Review of the Proposed Amendments to the Commerce Act

The insolvency procedure has been settled by the Bulgarian law in 1994, but the accumulated practice revealed some basic problems for all merchants regarding the procedures implementation. The greatest uncertainty in the commercial practice is caused by the following:

 

1. The Court has the possibility to set the date of company’s insolvency too remote back in time, e.g. 7 and more years ago. Such decision calls into question the validity of all transactions for the period. Thus, it turns out that in Bulgaria one can end up with the paradoxical situation where, for example, all payments made by the bankrupt debtor over the years in discharge of his bills for utilities such as electricity, water, telephone, etc., may be declared invalid and will have to be returned into the mass of the insolvency mass /the bankruptcy estate/. The same may also happen to any payments made by the debtor for accounting, legal, or any other services, received by him over the years, or, for that matter, to payments he has made as instalments under lease agreements, bank loans, etc.;

 

2. In insolvency proceedings the debtor or a related person often presents deliberately prepared documents proving liabilities that did not exist and have not been entered in the balance sheet. Such artificial liabilities establish advantage to the debtor and the related parties in the assets allocation in case of insolvency. There is no unified practice of the Court for the treatment of non balance liabilities and that situation leads to certain abuse practices;

 

3. Broad opportunities for announcing unenforceability of normal transactions regarding the turnover that does not assume to impose any damage to the creditors;

 

4. Problems in the rehabilitation of debtor’s company - due to refusal of the public utilities and the commercial partners to continue trade relations with the debtor (considering the risk of future claims for complementing to the bankruptcy estate).

 

According to the proposed amendments most of these problems will be resolved. The bill was approved on first reading and the final report of the Parliamentary Legal Commission for the second reading is finalized. It is expected that the Parliament will finalize the amendments till the end of January.

 

The main amendments are as follows:

1. Performance of contractual monetary obligations:

In line with Directive 2011/7/EU of the European Parliament and of the Council of 16 February 2011 on combating late payment in commercial transactions, the draft bill regarding amendment and supplement of the Commerce Act introduces a number of changes and specific terms for payment of monetary obligations, namely:

Payment must be executed within:

(а) 30 days as of

- the receipt of an invoice or equivalent request for payment or as of the receipt of the goods or the services, if the date of receipt of the invoice or the request is uncertain or if they were received prior to the goods or the services;

- the expiry of the term for acceptance or verification of the goods or services, if the debtor receives the invoice or the equivalent request earlier;

(b) 30 to 60 days when the debtor is an assignor under Art.7, para.1 - 4 of the Public Procurement Act, i.e. public authority, public organization, etc. and when the nature of the goods or the services allows this.

In case of late payment, the creditor who has fulfilled his contractual and legal obligations shall be entitled to the statutory interest due for late payment, as well as to compensation costs in the amount of BGN 80, without sending further notice. Such liability may be limited or excluded, provided that the debtor is not an assignor under Art.7, para.1 – 4 of the Public Procurement Act and if the nature of the goods or the services, or objective reason justifies that.

 

2. Changes to the insolvency proceedings

The draft bill envisages that the court may declare an initial insolvency date, which shall not be earlier than three years prior to the date of filing of the application for the opening of the insolvency proceedings.

 

Art. 646, Commerce Act

A) The legislative proposal sets limits to the so called ‘suspect period’, i.e. certain transactions may be challenged as null and void with respect to the insolvency creditors, if executed by the debtor after the initial date of the insolvency/the overindebtedness, but not earlier than one year as of the filing of the application for the opening of the insolvency proceedings.

Following the amendments, only two types of transactions can be challenged as null and void on the grounds of Art. 646, CA: payment of monetary obligation which is still undue, including giving in payment (datio in solutum), as well as establishing of mortgage or pledge over property rights, part of the insolvency estate. The draft bill repeals the possibility to claim the invalidity of voluntary transactions with property rights, part of the insolvency estate, as well as value transactions with property rights, part of the insolvency estate, whereas the paid considerably exceeds the value of the received.

The revocation of these legal provisions may jeopardize and cause instability in the civil turnover. Further on, a decrease in the debtor’s property may hinder the completion of the insolvency estate. On the contrary, the constant practice of the Supreme Cassation Court provides that the essence of the claim for declaring a certain payment null and void is to preserve the insolvency estate by restoring what was unfairly paid.

 

B) The draft bill also provides that such invalidity shall affect the rights assumed prior to the filing of the claim by third parties acting in good faith. If such third party is related to the debtor or the secured creditor, the lack of good faith shall be presumed until proven otherwise. 

Currently, the Commerce Act does not envisage such protection of the interests of third parties’ rights. This is also one of the main differences between the claim under Art.646 of the Commerce Act and the Paulian Action (Actio Pauliana) under Art.135 of the Obligations and Contracts Act, which protects third parties, who have acquired rights from the insolvency estate, acting in good faith.

It is beyond doubt that if declared, the invalidity of certain transactions shall have effect only with respect to certain third parties. This also attests to the enhanced protection of the creditors’ rights against the insolvent debtor. Therefore it may be concluded that the suggested amendment would unreasonably increase the scope of such protection.

 

C) The new regime also provides that the debtor’s voluntary or involuntary performance of a monetary obligation which is due may be declared null and void with respect to the creditors, if the creditor was to be put in more favourable position, compared to the position in which he would be following the distribution of the debtor’s property under the Commerce Act, and if the payment has been executed 6-months prior to the filing of the application for the opening of the insolvency proceedings.

 

Art. 647, Commerce Act

The major changes with respect to which actions may be declared null and void against the insolvency creditors are the following:

- it will be no longer possible to challenge the performance of a monetary obligation through transfer of property rights, executed three months prior to the initial insolvency date, if the return would increase the amount which the creditors would be entitled to receive;

- transactions, executed by the debtor in the period between the filing of the application for opening of insolvency proceedings and the date of the decision for opening of insolvency proceedings, may be challenged as null and void with respect to the insolvency creditors.

© Velchev&Co. 2012

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