In the 2004 European Bank for Reconstruction and Development (EBRD) Insolvency Sector Assessment, which measured the compliance of insolvency legislation with international standards set by the World Bank, the Asian Development Bank, the International Monetary Fund and the United Nations Commission on International Trade Law (UNCITRAL), the Bulgarian insolvency law was one of only 6 laws to receive an overall score of "high compliance." The EBRD assessment was based solely on the content of the insolvency law. According to the EBRD, the insolvency law in Bulgaria effectively deals with the avoidance of pre-bankruptcy transactions. It provides sufficient detail to determine which types of transactions will be subject to challenge and the circumstances that must be established to affect such a challenge. Although reorganization processes were the weakest area of performance in this legislation, it still provides for a relatively well-designed reorganization process. The EBRD states, however, that the Bulgarian insolvency law could be significantly improved in a number of ways. For example, the law could provide a clearer (and therefore more transparent) description of what precisely constitutes insolvency; it could provide more stringent sanctions for the failure of officers and directors of a debtor company to comply with their respective obligations under the insolvency law; and it could also remove some of the legal obstacles that make immediate insolvency financing difficult to obtain. The EBRD 2004 Legal Indicator Survey on Insolvency, which examined the effectiveness of insolvency regimes in creditor-initiated insolvencies, revealed a large "effectiveness" gap (the difference between the quality of the legislation and the effectiveness of the insolvency regime in practice) in Bulgaria. The EBRD points out that this gap underscores the need for further reform work to strengthen courts and other institutions that implement insolvency legislation.

General Overview

In the 2004 European Bank for Reconstruction and Development (EBRD) Insolvency Sector Assessment, which measured the compliance of insolvency legislation with international standards set by the World Bank, the Asian Development Bank, the International Monetary Fund (IMF) and the United Nations Commission on International Trade Law (UNCITRAL), the Bulgarian insolvency law was one of only 6 laws to receive an overall score of "high compliance". The assessment, which evaluated the content of the laws, assigned the following compliance levels: (1) very high; (2) high; (3) medium; (4) low; and (5) very low. According to the EBRD, the insolvency law in Bulgaria effectively deals with the avoidance of pre-bankruptcy transactions. It provides sufficient detail to determine which types of transactions will be subject to challenge and the circumstances that must be established to affect such a challenge. Although reorganization processes were the weakest area of performance in this legislation, it still provides for a relatively well-designed reorganization process. The EBRD states, however, that the Bulgarian insolvency law could be significantly improved in a number of ways. For example, the law could provide a clearer (and therefore more transparent) description of what precisely constitutes insolvency; it could provide more stringent sanctions for the failure of officers and directors of a debtor company to comply with their respective obligations under the insolvency law; and it could also remove some of the legal obstacles that make immediate insolvency financing difficult to obtain. (EBRD 2005, pp. 11, 13; Harmer & Cooper 2004, pp. 6-8)

The EBRD 2004 Legal Indicator Survey on Insolvency, which examined the effectiveness of insolvency regimes in creditor-initiated insolvencies, revealed that for debtors and creditors seeking to commence insolvency proceedings in Bulgaria, it is relatively easy to determine which court such proceedings should be commenced, but that the process is unduly complex. Bringing such proceedings is seen as far too expensive and the courts cannot generally be relied upon to deal with insolvency matters in a predictable and competent manner. It should be noted, however, that the government has made serious efforts recently to improve the qualification of bankruptcy trustees including adopting and enforcing strict professional criteria and organizing and funding training programs for bankruptcy trustees. The survey demonstrated a large "effectiveness" gap (the difference between the quality of the legislation and the effectiveness of the insolvency regime in practice) in Bulgaria. This gap underscores the need for further reform work to strengthen courts and other institutions that implement insolvency legislation. (EBRD 2005, p. 14)

In its 2007 Country Commercial Guide for Bulgaria, the U.S. Department of Commerce reports that the 1994 Commercial Code Chapter on Bankruptcy provides for reorganization or rehabilitation of a legal entity, attempts to maximize asset recovery, and provides for fair and equal distribution among all creditors. The law applies to all commercial entities, except public monopolies or state-owned companies established by a special law. Bank bankruptcies are regulated under the Bank Bankruptcy Act, while the 1996 Insurance Act regulates insurance company failures. (U.S. DoC 2007, p. 40)

Under Part IV of the Commercial Code, the debtor or creditors can initiate bankruptcy proceedings. The debtor must declare bankruptcy within 30 days of becoming insolvent. Once insolvency is determined, the court appoints an interim trustee to represent and manage the company, take inventory of property and assets, identify and convene the creditors, and develop a recovery plan. At the first meeting of the creditors a trustee is nominated; usually this is just a reaffirmation of the court appointed trustee. Non-performance of a money obligation must be adjudicated (res judicata) before the bankruptcy court can determine whether the debtor is insolvent. Additionally, amendments passed in 2003 add a presumption of insolvency when the debtor is unable to perform an executable obligation, has suspended all payments or when the debtor can only pay the claims of certain creditors. (U.S. DoC 2007, p. 40)

Creditors must declare all debts owed to them within one month of the start of bankruptcy proceedings. The trustee then has seven days to compile a list of debts. A rehabilitation plan or a scheme of distribution (in cases of liquidation) must be proposed no later than a month after the date on which the court approves the list of debts. The court must grant approval of the plan by the creditors within seven days. After creditors' approval the court endorses the plan and terminates the bankruptcy proceeding.

The lack of trained trustees has been a problem in the past. The June 2003 amendments to the Commercial Code provided for examinations for individuals applying to become trustees and obliged the Ministers of Justice and Economy to organize annual training courses for trustees. A Regulation on the procedure for appointment, qualification and control over the trustees, developed by the Ministries of Justice, Economy and Finance was published in June 2005. (U.S. DoC 2007, p. 40)

The methods of liquidating assets were also revised by the June 2003 amendments. The main objective was to establish a legal framework for selling assets that accounts for the character of bankruptcy proceedings, thus avoiding the need to apply the Civil Procedure Code. The new regime includes rules requiring a greater degree of publicity for asset sales. The amendments limited the rights to appeal judicial decisions made during bankruptcy proceedings. (U.S. DoC 2007, p. 40)

According to the World Bank, in 2006, the time and cost required to resolve bankruptcies was 3.3 years in Bulgaria compared with a regional average of 3.5 years and an OECD average of 1.4 years. The recovery rate in Bulgaria was 34.4, compared to the regional average of 29.5 and OECD average of 74. The Recovery Rate measures the efficiency of foreclosure or bankruptcy procedures, expressed in terms of how many cents on the dollar claimants recover from the insolvent firm. (WB 2006)