MINISTRY OF JUSTICE
For the attention of:
Ms. Maria Pavlova
Minister of Justice
submitted by
BULGARIAN ENTREPRENEURIAL ASSOCIATION (BESCO), a non-profit legal entity registered in the Register of Non-Profit Legal Entities maintained by the Registry Agency, UIC 177239971, with its registered office and management address at: 117 Hristo Botev Blvd., Floor 2, Sofia 1303, Vazrazhdane District, represented by its Executive Director, Dobromir Georgiev Ivanov.
With this opinion, we would like to express our principled support for the adoption of a new, standalone Personal Insolvency Act, whose primary objectives are to provide insolvent individual debtors with an opportunity to obtain relief from outstanding unpaid obligations while ensuring the fair, efficient, and timely satisfaction of creditors' claims to the greatest extent possible within a single, unified insolvency proceeding.
We would also like to bring to your attention several additional recommendations, which we hope will be taken into consideration during the legislative process.
The draft Act makes it clear that it applies to debtors who are natural persons. However, it does not specify whether this includes only Bulgarian citizens, citizens of EU Member States, or foreign nationals residing in Bulgaria under a residence permit and for a specified period.
We recommend defining more clearly the categories of persons to whom the proposed measures apply. We believe it would be useful to include an explicit provision regulating the applicability of the Act to individuals of different nationalities who reside in Bulgaria. Such clarification would improve legal certainty and prevent potential disputes regarding the interpretation of the law.
We believe that granting all creditors—not only the debtor—the right to initiate insolvency proceedings would contribute to a fairer and more balanced application of the legislation.
Under the current insolvency framework applicable to traders and entrepreneurs, creditors are also entitled to file petitions to initiate insolvency proceedings. Limiting this right exclusively to the debtor in personal insolvency proceedings could create an imbalance and place creditors of individual debtors in a less favorable position.
As currently provided under Article 56 and Article 60(3) of the draft Act, the procedure for proposing and approving a repayment plan may adversely affect creditors' rights.
Unlike Article 703 of the Commerce Act, the draft does not provide for creditors to be divided into classes when voting on the repayment plan. Consequently, all creditors, regardless of the nature or security of their claims, vote together.
The absence of class-based voting may result in creditors holding larger but unsecured claims imposing a repayment plan that disadvantages secured creditors. This would undermine the principle of equal treatment of creditors and create opportunities for debtors to act in bad faith while circumventing the rights of secured creditors.
We propose that the repayment plan also include, as a mandatory element, an indication of the level of satisfaction each class of creditors would receive compared with what they would receive through liquidation of the insolvency estate.
Article 65(3) provides that:
"Guarantors, persons who have established a pledge or mortgage securing the debtor's obligations, and jointly liable persons may not benefit from the relief provided under the repayment plan."
We believe this provision contradicts both the legal nature of security interests and Article 139 of the Obligations and Contracts Act, according to which a guarantor cannot bear liability under more burdensome conditions than the principal debtor.
We understand the rationale presented in the explanatory memorandum, namely that:
The proceedings will not provide for preferential or avoidance actions intended to replenish the insolvency estate where certain actions or transactions of the debtor have harmed creditors, as provided under Articles 646 and 647 of the Commerce Act. The existence of grounds for such actions is considered evidence of bad faith and therefore constitutes an obstacle to opening insolvency proceedings.
Nevertheless, we have reservations regarding this approach.
The bad-faith criteria listed in Article 9(2) of the draft do not encompass all situations covered by Articles 646 and 647 of the Commerce Act, including:
Articles 646 and 647 of the Commerce Act address a much broader range of actions through which debtors may prejudice creditors.
By contrast, Article 9(2), items 4 and 5 of the draft introduce thresholds such as transactions of "significant value" and conduct "manifestly disproportionate to the debtor's assets and income," thereby narrowing the circumstances under which a debtor may be deemed to have acted in bad faith.
This creates opportunities for debtors to undertake transactions that reduce the insolvency estate without meeting these narrower criteria, leaving creditors without effective legal protection.
We therefore propose that avoidance actions equivalent to those under Articles 646 and 647 of the Commerce Act be expressly incorporated into the new legislation, with the necessary adaptations to reflect the specifics of personal insolvency proceedings.
Article 9(1) defines good faith, while Article 9(2) defines bad faith.
Although the two concepts are intended to be opposites, their current formulation gives rise to several ambiguities.
While the definition of good faith expressly requires a particular degree of fault, fault is not included as an element of bad faith.
This inconsistency may lead to conflicting interpretations and reduce predictability in the application of the law.
To improve consistency and legal clarity, we recommend reconsidering the relationship between the concepts of good faith and bad faith.
Throughout the draft, references are made almost exclusively to the debtor's bad faith under Article 9(2). The role of the concept of good faith should therefore be clarified and harmonized with the concept of bad faith used elsewhere in the Act.
Article 9(1) states that:
A debtor may request the opening of insolvency proceedings and exercise the rights provided under this Act if acting in good faith.
Meanwhile, Article 33 provides that insolvency proceedings may be opened upon application by a debtor who:
These provisions describe the same legal action using different terminology.
For consistency, we recommend harmonizing the wording used throughout the Act.
To enhance clarity, we propose defining good faith simply as the absence of any of the bad-faith circumstances listed in Article 9(2).
The draft refers to the Civil Procedure Code for matters not expressly regulated.
However, despite its specific characteristics, personal insolvency proceedings are far more closely related to commercial insolvency proceedings than to ordinary civil, enforcement, or interim proceedings regulated by the Civil Procedure Code.
Accordingly, while the Civil Procedure Code may continue to apply where appropriate, we recommend explicitly providing for the subsidiary application of the Commerce Act in matters not regulated by the new legislation.
Such a provision would fill legislative gaps and prevent uncertainty where the Civil Procedure Code offers no suitable solution.
We note that the proposed two-instance judicial procedure for determining prescription-based discharge of debts (Article 105) may adversely affect both creditors and debtors.
By comparison, disputes regarding prescription following an action to establish a claim are generally examined through three judicial instances.
Although two-instance proceedings may be faster, they may also result in more superficial review. Complex prescription issues require thorough judicial examination to ensure fairness and legal certainty.
The purpose of personal insolvency is to enable debtors to obtain relief from debt under specified conditions.
Reducing the limitation period to three years would create unequal treatment between debtors undergoing insolvency proceedings and those outside such proceedings.
We therefore recommend maintaining the general five-year limitation period.
A shorter limitation period may also undermine repayment plans involving deferred or installment payments. If repayment extends beyond three years, debtors could simply cease making payments once the claims become time-barred, placing creditors at a serious disadvantage.
Where no repayment plan exists, the limitation period currently begins upon the court's approval of the initial inventory of assets.
We propose that the limitation period instead commence from the publication of that ruling in the Insolvency Register, as publication serves the purpose of public notice.
The draft creates a risk of conflicting interpretations between the Civil Procedure Code and the new Act concerning exempt property that serves as collateral.
Article 445 of the Civil Procedure Code provides that exemption from enforcement does not apply to pledged or mortgaged assets in favor of secured creditors, nor to maintenance claims, tort claims, or certain public claims.
Conversely, Articles 11(2) and 12 of the draft provide that exempt property shall not form part of the insolvency estate and may not be subject to enforcement during insolvency proceedings.
This raises the question whether secured creditors would lose rights they currently enjoy under ordinary enforcement proceedings.
If so, they would be placed in a significantly less favorable position and debtors could abuse the system by initiating insolvency proceedings to shield collateral that would otherwise remain enforceable.
For this reason, we recommend that the legal status of exempt property serving as collateral be expressly regulated.
Article 12 refers only to exempt property, whereas the Civil Procedure Code also protects exempt income.
We therefore propose replacing the wording with:
"Enforcement may not be levied against the debtor's exempt property during insolvency proceedings."
Article 23 requires the insolvency trustee to provide prior consent to appointment together with a declaration confirming eligibility.
However, the required form of that consent is not specified.
By comparison, Article 656 of the Commerce Act requires both the consent and declaration to be in writing with notarized signatures.
Given the trustee's authority to manage and dispose of the debtor's assets, we recommend requiring both documents to be in writing with notarized signatures.
If notarization is considered excessive, Article 23(1) should at minimum expressly require the consent to be in writing for evidentiary purposes.
We propose the following amendments:
Article 34(2)(g) should require the list of creditors to include:
Article 34(2)(3) should specify the period covered by bank statements and statements from other payment service providers that must accompany the application.
We recommend the following drafting changes:
11.1 Replace every reference to an application being "published" with "entered" (or "recorded," depending on the terminology used for the register).
11.2 Replace every reference to court decisions being "announced" with "entered in the register."
11.3 Delete the final sentence of Article 14(3), stating that "The state fee is fixed." In legislative practice, the type and amount of fees are generally determined by tariff regulations.
11.4 In Article 15(2), replace "final court judgment" with "final court act," since proceedings are terminated by a court order rather than a judgment on the merits.
11.5 In Article 37(1), specify that the decision opening insolvency proceedings must indicate the deadline for filing claims pursuant to Article 45(1).
Thank you for your time and consideration. We hope that the recommendations outlined above will be taken into account during the adoption of the new legislation.
Respectfully,
Dobromir Ivanov
Executive Director
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