The commercial department of the Supreme Court of Cassation (SCC) will rule on some important practical issues, which have been the subject of long-standing contradictory case law. The interpretative case was initiated by an order of the Chairman of the SCC of 06.03.2020 and the court is expected to rule on it within a year. The questions are phrased as follows:
1. How is a single-shareholder limited liability company terminated upon death of the sole owner of the capital, who is also Managing Director of the company, in case of inaction by their heirs?
2. Should a claim under Article 74, paragraph 1 of the Bulgarian Commerce Act (CA) be considered admissible in relation to the annulment of a resolution of the Shareholders’ General Meeting in a limited liability company for the dismissal of a Managing Director of the company adopted by the same General Meeting following a previous resolution for dismissal of the Managing Director as shareholder?
3. Is the penalty under Article 126 CA applicable to a shareholder for actions envisaged in Article 126, paragraph 3 items 1-3 CA, but performed by them in their capacity as Managing Director or they may be liable only under Article 145 CA?
4. Which body of the limited liability company is entitled to receive the written notice of the Managing Director for their obliteration pursuant to Article 141, paragraph 5 CA?
5. Is the shareholder who is terminating their participation in the company under Article 125, paragraph 2 CA entitled to apply for entry with the commercial register in relation to the termination of their participation in a limited liability company in case of inaction of the company's bodies to adopt a resolution for their shares in the company and the entry of this change with the commercial register?
6. What are the powers of the court in case of an appeal of a refusal under Article 25, paragraph 25 of the Bulgarian Commercial Register and Register of Non-Profit Legal Persons Act in case of lack of instructions by the registry official?
7. Is it admissible to enter a transaction with company shares pursuant to Article 129 CA in the presence of a registered seizure or in case of non-entered previous sales? Should one apply the negative prerequisite under Article 129, paragraph 1, item 2 CA when transferring shares between shareholders?
8. Pursuant to Article 25 of the Bulgarian Commercial Register and Register of Non-Profit Legal Persons Act, is it permissible for other acts of the registry officials, reflected in the electronic registers (apart from the refusals, issued on submitted applications for entry, deletion and announcement of acts) to be appealed?
The ruling of the SCC on the posed questions will provide a solution to many practical difficulties, which commercial industry participants have been facing for years.
For example, it is very common for a shareholder in a limited liability company to terminate their participation in the company on their own initiative under Article 125, paragraph 2 of the Bulgarian Commerce Act (CA) (1). Another common hypothesis is the withdrawal of a Managing Director of a limited liability company (respectively, a single-shareholder limited liability company) on their own initiative under Article 141, paragraph 5 CA(2).
Each shareholder has the right to terminate their participation in the company on their own initiative subject to written notice. The condition for this, as laid down in the CA is the expiration of a period of three months following which the shareholder may be obliterated from the commercial register.
However, in order for this to happen, the management body of the company needs to provide assistance by applying for entry of this circumstance with the commercial register. In case the shareholder terminating their participation in the company is not part of the management body and accordingly, do not receive the assistance of the Managing Director, then they cannot be obliterated. In case they applied for entry of this circumstance with the commercial register themselves, they would receive a refusal, as they do not belong to the category of persons who have the right to apply for entries according to Article 15 of the Bulgarian Commercial Register and Register of Non-Profit Legal Entities Act.
The possibility for the shareholder terminating their participation in the company is to appeal to the court against the refusal. However, the case law in this regard is contradictory. In some of its judgments, the court allows the shareholder to apply for their obliteration with the commercial register, although they are not part of the above-mentioned persons. In many other judgments this is not allowed. In this way a hypothesis is reached in which the shareholder terminating their participation in the company has complied with the legal requirements, but cannot be obliterated and remains registered as shareholder (sometimes for years).
Unlike the hypothesis of a shareholder terminating their participation in the company discussed above, the Managing Director can always apply for their withdrawal to be entered with the commercial register and be obliterated, as they belong to the category of persons who have the right to apply for entries under Article 15 of the Commercial Register and Register of Non-Profit Legal Persons Act.
The practical question that arises here, however, is different. According to the CA, the Managing Director withdraws with a written notice addressed to the company. The company, in turn, is represented by himself/herself, in their capacity as Managing Director. In this case the Managing Director, in their capacity as natural person, formally notifies himself/herself, in their capacity as legal representative of the company, of their wish to be dismissed and obliterated as Managing Director.
The case law accepts this as lawful conduct and thus, there is no violation of legal provisions. However, the question here is what happens if the Managing Director and the shareholders (respectively the sole owner of the capital) are different persons and the Managing Director does not inform them of their intentions. The written notice is formally received by the company, but in practice it is not brought before the attention of the shareholders/sole owner of the capital.
After the expiration of the one-month period under Article 141, paragraph 5 CA, the Managing Director has the right to apply for their obliteration with the commercial register and if they are the only legal representative of the company, the company remains without a legal representative. This circumstance entails a number of unfavourable consequences (including the possibility for the company to be terminated by the respective district court at the request of the prosecutor, in case there hasn’t been a registered Managing Director for three months). Theoretically, the leaving Managing Director could be liable for the damages caused to the company in case they have not notified the shareholders / sole owner of the capital of their withdrawal.
The other questions could also be considered in a number of perspectives, but in the present article two very common hypotheses have been addressed, which have often been encountered by both lawyers and traders. The Supreme Bar Council has also expressed its opinion on these matters.
(1) Article 125, paragraph 2 CA: "The partner may terminate its membership in the company by at least 3-month notice prior to the date of termination."
(2) Article 141, paragraph 5 CA: The managing director may request to be expunged from the Commercial Register by a written notice to the company. Within one month after receipt of such notice, the company must apply for their dismissal to be recorded in the Commercial Register. If the company fails to do so, the managing director themselves may apply for this circumstance to be recorded, which shall be recorded regardless of whether another person has been elected to replace them."