Practical aspects of trader stabilisation proceedings

The Bulgarian Commerce Act (“CA”) was amended at the end of 2016 with the introduction of a new part - Trader stabilisation proceedings, which entered into force in July 2017. The purpose of the amendment is to enable traders (debtors) to overcome their financial difficulties at an early stage, when they can avoid the opening of insolvency proceedings, meanwhile ensuring continuity of business operations.

Trader stabilisation proceedings are an entirely new type of proceeding, which essentially constitutes a preventive normative framework for restructuring of financially distressed businesses. The restructuring consists in a change in the composition, conditions or the structure of the assets and liabilities of the trader (debtor), or a combination of all of these elements. In general, the idea of stabilisation proceedings is to create an opportunity for an agreement to be reached between the financially distressed trader and its creditors with regard to the means of fulfilling the trader’s obligations. This agreement in turn leads to the continuity of operations of the trader. Stabilisation proceedings are court proceedings - they are opened and closed with an act of a court. The proceedings are invoked by the trader and an application for their initiation is submitted only by the trader, as opposed to insolvency proceedings where the creditor can also initiate the process.

Stabilisation proceedings are initiated for a trader, which is not insolvent but is in imminent threat of insolvency. This type of proceedings cannot be initiated for certain categories of traders, for example a trader which has been the subject of stabilisation proceedings in the last 3 years or which has been the subject of an application for initiation of insolvency proceedings before submitting the relevant stabilisation application.

At any time, the trader may withdraw its application for initiation of stabilisation proceedings, but not after the court has issued a ruling approving a stabilisation plan. The trustee is an auxiliary body in the proceedings and is appointed by the court. Besides the supporting function, the court can also assign the trustee with the supervision of the trader’s activity. The conclusion of transactions on behalf of the trader may also depend on the trustee's consent.

Stabilisation proceedings seek to provide financial stability on a larger scale in order to achieve better investment conditions, more information on risk-taking and lower levels of financial deleveraging.

Since the entry into force of stabilisation proceedings, a small number of cases have been brought before a court at the request of financially distressed traders. Evident from the public official statistics kept by the Supreme Judicial Council, in the second half of 2017, 3 applications were submitted by traders for initiation of stabilisation proceedings against them. In 2018 - only 1, and in 2019 - a total of 5.

Furthermore, the case law shows that the proceedings do not develop beyond the opening phase. An important shortcoming is the rejection of the stabilisation applications by the court. The argument is that the preconditions for initiating stabilisation proceedings are not present, since the applicant-trader is not in imminent threat of insolvency, but is already insolvent. Another reason is that there are no conditions and opportunities for the continuation of the trader's activity after the adoption of a stabilisation plan. Consequently, part of the proceedings are terminated due to lack of good faith of the applicant, who has not submitted all the documents, clarifications and detailed information required by Article 770 of the CA as soon as possible. These problems lead to difficulties in the application of the stabilisation procedure and respectively, the latter does not fulfil its function of a preventive procedure for the restructuring of traders’ debts. The reasons for the limited application of stabilisation proceedings can be summarised in the following:

1. The use preventive restructuring mechanisms by traders is not a common practice in Bulgaria.

2. Traders invoke stabilisation at a very late stage - when they are already insolvent and the preconditions for initiating insolvency proceedings against them are present.

3. Traders encounter difficulties in submitting the application for initiation of stabilisation proceedings, given its numerous details, as well as due to the many annexes that the application must contain (Article 770 of the CA).

4. No interim financing is provided for financially distressed traders. The current legislation related to insolvency proceedings provides for the possibility to revoke transactions performed after the initial date of insolvency, which is determined by a court.

5. Stabilisation requires an agreement between the trader and all its creditors, which is difficult to achieve, including due to the presence of large claims of the National Revenue Agency in some cases. This problem is not derived from case law, as stabilisation proceedings do not develop to this stage, but can be derived by analogy with the administration plan, provided for in Chapter 44 of the CA, which applies to insolvency proceedings.

Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 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 (Directive on restructuring and insolvency) is yet to be transposed into Bulgarian law. The Directive will apply in the countries of the European Union from 17 July 2021. Some of the most important changes that will be brought about by the transposition of the Directive on restructuring and insolvency into Bulgarian law include:

► measures to increase access to stabilisation proceedings

► the circle of traders in respect of whom stabilisation proceedings are opened

► determination of receivables excluded from the stabilisation proceedings - for example, receivables for maintenance provided for by a law

► the development of early warning mechanisms and traders' access to one or more clearly defined and transparent early warning tools that can identify the circumstances leading to the likelihood of insolvency

► changes in the field of restriction of the rights and activity of the trader so that the trader always maintains at least partial control over its property and the management of its business activity (aimed at encouraging traders to submit an application for initiation of stabilisation proceedings at an early stage of their financial distress)

► suspension of enforcement actions against the trader (debtor) in order to assist in negotiating a stabilisation plan so that the trader can continue its activity or at least maintain the value of its assets during the negotiations

► an obligation of the trader to inform and advise employees' representatives on trends in the trader's operations and economic situation, as well as on the decision to resort to stabilisation proceedings before adopting or approving a stabilisation plan

► the content and adoption of the stabilisation plan, as well as the conditions for its approval and appeal

► additional obligations of the management bodies of traders in order to take all necessary actions to avoid insolvency

The Directive on restructuring and insolvency aims to remove obstacles, like those observed in Bulgaria, which prevent timely action. This would guarantee that viable financially distressed businesses and entrepreneurs have access to effective early warning and preventive restructuring mechanisms, allowing them to continue their activities. In view of the limited application of trader stabilisation proceedings in Bulgaria, it can be reasonably concluded that at this stage, the proceedings have no practical and useful effect, nor have they an application when it comes to supporting traders.

The rules of the Directive on restructuring and insolvency aim to amend and harmonise the laws of EU Member States. This in turn would help companies to restructure earlier and encourage innovation, which could lead to the creation of new jobs. Research conducted by the European institutions shows that businesses set up by entrepreneurs, who are given a second chance, have faster growth in terms of turnover and jobs, than companies set up by entrepreneurs who are starting a business in a given field for the first time.

It remains to be seen whether stabilisation proceedings will continue to be the only legal mechanism in Bulgaria to assist financially distressed traders, prevent the opening of insolvency proceedings and maintain commercial enterprises, or whether new such mechanisms will be introduced. Close attention should be dedicated to the current Bulgarian legislation in the field of stabilisation. The main priority and the first step towards actual effectiveness should be the easy and transparent access to stabilisation proceedings. To this end, mechanisms should be put in place to assist traders in identifying their financial difficulties in a timely manner. This would increase the practical applicability of the legal institute of stabilisation and the preservation of businesses.

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