A resolution of the Supreme Court of Cassation casts light on overindebtedness of companies

A resolution of the Supreme Court of Cassation

The topic of overindebtedness gained more popularity when the Bulgarian Supreme Court of Cassation issued a resolution covering several topics related to the position of overindebtedness as ground for insolvency proceedings in the end of 2014. What makes the resolution essential to the administration of justice in Bulgaria is that it is part of the mandatory court practice under Article 290 of the Civil Procedure Code

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The resolution sets out that, when an assessment is made whether a company is overindebted or not, all of the company’s liabilities are to be taken into consideration, i.e. even the ones which are not due yet, as opposed to the position of insolvency, for the establishment of which the court takes into consideration only those liabilities of the company which are due and unpaid.

For example, a company has been granted a large bank loan which it duly
serves on a monthly basis, but when as assessment is made whether the company is overindebted, the whole amount of the bank loan shall be considered, regardless of the fact that it is being repaid in installments over a period of 10 years.

Based on the above, it might be the case that a company is duly paying
all of its creditors on time, but still it may be threatened by insolvency
proceeding on the basis of the fact that it is overindebted.

It should be emphasized that the position of overindebtedness at an
earlier stage would be irrelevant to the opening of insolvency proceedings if,
as at the date of the issuance of the court resolution, the company has managed to overcome this position. In view of this, it is essential that the necessary remedial actions with regard to improving the company’s financial state are undertaken in due course.

It is also essential that the managing bodies or representatives of
overindebted companies have a legal obligation to file for initiating insolvency
proceedings within 30 days from the date they become aware of this status.
Failure to do so might result in joint liability of the managing bodies /
representatives to the company’s creditors for the damages the latter have
incurred as result of the delay or non-filing for insolvency.

The topic was discussed at the 2016 KPMG Business Seminar for clients.

© 2017 KPMG Bulgaria OOD, a Bulgarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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