

•  Preliminary phase – for the court to review whether the insolvency application is grounded – initiated after the filing of the insolvency application;
•  Opened insolvency proceedings phase – initiated after the court has ruled to open the insolvency proceedings;
•  Sale of insolvency estate and distribution of assets phase – initiated after the court has declared the debtor insolvent.

Exceptions are possible in the following cases:

•  If there are insufficient assets to cover the initial insolvency expenses and they are not prepaid as directed by the insolvency court, the latter declares the insolvency/over-indebtedness, sets its initial date, initiates the insolvency proceedings, admits collaterals, terminates the business of the debtor, declares it insolvent, and stays the proceedings.

Proceedings may be resumed within one year, upon application by the debtor or by a creditor, if the applicant proves that sufficient property is available or deposits the required amount for prepayment of the initial expenses. If no request to resume the proceedings is made, the court orders termination of the insolvency proceedings and deregistration of the debtor from the Commercial Register, foregoing the sale of the insolvency estate (if any) and distribution of assets to creditors;

•  If the court considers that the continuation of the business of the debtor may harm the creditors and its recovery is impossible the court may combine phases two and three, i.e. – to open the insolvency proceedings and declare the debtor insolvent with a single decision;
•  If a recovery plan is approved, the court terminates the proceedings prior to phase three, i.e. the insolvency estate is not sold and the debtor continues its business pursuant to the approved recovery plan.

In general, the three phases of the insolvency proceedings entail the following:

a) Preliminary phase

•  Filing of the insolvency application – by the debtor or a creditor;
•  Review of the application, usually, several court hearings are held to review the accounting books of the debtor, and examine an expert witness on the financial coefficients of the debtor, etc;
•  If requested or ex officio – imposing of preliminary security measures on the debtor (such as the ones described above – appointment of a temporary insolvency administrator, imposing of attachments and distraints over debtor’s property, etc.);

b) Opened insolvency proceedings phase

•  Court ruling for opening of insolvency proceedings – determining the initial insolvency date, the appointment of the temporary insolvency administrator, imposing of security measures over the property of the debtor, scheduling a first meeting of the creditors, etc.; 
•  Holding of the first meeting of the creditors – As at this stage the list of approved creditors’ claims has not been published yet, only creditors included in the accounting books available to the temporary insolvency administrator are eligible to participate. At this meeting the creditors hear the report of the temporary insolvency administrator, appoint a permanent insolvency administrator, and, optionally, a creditors’ committee to assist and supervise the insolvency administrator when exercising his/her powers;
•  Lodging of creditor claims – Creditors have two deadlines to lodge their claims – one month after the decision to open insolvency or within an additional two-month period, in which, however, they do not have the right to contest other creditors’ claims which have already been accepted in the initial period. Claims which have arisen prior to the insolvency decision and have been lodged after the expiry of the deadline are inadmissible;
•  Drafting of the lists of approved and rejected claims – After the expiry of the above deadlines and based on the evidence submitted by the creditors, the insolvency administrator drafts two lists – of approved and rejected creditors’ claims and lodges it for approval by the insolvency court;
•  Filing of objections against the lists by the debtor and insolvency creditors and amendment/approval of the lists by the court – The debtor and creditors who filed their claims within the deadlines described above are entitled to object against an accepted creditor’s receivable, while each rejected creditor is entitled to object against its rejection. Thereafter the court schedules one or several court hearings, hears the objections, admits the respective evidence, and renders a ruling approving and/or amending the lists proposed by the insolvency administrator. The debtor or creditors whose objection has been rejected or who are unsatisfied with the final versions of the lists may bring actions before a different panel of judges with the insolvency court to prove the existence of a rejected claim or prove the non-existence of an accepted claim. Such court actions may be reviewed by up to three court instances;
•  Holding of a second meeting of creditors – After approval of the lists of accepted/rejected claims, the court shall schedule a new meeting of creditors. This meeting may review the report of the insolvency administrator, set his/her salary, replace the insolvency administrator, appoint a creditors’ committee, and adopt other decisions important for the course of the insolvency proceedings. Thereafter, the court shall schedule new meetings of creditors upon the request of the debtor, the insolvency administrator, the creditors’ committee, or creditors whose receivables are at least 20% of the total accepted receivables;
•  Proposal of a recovery plan – Within one month of the court ruling that approves the lists of approved/rejected receivables, the debtor, the insolvency administrator, shareholders, a certain majority of employees of the debtor, or a certain majority of creditors are entitled to propose a recovery plan for the company of the debtor. The plan shall, amongst others include provisions regarding the level of satisfaction of different creditor categories, compared to the expected level of satisfaction if no plan is approved, guarantees that shall be given to all creditor categories, management, organizational, legal, financial, technical, and other actions for the implementation of the plan and the impact of the recovery plan on debtor’s employees;
•  Admitting and approval of the plan – The court shall review the lawfulness of the proposed recovery plan. Should the court decide that the recovery plan meets the statutory requirements, the plan shall be put to a vote by the meeting of creditors. The creditors are divided into several categories, depending on the nature of their claim and their ranking (as described in the answer to Section 2.6.). The plan is considered adopted if approved by creditors with more than half of the accepted receivables. The approval of a recovery plan and its entry into force shall be confirmed by the court. The court grants its confirmation if, amongst others: the procedure has been lawfully conducted, the necessary majorities of creditors have approved the plan, no creditor shall receive more under the approved recovery plan than the amount of its receivable, and all creditors which voted against the plan shall receive satisfaction equal to the one if no recovery plan was confirmed. If a recovery plan is confirmed by the court, the latter terminates the insolvency proceedings and appoints a supervisory body of creditors to monitor the performance of the recovery plan (non-performance shall lead to re-initiation of the insolvency proceedings). If no recovery plan is proposed, approved by the creditors, and/or confirmed by the court, the insolvency proceedings enter their next phase with the declaration of the insolvency of the debtor.

c) Sale of assets and distribution of proceeds phase

•  Declaration of debtor’s insolvency – In the absence of a recovery plan, the court renders a decision declaring the debtor insolvent. In addition, the court: terminates the commercial activities of the debtor and the representative powers of its management bodies, orders a general attachment and distraint over the debtor’s property, bars the debtor from disposing of its property, and orders the initiation of the liquidation of the insolvency estate and distribution of the proceeds amongst the creditors;
•  Holding of a new meeting of creditors – Usually, a new meeting of creditors is held after the declaration of the debtor’s insolvency with the main goal to give instructions to the insolvency administrator on creditors’ preferred strategy for the sale of the insolvency estate; 
•  Liquidation of the insolvency estate – The insolvency administrator, with the approval of the meeting of creditors and the court organizes public tenders (and in limited circumstances – direct negotiations with buyers) for the sale of assets belonging to the insolvency estate;
•  Distribution of proceeds – Pursuant to the accumulation of sufficient proceeds from the sale of parts or the whole insolvency estate, and pursuant to the priority ranking of creditors described in the answer to Section 2.6., the insolvency administrator prepares a distribution list, to be announced in the building of the court and in the Bulgarian Commercial Register. Within 14 days of its announcement, all affected creditors are entitled to file objections against the distribution list before the insolvency court. The approved distribution list is thereafter approved and/or amended by the insolvency court (its ruling may be appealed by affected creditors before the appellate court). The distributions under the court-approved list are made by the insolvency administrator;
•  Termination of insolvency proceedings – After all creditor claims have been satisfied or the insolvency estate (bar unsellable assets) has been exhausted, the insolvency proceedings shall be terminated by the insolvency court (please refer to our answer to Section 2.7. for more details on the finalization of the insolvency proceedings).

2.6. In insolvency proceedings, do specific stakeholders’ claims enjoy priority (e.g. employees, pension liabilities)? Can the claims of any class of creditor be subordinated (e.g., equitable subordination)?

Yes, there is a complex system for the ranking of the priority of creditors’ claims during the distribution of proceeds accumulated from the sale of the insolvency estate, the ranking being, as follows:

(a) receivables secured by a pledge or mortgage, interdiction or attachment, recorded under the procedure of the Registered Pledges Act – from the proceeds from the sale of the respective encumbered property;

(b) receivables, on account of which a right of retention is exercised – from the proceeds from the sale of the retained property;

(c) the following insolvency expenses are covered by creditors due to a lack of liquid assets in the insolvency estate: state fees, remuneration of the insolvency administrator, employee salaries after the date of the decision on initiation of the insolvency proceedings, expenses for collection, management, evaluation, and distribution of the insolvency estate, debtor allowance;

(d) employee claims, which have arisen prior to the date of the decision on initiation of the insolvency proceedings;

(e) alimony payable by the debtor to third parties under the law;

(f) public-law receivables of the State and the municipalities such as taxes, customs duties, fees, mandatory social-security contributions, and others, which have arisen prior to the date of the decision on initiation of insolvency proceedings;

(g) outstanding receivables, which have arisen after the date of the decision on initiation of the insolvency proceedings;

(h) any remaining unsecured receivables, which have arisen prior to the date of the decision on initiation of the insolvency proceedings;

(i) legal or contractual interests on an unsecured receivable, payable after the date of the decision on initiation of the bankruptcy proceedings;

(j) credit extended to the debtor by a partner or shareholder;

(k) a gratuitous transaction;

(l) other creditors’ expenses related to their involvement in the insolvency proceedings (such as, for example, attorney fees).

When the proceeds from the (partial) sale of the insolvency estate are insufficient to fully satisfy the receivables of a respective category of debtors, such proceeds shall be distributed commensurately among the creditors of the respective category.

The concept of equitable subordination is not present in Bulgarian law. The aforementioned ranking of creditors is unalterable and creditor claims cannot be subordinated based on creditor’s misconduct. However, as described above, certain transactions concluded by the debtor are deemed null and void. Another category of transactions can be attacked by a creditor/the insolvency administrator before Bulgarian courts as harmful to the insolvency estate. Therefore, the insolvency administrator/Bulgarian courts may deny the inclusion of such creditor claims in the list of approved claims, depriving such creditors of the opportunity to participate in the distribution of proceeds entirely.

2.7. What is a timeline for insolvency proceedings and how are they finalized? 

There are no strict timelines to finalize insolvency proceedings in Bulgaria. There are several intermediate recommended deadlines for the court, but they are rarely followed. Thus, insolvency proceedings may take several years or even a decade in worst cases from start to finish. 

Insolvency proceedings are finalized, as follows:

(a) If a recovery plan is approved

With its decision approving the recovery plan, the court shall appoint the recovery plan supervisory body and terminate the insolvency proceedings.

The insolvency proceedings may be re-initiated pursuant to an application of creditors with at least 15% of the total receivables towards the debtor or of the recovery plan supervisory body if the debtor has defaulted on the agreed recovery plan. 

(b) If no recovery plan has been approved

•  Within one month of exhaustion of the insolvency estate or satisfaction of all creditors, the insolvency administrator files a final report to the court for his/her activities;
•  Within 14 days of receipt of the report, the court schedules a final meeting of creditors, whereat the creditors discuss the report of the insolvency administrator and decide on the faith of the unsellable items part of the insolvency estate;
•  Thereafter, the court renders a decision that terminates the insolvency proceedings, terminates the rights of the insolvency administrator, and orders the deregistration of the trader from the Bulgarian Commercial Register. Alternatively, if all creditors have been satisfied and there are still assets in the insolvency estate, the debtor is not deregistered and may resume its business.

The insolvency proceedings may be re-initiated if within one year of their termination amounts set aside for contested claims are released or previously unknown assets are discovered.

2.8. Are there any liabilities that survive the insolvency proceedings?

(a) If a recovery plan is approved

If the insolvency proceedings have been terminated pursuant to the approval of a recovery plan, all creditor receivables included in the recovery plan survive the insolvency proceedings and shall be performed by the debtor, as agreed. Creditor claims not submitted to the insolvency court or creditor claims not included in the recovery plan are extinguished. 

(b) If no recovery plan has been approved

If the insolvency proceedings have been terminated without a recovery plan (rather – through sale and distribution of the insolvency estate), no creditor receivables survive the termination of the insolvency proceedings. The only exception is in the event the insolvency proceedings are re-initiated if within one year of their termination amounts set aside for contested claims are released or previously unknown assets are discovered. In this case, creditors whose claims were accepted in the initial insolvency proceeding may participate in the distribution of the proceeds from these newly discovered assets. Creditor claims not submitted to the insolvency court are considered extinguished irrespective of such re-initiation.

3. Restructuring

3.1. What formal and informal restructuring proceedings are available in your country?

There is only one formal restructuring proceeding in Bulgaria – the one governed by Part Five of the Bulgarian Commercial Act (described in detail below). There are no informal restructuring proceedings although every debtor is free to voluntarily settle, defer and/or reschedule its obligations with its creditors. Such settlement is at the parties’ discretion, except for obligations towards the National Revenue Agency, which may be forgiven, deferred, or rescheduled pursuant to a complicated procedure laid down in the Bulgarian Tax and Social Insurance Procedure Code. 

The adoption, implementation, and supervision of a recovery plan within the main insolvency proceeding (described in detail above) have significant similarities to the restructuring proceeding.

3.2. What are the entry requirements to restructuring and how are restructuring plans approved and implemented?

Restructuring proceedings may be opened by a trader that is not yet insolvent but is in imminent danger of insolvency. Imminent danger of insolvency is presumed if it is expected that the trader will fail to meet a commercial/public obligation within the following six months or may stop paying its debts altogether.

Restructuring proceedings may not be opened by a trader, that:

•  has failed to request its annual financial statements for the past three years to be announced in the Commercial Register within the legally defined deadlines;
•  has had a restructuring proceeding in the last three years prior to the restructuring petition;
•  has an insolvency petition filed against it;
•  has obligations towards related parties, representing at least one-fifth of their total obligations;
•  is a public company, exercising state monopoly or incorporated by a special law, a bank, or an insurer.

The restructuring proceedings are initiated by the filing of a restructuring petition by the trader. The petition shall list, amongst others: the amount, type, and due date of the trader’s obligations, including obligations to related parties; data about the trader’s creditors, about the commercial, arbitration, and enforcement proceedings pending against it; information about trader’s property, encumbrances, future commercial plans, a restructuring proposal. The petition shall be supported by evidence, including, but not limited to: lists of the different types of creditors (unsecured, secured, related parties, etc.), list of debtors, financial statements, a list of assets and liabilities of the trader, list of payments, a restructuring plan.

The restructuring plan is proposed by the trader and attached to the restructuring petition. The plan shall:

•  Provide for no less than 50% satisfaction of unsecured and secured creditors, except for creditors which are related parties;
•  Not defer trader’s obligations for more than three years as of the termination of the restructuring proceedings;
•  Include a fair market value estimation of the property of the trader to be sold under the plan;
•  Have attached the preliminary consent of creditors who are to subscribe to shares in the trader against their receivables.

The restructuring court is entitled to terminate the restructuring proceedings should the court hold that the restructuring plan does not meet the above satisfaction criteria or that the restructuring plan does not correspond with the trader’s economic and financial position.

After the restructuring practitioner (restructuring trustee) approves the list of restructuring creditors (to be described in more detail in the answer to Section 3.6. below), the restructuring plan is put to a vote before a meeting of the creditors chaired by the restructuring court. The creditors are divided into several categories, depending on the nature of their claim and their ranking (secured creditors, employees, National Revenue Agency, unsecured creditors, and related parties). The plan is considered approved if approved by creditors with more than three-quarters of the accepted receivables. The approval of a restructuring plan and its entry into force shall be confirmed by the court. The court grants its confirmation if, amongst others: the procedure has been lawfully conducted, the necessary majorities of creditors have approved the plan, and no creditor shall receive more under the approved restructuring plan than the amount of its receivable. If a restructuring plan is confirmed by the court, the court terminates the restructuring proceedings and appoints a supervisory body of creditors to monitor the performance of the restructuring plan (if such has been proposed by the creditors). If no restructuring plan is approved by the creditors and/or confirmed by the court, the restructuring proceedings are terminated without success.

The restructuring plan has no effect on the receivables of creditors who were not included in the list of creditors entitled to vote on the plan.

3.3. Who has the right to initiate formal restructuring proceedings?

Only the debtor is entitled to initiate formal restructuring proceedings. Neither the creditors nor public bodies have legal standing to file a restructuring petition.

3.4. What are the consequences of commencing restructuring proceedings, in particular:

3.4.1. Does management continue to operate the business and/or whether the debtor is subject to supervision? 

After the commencement of the restructuring proceedings, the management of the trader continues to operate the business but under the supervision of a restructuring trustee appointed by the court. Upon finding that the trader’s actions may put the interests of its creditors at risk, the court may restrict or suspend the trader’s right to manage and dispose of its property, and grant this right to the trustee.

3.4.2. Does a moratorium or stay apply, and, if so, what is its scope?

After the opening of the restructuring proceedings, in addition to the powers of the court to order additional precautionary measures, some measures are applied by virtue of the law:

•  the trader may not make any payments on any payables, arising prior to the date of the application on initiation of the proceedings and remaining outstanding on their respective due dates, with the exception of transfers of amounts to settle public receivables;
•  The statute of limitation of all creditor receivables is stayed during the restructuring proceedings;
•  All enforcement proceedings against the debtor are stayed until termination of the restructuring proceedings. No new enforcement proceedings can be initiated against the debtor during the restructuring proceedings;

3.4.3. How do restructuring proceedings affect existing contracts?

Existing contracts are not terminated by virtue of the law. However, either the trader or the counterparty may apply for termination of each existing contract before the restructuring court. The restructuring court shall terminate such contracts only if the court finds that their performance will impede the performance of the trader’s obligations under the restructuring plan and that the non-performance of the contract will not cause more than the usual damages to the counter-party. Upon termination of the contract, the counter-party shall be entitled to damages.

3.4.4. How are existing contracts treated in restructuring and insolvency processes? 

Please refer to Sections 2.4.3 and 3.4.3.

3.5. Can third-party liabilities be released through restructuring proceedings?

Bulgarian restructuring proceedings do not foresee any specific mechanism by which liabilities of third parties may be released. Such release shall be agreed with the respective third-party independently from the restructuring proceeding.

3.6. Which steps do restructuring proceedings normally include and what are the roles of the courts and other key stakeholders (such as debtor, directors of the debtor, shareholders of the debtor, secured creditors, unsecured creditors, etc.)?

Restructuring proceedings normally include the following steps:

•  Filing of restructuring petition by the trader (its content is described in detail in Section 3.2.);
•  Review of restructuring petition by the court. If the court deems that the petition meets all statutory requirements, the court opens the restructuring proceedings and:

•      Appoints a restructuring trustee and determines his/her remuneration. The trustee supervises the commercial activities of the trader (or takes over the management of the company if the court has ruled that the debtor endangers the rights of its creditors); reviews objections against the list of restructuring creditors; drafts a written report on the financial position and property of the debtor; reports to the court on all grounds to restrict the trader’s business operations; assists the debtor and the creditors during the restructuring plan approval process;
•      Imposes, at its discretion, necessary interim, and precautionary measures;
•      May appoint a registered auditor to audit the debtor’s books;
•      Sets a date for an open court hearing to vote on the proposed restructuring plan (not later than three months after the date the restructuring proceedings were opened).

•  Finalization of the list of creditors. A list of creditors is drafted by the debtor and attached to the restructuring petition. This list is announced in the Bulgarian Commercial Register together with the court ruling to open restructuring proceedings. Each creditor is entitled to object within 14 days of the announcement against their non-inclusion in the list or the inclusion of the receivables of another creditor. Each creditor subjected to an objection has seven days to file an application with counterarguments. The restructuring trustee shall review the objections and update the list within 14 days of the expiration of the above terms. The thus updated list is reviewed and approved/amended by the court with a court ruling to be rendered not later than 14 days prior to the set date of the open court hearing;
•  Holding of a court hearing to discuss the restructuring plan – The creditors and the debtor discuss the restructuring plan. Thereafter the different categories of creditors hold a vote on the proposed plan. The procedure is described in more detail in Section 3.2.;
•  Confirmation of the approved restructuring plan by the court – Upon approval of the restructuring plan by the creditors, the court shall review the lawfulness of the plan and the approval procedure and confirm/refuse to confirm the restructuring plan. In any case, the restructuring proceedings are terminated following this court ruling. The procedure is described in more detail in Section 3.2.;

3.7. How are restructuring proceedings normally finalized? 

The restructuring proceedings are finalized with a court ruling:

•  upon the confirmation of the restructuring plan by the court;
•  when the trader withdraws its proposal for a restructuring plan, before the creditors have voted on the plan;
•  when a restructuring plan is not confirmed by the court within four months after the initiation of the proceedings, regardless of any suspensions thereof;
•  when, after initiation of the proceedings, the trader becomes ineligible for restructuring (due to the circumstances described in Section 3.2.) or it is found that the details provided by the trader are false;
•  when the trader fails to appear at the court hearing of the plan;
•  upon violation of the court-imposed restrictions on the trader’s actions;
•  when the trader fails to cooperate with the trustee, the court-appointed auditor, fails to submit to the court, within the set time limit, any requested information and evidence, or fails to deposit the expenses set by the court for the remunerations of the trustee, the auditor or the forensic expert;
•  when the proposed restructuring plan has not been adopted or confirmed by the court.

4. Cross-border restructuring and insolvency

4.1. Do domestic courts in your country recognize foreign insolvency or restructuring proceedings over a local debtor?

Bulgarian courts should not recognize foreign insolvency or restructuring proceedings over a local debtor.

If the court decision has been rendered by a court in a Member State of the EU, the provisions of Regulation (EU) 2015/848 of the European Parliament and of the Council of May 20, 2015, on insolvency proceedings shall apply. Pursuant to Art. 3 of the Regulation “The courts of the Member State within the territory of which the center of the debtor’s main interests is situated shall have jurisdiction to open insolvency proceedings… In the case of a company or legal person, the place of the registered office shall be presumed to be the center of its main interests in the absence of proof to the contrary”. Therefore, pursuant to the Regulation, Bulgarian courts shall have jurisdiction to open insolvency proceedings against debtors whose center of main interests is in Bulgaria. 

The only exception to the above rule is laid down in item 2 of Art. 3: “Where the center of the debtor’s main interests is situated within the territory of a Member State, the courts of another Member State shall have jurisdiction to open insolvency proceedings against that debtor only if it possesses an establishment within the territory of that other Member State. The effects of those proceedings shall be restricted to the assets of the debtor situated in the territory of the latter Member State”.  

Where the insolvency court decision has been rendered by a third country court, the provisions of the Bulgarian Commerce Act shall apply. Pursuant to Art. 757 of the Commerce Act “On the basis of reciprocity, the Republic of Bulgaria shall recognize a foreign court decision declaring insolvency, if the decision is rendered by an authority of the State, where the debtor’s registered office is located”. Per argumentum e contrario, a foreign insolvency decision over a Bulgarian debtor shall not be recognized. 

4.2. What are the preconditions for recognizing foreign decisions?

As laid down above, Bulgarian courts would not recognize foreign insolvency or restructuring proceedings over a Bulgarian debtor.

The preconditions for recognizing foreign decisions concerning foreign debtors are, as follows:

If the court decision has been rendered by a court in a member state of the EU, the provisions of Articles 19 and 20 of Regulation (EU) 2015/848 shall apply, namely:

•  Any judgment opening insolvency proceedings handed down by a court of a Member State which has jurisdiction pursuant to Article 3 (reviewed in Section 4.1.) shall be recognized in all other Member States from the moment that it becomes effective in the state of the opening of proceedings;
•  The judgment opening insolvency proceedings shall, with no further formalities, produce the same effects in any other Member State as under the law of the state of the opening of proceedings, unless the regulation provides otherwise.

If the court decision has been rendered by a court of a third country, the decision shall be recognized pursuant to Art. 117 of the Bulgarian International Private Law Code and on the basis of the reciprocity (to be proven during the court proceedings):

Article 117. The judgments and authentic acts of the foreign courts and other authorities shall be entitled to recognition and enforcement where:

1. The foreign court or authority had jurisdiction according to the provisions of Bulgarian law, but not if the nationality of the claimant or the registration thereof in the State of the court seized was the only ground for the foreign jurisdiction over disputes in rem;

2. The defendant was served a copy of the statement of claim, the parties were duly summoned, and fundamental principles of Bulgarian law, related to the defense of the said parties, have not been prejudiced;

3. If no effective judgment has been given by a Bulgarian court based on the same facts, involving the same cause of action and between the same parties;

4. If no proceedings based on the same facts, involving the same cause of action and between the same parties, are brought before a Bulgarian court earlier than a case instituted before the foreign court in the matter of which the judgment whereof the recognition is sought and the enforcement is applied for has been rendered;

5. The recognition or enforcement is not contrary to Bulgarian public policy.

4.3. Do domestic courts cooperate with their counterparts in other jurisdictions and if so, what does such recognition depend on (such as the COMI of the debtor, the governing law of the debt to be compromised, etc.)?

Judicial cooperation between EU Member States’ courts regarding cross-border insolvency proceedings is laid down in Art. 42 of Regulation (EU) 2015/848. Such cooperation may in particular concern:

•  coordination in the appointment of the insolvency practitioners;
•  communication of information by any means considered appropriate by the court;
•  coordination of the administration and supervision of the debtor’s assets and affairs;
•  coordination of the conduct of hearings;
•  coordination in the approval of protocols, where necessary.

Judicial cooperation between Bulgarian courts and third-country courts does not have regulation in local Bulgarian legislation. However, Bulgaria has entered into mutual legal assistance treaties on civil proceedings with multiple third countries (amongst which the USA, China, Russia, Balkan countries, ex-USSR countries, and others) which lay down provisions on the procedure for legal assistance between public institutions and courts of the respective countries (although we are not aware of an MLAT specifically considering insolvency matters).

As for the question of what the recognition of foreign insolvency decisions depends on, see Sections 4.1. and 4.2.

4.4. How are foreign creditors treated in restructuring and insolvency proceedings in your jurisdiction?

Our view is that foreign creditors are treated fairly in restructuring and insolvency proceedings in Bulgaria. The legislation does in no way distinguish between foreign and national creditors. We have also not observed any practical discrimination by judges and insolvency administrators.

5. Summary

5.1. Overall, do you have a more creditor-friendly or debtor-friendly restructuring and insolvency regime in your jurisdiction?

Bulgarian insolvency proceedings are debtor-friendly but mainly to debtors acting in bad faith and not debtors that hope to be restructured and resume their business (which rarely happens). This is because insolvency proceedings can take multiple years to finish (in some cases – more than a decade). Meanwhile, assets distributed by the debtor to related parties prior to the initiation of insolvency proceedings are difficult to return to the insolvency estate due to the difficulties of successfully concluding actions to invalidate the harmful transactions of the debtor (before up to three court instances). 

On the contrary, the current restructuring regime is too creditor-friendly to the point it is impossible to implement, and we are not aware of any single restructuring proceeding that has been successfully initiated before a Bulgarian court. The few restructuring petitions filed by debtors to the respective courts have been dismissed, not meeting the requirements set by the Commerce Act. This is due to the vast requirements imposed on debtors for requisites of the restructuring petition and restructuring plan and few upsides for a debtor undergoing restructuring proceedings. Hopefully, the proposed changes to the restructuring regime described in Section 1.5. will repair some of the deficiencies of the current regime.