TRADE BANKRUPTCY IN BULGARIA: LEGAL PROBLEMS IN DEFINING THE STARTING DATE OF THE BANKRUPTCY

From the standpoint of legal theory the principle valid in bankruptcy is as follows: the moment the merchant falls into bankruptcy, respectively over-indebtedness – all his creditors form a particular group, namely that of the bankruptcy creditors of the debtor. It may well be the case that some of the creditors have found out about their debtor’s bankruptcy only after the opening of the bankruptcy proceedings. This does not change the fact that all these creditors from that moment onwards have become “bankruptcy creditors” by virtue of the law.
There is also another valid principle: when distributing the bankruptcy estate all bankruptcy creditors are equal in rights in that each of them is entitled to receive a just compensation. None should get preferential treatment or receive more than the others (only proportionally and according to the different classes of creditors – e.g. creditors secured by mortgages, by injunction, creditors at large, etc.).
The specific problem in Bulgaria is that in practice the creditors learn they have become bankruptcy creditors only after the bankruptcy has been announced publicly. If the debtor (who at that moment is de facto bankrupt already) pays up one of his creditors, he thereby harms the rest of the creditors: the bankruptcy estate diminishes – some creditors receive full compensation, whereas others are left with even less.
In order to prevent such damage to a part of the creditors the Bulgarian law provides that such payments be declared invalid and this is usually achieved by retroaction. And this is precisely this aspect of the problem by which the different national jurisdictions differ substantially from one another.
Some of the countries lay down time restrictions: retroaction cannot cover very long periods. In Germany, for example, the maximum period is three months before the application to institute bankruptcy proceedings. In certain circumstances a longer period of retroaction is allowed, but only where the creditor although being aware of the actual bankruptcy of the debtor (and this has to be proved to the satisfaction of the court) has nevertheless accepted the payment, that is – where both the creditor and the debtor have knowingly harmed the other creditors. In Germany this retroaction can cover a period of 10 years back in time, but is only applicable if the debtor has made the payment while knowing that this payment harms the other creditors, and where the creditor, for his part, has accepted the payment whilst being aware of that intention of the debtor.
Regrettably the Bulgarian law is not sufficiently precise with respect to that particular aspect of the bankruptcy problem. The statutory provision simply states that payments made after the date for the beginning of the bankruptcy are invalid. It does not stipulate any time restrictions nor is any provision made for protection of the bona fide creditors.
The Bulgarian Court has the right to determine the date for the beginning of the bankruptcy without time restrictions on going back in time. This depends only on the court expert’s opinion which establishes the starting date of the bankruptcy (on the basis of accounting and other documents).
Thus, it turns out that, in Bulgaria, one can end up with the paradoxical situation, where, for example, all payments made by the bankrupt debtor over the years in discharge of his bills for utilities such as electricity, water, telephone, etc., may be declared invalid and will have to be returned into the mass of the insolvency amount /the bankruptcy estate/. The same may also happen to any payments made by the debtor for accounting, legal, or any other services, received by him over the years, or, for that matter, to payments he has made as installments under lease agreements, bank loans, etc.
So, given all of the above, it may well prove prudent if you do not make payments immediately after receiving an invitation for payment from the trustee for the bankruptcy because the prevailing court practice is to accept that the obligation for payment arises only after the court decision has taken effect. To put it differently, you had better wait for a claim to be filed (theoretically, in individual cases, that may not happen) so that the case could be won by the opposite party at the first and (eventually) second instance courts.
Legal theory has already produced several critical studies putting on the agenda the immediate need of amendment of the law and/ or the related court practice. A bill for amendment of the law has been introduced to Parliament, but as of to date it is not clear if and when the bill will be submitted for consideration by the Members of Parliament at their plenary sessions.