Bulgaria introduces new regime for insolvency of merchants


The Bulgarian government has introduced a new form of insolvency regime directed at merchants effective from 1 July 2023.
In this new framework, a merchant is distinctly defined as an individual involved in business or practising a craft or a liberal profession. The criterion for the classification is the nature and scale of the operations, which should not necessitate conducting activities in a purely commercial manner. Under the corresponding tax legislation, persons practising a liberal profession include, inter alia, expert accountants, consultants, auditors, lawyers, notaries, private bailiffs, licensed appraisers, medical professionals, architects, engineers, insurance agents, and other natural persons to whom the following conditions simultaneously apply: (1) they carry out their professional activity for their own account, (2) they are not registered as sole traders, and (3) they are self-insured.
The concept of the merchant's enterprise is central to this definition. The enterprise encapsulates all the rights, obligations, and factual relationships tied to the business, craft, or profession. When it comes to the intricacies of insolvency proceedings, the new regulations stipulate that in the absence of specific provisions, the procedures applying to merchants will mirror those set for sole traders.
One of the most salient aspects of the changes concerns the conditions under which a merchant is considered insolvent. A merchant falls into this category when they are unable to meet a monetary obligation that stems from or is associated with their professional activities. In situations where personal and professional obligations are intermingled and not clearly distinguishable, such obligations are treated as belonging to the merchant's professional sphere.
Regarding jurisdictional matters, the district court where the merchant is registered will oversee insolvency procedures. If a merchant has not been registered, the competent authority defaults to the court at their permanent address. Furthermore, to maintain transparency and proper record-keeping, all acts and proceedings related to insolvency will be duly recorded or announced in the insolvency information system overseen by the Bulgarian Ministry of Justice.
A pivotal section of the new regime details the conditions under which a merchant's debts are extinguished after the initiation of insolvency proceedings. For debts to be absolved, the merchant must cease their trade or business activities, ensure that expenses related to the insolvency procedure are covered, repay a minimum of one third of their outstanding obligations, and refrain from any actions or deals after insolvency initiation that could potentially harm the interests of creditors. Once these conditions are met, debt relief is automatically granted. However, this relief does not extend to specific types of debts, including those secured by legal instruments such as pledges or mortgages, as well as penalties, compensation for damages, alimony, debts that arise post-insolvency, and costs linked to the insolvency procedure itself.
In the procedural domain, a sole trader or merchant can approach the court to validate the conditions for debt extinguishment. Once the court verifies that the conditions have been satisfied, its decisions are made public either in the commercial register or through the insolvency information system managed by the Ministry of Justice. It is important to note that one cannot reapply to verify these conditions within a three-year window after the initial application. Once a merchant meets the conditions for debt extinguishment, they are no longer bound by any legal impediments or bans preventing them from engaging in trade, business, craft, or a liberal profession.
For more information on insolvency issues in Bulgaria, contact your regular CMS source or local CMS experts Antonia Kehayova and Desislava Anastasova.