Insolvency of natural persons – Part I

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The Council of Ministers has presented a draft law[1] which aims to introduce the institution of insolvency of natural persons and put an end to the so-called “perpetual debtors”.

The explanatory memorandum states that current legislation does not allow individuals who are insolvent to be declared bankrupt, which leads to a state of stress for debtors and uncertainty for creditors.

The proposed draft law regulates the terms and conditions for the discharge of debts of debtors in good faith who are not, however, traders or entrepreneurs. The term ‘debtor in good faith’ is given a legal definition in the law.

Personal scope of the law

The Act governs insolvency proceedings of natural persons who are insolvent debtors in good faith and who wish to have their debts to all creditors satisfied in a single proceeding.

Excluded from its personal scope are natural persons carrying on a trade, business, craft or profession where they have debts arising out of the trade, business, craft or profession carried on.

The law is built on the principles of voluntariness, fairness and good faith. It defines the debtor’s state of insolvency as the inability to meet one or more demandable monetary obligations totalling more than 10 minimum wages for more than 6 months.

Bona fide debtor

Central to the law is the concept of a debtor in good faith, which, according to the definition of Art. 9, para. 1 of the proposed draft is expressed in the assumption of obligations in accordance with the state of one’s property and income, as well as in the abstention from actions which intentionally or negligently harm the interests of creditors. The criteria for good faith are further developed in the following subparagraphs of the same Article, and it is worth noting that the failure of an able-bodied debtor to engage in employment for one year prior to the application for the opening of the proceedings also qualifies him as being in bad faith under the applicable rules. The debtor must not have been convicted of the crime of breach of trust – Article 217 of the Criminal Code, as well as of crimes against the financial, tax or social security systems, or be rehabilitated.

Another criterion for assessment is that the debtor has not, in the last five years, incurred an obligation under a contract for consideration which is not intended to meet basic needs or those of the family members he supports, where that obligation is manifestly disproportionate to his assets and income. Manifest inconsistency exists where, alone or in combination with other obligations, it would result in being unable to meet one’s own needs and those of the family members for whom one is responsible.

There is also a requirement that he has not disposed of any of his assets of substantial value without consideration in the five years preceding the application for the opening of proceedings. A substantial amount is considered to be that which exceeds the debtor’s average monthly income for the last twelve months.

The debtor in good faith shall have submitted full and true data, documents and evidence of his assets to the court or the insolvency administrator in connection with the proceedings and shall not have wilfully obstructed their powers of inspection of his assets, preservation and replenishment of the bankruptcy estate.

The last criterion is the fulfilment of the repayment plan or the out-of-court settlement reached with the creditors.

The insolvency estate shall comprise all the debtor’s property rights and one half of the property and rights to property held in the matrimonial property regime, and the debtor’s non-seizable property shall not be subject to execution.

In the proceedings, the court shall determine maintenance to meet the living needs of the debtor and the members of his family, the amount of which may not be less than one minimum wage.

Insolvency administrator

Similarly to the current regulations in the Commercial Act on insolvency proceedings of commercial companies, creditors submit their claims to the court which, if it approves them, includes them in a list of accepted claims. The creditors of the admitted claims elect an insolvency administrator and propose his appointment to the court. The role of the insolvency administrator is similar to that of a commercial company and the requirements that the person must meet to exercise that function are governed by reference to the provisions of the Commercial Act.

In order not to overburden the debtor with expenses, the insolvency administrator does not receive a monthly remuneration, but a one-off remuneration of one minimum wage at the stages specified by the law, namely when drawing up the list of admitted claims, when carrying out the inventory and establishing the insolvency estate, when drawing up and proposing a repayment plan for the debtor and when drawing up the distribution account. The regulation is also intended to encourage the insolvency practitioner to do his work within a reasonable time. It also provides for an additional remuneration of 5 per cent of the value of the realised assets, as well as an additional annual remuneration of one minimum wage, payable within 3 days of the approval of the insolvency administrator’s annual activity report.

Insolvency proceedings

As stated above, the proceedings are initiated by the debtor itself. The competent court is the district court of the debtor’s domicile if he was registered there more than six months before the date of the application for initiating the proceedings. The aim of the law is to avoid so-called “forum shopping” by giving the debtor the freedom to choose where the proceedings are to be conducted. The law also contains a special provision which prohibits a change of jurisdiction, even with the consent of the parties involved.

The ex officio principle is reinforced – the court may, of its own motion, establish facts and gather evidence relevant to the acts to be rendered in the proceedings, including the appointment of experts to clarify circumstances requiring special knowledge. Moreover, the court may, of its own motion, impose interim measures and restrictions on the actions and activities of the debtor.

The Code of Civil Procedure is applicable for matters not settled by the proposed act.

Presumably in order to protect and preserve the dignity of the debtor, the law provides that open hearings are to be held behind closed doors.

Proceedings begin with an application complying with the requirements of the act and accompanied by a declaration in a form approved by the Minister of Justice, containing information on the debtor’s civil and marital status, the absence of grounds excluding his good faith, an inventory of his personal assets, a list of creditors and their claims, and the payments made by the debtor in excess of BGN 500 in the last six months. The debtor shall also submit a reference to court and enforcement proceedings against him and an extract from his bank accounts and accounts with other providers of payment instruments. The application shall be accompanied by a repayment plan and proof that the National Revenue Agency has been notified of the request for bankruptcy under Article 78(2) of the Tax and Social Security Procedural Code.

The act states that the application is to be published in the insolvency register, which is currently not operational. The transitional and final provisions of the law state that until the bankruptcy register is developed and operational, acts in bankruptcy proceedings of natural persons shall be entered or published in the Information System for Bankruptcy Proceedings of the Ministry of Justice.

Decision for opening the proceedings

By the decision, the court shall declare the insolvency of the debtor, open the insolvency proceedings, grant security by way of seizure, restraint or other security measures, convene the first meeting of creditors, determine the maintenance of the debtor and the members of his family, as well as the debtor’s bank account into which payments shall be made for his benefit.

The decision shall be published in the register and shall be effective for all.

With the opening of the proceedings, the debtor may no longer enter into new management and disposal transactions with its property, or make payments without the authorisation of the insolvency administrator, or the court if an insolvency administrator has not yet been appointed. These restrictions do not apply to transactions necessary to meet the living needs of the debtor and the members of his family within the limits of the maintenance determined by the court, such as payments to the central and local budgets and payments for household, utility and communication services, necessary expenses for food, health, education, social services, etc.

 

[1] https://www.strategy.bg/PublicConsultations/View.aspx?lang=bg-BG&Id=7452

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