Mar 30

How the judgment rendered on the ground of Art. 632 (5) Commercial Act effects the insolvency assignee powers

  Just like the way enforcement procedure against debtors is associated with bearing a number of expenses, insolvency proceedings - regulated by the Commercial Act and representing a kind of universal compulsory execution against debtors[1] – may involve many and different costs, as well.

  According to Art. 723 Commercial Act (CA) which gives the legal definition of insolvency proceedings costs, such costs are: i) the insolvency assignee remuneration; ii) all the expenses made for managing, evaluating, protecting and completing the insolvency assets. These expenses may include attorney remunerations, accounting services costs, etc. As governed by Art. 620 (3) CA, when insolvency proceedings have been opened all the costs should be collected from the available insolvency assets, which basically include all property rights of the debtor due to the court decision initiating the insolvency proceedings and the rights acquired after this date.

  In the environment of misunderstood Bulgarian capitalism, it often happens that the debtor assets are too low to the point they are unsufficient for bearing even the initial expenses of insolvency proceedings. When this is the case, costs should be carried by the insolvency creditors. With a specific judgment the court may determine a certain deadline for the creditors to prepay the defined costs of the insolvency proceedings. If the deadline has not been met and the costs have not been prepaid, the court ceases the insolvency proceedings for a period of 1 year. During this period the debtor or any of the creditors may conclude the required payment and thus may ask for a reopening of the insolvency proceedings. In this case, due to the fairly early stage of the proceedings no insolvency assignee has been chosen yet, and therefore the question about his/her powers and duties during the ceased insolvency proceedings (Art. 632 (1) CA) is not on the table.

  The same question within a similar situation may well arise later in the proceedings timeline. However, when this happens, it has wider significance and that is for a reason. According to Art. 632 (5) CA, if during the course of the insolvency proceedings the debtor assets are scarce and insufficient to cover all the expenses, the court should again instruct the creditors for the necessary payment. Analogically, not paying the accumulated costs leads to cessation of the insolvency procedure for a period of 1 year. What makes the difference in this scenario is the fact that an insolvency assignee has been chosen and he/she possesses all the powers given by the law (Art. 658 CA). Therefore, the important question is what happens to the powers and duties of the insolvency assignee when the proceeding is ceased on the ground of Art. 632 (5) CA?

  Although the answer is not directly given by the Commercial Act, it could be reached through logical and systematic interpretation of the law.

  It is worth mentioning that neither the law nor the case law state that the unsufficient debtor assets (as a ground for the application of Art. 632 (5) CA) is to be associated with the absence of cash resources only. On the contrary, if the the debtor does not posses enough cash flow in order to bare the insolvency expenses but there are some properties left - moveable, immoveable, intellectual or any other, which can be used for reimbursement, the case law practice is clear – Art. 632 (5) is not applicable in this case. However, if the debtor assets consist only of immoveable properties with mortgages and these properties reimbursement will only be in favor of the mortgagees, then the debtor assets are seen as unsufficient and Art. 632 (5) shall apply.

  The legal practice is, however, quite controversial when it comes to the impact of ceased insolvency proceedings (on the ground of Art. 632 (5) CA) on the insolvency assignee powers. The Court of Appeal in Varna has adopted the opinion that during a ceased insolvency procedure all the assignee powers are ceased as well. The Court founds its opinion on Art. 658 (2) CA and the principle that the insolvency assignee accomplishes his/her powers according to the progress of the insolvency procedure. In such a case, reopening the insolvency procedure on the ground of Art. 632 (2) CA would lead to immediate resumption of assignee powers (Decision No. 202/03.10.2011, Case 310/2011 Varna Court of Appeal).

  The practice of the Supreme Court and the Court of Appeal in Veliko Tarnovo is in the exact opposite direction. In their legal judgments (Order of the Supreme Court No. 274/16.04.2013, Case 718/2012 and Order of Veliko Tarnovo Court of Appeal No. 226/03.08.2015, Case 287/2015) the two courts rule that even during ceased insolvency procedure the assignee powers should not be discontinued. The insolvency assignee remains the legal representative of the debtor and possesses all the powers given to him/her by Art. 658 (1) CA. Rendering judgment on the ground of Art. 632 (1) CA does not end the powers of the legal representative (e.g. director, manager, etc.) of the debtor either, but they are strictly limited to the powers given by Art. 635 (3) CA and the powers not expressly granted to the insolvency assignee – actually an argument leading to the conclusion that assignee powers as justified in Art. 658 CA remain in full.

  The opinion of the Supreme Court and the Veliko Tarnovo Court of Appeal is to be endorsed. The abovementioned conclusion of Varna Court of Appeal could not be backed. The fact that the insolvency assignee fulfills his/her duties and powers in accordance with the insolvency procedure could not lead to the conclusion that the ceased insolvency procedure results in cessation of the assignee powers. Moreover, the period of ceased insolvency procedure is still a phase of the insolvency procedure itself during which the interests of creditors presuppose the need of an insolvency assignee who possesses the powers set up in Art. 658 (1) CA. The fact that while the insolvency procedure is ceased no actions towards the development of the case could be accomplished, does not mean all the cases initiated before the cessation of the procedure and aiming at the available assets should be stopped. As a matter of fact if an insolvency procedure is ceased on the ground of Art. 632 (5) CA, the insolvency assignee is indeed the one and only person to whom debtors of the insolvency debtor could pay. Even after the cessation the of the procedure there is need of preservation the debtor assets and it is the insolvency assignee – being a legal representative of the debtor – who fulfill these duties. Thus, the assignee is still accountable towards the creditors and the debtor (Art. 663 CA). In order to achieve the objectives of the insolvency proceedings and to eliminate every possible detrimental action of the debtor the powers and duties of the insolvency assignee need to be maintained during the cessation and hence, his/her monthly remuneration is to be paid. Insufficient available assets do not affect the eligibility of the remuneration.

  The opinion of the Varna Court of Appeal that the cessation of the insolvency procedure leads to cessation of the assignee powers can not be accepted, even though the Court has tried to justify its decision with Art. 746 (1) CA. This provision rules the reopening of a suspended insolvency proceedings, not a temporarily ceased one! Suspension and cessation of the insolvency proceedings are two quite different concepts not only in their legal nature but also in their legal consequences. This is the reason why no correlation between the assignee powers during cessation and his/her powers during the suspension should be sought.

  Some beliefs even go further by claiming that when an insolvency procedure is ceased on the ground of Art. 632 (5) CA the court should decree in a specific judgment the cessation of assignee powers. It is here to be clarified that the Commercial Act does not provide the court with the power to terminate the insolvency assignee powers, except for the exhaustively listed in Art. 657 CA hypotheses in which the court is allowed to terminate the assignee powers. The temporarily ceased insolvency procedure being discussed is not amongst these exhaustively listed hypotheses. Art. 657 (2) CA provides for the possible removal of an insolvency assignee in the event of wrongful conduct. It should be mentioned that Art. 657 (2) is in the nature of a penalty and thus, its application by analogy is inadmissible. Moreover, in the case of temporarily ceased insolvency procedure on the ground of Art. 632 (5) CA no assignee fault could be sought. Each and every judgment of the court which terminates the insolvency assignee powers or removes him/her from the proceedings, and is issued out of the premises of Art. 657 CA – is beyond the court jurisdiction and is therefore null and void.

  The discussed view that the court decision given on the ground of Art. 632 (5) CA has terminating effect towards the assignee powers is not only legally unjustified. It also contradicts the worldly logic that has been taken into consideration by the legislator when regulating the insolvency procedure. As a matter of fact, if the judgment given on the ground of Art. 632 (5) CA led to terminating the assignee powers and reviving the powers of the body representative, it would give the person who is usually to blame for the bad financial condition of the debtor the opportunity to manage the available assets left. The greater part of the rules and regulation of the insolvency proceedings themselves are directed exactly against these persons and their actions damaging the actual creditor rights. If that were the true legislator intention, the first thing these people would do is “brush off” the evidences of their wrongful actions and to further in covering up the available debtor assets. As already stated, the described opinion that the court judgment for temporal cessation of the insolvency procedure on the ground of Art. 632 (5) CA leads to cessation of the insolvency assignee powers, is not only legally unjustified but also does not follow the ordinary life logic.

  In conclusion, when the insolvency procedure is ceased on the ground of Art. 632 (5) CA, the insolvency assignee powers do not withdraw. The assignee continues to be the only legal representative of the insolvency debtor and possesses all the powers given to him/her by Art. 658 (1) CA.


[1] In Bulgaria insolvency proceedings may only be initiated against a trader thus the insolvency debtor must bear commercial characteristics. The Bulgarian insolvency law does not know personal insolvency.