Articles

Bank Bankruptcy Proceedings in Bulgaria

December 4, 2014

By Konstantin Mikov, PETERKA & PARTNERS

Overview

Following the global economic crisis, financial pyramid schemes such as the one Bernard L. Madoff Investment Securities LLC ran based on the principle of the Ponzi scheme resulted in tremendous losses for investors of as much as $65 billion.

In Bulgaria, a financial institution, Corporate Commercial Bank ("CCB",) in what appears to be also a financial pyramid scheme, has potential losses which could be more than 2% of the GNP of Bulgaria.

The Bulgarian National Bank ("BNB") took control of CCB in July 2014 when the latter bank was unable to meet its liquidity needs.

After months of debate and speculation, the Bulgarian Parliament eventually rejected any possibility that the state would rescue the bank and finally the BNB revoked the license of CCB, which will automatically go bankrupt if the decision of BNB enters into force.

In that respect, Bulgarian legislation has a specific Law on Bank Bankruptcy (the "LBB") which in most of its aspects provides for specific rules derogating the bankruptcy rules for companies.

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The authorities which play a role in bank bankruptcy proceedings

The authorities involved in bankruptcy proceedings are the BNB, the Fund for the Guarantee of Deposits (the "Fund"), the administrator(s) nominated by the Fund, and the District Court.

Bulgarian law provides the BNB with the right to revoke the license of a bank under specific conditions (such as negative capital) and file a claim for bankruptcy before the district court in order to begin bankruptcy proceedings.

Role of the Administrators of the Bank

Upon the beginning of the bankruptcy proceedings, the court appoints at least two "Administrators of the Bank" indicated by the Fund.

The Fund may at any time change the Administrators if it considers that they are not fulfilling their obligations or jeopardizing the interests of the creditors of the Bank.The main duties of the Administrators are:

(i) to represent the Bank vis-à-vis third persons, (ii) to protect, track, and complete a list of the assets of, and to collect the claims against, the Bank; (iii) to track down and identify the creditors of the Bank, (iv) the management of the redemption of the assets of the Bank and their distribution among creditors.

Their most important activities are subject to prior consultation with, and approval by, the Fund and/or court. They are recorded on a monthly basis or at the request of the Fund. The creditors have the right of access to their reports.

Administrators may not, directly or by related persons, acquire the assets of the Bank and are liable for the damages caused to the Bank and the creditors.

Role of the Fund

The Fund plays an important role in bank bankruptcy proceedings. As mentioned above, it will appoint the Administrators of the Bank, oversee and approve their actions, their expenditures, and may replace them at any time, etc.

It is important to note that protection of the interest of the creditors of the Bank is vested only and solely in the Fund, as under the LBB there is no institution such as a council of creditors.

The Fund is automatically subrogated in the rights of the deposit holders up to EUR 100,000 guaranteed by the Fund.

One of the most important prerogatives is the approval of the redemption plan for the Bank's assets and the supervision of its implementation. The Fund also approves the distribution of funds received from the liquidation of assets to the creditors, gives permission for the conclusion of transactions for assignment or sale of receivables and other methods of settlement of claims and obligations of the Bank, etc.

Role of the District Court

The Court is responsible for the judicial control of the activities of the authorities above. However, some of the activities of the Fund are not subject to judicial control, such as:

(i) Appointment of the Administrators; (ii) Budget of the Administrators; (iii) Approval of the redemption plan; (iv) Approval of settlement agreements with the debtors of the Bank;

Beginning of bankruptcy proceedings

Once the license of the Bank is repealed, the BNB is obliged to make a request before the District Court where the seat of the Bank is for the beginning of bankruptcy proceedings for the Bank and to notify the Fund.

If the decision of the BNB for the revocation of the license enters into force, the Court begins bankruptcy proceedings.

Consequences of the beginning of bankruptcy proceedings

From the moment of the beginning of bankruptcy proceedings:

(i) the Bank's activity is definitely terminated and the management is handed over to the Administrators. (ii) the Court will determine the starting date of the insolvency of the Bank. This date is very important as the number of transactions and activities performed after this date may be invalidated by the Court. (iii) the loans granted by the Bank are not immediately payable. Only the obligations of the Bank (such as deposits) are immediately due at the beginning of bankruptcy proceedings. This means that borrowers continue to owe installments in accordance with the repayment schedule agreed with the Bank and will not be forced to repay the whole amount at once. (iv) only the Administrators of the Bank will have the right to manage and dispose of its property under the supervision and control of the Fund; (v) all judicial, arbitration and enforcement procedures in relation to the Bank are stopped.

Redemption of assets

The Administrators, with the approval of the Fund, have to establish a redemption plan.

The Administrators can cash all assets/receivables of the Bank by selling them (individually or as an aggregate) through a public sale. An alternative is to sell the Bank's on-going concern (which includes its assets and liabilities) without the need to carry out a public sale, i.e., through direct negotiation with potential buyers.

Order of the Claims

The claims of Bank's creditors will be reimbursed in the following order:

(i) claims secured by a pledge or mortgage - from the amount received from the redemption of the collateral; (ii) claims secured by retention right - out of the value of the retained asset; (iii) expenses related to the bankruptcy; (iv) claims for which the Fund has subrogated itself, and claims of depositors not covered by the deposit insurance system; (v) claims of complementary pension insurance funds; (vi) claims of the banks; (vii) current liabilities due to the State Social Security and liabilities arising from employment contracts having arisen up to one year prior to the date of opening of bankruptcy proceedings; (viii) public liabilities of the state and the municipalities having arisen up to one year prior to the date of opening of bankruptcy proceedings; (ix) all other claims; (x) interest rates over non-secured claims due after the date of opening of bankruptcy proceedings; (xi) gratuitous transactions.

Guaranteed deposits

The Bulgarian state guarantees all the deposits and accounts (deposit, current, savings, joint-deposits etc...) to an amount of BGN 196,000 (100,000 Euros) in one Bulgarian bank.

The State does not guarantee deposits, which, among other issues:

(i) exceed EUR 100,000 per person; (ii) are under individually-agreed rates different from those which the Bank provides to the public; (iii) belong to banks, financial institutions and local and central government authorities; (iv) belong to Bank's shareholders with more than 5% of the share; (v) belong to members of the management and supervisory bodies and auditors of the Bank and their close relatives;

Repayment of Guaranteed Deposits

Payment of guaranteed deposits begins not later than 20 working days as of the revocation of the license of the Bank. If there are exceptional circumstances, this period may be extended by another 10 working days.

The Fund announces with a notice in at least two main newspapers the date on which the payment of guaranteed deposits at the Bank will begin and the banks where the accounts can be opened.

The Fund heralded that starting as of 4th December 2014 the guaranteed deposits will be available to CCB's depositors in nine different banks licensed in Bulgaria.

The guaranteed deposit can be paid in cash, by order of transfer to another account specified by the depositor or may be left as a deposit in the new bank.

Deposits in foreign currency will be paid in BGN equivalent to the guaranteed amount at the BNB rate for the day specified by the Fund as the starting day for the payment of the guaranteed deposit.

CONCLUSION

After the entry into force of the LLB in 2001, Bulgarian authorities had the occasion to implement it only once, in 2005, for the bankruptcy of a very small bank - the International Bank for Commerce and Development (approx. EUR 30 million in assets). Most of the public did not even notice that this bank went bankrupt.

There is still much uncertainty surrounding, and lack of familiarity with, the LBB which allows for some subjective interpretation by the bankruptcy authorities and the threat of political pressure cannot be excluded from what should be a technical procedure.

However, this time around, the entire public and international business community is focused on the bankruptcy proceedings of the fourth largest bank in Bulgaria and the bankruptcy authorities will be under great pressure to implement it with transparency and without political pressure, otherwise the image of Bulgaria would suffer.

ADDITIONAL RESOURCES

Bulgaria Seizes Lender Part-Owned by VTB After Run on Bank, Elizabeth Konstantinova, Bloomberg Troubled bank rescued by Bulgarian state, BBC News Investors hold talks with Bulgaria's authorities aimed at rescuing CCB, Bulgarian National Radio What On Earth Is Going On In Bulgaria?, Frances Coppola, Forbes magazine Bulgaria's CorpBank: A Tangled Web Of Fraud, Frances Coppola, Forbes magazine Corporate Commercial Bank sees licence revoked, StandartNews

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Region: Bulgaria

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