Multinational Enterprise Liability in Insolvency Proceedings

Bulgaria[*]

Varadinov & Co Javor Varadinov, Managing Partner;Yanislava Chankova–Docheva,Attorney-at-law;Zoya Zlatkova,Attorney-at-law

A Domestic Family of Companies

Bulgarian law explicitly admits the existence of commercial groups as a legal phenomenon and regulates their existence. The legislation applicable to such groups is not a systematic and comprehensive one, nevertheless the law provides some special rules for these cases. The legal status of companies underBulgarian law is set out mainly in theCommercialAct (CA).Companies’ regulation and commercial groups have special domestic legal acts too, such as the Public Offering of Securities Act,theBanking Act,the Insurance Code, accounting laws, the Protection of Competition Act, etc. The CAprovides for two types of commercial groups: consortium and holding.

A ‘consortium’ is a contractual grouping of merchants for carrying out specified activities.It may be organised as a partnership under civil lawor as a commercial company.The respective rules for partnerships under the civil law or for the company, in the form of which a consortium has been organized, shouldbe applied(Article 275 and 276 CA).Consortiums can be created either as a personal partnership–general or limitedor as a capital company –a joint-stock company, a partnership, limited by shares, or as a limited liability company.

A ‘holding’is not a contractual association of merchants, but a vertical grouping of companies that keep their legal independence, for whose establishment isnot necessaryto have an agreement between the participants. In order to have a holding it is necessary that a holding companybe created, which isthe top company of apyramid containing a subsidiaryor several subsidiaries.The CAensuresthat the holding company is created as a joint-stock company, a partnership limitedby shares ora limited liability company, i.e. as a capital company, that pursues a specific goal – to participate in other companies through the acquisition and ownership of shares and stakes, or to participate only in their management. At least 25 per cent of the capital of the holding company must be paid directly to the subsidiary.The holding company may conduct its own production or commercial activity or not(Article 277 CA).

A mandatory elementin the creation of a holding isthe subsidiary.The lawdefines itasa company,in which the holding company owns or controls directly or indirectly at least 25 per centof the shares of that company or participates in its management, having the right to determine, directly or indirectly, half of the members of itsboard.

1. If insolvency proceedings must be commenced for the family of companies, does your law permit a joint proceedings, i.e. a single court file, a single judge, a single list of creditors, single notice list, or must the case for each member of the family proceed separately with no practical acknowledgment of the related proceedings?

With regards tothe above, the consortium is subject to the rules regarding partnership under civil law (article 357 of the Law on Obligations and Contracts) or the rules of the respective company(article 56–285 CA) in whichthe consortium is registered. If the consortium has been established as a partnership under the civil law,the consortium is not a legal entity and therefore in case of insolvency of one of the merchants involved in the contract, insolvency proceedings should be opened for each of them. In case the consortium is created as a kind of company under the CA and accordingly is personified, and insolvency proceedings are initiated,there are not any specific provisionsfrom the general principles, since there is one company, for which the relevant provisions of the CA shall be applied.

The subsidiaries are separate and independent legal entitiesin relation to the holding company, upheld byBulgarian legal doctrine and court practice(Decision No 41/1993 under the company file No 214/1992–V–Supreme Court;Ruling No 399/1994–V–Supreme Court;Decision No 19/1995–V–Supreme Court). The subsidiary is economically subordinateto the holding company as the latter holds at least 25 per centof the subsidiary’s shares or has the power to determine its management. The CA endorses the understanding of the classical corporate doctrine – the principle of legal severalty of liability and risk allocation of the self-dependant legal entities. Hencethe holding company and the subsidiaries are legally separated, self-dependant and personified legal units. In its capacity of an independent legal company, the subsidiary concludes contracts, respectivelyholds rights and assumes obligations, adopts execution of its debtors, etc. When obligations arise from contracts with subsidiaries, the creditors may not engage either joint or subsidiary liability of the holding company. This is true also for the reversesituation –the subsidiary can not be responsible for the obligations assumed by the holding company.

Each of the companies within the group forms its own property and meets its obligations to the limits of that property. As far as the holding group has no separate legal personality, we can not speak for group's capital or group’s property.The CA does not provide anything specific about the groups and the liability of companies involved in them, from the general rules for individual companies. The formation of its own capital for each of the individual companies is a prerequisite for severalty of liability and risk allocation.Therefore if there are legal grounds for the initiation of an insolvency procedure, either for the holding company or for any of the subsidiaries, the insolvency proceedings should be opened for each particular company.

However, in addition to the general rules for the commercial groups, the CA provides some specific regulations that should be noted:

  • In case the holding company is declared bankrupt, which is grounds for its termination, it will triggerthe termination of the companies in which the holding company is a general partner(general partnership, limited partnership and partnership limited by shares –Art. 93, p. 4 and 5, Art. 99, para. 2, Art. 259, para. 2 CA),andthe sole limited liability companies, in which the holding company is a sole shareholder(Art. 157, para. 2,in connection to the art. 154, para. 1, p. 4 CA).However this is not a specific consequence of the group interconnection between the holding company and the subsidiary, butit follows the general rules of the company law.
  • Notethe text of thearticle 610CA: in concurrence with the institution of the bankruptcy proceedings for the company,a bankruptcy proceeding shall be deemed instituted as well for its unlimited partner.In case the holding company is the unlimited partner in a subsidiary company, when the insolvency procedure starts for a subsidiary, it should be considered as having started for the parent company too. Once again, this is not a specific rule considering commercial groups, but a general one, implemented by company law.
  • As a general principle the holding company is not liable for the duties and responsibilities of its subsidiaries. Nevertheless, there are some exceptions. When the subsidiary company is established in the form of general partnership, limited partnership or partnership limited by shares and the holding company is an unlimited partner –then the parent company is financially liable for the obligations of the subsidiary. This is not a special rule, but a consequence of the general principle of the unlimited liability of general partnerships adopted by law, despite the legal recognition of their independence.
  • Notwithstanding the general principal of commercial law regarding separation of the property and the respective liability of the companies within a commercial group, there are some cases in which the holding company takes on a responsibility for the subsidiary’s obligations towards creditors. There are different legal instruments to achieve this effect, such as entering into debt, becoming a guarantor, assuming real securities, accepting a bill of exchange, etc. The liability described arises from the contract between the parties involved and does not represent a specific rule regarding the relationship between the holding company and the subsidiary.

a) What if the members of the family are organized under, or operate in, different locations within your country? Can a company from a distant location in your country commence its bankruptcy proceedings where its affiliate is located, if the affiliate has already commenced its bankruptcy proceedings?

The seat is a legal individualised characteristic of a merchant. It represents the place where the merchant’s registered office is located. The merchant's address is the address of its registered office(article12, paragraph1 CA).In a holding each of the participating companies has its own seat and registered office. Theholding as a group of self-dependantlegal entitieshas neithera seat of its own nor a trade name.The seat of each of the participating companies in the commercial group –the holding company and subsidiaries, is essential to determine its ‘nationality’ and the applicable law.

The CAenvisages thatthe court of insolvency is the district court where the merchant is domiciled at the moment of submission of the petition for institution of the insolvency proceedings.Companies included in the commercial groupmay have a seat and a registered office in different locations. There is no possibility to initiate a bankruptcy for the parent company at the seat of the insolvent subsidiary. This follows the general rule of legal severalty of liability and of risk allocation of the separate companies within the economic union, which keep their legal independence.

b).To the extent your country has different types of insolvency proceedings (such as Chapter 11 reorganization and Chapter 7 liquidation on the U.S.), do the members of the corporate family all have to proceed under the same type of proceedings?

The CAprovides for a single insolvency procedure. On the other handthe aboveshould be respected with regard to the principle of legal independence and severalty of liability of the companies within the commercial group, which leads separate insolvency proceedingsto be initiated.

The lawregulates thetransformation through joinder, merger, splitting and separation of a company or a change of the legal form and liquidationof companies, but all these are separate legal procedures from the insolvency procedure. The CA provides for exhaustively the prerequisites for starting the insolvency proceedings and they are different from the necessary grounds to initiate procedures for transformation and liquidation. The law(Article 261a CA)envisages that a company which is in an insolvency procedure can be transformed if the rescue plan provides for continued operation of the company.

There is a connection betweenthe termination of a company, its liquidation and the insolvency procedure, and it is in order of consistency. The law provides thatone of the legal grounds for termination of a company is it being declared bankrupt(Article252, paragraph1,3 CA).The general rule is that after the termination of a companyit should be liquidated (Article 266, paragraph 1 CA). However,from the date of the decision for opening insolvency proceedingsthe liquidation procedure of a company in liquidation shall be stopped(Article272a CA). The proceedings for liquidation shall be terminated on the date of enactment of the decision under Article 630 CA, by which the company is declared bankrupt.

2. Does your law permit, or prohibit, a single administrator/trustee/receiver to administer the assets and the liabilities of the entire corporate family?

In accordance withthe separate insolvency proceedings for each company withina commercial group, the court will appoint a receiver in bankruptcy for each of the proceedings.Thelawprovides for the rights and obligations of this professional, the rules for his appointment and removal, accountability, standard care regarding performing his duties, remuneration, etc. The powers of the receiver in bankruptcy may be exercised by several persons. In such cases, decisions shall be taken by consensus and actions shall be undertaken jointly, unless theMeeting of creditors, in case of dispute between the persons who exercise the authority of the receiver in bankruptcy, or the court decides otherwise. In case the powers of the receiver are exercised by several persons, they shall have joint liability.

(a) If the law permits it, is there a hearing for the court to determine whether the administration by a single party is appropriate? Are secured and unsecured creditors or other parties in interest allowed to object or be heard at such hearing?

Together with the application to start proceedings in bankruptcy, the debtor or a creditor(depending who files the application)is entitled to designate a person who meets the legal requirements for a receiver.If the court finds the application well grounded and pronounced with a decision under Article 630 CA, and if the proposed person meets the legal conditions, the court shall appoint him as a temporary receiver in bankruptcy. The temporary receiver shall carry out his powers until a permanent oneshall be appointed by the court after his election on the first meeting of creditors.

The first meeting of creditors shall be conducted on adate chosenby the court.It shouldbe attended by creditors included in alist prepared by the receiver and those in extractsfrom the commercial books of the debtor.The CAallows foran order of the receipts of the creditors and grants a priority to the secured creditors.The participation of the creditors, secured and unsecured, in the first meetingshall be personal or by proxy with an explicit letter of attorney in writing.

After claims are accepted, voting rights at the meeting of creditors are granted only to creditors with accepted claims.Whether the claim of a creditor is secured or not is relevant for order according to which the claim shouldbe paid by the bankruptcy estate,but has no connection to the voting in the meeting of creditors.

(b) What about joint representation by other professionals, such as law firms or accounting or auditing firms?

Insofar as legally independent companies within acommercial group have separate insolvency proceedings,the court shouldappoint one receiver for each procedure. Accordingly, there is not a general representation of companies by a lawyer or other professionals, audit firms, etc., since there is no general procedure.

(c)If the law does not permit a single administrator/trustee/receiver, are there provisions allowing the different administrators to coordinate with each other so that values of assets may be maximized?

The receiversofeach separate bankruptcy proceedingdo not coordinate their activities as the procedures are legally separated. However, in practice,it is possible for the separate insolvency procedures of two or more companies which have economic interdependence within a commercial group to have the samereceiver appointed. He will have an overview of the development of the two or more formally separated procedureson the status of the property, which is included in the bankruptcy.

3. Does your law encourage or discourage overlapping boards or management teams for separate members of a corporate family?

As statedabove, individual companieskeep their legal autonomy within the commercial group. Respectively, the principle of severalty of liability andrisk allocation of each legal entity have to be considered.

a)If the directors of a parent company are not directors of the subsidiary, but they manage the affairs of the subsidiary anyway, do your country’s laws render such people ‘de facto’ or ‘shadow’ directors of the subsidiary? What are the resulting consequences?

The self-determininglegal personalities of the companies in the holding leads to formation of independent corporate bodies of each legal person. Both holding company and subsidiary companies form a separate management structure depending on their legal form. The CAdoes not envisage the creation of managing authorities of the holding group, since it has no legal personality.

The managing body of a capital company makes the firm’s management, in accordance with the statutory act, awareof the company’spurpose. The holding companymanagesits own shares in other companies (subsidiaries) and indirectly manages the subsidiaries. In case the holding company has the power to determine or monitor the management of the subsidiary, the theoryspeaks of ‘a shadow management’ or ‘a shadow director.’ But these casesare not explicitly and legally defined so there are not any direct specific legal consequences.

The holding company manages its shares/stakes in the other companies in different ways –through the exercise of voting rights in the respective governing bodies of the subsidiaries, or through direct intervention by giving guidance to the governing bodies of the dependent companies. Direct impact can be ensured by belonging to thegoverning bodies of the subsidiary. For example, in cases where the subsidiary was entered in the trade register as a joint stock company, the holding company would be directly involved in the composition of the ManagementBoard or the Board of Directors as an entity because of the general prescription of article 234, para. 1 CA.

The CAdoes not envisage anything special with regard to the representation of the companies within a commercial group. Each company in the group is represented by its own managing bodiesdepending on the legal form of the particular company. According to the general rule, the holding company does not haveany powers of representation, both for the whole group or for the separate company, because of the independence and separate legal personality of each participant within the group. However, it is possible to havecommon representation on acontractual basis;for example, it is the usualsituation for the holding company to act as a sales representative of the companies of the entirecommercial group.

b) Do the duties or responsibilities of officers or directors of a family of companies change when the companies become insolvent? What if only one of the companies is insolvent?

Upon institution of bankruptcy proceedingsthe debtor continues his activities under the supervision of the receiver. He may conclude new transactions with thepreliminary approval of the receiver, and in compliance with the security measures, determined by the judgment(under Article 630 CA) for institution of bankruptcy proceedings.The court may deprive the debtor of the right to administrate and dispose of his assets and to concede this right to the receiver, should it establish that the debtor jeopardises the interests of creditors.

As a general rule, the receiver represents the insolvent company and pursues a specific goal – to find and convert the bankrupt estate into cash.

4. Are the rules regarding members of the corporate family transferring assets among one another (such as by way of loans, capitalization, other transactions) different when the members are insolvent?