Category: Bulgaria

Under art. 90, par. 1 of the Bulgarian Contracts and Obligations Act, a party may refuse to perform its obligations if there is non-performance by the counterparty under the same transaction (“Statutory Retention Right”).

In cases with multiple mutual transactions (e.g. where a bank has obligations under deposits and receivables under credits with a same counterparty) a contractual arrangement is needed so that the creditor under one transaction, e.g. under the bank deposit above, retains payment in case its counterparty is in default under another transaction, e.g. under the bank credit above. Such arrangements effectively extend the Statutory Retention Right (limited to retention under the same transaction) to the whole spectrum of the parties’ mutual dealings (“Contractual Retention Right”).

Practical importance: Standalone quasi-security
Contractual Retention Rights as a standalone security are popular among financial institutions that normally have multiple transactions with the same counterparty. Apart from the bank deposit-credit scenario above, they are typically employed by financial institutions with multiple derivatives transactions with a single counterparty where mutual payment obligations on recurring future dates occur. Making performance of all payment obligations under various transactions dependent on there being no event of default under any of them serves as a powerful security for the non-defaulting party, as it may validly refuse performance under another transaction, thus reducing its exposure.

Practical importance (cont.): Quasi-security supporting contractual set-off/netting
Contractual Retention Rights may be an important supporting mechanism for a pre-agreed contractual set-off or close-out netting, the latter being in turn also quasi-securities for creditors. In such contexts it grants sufficient waiting time between the moment of default – when contractual set-off/netting may be exercised – and the moment when they are actually exercised.

Why is such waiting time important? Bulgarian courts construe contractual set-off with no accompanying rule on the timing when it should be exercised as one that should be exercised “with no delay” upon occurrence of default. The argument is to avoid unjust enrichment for the non-defaulting party that may prefer delaying set-off to allow the default interest rate or liquidated damages (agreed as due for each day in default) to accrue. However, if a prior contractual arrangement allows the non-defaulting party to wait before exercising set-off, the above “no delay” rule is overridden, ensuring that all contractual default compensations, including default interest on top of the unpaid amount, may be exercised. Contractual Retention Rights are the most suitable tool to implement a sufficient waiting time and thus guarantee a non-defaulting party’s full compensation in the said sense.

In a more sophisticated scenario, such as multiple derivatives transactions, retention of payment is necessary to postpone set-off/netting, where relevant market indices (interest rates, FX rates, etc.) underlying the respective derivatives are excessively unfavourable for the non-defaulting party at the time of default. Otherwise, immediate set-off/netting at the initial moment when the right has occurred may result in the non-defaulting party having to pay an excessive close-out amount. Contractual Retention Rights in such a case would postpone set-off/netting through retention of payments until market indices revert to normal and are favourable to the non-defaulting party.

Operation of Contractual Retention Rights under Bulgarian case law
The operation of Contractual Retention Rights was clarified in judgment No. 227 of 29 October 2018 under civil case No. 431/2018, IV – the civil department of the Supreme Court of Cassation, chaired by judge Veska Richeva (the “Judgment”). It dealt with an unjust enrichment claim for repayment of sums under a terminated transaction, where the respondent refused payment of these restitution amounts by invoking a Contractual Retention Right on account of a contractual liquidated damages arrangement. The court ruled that the Contractual Retention Right could be exercised up to the moment when set-off may be invoked in court proceedings. So, determining that moment is important, and parties should pay attention to it.

What is the moment until which set-off may be invoked?
The moment is different depending on whether the claim of the party invoking set-off (active claim) is “liquid” (i.e. indisputable as to legal grounds and amount).

Under Bulgarian law, for an out-of-court statutory set-off to occur the active claim should always be liquid (i.e. undisputed) unless the parties have made a contractual set-off arrangement and have contractually modified or displaced the liquidity requirement for the active claim. If the active claim is illiquid (i.e. disputed) statutory set-off may be invoked only in court proceedings (where the said dispute would be solved with res judicata) and in such an illiquid-active-claim scenario set-off should be invoked very early in the proceedings – with the response to the initial claim before the first court instance. Conversely, a liquid-active-claim-set-off may be invoked before a court even if the case is pending before the second-instance court.

Practical importance of the Judgment
The Judgment indicates that depending on the type of set-off at stake, parties should pay attention to the time until which it is available, as they may avail of a Contractual Retention Right no later than this time. Otherwise, if the timeline is exceeded, the set-off itself may be compromised (e.g. in the case of an unjust enrichment claim as per the Judgment).

To avoid this, parties should make appropriate arrangements, especially in the context of insolvency proceedings.

The above reasoning regarding set-off also applies to the Contractual Retention Right when it is a corollary to close-out netting. Although close-out netting in certain scenarios is subject to strong protection in insolvency under various EU laws, those laws arguably do not protect supporting legal mechanisms as the Contractual Retention Right discussed here (or the “flawed-assets” arrangements typical for financial documentation under English law). Therefore, as with set-off above, special arrangements taking account of the restrictions under Bulgarian law are crucial for the close-out netting supporting mechanisms, too.

By Tsvetan Krumov, Attorney at law, Schoenherr

Djingov Gouginski Kyutchukov & Velichkov, working with Buchanan Ingersoll & Rooney, has advised Bulgaria’s M2M Services on its acquisition of the Uplink-branded residential and commercial security and fire alarm business line from Sierra Wireless. Canada’s Blake Cassels & Graydon reportedly advised the seller.

Residence Control EOOD, operating under the M2M Services name, is a Bulgarian-based technology company operating in over 40 countries.

“The acquisition marks the increasing strength of the Bulgarian internet-of-things business and represents a significant achievement for Residence Control on the North American market,” DGKV reported. “The acquisition aims to provide the M2M Services Group a strong foundation of internet-of-things-based alarm and fire monitoring solutions, brand, customers, partners, and an expert management team to establish themselves in the North American region.”

Sierra Wireless delivers device, software, and service solutions and operates research and development centers in North America, Europe, and Asia.

The DGKV team was led by Partner Georgi Tzvetkov.

Despite the political stalemate preventing any legislative movements and access to recovery and resilience funds, Bulgaria’s markets are humming, according to Kambourov & Partners Partner Angel Rizov. Which is just as well, as the political crisis shows no signs of abating. 

“Bulgaria has been in a political crisis for almost two years now,” Rizov begins. “We’re probably looking at our fifth round of elections in a period of under two years. The President has performed his constitutional duties to offer a mandate for the formation of a new government to the largest parliamentary group in the National Assembly, and they are attempting to gather support for a coalition, yet the rumors point to this not being likely to occur,” Rizov reports. New elections are likely to take place in March.

“We had no actual legislative body in action, save for the first half of 2022 when we had a coalition government in place,” he continues. “Everybody is waiting for the legislation which would enable funds for Bulgaria to start flowing under the EU Recovery and Resilience Facility. A little over EUR 6 billion have been allocated to Bulgaria, yet most of these funds cannot be accessed without the relevant legislation in place,” Rizov explains.

“The worst case scenario would be yet another protracted process of attempting to form a government in the spring of 2023, which would lead to our sixth consecutive round of parliamentary elections in the summer of 2023,” he says. “The proposed Recovery and Resilience Plan will, thus, be postponed even more. Hopefully, Bulgarian politicians will be able to get together and try to clear their differences soon, so that the country can move forward in these troubling times,” he says.

Rizov continues to report that once the Recovery and Resilience Plan starts, “R&D and innovation and digital infrastructure funding” will start flowing, improving the overall status of the economy. Additionally, “there is a part of the funding which will go to the e-Justice program, which has been running for a few years now. Hopefully, these funds will help with the work of all lawyers in the country by improving the initiative to digitize the work of courts and the justice system as such,” Rizov explains. “There are still some courts in Bulgaria that are not part of the existing online databases and offer no online access to files and procedures, despite best efforts to change this over the past five years,” he says. 

Turning to the overall market status, Rizov reports that there have been “a lot of transactions taking place in the areas connected to energy and construction, which have traditionally been strong in Bulgaria. Also, the outsourcing IT sector has been growing steadily as well.” He attributes this vibrant activity to a post-COVID-19 restart. “New business opportunities presented themselves as well and, after another slowdown around the time the conflict in Ukraine started, the market continued its recovery,” Rizov says. “There has been a high influx of highly-qualified specialist immigrants coming in from Ukraine and other affected countries, and this will assuredly have a positive impact.”

Kinstellar has advised the owners of Zoo Group Stefanov on the sale of their company to A&M Capital Europe.

“The sale will enable Zoo Group Stefanov to combine with the other pet store business owned by the purchaser in Bulgaria which will ensure its sustained growth in the future,” Kinstellar informed.

With 29 locations in Bulgaria, Zoo Group Stefanov operates a pet store chain that specializes in the supply of pet food and accessories.

A&M Capital Europe is a European private equity fund.

The Kinstellar team was led by Counsel Atanas Mihaylov and included Partner Nina Tsifudina, Associate Nikolay Gergov, and Junior Associate Yasen Toshev.

Kinstellar did not respond to our inquiry on the matter.

Djingov Gouginski Kyutchukov & Velichkov has advised the administrators and senior secured lenders of Bulsatcom UH Holdco Limited on the sale of Bulsatcom to Viva Corporate Bulgaria. Kambourov & Partners and, reportedly, Squire Patton Boggs advised Viva Corporate Bulgaria.

The senior lenders of the Bulsatcom Group included the EBRD, the Bulgarian Development Bank, and funds managed by Blantyre Capital, BlackRock, and Integral Venture Capital, with Alvarez & Marsal Europe as the administrators of Bulsatcom UH Holdco Limited, DGKV informed.

Viva Corporate Bulgaria is a Sofia-based investment company.

According to DGKV, Bulsatcom EOOD is the “largest TV satellite distributor in Bulgaria. The sale marked the successful completion of the restructuring of the Bulsatcom Group made by its senior secured lenders, who took control of the group in August 2019.”

In 2019, DGKV advised the consortium of lenders on the appropriation of Bulsatcom and the introduction of financial restructuring proceedings (as reported by CEE Legal Matters on November 15, 2019).

DGKV’s team included Partner Georgi Tzvetkov and Counsel Gergana Monovska.

Kambourov & Partners’ team included Managing Partner Vladimir Rangeloff and Partners Angel Rizov and Ivo Alexandrov.

Djingov Gouginski Kyutchukov & Velichkov has advised the Oman Investment Authority on the sale of a real estate portfolio to the Smart Property Fund.

According to DGKV, “the deal was cross-border and involved three distinct target companies, each owning a portion of the target real estate portfolio.”

The Oman Investment Authority is the sovereign fund of the Sultanate of Oman.

The Smart Property Fund is a real estate development and investment company with competence and interests in residential and commercial properties.

DGKV’s team included Partner Stephan Kyutchukov, Counsel Ralitsa Gougleva, and Senior Associates Maya Mircheva and Krassimir Stephanov.

Velchev & Co has helped Premier Energy obtain a natural gas trading license in the Republic of Bulgaria.

According to Velchev & Co, “Premier Energy is the third-largest natural gas distributor and supplier in Romania and the leading electricity distributor and supplier in the Republic of Moldova.” The company is part of the Premier Energy Group, a subsidiary of Emma Capital, which is a Czech investment management company.

Velchev & Co’s team included Attorney at Law Martina Chuchukova.

After Decree No 318 of 7 October 2022 adopting the Ordinance on the conditions and procedure for issuing, extending and revoking a certificate for a high-tech and/or innovative project (the “Ordinance”) was promulgated in issue 82 of the State Gazette of 14 October 2022, Bulgaria joins the almost half of EU countries that issue “start-up visas”.

What is the start-up visa and what is its aim?

The long-awaited amendments to the local legislative framework facilitate quick access to long-term residence in Bulgaria for third-country nationals who want to start innovative businesses using high-end technologies and producing high added value products. Luckily, the start-up visa is not tied to minimum financial investment requirements. The share capital of the company through which the start-up project will be implemented is irrelevant. There is also no need to create a certain number of jobs for Bulgarian nationals. This incentivises non-EU entrepreneurs to legally transfer their business to the country and take advantage of its tech ecosystem, access to funding and free movement of capital within the EU. For its part, Bulgaria will gain access to capital and accelerate economic growth. Foreign investors will bring experienced specialists from abroad and create new jobs for locals. Last but not least, the newly attracted companies will bring new know-how, new technologies and practices, and will enrich the country’s business ecosystem.

How to apply for a Bulgarian start-up visa?

All interested entrepreneurs will be able to apply electronically and free of charge, in Bulgarian or English, for a start-up visa certificate on the website of the Bulgarian Ministry of Innovation and Growth. The certificate will be issued within one month following an expert assessment prepared by an Expert Council comprised of representatives from the Ministry of Education, the Patent Office of the Republic of Bulgaria, the Bulgarian Academy of Sciences, the academic and business community, and two NGOs from the start-up and equity investment community.

After obtaining a type D long-term residence visa, the applicants should become partners or shareholders holding more than 50 % of the shares in a Bulgarian legal entity with the same business activities as requested when the start-up visa was issued. If the applicant obtains a long-term residence permit based on the start-up visa, they will be allowed to reside and work in Bulgaria for a year, with the possibility to renew for another two-year period a month before their start-up visa expires. Within the last month before the expiry of the one-year period, the visa holder should electronically submit to the Ministry of Innovation and Growth a report of what has been done to date, including whether they have become shareholders or partners in a Bulgarian legal entity.

Eligibility criteria

The Ordinance defines the requirements for a high-tech and/or innovative project and sets out the evaluation criteria:

(i) A high-tech project is a project based on the use of high-end technology to produce new high-tech products and/or services. High-end technologies are those that are highly complex and require specialised knowledge and skills to use.

(ii) An innovative project is a project based on technology resulting from scientific progress and the latest scientific discoveries in the relevant field and/or the introduction of new, previously unknown models, methods or practices. Such a project has the potential to create a significant difference compared to the current situation and to be a catalyst for change in a sector or market.

(iii) Applications will be evaluated based on six criteria, each equalling a certain number of points: security of funds (0-3 points), financial projections and available capital (0-3 points), customer network (0-1 points), investment from an equity or venture capital fund not less than EUR 51,000 (0-1 points), valid patent or utility model registration certificate (0-1 points), as well as business plan and presentation showcasing the project’s scalability and potential (0-5 points). Successful applicants must receive a minimum of eight out of 14 points.

Is the start-up visa sufficient for residence in Bulgaria?

The issuance of a start-up visa is not sufficient for a third-country national to obtain a long-term residence permit, but it will certainly make the process easier and faster. The overall duration of the residence permit procedure is expected to be around three months, of which:

• one month for obtaining a start-up visa;
• one month for a D visa; and
• two weeks for a residence permit.

What’s next?

Though the current entrepreneurial legal framework in Bulgaria is still not perfect, the start-up visa is a step forward. Feedback from applicants may lead to further improvements, and so the Bulgarian start-up ecosystem will get a boost.

By Katerina Kaloyanova-Toshkova, Attorney at Law, Schoenherr

Going through hard times, Bulgaria’s newly elected political parties are still unable to form a government, yet the market is showing positive developments in some sectors, according to Boyanov & Co. Managing Partner Borislav Boyanov.

“The country is going through the most complex time in, maybe, the past sixty years, with high energy prices, inflation, disruption in supply chains, and rising concerns about recession and the eventual escalation of the war in Ukraine,” Boyanov begins. “Added to this, political instability continues in Bulgaria, as we had four elections in the last two years and, after that, the political parties with seats in parliament are so fragmented that it is not clear whether they will be able to form a government.” According to him, one month after the elections, people still “do not see the light at the end of the tunnel.”

Still, Boyanov highlights the progress in terms of some parliamentary activities. “Last week, the parliament did vote that Bulgaria will provide weapons to Ukraine, and a discussion has started on anti-corruption rules – but also on a controversial law on the elections process – so certain things have started to move,” he says. “Yet, we have a package of more than 20 pieces of outstanding legislation that need to be adopted quickly, in order for Bulgaria to receive portions of the EUR 12 billion funding from the EU as a part of its national recovery and resilience plan.” About the anticipated legislation, Boyanov says that “there are sensitive issues, such as the laws related to judicial reform, anti-corruption, transparency, etc.”

Regardless of the difficulties, Boyanov reports that there are positive developments in the country. “The country did pretty well after the COVID-19 pandemic. We had a GDP growth of 7.4% in 2021, and during the first two quarters of this year that number is around 4%. When the war started in February, investors practically stopped many activities, but now we see an increasing number of M&A transactions, with Eastern Europe again becoming an attractive destination for investments in infrastructure, ITC, and energy,” he notes. Boyanov also says that “during the yearly meeting of the Three Seas initiative – which includes 12 EU countries in CEE – there has been strong participation from Japanese, American, and EU companies showing an increased interest in the region.” He adds that “the importance of the region might actually be increasing because of the war.”

“We feel that the economy is still doing well,” Boyanov continues. “Some sectors, in particular, IT, pharma, construction, defense, and energy have been doing extremely well. We had about a 31% increase in exports and a 33% increase in imports in the first half of the year.” As for IT, he notes that “10,000 new people joined IT companies last year, and their revenues increased by EUR 1 billion to almost EUR 9 billion in total. There are acquisitions and investments as well, both from larger Western corporations and from some local companies that have become global players. We also have a first unicorn – Bulgarian fintech company Payhawk.”

Still, he notes that there are expectations of a recession. “Last year, Bulgaria’s support for families and businesses has been dramatically increased, which is currently leading to a deficit in the budget. We need to find a solution for that deficit, at the latest, at the beginning of next year, as this is an important socially relevant issue, while also being an economic and political one,” he concludes.

Schoenherr has advised Oiltanking on the sale of a 91.1% stake in a liquid storage terminal at the Black Sea in Devnya, Varna, to Astra-Finance. 

Closing is expected in the first quarter of 2023, pending regulatory approval.

Oiltanking is a subsidiary of Marquard & Bahls, an independent holding company in the energy and chemical sector. Through its portfolio, Oiltanking is one of the largest independent tank storage providers for gas, chemicals, and petroleum products worldwide.

Astra-Finance is a subsidiary of The Bulmarket Group, a manufacturer of biodiesel, refined and unrefined oils, and free acids in Europe and one of the biggest private transportation companies in the Balkans.

According to Schoenherr, “Terminal Devnya, with a storage capacity of 25,860 cubic meters, is strategically located at the Black Sea in Devnya, Varna, and provides storage and handling services for inorganic chemicals, biofuels, and edible oils. It is tightly integrated into its customers’ value chains and has water, rail, and pipeline access.”

Schoenherr’s team included Partners Alexandra Doytchinova, Stefana Tsekova, and Ilko Stoyanov and Attorneys at Law Stela Pavlova-Kaneva and Dimitar Vlaevsky.

Schoenherr could not provide additional information on the deal.