With the initiation of insolvency proceedings for the debtor, it is inadmissible for its creditors to be satisfied under the procedure of individual enforcement provided for in the Bulgarian Civil Procedure Code ('CPC')(1) as this type of enforcement is not suitable to settle competition between the interests of creditors in a fair manner. The latter is achieved through insolvency proceedings where creditors' receivables are established in accordance with a special procedure provided for in the Bulgarian Commerce Act (‘CA’).
Pursuant to Art. 637, para 1, first sentence of the CA, court and arbitration proceedings under civil and commercial cases against the debtor are suspended with the opening of the insolvency proceedings(2). The suspended proceedings are then resumed and continued with the participation of(3):
1. the insolvency trustee and the creditor, if the receivable is not included in the list of admitted receivables approved by the insolvency trustee or in the list under Article 692 of the CA approved by the court;
2. the insolvency trustee, the creditor and the person who has filed an objection in case the receivable is included in the list of admitted receivables adopted by the insolvency trustee, but an objection has been made against the receivable by the order of Art. 692, para 3 of the CA.
The judgment in the resumed proceedings has a declaratory effect in the relations between the debtor, the insolvency trustee and all creditors within the insolvency(4). The legal framework in this field is analogous to the one for determining the subjective limits of the force of res judicata of a judgment rendered on a claim for establishment of receivables in the insolvency proceedings(5).
The purpose of the suspension of the existing proceedings under civil and commercial cases against the debtor is for the same to be maintained in the event that a dispute regarding the receivables which are the subject of the claim arises in the insolvency proceedings. In this case, in view of procedural economy, the dispute is resolved by a claim procedure within the existing proceedings, instead of by filing a new claim under Article 694 of the CA. After their resumption under Article 637, para 3 of the CA, the existing proceedings serve only the needs of the insolvency proceedings and perform the function of a claim under Article 694 of the CA.
The said legal framework, although observing the principle of procedural economy, in its current version violates another basic principle - the principle of equal treatment of the creditors of the insolvent debtor. The presence of the expression "and arbitration proceedings" in Article 637, para 1 of the CA creates unequal treatment of creditors which have brought their dispute with the debtor to an arbitration tribunal on the one hand, and creditors which have filed a claim under the general claim procedure before a state court or which are about to establish their receivables in proceedings under Article 694 of the CA, on the other hand.
When considering this issue, attention should be paid to the purpose of the arbitration proceedings, the legal consequences of the arbitral award, as well as the risks that arise for creditors, while respecting the principle of equal treatment of creditors of the insolvent debtor. The above-described legislation presupposes complications for other creditors when a creditor establishes receivables in insolvency proceedings through resumed arbitration proceedings and an award rendered in them.
Traders enter into an arbitration agreement with the aim of achieving speed when resolving potential disputes. When a dispute between them arises, they refer it to an arbitral tribunal. In the meantime, insolvency proceedings are initiated against the respondent in the arbitration proceedings. In this hypothesis, the arbitration proceedings are suspended, and the claimant-creditor claims its receivables in the insolvency proceedings. Following the inclusion of the receivable in the list of receivables that are not admitted by the insolvency trustee and the rejection of the objection against this admission or after the objection against the admission of the same receivable in the list of admitted receivables, the suspended arbitration proceedings between the debtor and its creditor are resumed. After the resumption of the arbitration proceedings, the arbitral award is rendered with the participation of the insolvency trustee, it has a declaratory effect, and its legal consequences are identical to the legal consequences of a judgment rendered on a declaratory claim filed under Article 694 of the CA. This is where the issues arise, especially the violation of the principle of equal treatment of creditors of the insolvent debtor.
In assessing the subjective limits of the force of res judicata of an arbitral award, an account should be taken of the specific nature of the arbitration proceedings, which aim to achieve speed in relations between the parties to the arbitration agreement. However, where one of the parties to the arbitration agreement is insolvent and insolvency proceedings have been initiated against it, the parties should not be allowed to settle their relationship by arbitration. There is a danger that the speed of settling relations between the parties to the arbitration agreement and the arbitration proceedings themselves might be to the detriment of the other insolvency creditors.
In examining this problem, the objectives of insolvency proceedings should also be taken into account, as the latter affects the interests of a significantly wider range of persons and aims to satisfy all creditors of the insolvent debtor and treat them equally. The verification of the validity, admissibility and correctness of the judgment of the state courts is carried out in three-instance court proceedings, while in order to achieve speed, the arbitration proceedings are conducted in single-instance proceedings before an arbitrator or arbitrators selected by the parties. In accordance with current regulations, the force of res judicata of the judgment rendered on a declaratory claim under Article 694 of the CA (or resumed under Art. 637, para 3 of the CA) and the force of res judicata of an arbitral award are equivalent for the purposes of insolvency proceedings. In this case there is inequality between creditors - a creditor which bases the incontestability of its receivables on an arbitral award rendered in single-instance proceedings is favoured as opposed to a creditor which establishes the existence of their receivables in three-instance proceedings under Article 694 CA (or in three-instance court proceedings resumed by the order of Art. 637, para 3 of the CA).
An example of the violation of the principle of equal treatment of creditors of the insolvent debtor is that a creditor which bases the incontestability of its receivable on an arbitral award will be able to exercise the rights on this receivable in the insolvency proceedings (e.g., the right to vote at a Creditors’ Meeting) at a much earlier stage than other creditors with contested receivables. The latter should conduct three-instance proceedings until a judgment establishing their receivable enters into force. This is because, until the entry into force of the judgment on the declaratory claim, the creditor with the contested receivable cannot exercise the rights on its receivable (unless it presents convincing written evidence), as the contested receivables are not admitted receivables within the meaning of Art. 693 of the CA. For this reason, the relationship between a creditor and a debtor which have entered into an arbitration agreement should be settled not on the basis of the arbitration agreement but under the rules of universal enforcement - in insolvency proceedings, as well as in accompanying proceedings before the insolvency court, namely the declaratory claims under Article 694 of the CA.
Another argument is that it is not possible for another insolvency creditor to intervene in the arbitration proceedings as a third party (an aide to the debtor's party) (6). Apart from that, although involved in the resumed arbitration proceedings, the trustee's procedural possibilities may be severely limited. Given the single-instance nature of the arbitration proceedings, the insolvency trustee is hindered by the opportunity to appeal the arbitral award. In this case, even if there is a defect in the arbitral award by which the debtor is convicted, the insolvency trustee may not exercise their functions as guardian of the debtor's property. At the same time, the constitution of the insolvency trustee in the arbitration proceedings has the consequence of covering all creditors of the insolvency by the force of res judicata of the arbitral award.
The creditor, basing the incontestability of their receivables on an arbitral award, competes the receivables of the other creditors with contested receivables in the insolvency. The latter should establish their receivables with the force of res judicata in three-instance court proceedings. This may lead to an unfair and unequal situation in which a creditor with an unadmitted receivable, whose objection to non-admission is not upheld by the insolvency court, resumes and conducts single-instance arbitration proceedings, and subsequently submits an arbitral award to the insolvency court. In contrast, a creditor with an admitted receivable, the objections against which have been disregarded by the insolvency court with the judgment under Art. 692, para 4 of the CA would have to establish their receivable in three-instance proceedings under Article 694 of the CA only because it is possible that formally negative declaratory claims have been filed against this creditor by another creditor. Therefore, observing the purposes and principles of the insolvency proceedings which find legal expression in Article 607 of the CA, the force of res judicata of an arbitral award should not be respected by the insolvency court, and the rights which the creditor claims to be uncontestable on the basis of a rendered arbitral award, should be fully and principally proved in the proceedings under Article 694 of the CA.
In order to avoid the described issues de lege ferenda, a legislative change should be made in Art. 637, para 1 of the CA, providing for the termination of the arbitration proceedings which have creditors' receivables for a subject and are pending at the moment of initiation of the insolvency proceedings. This will prevent the resumption of arbitration proceedings, and the force of res judicata of the arbitral award will not be formed, respectively, it will not be regarded in the insolvency proceedings. Creditors which have opened arbitration proceedings before the initiation of insolvency proceedings of the debtor will remain with the opportunity which all other creditors with contested receivables have - to establish their receivables in court in the proceedings under Article 694 of the CA. The purpose of this change is to respect the principle of equal and fair treatment of creditors in insolvency proceedings and eliminate the possibility of certain entities, who claim to be creditors of the insolvent debtor, to seek establishment of their receivables in an incontestable manner based on single-instance arbitral awards.
(1) An exception is regulated in Article 638, para 3 of the Commerce Act
(2) Excluding labour disputes on cash receivables
(3) As can be seen from the provision of Article 637, para 3 of the CA
(4) Art. 637, para. 4 of the CA - The judgment rendered under para 3, has a declaratory effect in the relations of the debtor, the insolvency trustee and all creditors within the insolvency
(5) Art. 694, para. 8 of the CA - The entered into force judgment on a claim under para 1 - para 3 has a declaratory effect in the relations of the debtor, the debtor, the insolvency trustee and all creditors in the insolvency proceedings.
(6) Such a possibility is provided in Art..694, para 4 of the CA.