Amendments to the Commerce Act Aim to Limit Claw-Back Options in Bankruptcy and Enhance Payment Discipline


Limit Claw-Back Options in Bankruptcy and Enhance Payment Discipline
Legal Alert - Amendments to the Commerce Act Aim to Limit Claw-Back Options in Bankruptcy and Enhance Payment Discipline


Important and in many respects long-awaited amendments to the Bulgarian Commerce Act (the “Act”) entered into force as of 4 March 2013. Thus twofold “reform” of the effective legislation appears to be pursued by the Bulgarian legislator, which in brief could be summarised as follows:

1.              In general
The Act, Part IV (“Bankruptcy”) regulates the general bankruptcy proceedings, which could be instituted against merchants (sole traders, commercial companies or cooperatives).
According to the Act at a petition of a creditor or the debtor itself, a competent court may institute bankruptcy proceedings against the debtor, should it considers such a debtor insolvent or for certain types of companies - overindebted (as per statutory definitions). The court is also to determine the initial date of insolvency (or where applicable overindebtedness).
In line with the insolvency laws of many other jurisdictions the Act contains rules (Articles 646 to 649) relating to voidness or voidability of legal acts detrimental or presumed to be detrimental to all the creditors of the insolvent debtor. Once such a voidness is declared or respective act or transaction is invalidated, the trustee in bankruptcy is able to "clawback" or take the assets subject to the null act or transaction back into the bankruptcy estate. Locally such claims are often qualified as “claims for replenishment of the bankruptcy estate”.
1.1             Disadvantages of the previous rules
The explanatory memorandums to the Bill, which introduced the latest changes of the above-referred rules, note that the latter had a number of downsides, which became obvious during the past years of financial crisis. One of their most significant disadvantages was the legal possibility for declaring void of an excessively large number of transactions and acts effected after the initial date of insolvency, (i.e. in the “suspicious” period). By way of example only, as per the repealed statutory provisionspayment of financial debts by the debtor or establishment of pledge or mortgage or other security interest in the assets of the insolvent debtor after the initial date of insolvency (or overindebtedness) was able to be declared null and void vis-à-vis the creditors in the bankruptcy proceedings. However the initial date of insolvency was often determined by courts long time before the start of the bankruptcy proceedings (in many cases preceding it by more than 10 years). This represented a serious challenge to good faith creditors, (oftentimes banks), which did not have any legal remedies to defend against “clawback” claims. At the end according to the Bill’s initiators, the above described features of the now amended law might trigger “chain” bankruptcy of businesses and an unacceptably high level of legal uncertainty. Such rules appeared to be detrimental to the debtors as well, as they often discouraged business partners to deal with potentially insolvent debtors, thus precluding options for their business recovery.
1.2            Revised rules
For the above reasons the Act was amended by the Bulgarian Parliament in many key respects and as per the effective rules:
1.               The maximum length of the suspicious periods relevant to claims for replenishment of bankruptcy estate shall be calculated back from the date of filing of the bankruptcy petition, rather than from the initial date of insolvency, respectively the date of the court decision for initiation of the bankruptcy proceedings. In most cases transactions performed prior to the initial date of insolvency/ overindebtedness shall not be subject to the above claims. This aims at establishing reasonable length of the suspicious periods, at the same time ensuring their independence from slow development of the phase preceding the formal institution of bankruptcy proceedings. This in fact is the most material change of Article 647 of the Act, save for: (i) original Item 4 of the same was removed completely, (it dealt with invalidation of settlements of payment obligations by datio in solutum madewithin 3 months before the initial date of insolvency); (ii) the voidability of pledges and mortgages within predetermined periods preceding the filing of the bankruptcy petition after the latest amendments will be in place only in the case where such collateral are granted to secure third parties’ debts but not debts of the insolvent debtor itself. Acts and transactions envisaged by Article 647 will remain voidable if made in the period between the filing of the bankruptcy petition and the institution of the bankruptcy proceedings, despite of the change of the date from which the look-back periods will be calculated.
2.              The suspicious periods under Article 646 of the Act became relatively short and differentiated depending on the specifics of the voidable acts or transactions, as well as on the position of the third party, (e.g. shorter for good faith commercial partners and longer for insiders or other persons being aware or presumed to be aware of the state of insolvency of the debtor at the time of the transaction or act).
In line with the above Article 646, paragraph 2, items 1 and 2 of the Act provides that the following acts and transactions, conducted by the debtor after the initial date of insolvency, respectively overindebtedness, but not earlier than one year, (respectively two years for creditors acting in bad faith) prior to filing of the bankruptcy petition, may be declared invalid vis-a-vis the creditors in the bankruptcy proceedings:
a)       (item 1) performance of a monetary obligation prior to maturity date, including by datio in solutum;
b)      (item 2) establishment of a mortgage or pledge over a property right from the bankruptcy estate to guarantee previously unsecured claim against the debtor.
Article 646, paragraph 2, item 3 on its part allows invalidation of payments or collections of matured debts if made within six months, (respectively one year for creditors acting in bad faith) prior to filing of the bankruptcy petition.
3.              Creditors shall be ensured option to defend the validity of payments in relevant suspicious periods when they are made in the normal course of business. In particular according to Article 646, paragraph 5 of the Act the above referred items 1 and 3 of Article 646, paragraph 2 shall not apply, if the payment is made by the debtor in its customary course of business and as far as: (i) it is made in line with the agreed terms along with the simultaneous provision of equivalent goods or services to the benefit of the debtor or up to 30 days after the maturity of the monetary obligation; or (ii) after payment the creditor has truly provided to the debtor equivalent goods or services.
4.              Secured creditors shall enjoy exemption from the application of Article 646, paragraph 2, item 2 of the Act, if the pledge or mortgage is set up: (i) before or along with extension of a loan to the debtor; or (ii) as a replacement of another security interest, which may not be invalidated as per the effective “clawback” provisions; or (iii) to guarantee loan extended for the acquisition of the pledged or mortgaged asset.
5.               Most of the newly amended rules (albeit not all) shall apply for pending insolvency proceedings and filed clawback claims, which have been instituted before the enforcement of the new rules.
The latest legislative amendments are designed to reform the general business bankruptcy rules under the Act. However it is noted that revisions with similar rationale might be also appropriate with respect to the effective Bank Bankruptcy Act (regulating bankruptcy of banks with a seat in Bulgaria, including relevant clawback claims), although in the context of the relatively stable banking system such revisions might not look urgent.
The requirements of Directive 2011/7/EU of the European Parliament and of the Council of 16 February 2011 on combating late payment in commercial transactions (the “Directive”) were also implemented by way of amendments to relevant provisions in Part III (“Commercial Transactions”) of the Act and to Article 3 of the Medical Treatment Facilities Act. The Council of Ministers, which proposed these amendments, shares the views expressed in the preamble of the Directive, that legislative measures are needed in order to combat the trend payments in commercial transactions between economic operators or between economic operators and public authorities to be made with material delay. As noted such delays negatively affect liquidity, complicate the financial management of undertakings and could be even reasons for the bankruptcy of otherwise viable businesses.
Thus in attempt to reverse the above trend and to shift to a culture of prompt payment, (as contemplated by the Directive) the Council of Ministers proposed certain new statutory provisions, providing that:
1.               The parties may agree on contractual payment periods subject to the following limitations:
(i)              as a general rule the agreed payment period shall be limited to 60 days. In business-to-business transactions the parties may expressly agree on payment periods longer than 60 days if the nature of the procured goods or services allows this or due to another justified reason (Article 303a, paragraph 1 of the Act);
(ii)            when the debtor is a public contracting authority under Articles 7 of the Public Procurement Act (such as state authority, public law governed organisation, etc), the deadline for payment shall be limited to 30 days, as the parties may agree on longer deadline, only if the nature of the procured goods or services allows this or due to another justified reason but in all cases such deadline may not exceed 60 days (Article 303a, paragraph 2 of the Act). [This shorter maximum deadline is explained in the Directive with the fact that generally “public authorities benefit from more secure, predictable and continuous revenue streams than undertakings”].
(iii)           Specified public entities providing healthcare shall enjoy extended statutory payment period of up to a maximum of 60 days as of receipt of invoice or payment invitation according to paragraph 5 of Article 3 of the Medical Treatment Facilities Act.
2.              In the absence of an agreed payment deadline, payment shall be made within 14 days as of receipt of the invoice or other invitation for payment or as of receipt of the purchased goods or services, if later than the receipt of the invoice or payment invitation. Special rules on the calculation of this deadline are established if the agreed goods or services are subject to verification and/or acceptance by the purchaser/contracting entity.
3.              The above payment period - related rules (paragraph 1 and 2) also apply to transactions concluded by craftsmen and self-employed individuals but not only to transactions between traders. Said rules however do not apply to: bills of exchange, promissory notes or cheques; liabilities under pending bankruptcy proceedings and claims for compensation of sustained damages, including insurance claims.
4.              Compensation of creditors in the case of late payment should be dealt with in compliance with the following rules (Article 309a of the Act):
(i)             upon delay in payment of a monetary obligation, and if the creditor has fulfilled its contractual obligations, the creditor is entitled, unless otherwise agreed, without the necessity of a reminder, to a compensation to the amount of the statutory interest for late payment and a compensation to the amount of BGN 80 for the recovery cost incurred. Damages in excess of the above compensations may be claimed in line with the general rules of the Bulgarian private laws, (i.e. as opposed to the statutory interest and the recovery cost of BGN 80, such damages will need to be proved by the creditor);
(ii)           the above liability rules may be subject to limitation, if:
- such limitation of liability is not grossly unfair to the creditor and does not violate the good morals; and
- the debtor is not a public contracting authority (under Art. 7 of the Public Procurement Act).
5.               The payment discipline - related rules do not apply to agreements executed before 15 March 2013.

Legal Alert - Amendments to the Commerce Act Aim to Limit Claw-Back Options in Bankruptcy and Enhance Payment Discipline