- Monday, July 10, 2017
With the latest changes in the Bulgarian Commerce Act, promulgated on December 2016, a complete new set of business stabilization proceedings were created, which are regulated in the amended Fifth part of the Act.The aforementioned amendment, together with the other changes in the Act, are a result of the tendencies at transnational level within the European Union, which have been prevailing in the last years,for creating minimum standards for security and guaranteeing the citizens’ rights and the opportunities for investments. One of the main aims of the European Commission Recommendation from 12 March 2014 is to ensure the possibility for restructuring of businesses with financial difficulties, in order to prevent the risk of becoming insolvent, and to lead to maximum benefit for the businesses and their creditors and employees. The same point is set out in the European Council Recommendation from 14 July 2015, which recognizes the importance of national legislation for facilitating the process of reduction of the debt ratio of businesses. The Recommendation also provides advice for improving the businesses’ restricting mechanisms before the bankruptcy proceeding are instituted.The changes in the Commerce Act are also in compliance with the recommendations of the World Bank, in accordance with the regulations of the bankruptcy proceedings and the rights of the creditors. The new amendment in the field of the stabilization proceedings will enter into force on 01 July 2017.
Generally, the main idea of the stabilization proceedings is to create a possibility for achieving a settlement between the company with financial difficulties and its creditors about the fulfillment of the company’s obligations, which can lead to opportunity for continuation of the company’s activity. Namely, one of the reversals of the new approach to business failure and insolvency, mentioned in the European Commission Recommendation from 12 March 2014, is to ensure more guarantees for the stabilization of businesses with financial difficulties, to give a second chance and to create conditions for the companies to preserve and continue their activities. As a result, the rights of the debtor are guaranteed, the satisfaction of the creditors is ensured and also the investments are stimulated, because of the wider range of security guarantees.
A petition for the institution of stabilization proceedings can be filed only by the company and it’s without significance if the business is a sole trader, a commercial corporation or cooperative. It’s necessary that the company is not in a liquidation procedure, because that would be incompatible with the main aim of the stabilization proceedings – continuing the activity of the company.The stabilization procedure is not applicable for public enterprise companies exercising a state monopoly or established by a special law, and also for the banks and insurance companies. The stabilization court shall be the district court exercising jurisdiction over the district where the company’s registered office is at the time of submission of the petition for institution of stabilization proceedings.
In order for the stabilization proceedings to be constituted, there must be a legal basis, which is provided in Article 762 of the Commerce Act – the company must be in immediate danger of insolvency. It’s explicitly stipulated that the company must not be insolvent, otherwise there is no possibility for the its stabilization, and the institution of the bankruptcy proceedings is unavoidable. It should be noted that the above-mentioned is the only legal basis. An immediate danger of over-indebtedness is not regulated as basis for instituting proceedings.In accordance with the legal provisions, an immediate danger of insolvency is in evidence when the company, in view of the upcoming maturity of its monetary obligations in the following six months from the moment when the petition for institution of stabilization proceedings can be filed, will be unable to fulfill due monetary obligations (monetary obligation due under or related to a commercial transaction, including the validity, performance, non-performance, termination, invalidity or dissolution, as well as the consequences from termination thereof; public legal obligation to the state or municipalities related to its commercial activity; obligation under a private state obligation) or may cease payments.
It is possible the legal basis, provided in Article 762 of Commerce Act, to be in evidence, but despite this a prohibition for instituting stabilization proceedings to be provided. This can happen in the following hypotheses:
The stabilization proceedings shall be instituted with a court ruling. With this act the court appoints a monitoring trustee and schedules a meeting for admitting and accepting the stabilization plan. It’s possible the court to grant precautionary measures and also to appoint a registered auditor.
The consequences of stabilization proceedings institution are:
The changes in the Commerce Act introduce some specific, in relation to the previous framework, authorities of the stabilization proceedings, like:
The main element in the stabilization proceedings is the plan for stabilization. It is offered by the company and is presented as an application to the petition for institution of stabilization proceeding. The plan contains:
Imperative requirements for the contents of the plan are also incorporated in the Commerce Act . The first requirement affects the assumption,under which the plan provides a partial remission of the debts. In this case the plan should provide the satisfaction of no less than 50% of the claims of each creditor, except for these creditors, who are affiliated to the company. The affiliated to the company will be satisfied only after the ful satisfaction of the claims of every other creditor. Also by the partial remission the satisfaction of the secured creditors should be in amount equal to the market value of the established securities and no less than 50% of their claims. Another imperative requirement is related to the possibility of deferred payment of the debts. In this case the time limit for payment could not be longer than three years from the date of termination of the stabilization proceeding.
The plan for stabilization is examined in public session on camera. The company, its creditors, included in the validated creditors list, the monitoring trustee, the auditor and the expert, if there are any selected, take part in the session. The plan is discussed and additions could be made. The vote on the offered plan is carried out by the creditors separately in the following classes:
The plan must be accepted by each class by a majority of half of the claims in the class, provided that at least three-quarters of the creditors in the class have voted for the acceptance of the plan . Furthermore, it is necessary for the acceptance of the plan that creditors, who are holders of more than three-quarters of the claims, participate in the vote, notwithstanding the votes of the creditors, who are affiliated to the company.
The plan accepted on the meeting shall be implemented by a court ruling, which could be appealed before the Supreme Court of Cassation.
The plan is mandatory and has transforming action against the claims of the company, of the creditors, whose claims have arisen before the date of the ruling on institution for endorsement of the plan, including these who haven’t exercised their voting right or have voted against, and also for the general partners, unless it is stipulated otherwise. But the plan could not have legal action towards creditors, who were not included in the final creditors list or to whom the opportunity to vote on the meeting for its acceptance was not given.
The objectives pursued with the establishment of the completely new stabilization proceedings, on the one hand, are related to the possibility for different companies in financial difficulties to stabilize their condition and to continue their activities. On the other hand, the proceedings aim also to protect the rights of the creditors, as they guarantee the satisfaction of their claims, by setting requirements for the plan for stabilization, which should secure the payment of the creditors’ claims in a certain guaranteed amount. It is expected mainly the small and the medium-sized companies will benefit from this procedure . Last but not least, it has to be noted that the new proceedings will contribute to the financial stability on a larger scale, in view of achieving better conditions for investments, more security for taking on risks and reductions in the level of financial debt of the small and medium-sized businesses.