In July 2020, the Bulgarian Supreme Court of Cassation adopted an interpretative decision (№2/2020) on certain legal issues related to insolvency proceedings. The decision was prompted by existing contradictory case law. According to Art. 130, para. 2 of the Judicial System Act (JSA), interpretative decisions are binding for the judiciary. Given the special jurisdiction of insolvency cases (Art. 613 of the CA, Art. 649, para. 5 of the CA and Art. 694, para. 6 of the CA), the enacted interpretative decision should be complied with by the district courts, in their capacity of insolvency courts. Insolvency proceedings, claims for filling the insolvency estate and special declaratory claims under the CA are under the jurisdiction of district courts. The appellate courts, as an appellate instance in these cases, as well as the Supreme Court of Cassation - as a last resort, must also comply with the newly adopted interpretative decision.
The Interpretative case (№ 2/2018) was brought to resolve the following legal issues:
1) Upon termination of the insolvency proceedings under Art. 632, para. 4 of the CA and without the development of the stage of presentation and acceptance of the receivables, are the rights, which are not exercised and not presented in the insolvency proceedings, terminated under Art.739, para. 1 of the CA?
2) What are the consequences of suspension on the grounds of Art. 632, para. 5 of the CA of the insolvency proceedings on the filing of the claims under Art. 649, para. 1 of the CA and Art. 694 of the CA, the development of the proceedings under them and the course of the term under Art. 649, para. 1 of the CA?
The first question concerns a situation in which the debtor's available assets are insufficient to cover the initial costs and the latter are not prepaid by a creditor. In this case, the court rules under Art. 632 of the CA to suspend the insolvency proceedings simultaneously with their opening and with the declaring of the debtor bankrupt. The suspended proceedings may be resumed within one year from the entry of the judgment to suspend them, if the debtor or a creditor certify that there is sufficient property to cover the initial costs or if the necessary amount to cover them is paid - this right is provided as an option, not as an obligation. However, if within one year no sufficient property is established or no costs are paid, the court terminates the insolvency proceedings and orders the deletion of the bankrupt trader from the commercial register. In this case, the procedure for presenting and accepting the receivables does not develop, as the debtor's financial situation does not allow the creditors to be satisfied, even if their receivables are established.
According to Art. 739, para. 1 of the CA, the receivables, which are not claimed in the insolvency proceedings, and the rights, which are not exercised, are terminated. The question was whether this provision should be applied in case a judgment under Art. 632, para. 4 of the CA is adopted and subsequently the proceedings are terminated, given the fact that in this case the procedure for presenting and accepting receivables has not developed. Respectively, the creditors have not claimed their receivables, not due to their own inaction, but due to an objective fact - the economic condition of the debtor, which makes the claiming of receivables pointless.
In in its interpretative decision the SCC accepts that the provision of Art. 739, para. 1 of the CA also applies in the hypothesis of Art. 632, para. 4 of the CA, regardless of the type and source of the creditors' receivables and the legal organisational form of the debtor. The Court bases its decision on the following:
► The provision of Art. 739, para. 1 of the CA does not introduce as a precondition for its application the existence of culpable behavior of the creditor - unscrupulous inaction of the same. It is assumed that the non-claiming of receivables may be due to an objective fact - the economic condition of the debtor. Additionally, Bulgarian law provides negative consequences for legal persons not only in case of non-fulfillment of their obligations, but also in case of non-exercise of their rights (for ex., the institute of the statute of limitations). The SCC cites examples, in which creditors have an interest in providing payment - the existence of property rights, which the debtor has disposed of and which may be the subject of claims for filling the insolvency estate and non-monetary property, in which case it is necessary to prepay the costs of its cashing. On this basis, the SCC held that it was unjustified that the non-exercise of the creditors’ right to prepay costs does not lead to repayment of the latter's receivables.
► To deny the application of Art. 739, para. 1 of the CA in case of Art. 632, para. 4 in conn. para. 1 of the CA would mean to legitimise the possibility for creditors to seek enforcement of receivables arising before the completion of insolvency proceedings, on the basis of newly acquired property by a debtor (sole trader). This problem exists due to the fact that in the case of traders - legal entities, the termination of the insolvency proceedings is accompanied by their deletion from the commercial register (which has a constitutive effect). Because of this, they cease to exist legally, no new property can be formed with respect to them and no property can serve to satisfy creditors. There is a difference in the case of a debtor - sole trader. Insofar as the latter is a natural person and the entry or deletion in the register does not affect its legal personality (no constitutive effect), upon termination of insolvency proceedings against such debtor, but failure to repay the claims of its creditors, there may be a claim by a creditor and fulfillment by a debtor (sole trader) of obligations, which arose before the termination of the insolvency proceedings on the basis of newly acquired property. This dualistic regime with regard to the legal personality of debtors – legal entities and sole traders (the effect of entering of circumstances related to their legal personality in the commercial register) should not be transferred to insolvency proceedings, as the latter has the character of universal enforcement proceedings and treats the traders in the same way, regardless of their legal organisational form, except in cases explicitly provided by law (the hypothesis of Art. 612 of the CA is referred to). In its reasoning, the Supreme Court of Cassation also refers to Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132, which directs European legislation towards a "rescue culture", under which insolvency proceedings should lead to full debt forgiveness for entrepreneurs after a maximum period of 3 years, and the same maximum period is provided for the restoration of their rights.
► With regard to the period of prescription of receivables in the insolvency proceedings – an issue, which is in principle resolved by the provision of Art. 685a of the CA, the SCC accepts that in the case of termination of the proceedings under Art. 632, para. 1 of the CA, the provision of Art. 685a of the CA, is not applicable. The reason for this is that since Article 685a of the CA regulates the suspension, interruption and expiration of the period of prescription on receivables filed in the insolvency proceedings, insofar as in the case of termination of the proceedings under Article 632, para. 4, in conn. para. 1 of the CA, the phase of presenting and accepting the receivables does not develop, there is no way for the provision of Art. 685a of the CA to find application. In order to reach this conclusion, the Supreme Court of Cassation made an official grammatical, logical and restrictive interpretation of Article 685a of the CA. It also accepts that in the cases of Article 739, para. 1 of the CA, not only the right of enforcement is extinguished, but also the substantive right itself.
The Interpretative decision also considers the hypothesis of Art. 744 of the CA, in which suspended insolvency proceedings (including a judgment under Art. 632, para. 4 in conn. Para. 1 of the CA) are resumed by a judgement of the court when within one year after the termination of the proceedings, amounts set aside for disputed receivables are released or property is found that was not known at the termination of the insolvency proceedings. In this case, the SCC accepts that upon resumption of the proceedings under Art. 744 of the CA, the undeclared receivables will not be considered repaid, as long as the proceedings are not considered completed, as there is a continuation of the same proceedings, which were terminated by the judgment under Art. 632, para. 4 of the CA, and not initiating new insolvency proceedings. Based on the decision of the Supreme Court of Cassation, it can be concluded that the resumption of proceedings under Art. 744 of the CA, Art. 739, para. 1 of the CA has not generated its legal effect and creditors will have the opportunity to claim their receivables in the resumed proceedings. However, upon precluding the possibility for resumption of the proceedings under Art. 744 of the CA, the SCC accepts that under Art. 744 of the CA, there is no reason to deny the stabilisation of the repayment effect under Art. 739, para. 1 of the CA regarding unadmitted receivables and unexercised rights in these proceedings.
An important authorisation in the interpretative decision is the issue of the liability of partners with unlimited liability in partnerships- partners in a general partnership and partners with unlimited liability in a limited partnership. However, the issue of partners with unlimited liability in a limited partnership with a share capital remains unresolved as the latter are by definition partners with unlimited liability, but the limited partnership with a share capital is a stock company, and the Interpretative decision explicitly addresses the liability of unlimited liability partners in partnerships.Out of this gap, the Supreme Court of Cassation accepts that upon termination of insolvency proceedings against a partnership under Article 632, para. 4, in conn. para. 1 of the CA, the partners with unlimited liability are not liable for company debts. The reason for this is the provision of Art. 88 of the CA, which the court has interpreted grammatically and has deduced that the liability of partners with unlimited liability in the company is supplementary to that of the latter. Upon termination and deletion of the company under Art. 632, para. 4 in conn. para. 1 of the CA, the debts are repaid under Article 739, para. 1 of the CA, which, given the supplementary nature of the liability of partners with unlimited liability should also apply to the latter.
In addition to the above, the Supreme Court of Cassation takes into account the provision of Art. 610 of the CA, according to which simultaneously with the opening of insolvency proceedings for the company, insolvency proceedings are considered open for its partner with unlimited liability, as well. The Supreme Court of Cassation clarifies that if the partner with unlimited liability is a legal entity, then the latter does not owe both company and personal debts after the termination of the proceedings against it and it should be assumed that the provision of Art. 739, para. 1 of the CA finds application in relation to the insolvency proceedings against it. Consequently, the receivables are repaid. In order to reach this conclusion, the Supreme Court of Cassation presumes that the consequences of terminating the insolvency proceedings initiated for the partner with unlimited liability - legal entity are the same as for the company itself, in which the partner with unlimited liability - legal entity is deleted from the commercial register and ceases to exist as a legal entity. In case the partners with unlimited liability are natural persons, their personal debts are also repaid on the grounds of Art. 739, para. 1 of the CA with the completion of the insolvency proceedings opened against them simultaneously with the termination of the insolvency proceedings against the company in which they are members. Thus, the situation of the natural person – partner with with unlimited liability, cannot be more difficult than that of the natural person - sole trader, taking into consideration the permission given in the Interpretative decision as far as the latter.
The second issue, which is resolved by the interpretative decision, covers cases in which the insolvency proceedings have been suspended under Art. 632, para. 5 of the CA, after in the course of the proceedings it is established that the available property of the debtor is insufficient to cover the costs of the insolvency proceedings. In this case, a series of decisions are often taken to suspend and resume production at short intervals in order to provide funds to cover the costs of the proceedings. At the same time, the insolvency proceedings are accompanied by a number of special (under Art. 649, para. 1 of the CA) and ordinary (under Art. 658, para. 7, proposal two of the CA) claims for filling the insolvency estate and declaratory claims under Art. 694, para. 1-3 of the CA. There is a contradiction in the case law regarding the consequences of the judgment to suspend the insolvency proceedings under Art. 632, para. 5 of the CA for the claims under Art. 649, para. 1 of the CA (special claims for filling the insolvency estate and for the proceedings under Art. 694 of the CA (positive and negative declaratory claims regarding the existence of unadmitted and admitted receivables in the insolvency proceedings). The main issues in case of suspension of the proceedings under this procedure are:
a) whether in case of suspended proceedings it is admissible to raise new claims for filling the insolvency estate under Art. 649, para. 1 of the CA and declaratory claims under Art. 1-3 of the CA;
b) whether the suspension of the insolvency proceedings is a ground for suspension of the existing claim proceedings under Art. 649, para. 1 of the CA and under Art. 694, para. 1-3 of the CA, and;
c) how the suspension of the insolvency proceedings affects the one-year preclusive period under Art. 649, para. 1 of the CA for filing the claims for filling the insolvency estate ;
In the Interpretative decision, the Supreme Court of Cassation accepted that the suspension of the insolvency proceedings on the grounds of Art. 632, para. 5 of the CA is not an obstacle for filing new claims under Art. 1-3 of the CA, it is not a ground for suspension of the existing claim proceedings under Art. 649, para. 1 and Art. 694, para. 1-3 of the CA, nor it interrupts or stops the course of the one-year preclusive period under Art. 649, para. .1 of the CA. The following arguments are given as reasons for the given permission:
► The one-year period under Art. 649, para. 1 of the CA is by its nature a preclusive period, therefore, unlike the period of prescription, the preclusive period may not be interrupted and its expiry may not be stopped. It should be added that the effect of the preclusive periods occurs automatically by virtue of the law, as under Art. 649, para. 1 of the CA, the initial moment of expiration is related to the cumulative implementation of the prerequisites for the emergence and exercise of the right of a claim under Art. 649, para. 1 of the CA. In the case of subsequent suspension of insolvency proceedings under Art. 632, para. 5 of the CA, after a judgment under Art. 630, para. 1 or para. 2 of the CA, the one-year period for filing claims under Art. 649, para.. 1 of the CA begins to run with the delivery of a judgement under Art. 630, para. 1 of the CA or under Art. 630, para 2 of the CA. Therefore, in case of subsequent suspension of the insolvency proceedings before the expiration of the term under Art. 649, para.. 1 of the CA, a new one-year period for filing claims for filling the insolvency estate does not start to run. The Supreme Court of Cassation further argues that if the contrary is accepted, this would mean allowing the claims for filling the insolvency estate to be filed in a period - longer than the one-year preclusive period provided by law and to have more than one starting point for the expiration of this period - from the announcement of each judgment for resumption of the insolvency proceedings, in case of repeated suspension and resumption of the proceedings. The latter would mean that the period should be interrupted, and given its nature of preclusive period, this is impossible.
► Once started, the period under Art. 649, para. 1 of the CA, for filing special claims for filling the insolvency estate, given its nature, cannot be interrupted and suspended, therefore the subsequent suspension on the grounds of Art. 632, para. 5 of the CA of the insolvency proceedings is not an obstacle for filing new claims under art. 649, para. 1 of the CA, given the continuing expiration of the preclusive period, within which the right to claim should be exercised. The application in the case of art. 61, para. 1 of the Code of Civil Procedure is also explicitly denied, which is considered to be relevant only to procedural terms for initiating a suspended pending case. In the case under consideration, this is the insolvency case and the provision applies to the latter, but not to the cases on the accompanying claims, as the proceedings on them are separate from the insolvency proceedings.
► The proceedings under Art. 694, para. 1-3 of the CA and Art. 649, para. 1 of the CA are separate from the insolvency proceedings, due to which its suspension does not extend its effect to them. With the suspension of the insolvency proceedings, there is a temporary prohibition to carry out procedural actions in the insolvency case, but not in the accompanying claims and the proceedings instituted on them, which are separate cases. It is also stated that the suspension of insolvency proceedings is not among the grounds for suspension of action proceedings explicitly provided for in Art. 229 of the Code of Civil Procedure, nor is there an explicit provision in this sense in the CA. The Supreme Court of Cassation also considers the purposes of the mentioned action proceedings. The claims for supplying the insolvency estate allow to provide funds to cover the costs of the insolvency proceedings, respectively to satisfy the creditors, and the declaratory claims under Art. 694, para. 1-3 of the CA will resolve disputes in connection with the establishment of the creditors of the insolvency and therefore the establishment of the capacity of a creditor of a person with an unadmitted claim may lead to an interest in the same from the advance payment of the necessary expenses for the maintenance of the insolvency proceedings. In conclusion, based on the objectives of the proceedings under Art. 694, para. 1-3 of the CA and Art. 649, para. 1 of the CA, the SCC accepts that the latter can help to resume insolvency proceedings, and not vice versa, therefore, the proceedings should not be suspended.
► The Supreme Court of Cassation is also motivated through the prism of the powers of the insolvency trustee. The Interpretative decision assumes that in case of subsequent suspension of the insolvency proceedings under Art. 632, para. 5 of the CA, the powers of the insolvency trustee are not terminated and the latter cannot be deleted by the judgment under Art. 632, para. 5 of the CA, as the content of the decision does not cover the deletion or dismissal of the insolvency trustee. It is also pointed out that the decision under Art. 632, para. 5 of the CA is not among the grounds for dismissal of the insolvency trustee exhaustively listed in Art. 657 of the CA. In the case of subsequent suspension under Art. 632, para. 5 of the CA, the insolvency proceedings are suspended and pending, but not terminated, due to which the provision of Art. 736, para. 1 of the CA, according to which the termination of the trustee's powers occurs by virtue of the law with the termination of the insolvency proceedings, does not apply. Upon suspension of the insolvency proceedings, the procedural actions performed so far should be preserved, including the action of appointing the insolvency trustee. insolvency trustee retains his powers, including to represent the debtor, he or she may also exercise his or her powers in the proceedings under Art. 694 of the CA and under Art. 649 of the CA, to participate in the proceedings in which the latter is a party, as well as to file lawsuits on his or her behalf. In connection with the latter, the proceedings under the suspension of the insolvency proceedings under Art. 649, para. 1 and Art. 694, para. 1-3 of the CA are not subject to suspension, as the powers of the insolvency trustee have not been suspended or terminated and the latter he may take part in them or initiate them if the law allows it. The opinion of the Supreme holds that the non-receipt of current remuneration by the insolvency trustee, due to the lack of funds for his or her payment, is not a circumstance that leads to loss of powers of the insolvency trustee or impossibility to exercise them. However, the practical problem of the motivation of the insolvency trustee to perform his or her statutory actions in the proceedings remains unresolved in this hypothesis. The problem is dictated by the fact that even if the insolvency trustee receives his or her remuneration at a later time, after the payment of costs by a creditor, this would happen much later in time, and given the privilege of the trustee's receivable for remuneration, which is under Art. 722, para. 1, item 3 of the CA, it may lead to cases in which the insolvency trustee does not receive remuneration for the actions performed by him or her. This ambiguity leads to practical problems, as in this case the insolvency trustees often do not want to exercise their powers and perform their statutory actions, given the complexity of the insolvency proceedings and the uncertainty as to whether their work in these proceedings will be remunerated.
It is obvious that the given permission aims, regardless of the suspended insolvency proceedings, to ensure the development of the proceedings on the accompanying actions proceedings under Art. 649, para. 1 of the CA and Art. 694, para. 1-3 of the CA, as well as the filing of new claims under Art. 649, para. 1 of the CA for revision of certain actions and transactions, the result of which could lead to supplying the insolvency estate, respectively - prerequisites for resumption of the suspended proceedings. However, the given permission does not take into account that in some of these claims (under Art. 649 of the CA) the trustee is an active party, and in others (those under Art. 694 of the CA) - the participation of the trustee is mandatory. However, it is not clear what will be the motivation of the latter to exercise his rights in proceedings in which he does not receive his current remuneration, moreover, that the accumulated and unpaid remuneration of the trustee does not enjoy priority, but is satisfied according to the general order of Art. 722, para. 1, item 3 of the CA. Moreover, the latter will be held hostage to the suspended insolvency proceedings, insofar as the court cannot proceed with the suspended proceedings and the insolvency trustee cannot be released even at his or her written request to the court (Art. 657, para. 1, item 1 of CA), nor in any of the other hypotheses of Art. 657, para. 1 of the CA. This is one of the next proofs that the activity of insolvency trustee and the regulation of his remuneration should be regulated in detail by law.
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