Introduction
Insolvency proceedings are a legal mechanism for the fair satisfaction of creditors of a trader who has become unable to meet its obligations. Bulgarian law regulates this area in Part Four of the Commerce Act (CA), Art. 607–760, providing two main pathways — restructuring (rehabilitation) of the enterprise or liquidation of its assets.
Insolvency is a serious legal situation with lasting consequences for the company, its owners, directors, employees, and creditors. Understanding the procedure, deadlines, and rights of the various participants is essential for proper crisis management and for protecting the interests of all affected parties.
This article provides a comprehensive guide for foreign investors and creditors on insolvency proceedings in Bulgaria — from the grounds for opening, through the phases of the proceedings, to the consequences for different stakeholders.
Legal Framework
Applicable Legislation
Insolvency proceedings in Bulgaria are governed by:
- Commerce Act (CA), Art. 607–760 — principal insolvency legislation
- Civil Procedure Code (CPC) — subsidiary application for procedural matters
- Corporate Income Tax Act (CITA) — tax aspects
- Labour Code (LC) — protection of workers’ and employees’ rights
- Guarantee of Workers’ and Employees’ Claims Act — fund for guaranteed employee claims
The 2023 amendments expanded the definition of over-indebtedness and introduced additional early warning mechanisms.
Which Companies Can Be Subject to Insolvency?
Insolvency proceedings may be opened against any trader within the meaning of the CA — sole traders (ET), general partnerships (SD), limited partnerships (KD), limited liability companies (OOD/EOOD), joint-stock companies (AD), partnerships limited by shares (KDA), variable capital companies (DPK), and consortia.
Insolvency proceedings cannot be opened against public-law entities, persons exercising liberal professions, or non-profit legal entities.
Grounds for Opening Insolvency Proceedings
Inability to Pay (Art. 608 CA)
A trader is deemed unable to pay when they cannot fulfil a due:
- monetary obligation arising from or related to a commercial transaction, including its validity, performance, non-performance, termination, annulment, and rescission, or the consequences of its termination
- public-law obligation to the state and municipalities related to their commercial activity
- obligation under a private state claim
The law establishes a rebuttable presumption of inability to pay — the trader is presumed unable to pay if they have suspended payments, including if they have failed to perform an obligation under a commercial transaction. This presumption can be rebutted by the trader demonstrating sufficient assets to cover their obligations.
Case law has developed additional criteria for assessing inability to pay, including analysis of liquidity ratios, leverage ratios, and the company’s financial autonomy.
Over-Indebtedness
Over-indebtedness exists when the company’s assets are insufficient to cover its monetary obligations. The 2023 amendments expanded this definition to include contingent and future obligations under certain circumstances.
Over-indebtedness as an independent ground for insolvency is applicable to capital companies (OOD, EOOD, AD, KDA, DPK), where the liability of partners/shareholders is limited.
Who Can File a Petition
The Debtor (Trader)
The debtor not only has the right but also the obligation to file an insolvency petition within 30 days of the onset of inability to pay or over-indebtedness (Art. 626(1) CA). Failure to comply may result in the directors’ personal financial liability.
A Creditor
Any creditor with a due and unpaid claim arising from or related to a commercial transaction may file a petition. The creditor must prove the existence of their claim and the debtor’s inability to pay or over-indebtedness.
The National Revenue Agency (NRA)
The NRA may file a petition where there are outstanding public obligations of the trader related to their commercial activity.
The Executive Agency “General Labour Inspectorate”
Where more than one-third of workers and employees have unpaid wages for more than two months, the Labour Inspectorate may file an insolvency petition.
Competent Court
The insolvency petition is filed with the District Court (Okrazhen Sad) at the trader’s registered office. The case is heard by the commercial division of the District Court.
Under the 6-month venue rule, if the trader has moved its registered office within 6 months before filing the petition, the court at the previous registered office has jurisdiction. This rule prevents abuse through relocation to a more favourable court.
Phases of Insolvency Proceedings
Phase 1: Opening of Proceedings
After the petition is filed, the court hears the case in an open hearing with the petitioner, debtor, and NRA summoned. The court appoints an expert — typically a financial expert — who prepares a report on the debtor’s financial condition.
The court renders a decision that:
- declares the inability to pay and/or over-indebtedness and determines its onset date
- opens insolvency proceedings
- appoints a temporary insolvency trustee (sindik)
- orders protective measures (attachment and injunction on the debtor’s assets) if necessary
- sets a date for the first creditors’ meeting
The determination of the onset date is critically important, as it defines the scope of the so-called suspect period, during which transactions made by the debtor can be challenged and voided.
Phase 2: Filing and Acceptance of Claims
After the opening of proceedings, creditors must file their claims with the trustee within a court-determined period (typically 1 month). The trustee prepares lists of accepted and rejected claims, which are published in the Commercial Register.
A creditor whose claim is rejected, or a debtor who contests an accepted claim, may file an objection with the court within 7 days of publication.
Phase 3: Creditors’ Meeting
The creditors’ meeting is the collective body through which creditors participate in managing the insolvency proceedings. At the first meeting, creditors:
- hear the temporary trustee’s report
- elect a permanent trustee
- elect a creditors’ committee (optional)
Voting at the creditors’ meeting is by amount of accepted claims — each creditor has as many votes as the size of their accepted claim.
Phase 4: Restructuring Plan or Liquidation
After claims are accepted, the proceedings may proceed in one of two directions.
Restructuring Plan (Rehabilitation)
A restructuring plan (ozdravitelen plan) aims to preserve the debtor’s enterprise as a going concern. The plan may provide for:
- deferral or rescheduling of obligations
- partial forgiveness of debts
- debt-to-equity conversion
- sale of part of the enterprise
- change of management
- other restructuring measures
A restructuring plan may be proposed by the debtor, the trustee, creditors holding more than one-third of total accepted claims, partners/shareholders holding more than one-third of the capital, or an unlimited partner.
The plan is adopted by the creditors’ meeting with a majority determined under Art. 703 CA and is subject to court confirmation.
Liquidation of Assets
If no restructuring plan is proposed or adopted, the proceedings move to liquidation — the sale of the debtor’s assets to satisfy creditors. Liquidation is carried out by the trustee under court supervision.
Sale methods include:
- sale by public auction
- sale by direct negotiation (under certain conditions)
- sale of the enterprise as a going concern (if more favourable to creditors)
Creditor Hierarchy — 9 Tiers (Art. 722 CA)
When distributing the liquidated assets, creditors are satisfied according to the priority set out in Art. 722 CA. The law provides for 9 tiers (classes):
| Tier | Type of Claim |
|---|---|
| 1st | Claims secured by pledge or mortgage, or attachment and injunction (up to the value of the security) |
| 2nd | Claims for which a right of retention is exercised (up to the value of the security) |
| 3rd | Costs of the insolvency proceedings |
| 4th | Claims arising from employment relationships that arose before the date of the decision to open insolvency proceedings |
| 5th | Maintenance obligations due by law |
| 6th | Public claims of the state and municipalities (taxes, social security, fees, etc.) |
| 7th | Claims that arose after the date of the decision to open proceedings and remain unpaid when due |
| 8th | All other unsecured claims |
| 9th | Claims for contractual or statutory interest on unsecured claims due after the opening date; claims of partners/shareholders for loans granted; claims under gratuitous transactions |
Claims of a higher tier are satisfied before claims of a lower tier. Claims within the same tier are satisfied proportionally (pro rata) if assets are insufficient for full coverage.
Suspect Period and Avoidance Actions
The Suspect Period
The suspect period runs from the court-determined onset date of inability to pay to the date of the decision opening insolvency proceedings. Transactions made by the debtor during this period may be challenged and declared void with respect to creditors.
Types of Avoidance Actions
The law provides for several types of avoidance actions:
- Art. 645 CA — transactions disposing of the debtor’s assets made after the onset date
- Art. 647 CA — specific transactions made within a defined period before the onset date (gratuitous transactions, transactions at significantly below market value, payments of unmatured debts, etc.)
- Art. 649(2) CA — transactions made to the detriment of creditors (Paulian action)
Avoidance actions are brought by the trustee or by a creditor to whom the trustee has refused to bring a claim. The limitation period is 1 year from the opening of proceedings (or from discovery of the transaction).
Consequences for Different Stakeholders
For the Company (Debtor)
- restriction of the management bodies’ powers — management passes to the trustee
- attachment and injunction on assets
- stay of enforcement proceedings (with certain exceptions)
- upon liquidation — termination and de-registration of the company
For Directors
- obligation to cooperate with the trustee
- personal financial liability for failure to file an insolvency petition within the 30-day deadline (Art. 627 CA)
- potential criminal liability for intentional (fraudulent) insolvency (Art. 227b of the Criminal Code)
- prohibition on participating in the management of commercial companies (under certain circumstances)
For Workers and Employees
- employment relationships are not automatically terminated upon opening of proceedings
- upon liquidation — termination of employment contracts
- employment claims enjoy priority (4th tier under Art. 722 CA)
- right to compensation from the Fund for Guaranteed Employee Claims (for the last 6 months before insolvency)
For Creditors
- obligation to file claims within the court-determined period
- right to participate in the creditors’ meeting
- right to satisfaction according to the Art. 722 CA hierarchy
- claims not filed are extinguished (with certain exceptions)
For Partners / Shareholders
- restriction on rights to dispose of shares
- upon liquidation — loss of investment (partners/shareholders are satisfied last)
- right to propose a restructuring plan
The Role of the Insolvency Trustee (Sindik)
The insolvency trustee is the central figure in insolvency proceedings. Appointed by the court (temporary trustee) or elected by the creditors’ meeting (permanent trustee), the trustee performs the following functions:
- management of the insolvency estate
- representation of the debtor
- collection of the debtor’s receivables
- preparation of lists of accepted and rejected claims
- bringing avoidance actions
- liquidation of assets (when proceedings move to liquidation)
- distribution of collected funds among creditors
The trustee acts under the supervision of the court and the creditors’ committee (if elected).
Conclusion of Proceedings
Under a Restructuring Plan
If the restructuring plan is confirmed by the court and performed, the insolvency proceedings are terminated and the company continues operations under the plan’s conditions.
Under Liquidation
After liquidation of assets and distribution of funds among creditors, the court renders a decision terminating proceedings and de-registering the company from the Commercial Register.
Insufficient Assets
If the debtor’s assets are insufficient to cover the costs of proceedings, the court stays proceedings. If no creditor assumes the costs within one year, proceedings are terminated and the company is de-registered.
Practical Tips
For Debtors (Directors and Owners)
- Monitor financial indicators — regularly analyse liquidity and leverage ratios
- Do not delay filing — the 30-day deadline under Art. 626 CA runs from the onset of inability to pay; delay triggers personal liability
- Consider a restructuring plan — if the business is viable, restructuring is preferable to liquidation
- Avoid dispositive transactions — transactions after the onset of inability to pay may be voided
- Seek legal advice early — early consultation can prevent complications
For Creditors
- File claims on time — claims not filed are extinguished
- Participate actively in creditors’ meetings — voting influences the course of proceedings
- Monitor for voidable transactions — if you discover suspicious transactions by the debtor, notify the trustee
- Secure claims in advance — secured claims (1st tier) have a significantly higher chance of satisfaction
Frequently Asked Questions
Conclusion
Insolvency proceedings in Bulgaria are a multi-phase process affecting the interests of numerous parties — the debtor, creditors, employees, and owners. Bulgarian law provides a balanced framework that allows both the rehabilitation of viable enterprises and the fair distribution of assets when continued operations are no longer possible.
Key aspects to remember: the grounds for insolvency are inability to pay and over-indebtedness; creditors are satisfied according to a hierarchy of 9 tiers (Art. 722 CA); directors bear personal liability for delays in filing the petition; and timely legal advice can prevent significant financial losses.
This article is for informational purposes only and does not constitute legal advice. For specific questions regarding corporate insolvency in Bulgaria, please seek qualified legal assistance.
Need assistance?
The Innovires team can assist you with insolvency proceedings — from early risk assessment to creditor representation and restructuring plans.