On 6 October 2022 a public consultancy procedure on the Personal Insolvency Bill was opened.
The main objective of the bill is to establish a procedure for the fair satisfaction of all creditors of natural persons in a common proceeding, following the insolvency proceeding of traders, regulated in the Commercial Act. This is intended to reduce the significant costs of the debtors and creditors in lengthy litigation and enforcement proceedings and to maximise efficiency in the collection of receivables.
Reasons for the creation of the bill:
By preparing the bill, Bulgaria takes advantage of the possibility provided for in Art. 1, Para. 4 of Directive (EU) 2019/1023 (Directive on Restructuring and Insolvency), under which each Member State can regulate in its national legislation a procedure which leads to the waiver of debts accumulated by insolvent natural persons who are not entrepreneurs. According to the text of the Directive, this is only a right from which the Member States can benefit at their discretion, not an obligation. The Directive provides for compulsory regulation by Member States only of insolvency proceedings for natural persons who are entrepreneurs, i.e., persons carrying out business activities.
The motives to the bill explicitly emphasize that its preparation is also in fulfilment of Bulgaria’s commitments under the National Recovery and Sustainability Plan, adopted by Resolution No. 411 of the Council of Ministers of 2021, whose main objective is to facilitate the economic and social recovery from the crisis caused by the COVID-19 pandemic. The adoption of the Personal Bankruptcy Act is precisely one of the reforms provided therein.
Highlights of the contents of the bill
It is provided that the act shall be applicable only for natural persons, who are not carrying out business activities. In essence, these are the consumers. All categories of self-employed persons and economic producers are outside of the scope of this bill. They qualify as entrepreneurs and the initiation of insolvency proceedings against them is provided for in the draft amendments of the Commercial Act (“CA”), that were published earlier this year.
The proposed regulation almost entirely reproduces the insolvency regulations of traders provided for in the CA. The classical legal figures and institutes of commercial insolvency are transposed. The procedure for initiating and declaring insolvency proceedings is identical and so are the insolvency bodies – the insolvency receiver, who must comply with the requirements of the CA, as well as the creditors’ general meeting. Here as well the cases will be reviewed by the district courts. The procedure for collecting receivables to the court and for approving the lists of receivables drawn up by the insolvency receivers is the same. There is also a possibility to draw up a repayment plan after the initiation of insolvency proceedings of the natural person, which is an analogue of the trader recovery regulation provided for in the CA, giving the possibility for prevention of insolvency through a deferral, rescheduling or waiver of the debts. The procedure for reimbursing the property is also similar.
The main difference and new point in the regulation is that only the debtor has the right to file a petition for the initiation of an insolvency proceeding and not its creditors. In this way, the realization of the targeted efficient collection of receivables in a general proceeding and the saving of time and costs depend entirely on the will of the debtor.
It is expressly provided that the insolvency proceeding shall not be initiated where the debtor has no assets in excess of the statutory subsistence minimum sufficient to partially discharge the debts.
A new point is the introduction of the requirement of good faith of the debtor as a prerequisite for the initiation of the proceeding. The bill exhaustively lists the hypotheses of bad faith of a debtor, which are an obstacle to the initiation of the proceeding. For example, a debtor who 5 years prior to the filing of the petition for the initiation of the insolvency proceeding has disposed of assets of significant value, has been convicted of certain categories of offences or has been sanctioned for breach of tax legislation will be considered to be in bad faith.
The bill provides for the use of an insolvency register, where insolvency acts will be published. The register will be of key importance because the time limit for the parties to act in the proceeding is linked to the time when the relevant act is published in the register. The introduction of a new insolvency register is a requirement of Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015, on insolvency proceedings (Regulation (EU)2015/848). This register must be available generally for the purposes of insolvency proceedings, regardless of their type. Until its introduction, the entries and announcements provided for in the bill will be made in the current Insolvency Information System of the Ministry of Justice. The Public Insolvency Register will be fully in line with the Concept of Registry Reform, adopted by Resolution of the Council of Ministers No. 298 of 2021.
As a disadvantage of the bill can be assessed the decision that the creditors of the debtor - natural person will not be able to file petitions for initiating an insolvency proceeding. Although personal bankruptcy is envisaged as a remedy for the debtor, its regulation should also reflect the creditors' interest in initiating such proceeding. In this case the deviation from the rules of the CA is unjustified and inappropriate. It is also unclear how the absence of this right of the creditors fits in with the predictions for the reduction of regulatory and administrative burdens on business which are highlighted in the preliminary impact assessment of the bill. In comparison, insolvency regulation in Germany allows creditors as well to initiate insolvency proceedings of natural persons – consumers.
As it is expressly provided that the petitions for initiating the proceeding will be announced in the insolvency register in order to be able to claim their receivables in time, the creditors will have to continuously monitor the register for petitions of their numerous debtors – natural persons and announced decisions for initiating the proceeding. This in no way reduces the administrative and financial burden on creditors and creates additional difficulties. It is therefor good to provide for the court upon submission of the petition to send express notice to the major creditors designated by the debtor such as providers of utilities, mobile services, banks, etc., having hundreds of thousands of debtors - consumers.
The bill is distinguished by quite a few internal controversies, legal inconsistencies, and imprecise wording. For example, Art. 2 expressly excludes persons carrying out business activities from the scope of the act. At the same time Art. 9, Para. 2, item 2 raises the debtor's failure to engage in a business activity that was a source of income one year prior to the filing of the petition as a ground for bad faith. In other words, despite the provision of the law that it is not applicable to persons carrying out business activities, the carrying out of the business activities one year prior to the filing of the petition by the debtor is grounds for the debtor to be considered as acting in good faith and its application to be admissible and not carrying out such activities automatically makes him/her acting in bad faith and is an obstacle to the initiation of the proceeding. Another example are the illogical provisions of Art. 34, Para. 3 and Art. 36, Para. 1 providing that the debtor may seek distraint of his/her own bank accounts as security measures to preserve its property.
The mass copying of provisions of the Commercial Act upon the drafting of the bill has led to inaccuracies, inconsistencies between its various provisions and may give rise to divergent conclusions.
The provisions regulating the receiver's supervisory and controlling powers over the debtor and its property, some of which resemble the powers of a guardian of a minor/restricted person, need refinement. An example of a provision which shall be revised is Art. 22, item 4 under which the receiver has the power to participate in the proceedings in the debtor's cases. It can be concluded from the general wording that the receiver should participate in all proceedings in which the debtor is also involved. The question arises whether it is appropriate and possible for the receiver to participate, for example, in a divorce proceeding of the debtor. It is hardly possible for the receiver to participate in all proceedings to which the debtor is a party and is better, for the avoidance of doubt and controversial case law, to explicitly list the exceptions.
It is notable that the bill provides for short deadlines for procedural actions. Thus, most deadlines for appeals against judicial acts are 7 days. This may be an effort to ensure speed, conciseness and discipline of the parties in the proceeding, but it should not be forgotten that in this case the debtor is a natural person – consumer and its orientation in such a complex proceeding would be considerably more difficult than that of a trader.