Bulgarian avoidance actions in line with EU Proposal

The EU Commission issued a proposal for a Directive harmonising certain aspects of insolvency law, EU (COM(2022) 702 final. Although still being discussed, the Proposal is unlikely to result in material amendments to existing Bulgarian insolvency avoidance actions, which follows the principles set out in the Proposal and in many ways affords creditors a greater level of protection. Nevertheless, certain time periods and rules on the implementation of the avoidance actions may need to be amended in the Bulgarian law.

The following article gives an overview of Bulgarian avoidance actions and highlights any differences with the Proposal.

Preferences

Actions after opening of proceedings

Satisfaction of a creditor, creation of a collateral over an asset or right of the insolvency estate or a transaction with an asset or right of the insolvency estate will be void if perfected after the date of opening of insolvency proceedings and not in compliance with insolvency proceedings. Under the Proposal, the relevant date is not the date of the opening of insolvency proceedings, but the date of the earliest admissible request for opening insolvency proceedings. It is likley that upon harmonisation of the law, this earlier date will be introduced under Bulgarian law as well.

Actions before opening of proceedings

Furthermore, payment of financial obligations of the debtor and collateralisation can be declared void if they were perfected after the date when the debtor became unable to pay its mature debts or became over-indebted and within the following periods:

1. one year prior to the submission of the request for the opening of insolvency proceedings for satisfaction of obligations that had not matured;
2. one year prior to the submission of the request for the opening of insolvency proceedings for collateralisation of previously unsecured obligations; and
3. six months prior to the submission of the request for the opening of insolvency proceedings for satisfaction of obligations that had matured.

Where the creditor knew or should have known that the debtor was unable to pay its mature debts, the periods are increased to two years and twelve months, respectively. The creditor is presumed to have known if the creditor was a related party to the debtor.

Under the Proposal, the relevant look-back period is three months. Therefore, it is unlikely any amendments will be required to harmonise the protections for preferential actions undertaken before the opening of insolvency proceedings.

Derogations under Bulgarian law are largely in line with the Proposal, except that Bulgarian law does not provide for any derogation regarding payments on bills of exchange or cheques where the law that governs bills of exchange or cheques bars the recipient's claims arising from the bill or cheque against other bill or cheque debtors such as endorsers, the drawer or the drawee if they refuse the debtor's payment.

Acts against no or a manifestly inadequate consideration

Transactions and other legal acts of the debtor against no or a manifestly inadequate consideration can be declared void if they were perfected within a certain time period prior to the submission of the request for the opening of insolvency proceedings.  Such transactions are split into different categories for the purposes of defining the relevant look-back period with the shortest period being one year prior to the submission of the insolvency request and the longest period being three years prior to the submission of the insolvency request.

Under the Proposal, the look-back period is one year. Therefore, the harmonisation of the Bulgarian law on transactions for inadequate value are unlikely to require any amendments to Bulgarian law.

Legal acts intentionally detrimental to creditors

Under Bulgarian law, only a detrimental transaction to the general body of creditors made between the debtor and a related party of the debtor within a period of two years prior to the request for opening of insolvency proceedings can be declared void.

Under Bulgarian law, there is no general rule – as there is in the Proposal – that legal acts by which the debtor has intentionally caused a detriment to the general body of creditors can be declared void where both of the following conditions are met:

1. those acts were perfected either within a time period of four years prior to the submission of the request for the opening of insolvency proceedings or after the submission of such a request;
2. the other party to the legal act knew or should have known of the debtor’s intent to cause a detriment to the general body of creditors.

In practice, most detrimental acts would be captured by existing Bulgarian law rules on transactions against inadequate value, including collateralisation without adequate benefit for the debtor. Nevertheless, the harmonisation of the EU law on avoidance actions should result in introduction of a broader provision capturing any transactions that are intentionally detrimental to the creditors.

Consequences of avoidance actions

The consequences of avoidance actions under Bulgarian law and the Proposal are largely the same.

Below we have outlined some discrepancies and gaps in existing Bulgarian law.

Under the Proposal, the limitation period for all claims resulting from the legal act that can be declared void against the other party will be three years from the date of the opening of insolvency proceedings. Under existing Bulgarian law, the relevant period is two years form the date of the opening of insolvency proceedings.

Under Bulgarian law, there is no explicit allowance to assign the claim to obtain full compensation from the voidable transaction to a creditor or a third party.

Under Bulgarian law, there is no explicit restriction that the party that has been obliged to compensate the insolvency estate cannot set off this obligation with its claims against the insolvency estate. Such a rule can be obtained by way of interpretation of existing Bulgarian law provisions.

Under Bulgarian law, there is no explicit provision that the consequences of declaring an avoidance action void are enforceable against an heir or another universal successor, or under certain conditions against an individual successor of the party that benefitted from the legal act declared void.

It should be expected that such rules will be explicitly provided under Bulgarian law by way of the EU harmonisation of insolvency law on avoidance actions.

For more information on the proposed EU Directive and insolvency avoidance in the EU, contact your client partner or one of these CMS experts.