Business Stabilization Proceedings under the New Amending Bill to the Companies Act

On 14 June 2016, the amending bill to the Companies Act was tabled for its first reading in Parliament with a view to introducing new stabilization proceedings for businesses faced with financial difficulties. Bulgaria is the only EU Member State whose legislation does not provide for such arrangements yet.

This article outlines the main provisions of the bill which introduces the new Part Five of the Companies Act.

The bill envisages more effective measures to prevent the insolvency of a company through rehabilitation and continuation of business operations. The main objective of stabilization proceedings is to avoid the opening of insolvency proceedings even in cases in which the prerequisites for this are in place. The option that businesses have to achieve this objective is to reach an agreement with the creditors on how debts will be repaid through restructuring and a rehabilitation plan which is subject to approval by the court.

Similarly to insolvency proceedings, the stabilization process is opened for an over-indebted business. The new prerequisite set out in the amending bill and added to the existing prerequisites is the imminent threat for the business to be unable to pay its debts. The imminent threat occurs where the debtor, with a view to the maturity of its debts within the six months after the date on which the stabilization request is filed, is unable to pay the debts under Article 608(1) of the Companies Act[1] or is likely to stop paying its debts.

Where they are opened for a general partnership, limited (commandite) partnership or a partnership limited by shares, the proceedings are deemed opened also with regard to the one or more partners with unlimited liability therein. It is possible to open stabilization proceedings for companies in liquidation, as well.

The bill sets out an exhaustive list of the cases in which stabilization proceedings are not opened. The ones bound by a three-year period prior to the date of the application for opening the stabilization procedure are the cases in which the business has failed to submit its annual financial reports to the Registrations Agency for the last three years prior to the application for stabilization proceedings or in which such proceedings have not been opened for the applicant within the last three years prior to the application. The other two cases in which no stabilization proceedings are opened are the cases in which an application for opening insolvency proceedings has already been filed and in which over one-fifth of the debts are to related parties or persons who for the last three years have acquired accounts receivable from persons related to the business.

The procedure is inapplicable to a business whose debts are primarily debts to its related parties or to a public undertaking which holds a state monopoly or which has been established under a special law. Proceedings are also inapplicable to banks and insurance companies due to their specific nature of provisions.

The competent court to examine the application for opening stabilization proceedings is the district court at the seat of the applicant. It is only the business or an explicitly authorized proxy that may file the application for opening stabilization proceedings. The bill gives an exhaustive list of the details of the application, the appendices thereof, and the conditions for considering it irregular. The applicant has to specify the type, amount and maturity of its debts to creditors, together with information on any existing security and enforcement measures. The business is required to submit data of the parties related to it for the last three years prior to the application, data of its assets, and details of any judicial, arbitration or executive proceedings opened against the business, including any action for out-of-court settlement with creditors. The applicant is required to specify the reasons for which the rehabilitation plan is proposed and the objectives it pursues. The application has to include a specific proposal on the manner, time limits and conditionality of the repayment to the creditors.

The court examines the application in camera immediately and rejects any application for which no grounds exist to open the procedure. The rejection ruling is subject to appeal by the applicant within a week in accordance with the Code of Civil Procedure (CCP). The bill envisages the possibility for the court to hold a public session if it finds it necessary to hear the business or to collect further evidence to what has been appended to the application. The application for opening stabilization proceedings may not be withdrawn after the court ruling on the approval of the proposed stabilization plan.

Parties to the stabilization proceedings are all creditors, including those to which the business has given security on debts to third parties. In the case of non-cash debt, all non-cash debts of the business are monetized at their market value as of the date of the application for stabilization. The creditors retain their rights to the existing security, while those which are related to the business are considered to be hierographic to all the rest and they are satisfied last.

Stabilization proceedings introduce the legal concepts of a trusted party and a verifier.

The trusted party is an auxiliary body to the court and this person is required to have a degree in law, as well as to meet the requirements for an administrator/receiver in insolvency proceedings. The powers of the trusted party include the power to propose the list of creditors to the court and to supervise the activities of the business.

The verifier is required to be a chartered auditor. The appointment of a verifier is mandatory if the plan envisages reorganization of the business or conversion of debt into equity.

Similarly to insolvency proceedings, the provisions of the CCP are applied to stabilization proceedings on the basis of subsidiarity. The general provisions concerning the new procedure set out some special procedural rules applicable only to stabilization, such as the powers of the court to impose security measures and restrictions on the actions and activities of the business or the option to stop the proceedings only in the case of the death of the sole proprietor or the partner with unlimited liability.

The bill envisages mandatory declaration and recordation of all acts submitted and/or issued in connection with the stabilization proceedings in the file of the business in the Companies Register kept at the Registrations Agency. The details of the trusted party and the verifier are also subject to recordation.

Where the required grounds exist, the court will open the proceedings, appointing a trusted party and, if necessary, a verifier. The court determines their remuneration and it also has the discretionary powers to decide whether it is necessary to secure the debt. The competent court is required to schedule a public session within three months to examine and approve the proposed stabilization plan.

The stabilization proceedings are deemed open upon the submission of the court ruling to the Companies Register and the words “in stabilization proceedings” are added to the name of the business. The effect of the opening is that the business is restricted in its operations either partially (under the supervision of the trusted party) or fully when the business is divested of its right to manage and dispose of its assets. The opening of the proceedings deprives the applicant of the right to repay debts which occurred prior to the date of the application, except for transfers to pay public law debts in the form of value added tax, excise taxes, taxes or mandatory social security contributions on behalf of employees or other persons from whose remuneration the public law debt is deducted. Another consequence is the suspension of executive proceedings against the business and any proceedings under the Special Pledges Act. The only action possible in the suspended proceedings is to impose security measures, whereby interest is accrued for the period of suspension. If the proposed plan is not approved by the court within four months, the suspension is lifted.

The main grounds for a rejection of an application by the court are the cases in which the proposed plan envisages unwarranted partial writing off debts or the business fails to appear in court at the public session scheduled to examine the stabilization plan or declines to give explanations requested by the court. The existence of any grounds for the opening of insolvency proceedings within the meaning of Article 607a of the Commercial Act (inability to pay/excessive indebtedness) also leads to the rejection of the application.

Each creditor has the opportunity to raise objections to the inclusion or non-inclusion of a creditor on the list of creditors. The business, in its turn, has the right to give its opinion on the objection. On the basis of all the evidence appended to the application for opening stabilization proceedings, including the objections and opinions (of any), the trusted party compiles the final list of creditors. The court holds a session in camera to examine the list and rule on its approval. Only the creditors put on the final list, as approved by the court, have the right to attend the public session to examine and approve the plan. The business must attend the session. The plan is voted by classes of creditors. It is adopted by each class of creditors by a majority of more than a half of the debts in the relevant class provided that at least three-quarters of the creditors of the relevant class have voted. The court holds a session in camera to rule on the approval or rejection of the plan voted in that way. The court ruling is subject to appeal by the business and by any creditor affected by the plan, in accordance with Chapter Twenty-one of the Code of Civil Procedure, before the Supreme Court of Cassation which examines the appeal in a session held in camera and issues a final ruling. After it is approved, the plan becomes mandatory for the business and for its creditors the debts to which occurred prior to the date of the ruling on the approval, including the creditors who did not take part in the proceedings or voted against the plan. The plan has no effect only with regard to creditors who have not been put on the list of creditors or have been prevented from voting the plan. Another effect is the termination of the powers of the trusted party and the pending insolvency proceedings.

New statutes of limitation are introduced for the debts converted in accordance with the stabilization plan, starting from the due date of each debt as set out in the plan. The statutes of limitation are stayed for the remaining part of the debt to the creditor during the implementation of the plan in relation to the converted debts.

The final chapter of the new Part Five of the Commercial Act covers the cases in which stabilization proceedings are terminated. Basically, the proceedings are terminated where the stabilization plan has not been approved by the court within four months, regardless of any suspension. The court ruling on the termination is subject to appeal by the applicant/creditors in accordance of Chapter Twenty-one of the Code of Civil Procedure. The ruling of the appellate court is final.

[1] Article 608 of the Companies Act. (1) A business shall be considered unable to pay its debts, where the business is not able to repay the following debts due:

  1. a debt occurring in or relating to a business transaction, including its validity, implementation, non-performance, termination, annulment or cancellation or the effects thereof; or
  2. a public law debt to the central or local government in connection with its business activities; or
  3. a private law debt to the central government.

(2) A business shall be considered to be unable to pay where the business has stopped payment.

(3) There may be a case of inability to pay also where the debtor has paid or is able to pay, fully or in part, only the debts to certain creditors.