The July 17, 2021 deadline for implementing 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, and amending Directive (EU) 2017/1132 is quickly approaching, leaving little time for EU Member States to adjust their national legislations to its requirements.
Against this background, the Bulgarian Ministry of Justice recently proposed amendments to the Bulgarian Commercial Act, supposedly to partially transpose Directive (EU) 2019/1023. Although the proposed amendments provide for some substantial changes in the insolvency regime, they can hardly be seen as a transposition of the Directive.
With regard to the insolvency process, the amendments would make parts of the process quicker and more efficient with minimum opportunities for debtors to undermine actions. Some of the positive developments worth noting include: (i) the criteria for opening insolvency are made more clear by elucidating the definition of over-indebtedness; (ii) the risk of forum shopping by the debtor is minimized with the introduction of the requirement that the competent insolvency court be the one at the registered address of the debtor six months prior to filling; (iii) sale through direct negotiations between the insolvency administrator and the buyer is no longer an option; (iv) sale through electronic public auction is introduced, which is expected to ensure transparency of the sale process; and (v) amendments to creditors’ rankings in the distribution removes certain privilege attributed to creditors who imposed interim measures. In other areas, such as preferential claims and claims for voidance of certain transactions, there is still room for legislative improvement, but hopefully, those provisions will be clarified once the bill enters the Parliament for approval.
From a purely restructuring perspective, however, the bill does not provide for any material developments, omitting from its scope important topics of the Directive such as the cross-class cram-down, the protection of new and interim financing, and the content of the restructuring plan. The stabilization proceeding as an early restructuring tool was initially introduced in Bulgaria’s Commercial Act in 2016 but since its entry into force very few stabilization proceedings have been opened (there was only one in 2018, only five in 2019, and only two in 2020). This is a clear indication of the inefficacity of this preventive procedure and the need for its improvement. In most cases, the proceeding does not develop beyond the opening phase because the debtor turns out to be already insolvent, and some cases are terminated due to a lack of good faith or active involvement of the applicant. One of the drawbacks of the current regulation that is likely to discourage debtors from using this option is the appointment of a trusted person (the equivalent of a practitioner in the field of restructuring under the Directive) and his powers. As per the Commercial Act, the appointment of this trusted person is mandatory in all cases. Moreover, in the resolution to open stabilization proceedings the court may order restrictive measures, which may include entering into a transaction that is subject to the preliminary consent of the trusted person. However, the debtor is entitled to appeal neither the appointment of the trusted person, nor the restrictive measures. This legislative decision contradicts some of the main goals of the Directive, among which is maintaining the total or at least partial control of the debtor over its business and the appointment of a practitioner in the field of restructuring only on a case-by-case basis.
It remains to be seen whether Bulgaria will manage to meet the timeframe for transposing the Restructuring Directive, although, given the ongoing political turmoil in the country, it seems increasingly unlikely. What is undebatable, however, is that the current legal framework of both the insolvency and the stabilization proceedings need to be revised to put in place an effective mechanism for the restructuring of company debts.
By Gergina Kyoseva, Partner, Kyoseva Yakimova Dimitrova Attorneys at Law