TO MR. KRUM ZARKOV

MINISTER OF JUSTICE

OPINION OF THE CENTER FOR ALTERNATIVE DISPUTE RESOLUTION (CARD) “CONSENSUS”

REGARDING: Draft Law on Bankruptcy of Individuals

DEAR MINISTER,


The Draft Law on Bankruptcy of Individuals, proposed for discussion through public consultations, requires fundamental revision.

The objectives set out by the petitioner in his explanatory memorandum should be reformulated. Currently, they are to achieve, as follows: “Fair, effective and rapid satisfaction of the creditors of the insolvent debtor to the greatest extent possible, within the framework of one common proceeding;” as well as to create “An opportunity for the bona fide insolvent debtor to be exempted from payment of unsatisfied claims with the expiration of a certain period.”. However, the measures provided for in the law should achieve the priorities set out in Directive (EU) 2019/1023 of the European Parliament and of the Council. It states that Member States' legislation should be revised to "ensure that viable businesses and entrepreneurs in financial difficulties have access to effective national preventive restructuring frameworks that allow them to continue operating, that honest insolvent or over-indebted entrepreneurs can benefit from a full discharge of debts after a reasonable period of time, thus giving them a second chance, and that the efficiency of restructuring, insolvency and discharge proceedings is improved, in particular by shortening their length." Recital 21 of the same regulation states that “Consumer over-indebtedness is a matter of serious economic and social concern… Furthermore, it is often impossible to draw a clear distinction between debts incurred by the entrepreneur in the course of his trade, business or professional activity and debts incurred outside those activities. Entrepreneurs cannot effectively benefit from a second chance if they have to go through separate procedures with different access conditions and discharge periods in order to have their debts relating to their business activity and their other debts incurred outside their business activity discharged. For these reasons, although this Directive does not contain binding rules on consumer over-indebtedness, it is recommended that Member States apply the provisions of this Directive on discharge of debts to consumers as soon as possible.”

The problems that need to be resolved with the draft law on the insolvency of individuals are caused by numerous factors, including the lack of regulatory control and adequate assessment of the debtor's creditworthiness by creditors, the lack of decisive measures to reduce the scope of the gray sector of the economy in the country, and have been exacerbated to a particular extent recently as a result of the Covid 19 pandemic, the crises in the economy, domestic and foreign policy, and growing social tension.

In this regard, the draft law should achieve results of great public importance, build mechanisms to reduce the number and size of bad loans in the country, create prerequisites for increasing the motivation for participation in civil turnover of bona fide individuals, including consumers, as well as lay the foundations for a legal framework in which they will receive a second chance to be active participants in the free market. The creation of the law is in connection with the transposition of Directive 1023/2019 of the EU into Bulgarian legislation, which also provides for the regulation of insolvency proceedings for individuals. Therefore, its purpose should correspond to that formulated in the Directive itself, namely to overcome the state of over-indebtedness of the individual /debtor, entrepreneur, consumer/ by providing an opportunity for partial forgiveness of obligations, fair satisfaction of creditors and creating opportunities for the restoration of the social, entrepreneurial and labor activity of every bona fide over-indebted individual.

The reason for believing that the draft law in its current version would not be able to achieve the above-mentioned objectives, respectively solve the highlighted problems, is described in detail in the statement below:

First of all, the draft law has limited its scope of action only to persons who own property and who, in the last year before filing the application for opening bankruptcy proceedings, have exercised a work or business activity by occupation that is a source of income, regardless of the manner of its assignment and execution, or have actively sought work (Article 5, paragraph 3 and Article 9, paragraph 3). Accordingly, no mechanism is provided for the forgiveness of debts for persons who do not have any funds, assets or income to repay claims, as in practice this will be the case for a huge number of over-indebted persons.

In addition, the procedure provided for in the draft is based on a presumption of good faith of the debtor, relying entirely on his capacity and ability to provide complete, accurate and truthful information about the amount and type of his debts. The proceedings are convened at his request, and the court convenes a meeting of creditors, after which a trustee is selected on the basis of the information collected and submitted by the debtor. In practice, however, the approach used in the bankruptcy of legal entities is not appropriate and applicable in bankruptcy proceedings aimed at restructuring debts, their partial repayment or forgiveness in the case of individuals. The reason for this is that for traders, bookkeeping and regular recording and review of cash flows are imposed by law, in which case a single statement of his accounts is sufficient to clarify the status of his current assets and liabilities, receivables and payables, while for individuals, this task is much more difficult. In general, the debtor keeps a contract with a repayment plan or an invitation for voluntary performance, but if there are more creditors, there have been assigned receivables, payments are irregular, some loans are due, others are partially paid, in enforcement proceedings, with costs and accrued interest included, identifying the creditors may prove to be an extremely difficult and overwhelming task for him.

The volume of persons who would be able to benefit from the draft law is also reduced due to the fact that only persons with debts worth more than 10 minimum wages can benefit from the bankruptcy procedure. It is not clear in the meantime whether this value is mentioned taking into account the principal or the total amount due under the debt, together with the default and legal interest on the principal debt.

Adding the hypothesis of Art. 107, which states that: “The debtor’s obligations to satisfy: 1. claims secured by a mortgage;…”, the number of potential debtors who would be interested in taking advantage of the procedure provided for in the law is practically reduced to an absolute minimum.

Next, we believe that the figure of the trustee is not suitable for the type of proceedings suitable for individuals. The size and approach to traders and individuals cannot be the same. The trustee should have a high financial culture, but it is not necessary to possess the expert knowledge necessary to work in bankruptcy proceedings with legal entities. In return, he should be an excellent communicator, familiar with the possible bodies, means and methods of out-of-court dispute resolution. To be able to motivate the parties to seek and find a solution, for example through a restructuring plan or debt repayment plan, as well as to have the ability to work with objections in order to convince creditors and the debtor of the benefits of finding solutions together. Experts with a similar profile are mediators and conciliators, entered in the relevant registers, whose expertise should be taken into account in these proceedings.

Regarding the determination of the trustee's remuneration, we believe that each of his actions should take into account the volume and complexity of the task performed by him, and not be accompanied by the payment of a fixed remuneration within the framework of a minimum wage, since such a legal situation can be defined as direct state intervention that can distort free market mechanisms.

In addition, the draft law proposes definitions in several places that are already available in other laws, part of the national legal framework. It is unnecessary to provide a definition of a receiver since one already exists in the Commercial Code. It is not appropriate to define a procedure for satisfying claims when a corresponding text is in force in the Obligations and Contracts Act.

The Directive mentioned above deals with the concept of "specialists in the field of restructuring". In the case where there is no legal entity, but it is a question of insolvency proceedings concerning an entrepreneur who has incurred obligations in his capacity as a person exercising a liberal profession, craft or consumer, the person who has undertaken to conduct the proceedings is much more appropriately called a restructuring specialist than a liquidator. The requirements for the inclusion of specialists in the field of restructuring in insolvency proceedings can be further developed and refined after public consultation with individuals and representative organisations who are relevant to the subject and have experts and capacity that can contribute to extracting the greatest benefit from conducting the proceedings, both for the debtor and creditors, and for public resources (by achieving procedural economy and minimal involvement of the court).

The draft law provides for the conclusion of an out-of-court agreement between the debtor and creditors, but mediation and conciliation (if the dispute is consumer) are not present as separate procedures or steps in the bankruptcy process. It is as if the legislation dedicated to alternative dispute resolution and the bankruptcy law are not part of a single national legal framework.

Apart from that, the idea of the drafter of the bill that only the debtor's property should be used for the costs of the bankruptcy proceedings is inappropriate. In a majority of cases, debtors who will need restructuring and forgiveness of their debts will not have the opportunity to repay in full the debts that such a proceeding will cause. In order to achieve the intended effect, namely that after the proceedings are concluded, new entrepreneurial initiatives will be available, it should be clear that specialists with complex qualities will be needed to support the entire process. Their expertise should include serious financial and legal culture, but also skills to help overcome the psychological trauma of a personal bankruptcy. In many cases, it may be necessary to involve career and business consultants. However, the engagement of specialists could not only happen pro bono, since such a strategy on a national scale needs to achieve a sustainable effect. The biggest defect of the legislative proposal, in this sense, is that there is no strategy and scenario for how the bankruptcy proceedings could be financed, respectively, our opinion is that without such a vision it will be doomed to failure. In many of the member states of the European Union, this responsibility is shared, relying on public funding, as well as on that of representative industry and other civil society organizations. In the training organized by the European Commission and the European Consumer Organization BEUC, Consumer PRO, in June 2020, many practices were shared in dealing with the problems faced by over-indebted individuals during the Covid 19 pandemic. Large consumer organizations work in consulting and providing legal advice to over-indebted individuals, connecting them with mediators and supporting the process of their recovery and getting them out of the impasse they find themselves in, with a large part of their activity subsidized by the state budget. The organizations have an organized network of specialists, with legal and financial knowledge, but also with experts who have the necessary skills and attitude to work on this specific type of case. A system of psychological, career and business counseling and training for the affected individuals has been created.

The process is generally chaotic, there is a lack of clarity as to who will bear the costs of this proceeding, who should bear the burden for cases in which there will be costs greater than the debtor's assets. Such cases must and will exist, only the state, that is, the proper taxpayer or business should not bear part of this burden. In the comparative analysis of different legal systems, these costs, similar to those for out-of-court dispute resolution, are divided between the state, representative business organizations and the non-governmental sector, where donors or members of organizations may participate.

However, for such a law to work now, it is necessary to provide for organization and financing mainly from the state sector (along the lines of legal aid, for example), but to create prerequisites for the inclusion of creditors who have a serious interest in increasing their market share on the relatively small Bulgarian market. In conclusion, we believe that without an initiated conversation between institutions, utility providers and consumers, this law cannot be implemented and produce an effect.

Finally, we would like to note that the approach of treating insolvent persons as incapacitated or prohibited without a proper procedure for this is absolutely unacceptable. It is unreasonable to require that handling the account of an over-indebted person be accompanied by the initiation of a protective procedure and court permission. It should be taken into account that in such a case, each transaction will involve the payment of a fee of at least 30 leva and the engagement of judicial resources, without there being a reasonable reason for this. Moreover, the engagement of the court, given the clearly established trend, as part of the recent judicial reform, to combat court overcrowding, must necessarily be subject to discussion and comment.

Last but not least, we believe that the draft law amending and supplementing the Commercial Act, in which new chapters have been developed regarding the insolvency of entrepreneurs /also individuals/, considered in public consultations in May 2022, is also subject to revision in view of the fact that the insolvency of all individuals - both the entrepreneur and the individual consumer, should be regulated in the same regulatory act, i.e. entrepreneurs should be included in the current draft law, and not the two categories of individuals should be regulated in two separate and completely different regulatory acts.

Sincerely,

Adv. Elka Krasteva

Director of CARS "Consensus"