Discussions about the latest legal changes in Bulgaria
Managing and collecting receivables
One of the most important and pressing issues in the current global economic crisis is related to payments between economic entities, and the so-called large intercompany indebtedness. The deteriorated economic environment creates grounds to multiple delayed payments, and most trade persons should conform their company behaviour with this new phenomenon that emerged and intensified after 2008 when global economy went down into total recession, which also affected Bulgarian economy. So, what shall we do to collect our claims? Which one is the best approach? Which are the conditions and prerequisites for success in this complex undertaking? To answer these questions we need to get acquainted with practically proven methods, approaches and solutions for successful collection of receivables and requesting performance on the part of the debtor. Ultimately, we should be well prepared for this pathological development of relations between credit providers and debtors. Otherwise, our naivety and unpreparedness in commercial activity can be penalized not only with high financial losses, but also with the loss of large amounts of time, efforts and nerves.
Many trade entities are not aware of changes in legislation related to payments in connection with Directive 2011/7/EU of the European Parliament and the European Council dated 16.02.2011 on the measures on dealing with late payment in commercial transactions. The directive aims to introduce legislative measures to counter act to the established practice (particularly negative during the crisis) of late payments on commercial transactions between various enterprises or payments between companies and the state.
The following amendments in the Commercial Code with view to introducing the requirements of Directive 2011/7/EU of the European Parliament and the Council dated 16 February 2011 on dealing with late payment in commercial transactions were promulgated in the State Gazette, issue No 20 of February 28, 2013.
Amendments to the Commercial Code, effective as of March 4, 2013, are related to the period of fulfilment of monetary obligations in commercial transactions and the consequences of non-fulfilment, and they will apply to agreements concluded between companies after March 15, 2013.
Parties in commercial transactions can now agree on a deadline for fulfilment of monetary obligations, which, however, cannot be longer than 60 days. A longer period can be negotiated in exceptional cases, when required by the nature of the goods or services or due to another important reason, if this is not grossly unfair to the credit provider and is performed with good intentions.
When the debtor is a public contractor, as per the meaning of the Public Procurement Act, the parties may agree on a deadline for implementation of a monetary obligation for no longer than 30 days. By exclusion, they can agree on a longer period, but not longer than 60 days.
In the event that the parties in a commercial transaction do not agree on a payment deadline, a monetary obligation must be fulfilled within 14 days as of the date of receiving an invoice or another payment request.
When a contract or law stipulates examining or acceptance of a product or service, the payment period shall be 14 days as of the date of acceptance or completion of examination, if the invoice or payment request have been received before that.
In rare cases, these rules are not applicable to promissory liabilities, liabilities in open bankruptcy proceedings, and compensations for damages, including insurance compensations. When the credit provider has fulfilled their obligations under a particular commercial transaction, and the debtor is in default of payment, unless otherwise agreed, the credit provider shall be entitled to compensation amounting to the statutory interest rate as of the day of delay, as well as compensation for costs of collecting receivables, amounting to not less than BGN 80, without the need for an invitation.
There has always been a risk of non-payment and the need for securing receivables. Problems that credit providers face in collecting liabilities are almost entirely related to the legal framework governing the sentencing of debtors and the procedure for compulsory collection of due amounts. In many cases, problems can be minimized by carrying out proper credit policy and using collaterals.
It’s a matter of estimation of each individual case on whether to sign an agreement under the terms of which we will find ourselves in the position of a credit provider and what provisions shall be included in this agreement, in order to ensure its fulfilment.
Analysing the debtor is the first and most important step that we have to perform. It is very important to know the counterpart who will be a debtor after signing an agreement and delivering goods or performing a service. In Bulgaria companies seek information about the reputation of the counterpart or debtor mostly from friends and colleagues. However, information can also be obtained by a number of public records of the court, property and commercial register. In Western European countries and the United States companies use the services of credit reporting agencies. Such agencies draw up credit reports, which contain assessments of payment morality, credit rating, and they can also include credit limits. Since most cases are related to commodity supplies with payment period of up to 30 days, the credit limit is the amount that the agency believes can be reasonably provided to the counterpart for a 30-day payment period without guarantees. The Agency collects information from official sources, other suppliers, their own information of cases of unpaid liabilities of the debtor, the press, public records, etc. This type of study of the counterpart is not widespread in Bulgaria. Commercial companies here seek the services of such agencies when it is already too late and they have to collect their liabilities forcefully. Prevention management of receivables is always a better and cheaper option than solving the problem at a later stage when we most often face additional costs and the cumbersome judicial system.
As a result of researching our potential customers and counter-parties, we can make a decision on:
whether to conclude an agreement or not;
what credit limit we can set;
what collaterals and guarantees we can use.
The correct answer to these questions would truly save us a lot of costs, time and nerves in the future.
We should keep in mind that according to Bulgarian and international legislation, an agreement has the force of a law - PACTA SUNT SERVANDA. After its conclusion, the principle of freedom of agreement is transformed into PACTA SUNT SERVANDA (to observe what is agreed upon). In Bulgarian legal system termination of an Agreement is only possible by an arrangement between the parties, as stipulated by law (Art. 20a, para. 2 of the Contracts and Obligations Act). Unilateral termination constitutes a refusal to perform obligations, but it cannot have as a consequence dropping out of the contractual agreement (Ruling dated 05.02.2008 as per Higher administrative case No 77/2007).
As emphasized at the beginning, a decision on what type of agreement we need to conclude and with whom it shall be concluded, shall be made in each individual case, as our decision must be based on information from such kind of analysis. When we conclude an agreement under which we will find ourselves in the role of credit providers, we do not do anything different from what a bank does when providing credit. It is therefore quite normal to use tools to secure our payment as per the agreement, just like any bank does in its practice. It is quite normal to stipulate a delay payment default in an agreement, as well as joint liability, pledge, and in rare cases a bank guarantee and mortgage, as well as a promissory note, which is still used as collateral, despite its contradictory legal application. fulfilment of an agreement can also be facilitated by inclusion of an arbitration clause or a clause for changing local jurisdiction. One shall mandatorily seek qualified legal assistance from an experienced lawyer for the use of collaterals and drawing up of an agreement. In my practice I always advise my clients to resort to agreements with notarized signatures of the parties.
An agreement with notarized signatures forms extrajudicial grounds for enforcement, as the regular party may request the court to issue a writ of execution as per procedural order for issuing a writ of immediate execution as per Art. 417 of the Civil Procedures Code. An objection on behalf of the debtor shall not suspend enforcement proceedings and this way the credit provider can quickly force their debtor with all available methods of execution - attachment of bank accounts, attachment of property, inventory and sale of movable properties owned by the debtor, etc. It is important to know that court has the powers to suspend enforcement in certain situations - when the debtor provides a security or when there are strong written pieces of evidence that the amount is not due.
Late payments have a negative impact on liquidity and make the financial management of enterprises more complex. They affect competitiveness and profitability when due to late payment the credit provider needs to obtain external funding. The negative consequences are increased during an economic turn-down and recession when access to funding is more difficult.
A debtor must fulfil their financial liability in an accurate and timely manner. A debtor who has a financial liability cannot rely on force majeure reasons. This basic situation is stipulated in Art. 81, para. 2 of the Contracts and Obligations Act and is applied in civil and commercial law. The fact that a debtor does not have the funds to fulfil a liability does not relieve them from responsibility. In my practice I have been observing two types of pathological development cases of contractual relations in terms of fulfilment of financial liabilities. The first type is when a delay is short and there is room for negotiation with the debtor for rescheduling the debt and its additional funding. The second type of pathological development of relations is when we have let a delay become too long and the debtor is unable to reschedule their liability and they do not want to negotiate with us. Then we only have the opportunity to resort to legal proceedings to collect our receivables.
I often point out that the collection of receivables is a right, just like it is merely psychology. We need to know the right time, and apply the right approach and tools to motivate the debtor to pay. We must also take into account the principle of time, stating that newer liabilities are collected more easily, but older ones are collected more difficultly. Higher delay in fulfilment of an obligation increases the chance of occurring of new circumstances, limiting the opportunities for collection of receivables.
Where a liability remains unpaid on its due date, the lender is the one who should be the first to take prompt and effective measures.
Good management of the risk of non-payment means that the credit provider’s accounts must be in good order, which means monitoring of delayed payments of their customers. At the very first day of delay the debtor must receive a call, which shall remind them about the maturity of their debt and the fact that it is still unpaid. If no payment is obtained within two weeks, a letter shall be sent to the debtor by the credit provider, which shall prompt them to pay their debt, highlighting the negative consequences for the debtor, arising from non-payment of the liability.
The emphasis is on the fact that the credit provider cares about their client and wants the two parties to maintain their good relations, the way they have been until the delay. In case a payment is still not made, the credit provider must send one final but bitter letter to their debtor. If after sending such a letter the debtor fails to fulfil their obligation, the credit provider shall seek the help of a lawyer or a specialized credit collecting company. A mistake that is commonly made by many lenders is that they leave the liabilities of their debtors to “mature” in time. There is an expression saying: “When a person spends a night having someone else’s money, they consider it their own”. Therefore, it is necessary that the above actions - making phone calls and sending letters - to be made promptly. According to generally accepted criteria, a 90-day delay makes a liability doubtful, and a 180-day delay makes it almost impossible to collect. In the event that the credit provider is unable to voluntarily collect its receivables, they are often directed to the so-called order proceedings in both varieties of law, as per Art. 410 and Art. 417 of the Civil Procedures Code for the issuance of an enforcement order and a writ of immediate execution.
According to Art. 410 of the Civil Procedures Code, “The applicant may request issuance of an enforcement order: 1. for receiving monetary amounts or replaceable items when a claim has fallen under the jurisdiction of the district court; 2. for the transferring of movable property which the debtor has received with an obligation to return or is encumbered by pledge or transferred by the debtor with an obligation to return its possession, when the respective claim has fallen under the jurisdiction of the district court.”
Execution proceedings in the new Civil Procedures Code have been borrowed by the laws of Germany and Austria. As per the old Civil Procedures Code there was also an opportunity for quick civil proceedings in absentia, but only for certain circles of credit providers, such as: banks, the state telecom, heating companies, water and sewerage companies, as well as credit providers with notarized contracts and promissory notes.
Now any credit provider shall issue a writ of execution, regardless of the origin and grounds of the liability, as long as it is below BGN 25,000.
A credit provider has to file an application to court, claiming that they are due a certain amount of money, and possibly, an interest, penalty and costs. The court only verifies the formal side of filing the application without going into the case in order to decide whether the money is owed or not, and issues an enforcement order. The debtor receives the latter at their address, as the document states that they are obliged to pay the amount requested by the credit provider. It is also stated that if they do not owe the money, they must write an objection to the issuance of the order.
This objection is made by only requiring the debtor to write the statement “I object” on the order that they have received. They may, but they are not obliged to explain why the amount of the order is not due. If a debtor has objected, the credit provider shall not be issued an executive order, and they will be sent a notification that they are obliged to file a claim for establishing their receivables. This way the order procedure is transferred into ordinary judicial three-instance proceedings, for which the general rules of the Civil Procedure Code are valid. In the event that the debtor does not object, the court issues a writ of execution to the credit provider and the liability is stabilized.
According to Art. 417 of the Civil Procedures Code, the applicant may request the issuance of a writ of execution, when the receivable, regardless of its price, is based on:
1. an act of an administrative authority, as per which the execution is assigned to civil courts;
2. a document or an extract of accounting books, which establishes claims of government agencies, municipalities and banks;
3. a title deed, agreement or other contract with notarized signatures on the obligations to pay monetary amounts or other replaceable items, as well as obligations to deliver certain items;
4. an extract from the register of pledges for a registered security and for starting of implementation - regarding the transfer of pledged property;
5. an extract from the Register of Pledges for a registered sales contract with retaining the ownership until payment of a lease price – in relation to the returning sold or leased property;
6. an agreement for pledge or mortgage as per Art. 160 and Art. 173, para. 3 of the Obligations and Contracts Act;
7. an effective act for the establishment of a private municipal or state liability when its implementation is performed as per this Code;
8. act of deficiency;
9. promissory note, bill of exchange or equivalent securities, as well as bonds or coupons related to the aforementioned.
When a credit provider submits one of the documents listed in Art. 417 of the Civil Procedures Code, the court shall issue a list of execution, along with the enforcement order. As per Art. 410 of the Civil Procedures Code there is a limitation to the amount of the liability – BGN 25,000, but in this case there is no such limitation - the order and the writ are issued regardless of the liability amount. Enforcement case is established and by the summons for voluntary execution the debtor is informed about the ongoing legal proceedings against them. At this point liens and foreclosures are imposed on their property to ensure successful recovery of the due amounts. The debtor may appeal again and this appeal forces the credit provider to file an establishment claim for their liability. Unlike Art. 410 of the Civil Procedures Coder, however, the appeal does not suspend the enforcement actions.
An exception to the rule is only an order issued based on a promissory note. In the latter case, the enforcement proceedings will be suspended until the conclusion of the case as per the establishment claim – i.e. until the court rules if the amounts under 33 are due or not. Liens and foreclosures on the debtor's property will remain, regardless of whether the debtor has filed an appeal and the enforcement case has been suspended. An action for establishing receivables is stipulated in Art. 415 of the Civil Procedures Code – “When an objection is filed in due time, the court shall instruct the applicant that they have the right to file a claim for establishing receivables within a period of one month, by paying the additional state fee due. If the applicant does not provide evidence that they have brought the claim within the stated period, the court shall invalidate the enforcement order partially or totally, as well as the writ of execution issued as per Art. 418”. Upon filing an establishment claim, they shall pay an additional state fee, amounting to 2 percent. This way the total paid percent becomes 4%, as 2% are paid upon filing an application as per Art. 410 or Art. 417 of the Civil Procedures Code, and 2% for the filing of an establishment claim.
When things become irreversible and any extrajudicial tools and negotiations do not help to motivate the debtor to at least partial fulfilment of their obligation, then we have to resort to using the assistance of court, but a specific method – order proceedings, general claim procedure, preliminary security measures or initiating bankruptcy proceedings should be chosen by a competent and experienced lawyer, who shall conduct preliminary investigation of the case and obtain information about the debtor, so they can offer the best strategy for collecting your money.
Hristo Vasilev, Attorney at law
Optimization of the tax burden
The global economic crisis in 2008 put an end to uncontrolled spending of company resources and the intoxication by the investment boom. The main task in the new economic situation became the preservation of economic growth and survival in conditions of increasing inter-company indebtedness and troubled bank credit provision. Trade persons started seriously thinking about minimizing their costs and cutting jobs. Multiple commercial entities did not manage to cope with the situation and went bankrupt. Entities in Bulgaria still underestimate the need for optimization of tax burden and creating long-term strategies for tax planning.
Small- and medium-sized businesses hire accountants for standard and routine accounting tasks, which sometimes has certain negatives aspects in such a dynamic economic environment. Small companies evade taxes through shadow economy transactions and illegal methods, often choosing behavior of non-compliant taxpayers, and place themselves in a hazardous situation. Large and reputable companies avoid this by using the experience and knowledge of consulting firms specialized in tax planning.
Larger businesses that are often operated by foreign auditing firms make long-term planning. There is a saying that "Nothing is certain, except for death and taxes". However, the same way as death can be postponed through certain measures, payment of taxes can be spread over time, so you have more resources by which you can increase the economic growth of your business. This can be performed entirely in accordance with laws and their mandatory provisions. This set of actions is called "tax optimization". Very often business representatives ignore the possibilities for tax optimization. Tax optimization is often a dirty expression and is confused with tax fraud, which means tax evasion by illegal means. To achieve optimization of tax burden or to avoid tax legally, one needs to be highly familiar with laws and use all of the possibilities legislation offers. Not only internal legislation but also European laws need to be taken into consideration.
The rulings of the European Court of Justice were intensely entered and started being implemented within the past few years. The court interprets and monitors the compliance with community legislation. In order to ensure effective and uniform application of community legislation within the EU, national courts may, and are sometimes obliged to make prejudicial inquiries to court in relation to the interpretation of EU legislation.
Lack of familiarity with the law in the most global sense, and not knowing the opportunities that it gives, are the barriers that prevent tax burden optimization. Means of tax optimization are entirely at your disposal. If you have the right consultants, your business will develop more successfully, you will earn more and you will create new jobs. And the state will also benefit from your business development and the job opportunities you create.
Tax legislation is constantly changing and businesses entities cannot afford not to adapt their behavior to it, because such ignorance leads to loss of business and creating a negative image before tax administration.
International tax analysts consider the trend that indirect taxes such as VAT are becoming more and more important and higher. Many countries rely increasingly on indirect taxes to fund their budgets. Non-refundable indirect taxes will increase business costs and make production more expensive. This will in turn require increasing the effectiveness in order to compensate for higher costs. Minimizing the tax burden is one of the ways to improve effectiveness. The following issues are extremely important: tax optimization in cases of transactions with assets/shares with domestic and foreign entities, optimization and tax structuring of the process of sale/transferring with view to funding and other aspects, consequences for VAT and real estate transfer tax, tax planning in case of investments in real estate, optimization of profits and development of strategies for repatriation, maximum use of losses from corporate income tax, VAT optimization strategies within and after its recovery.
Any serious business should seek and use the correct and effective tools for tax optimization, tailored not only with the Bulgarian, but also with European legislation, as well as the fiscal approach of tax administration.
On payment of insurance compensations
Are insurers in Bulgaria fair? This is an issue that concerns everyone who has concluded insurance policies and suffered damages from insurance events. Unfortunately, after sustaining damages from an insurance event, it may be very difficult to obtain compensation from the beneficiaries. An insured person needs to go through the process of notifying the insurer, collecting multiple documents, passing through various instances to obtain documents, and also go through communication with impolite insurance officials. Despite any efforts made, one may finally get a strictly formal refusal in a few sentences that states that for some reason (although one believes to be precise and conscientious) and breach of a contractual obligation they cannot pay your insurance compensation. After enacted refusal a client can file an application for revision by the insurer, but this usually remains unanswered because by now there is no case in which insurers have canceled their refusal. Filing a complaint to the Financial Supervision Commission is also not much help, because the authority usually investigates the case but has no powers to cancel the refusal of the insurer and convince them to change their mind. The Financial Supervision Commission may impose an administrative penalty or administrative compulsory measure for violation upon carrying out insurance business.
Insurance was severely affected by the natural disasters that struck the country in 2014. Damages from the hail of 08.07.2014 alone surpassed 100 million Bulgarian levs. In addition to the persons with vehicles harmed by hail insurers paid benefits and compensations to people harmed by the floods in Dobrich, Varna, Mizia, Sozopol and Burgas area. In fact, insurers performed well and paid for the damages from disasters, thus facilitating policy holders in this endeavor. All of the later caused stagnation in the payment of insurance compensations in the second half of 2015. In this respect, more frequent refusals to pay claims are occurring. Insurers are increasingly looking for formal reasons for refusal and use for this purpose inessential occasions as per the general conditions of the policies. According to Art. 208 of the Insurance Code upon occurrence of an insurance event, the insurer must pay insurance compensation within the agreed period. That period may not be longer than 15 days and shall commence on the date when the insured person has fulfilled their obligations and submitted to the insurer all required documents to complete the liquidation damage.
Even after submitting all required documents payment of compensations can remain a mission impossible because the insurer may state (for motor vehicle insurance) that declared circumstances of the insured event do not meet the real ones that have occurred; not all keys of the vehicle have been presented; no signaling or security system has been installed; or even arguing about the very occurrence of the insured event.
The reasons may vary, but most often refusals are short and completely ungrounded. Cases in which the insurer may refuse payment of compensation are listed in the Insurance Code. According to Art. 211 of the Insurance Code “The insurer may refuse payment of compensation only in the following cases:
1. upon intentional infliction of an insurance event by the insured person or a third party beneficiary;
2. upon non-fulfill of an obligation under the insurance agreement, which is significant with view to the interests of the insurer and has been envisaged by law or the insurance agreement;
3. in other cases stipulated by law.”
It should be emphasized that the insured person should not have fulfilled an obligation that is significant with view to the interests of the insurer and is envisaged in law or in the policy, and not any obligation. In this case what is determinant for the payment is the significance of the obligation of the insured person.
The situation with compensations under the “Civil liability” insurance is not perfect. It must be pointed out that the benefits that are voluntarily paid as per the “Civil liability” insurance in cases of death or physical injury have still not reached the size of those awarded by court and are way below those sizes. There are only individual cases of payment in real size. In all cases, persons entitled to receive compensation should seek qualified legal assistance upon refusal, mostly by firms and lawyers specializing in insurance cases. In case of conviction of the insurer, besides the insurance compensation, the insurer will also have to pay the costs for filing the claim and conducting the case (lawyer’s fee, state fee and deposit for an expert). The insured person will also receive default interest accrued on the insurance compensation from the moment when that compensation has become due.