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01 February 2016

Holding Security Interests under Syndicate Lending in Bulgaria

Structures where an agent holds security in favour of multiple lenders have been regarded as problematic so far, and as a result lenders have commonly taken security in their own names.

A challenging problem arising from syndicate lending in Bulgaria is to make enforceable arrangements with one person validly holding a security interest in favour of multiple lenders. The typical structures normally considered in this respect will be analysed in this article, and an attempt will be made to propose a practical solution to the problem.

Agency relationship

Sometimes an agency (mandate) agreement is proposed, where a person, who is a lender under only a part of the debt, or is not a lender at all, is appointed as agent under the security documents for all lenders. However, since the agent under such arrangements is not a creditor for the whole amount of the secured obligation, it is difficult to reconcile such proposition with the principle that security interests give rise to secondary obligations, enforceable only in so far as the security holder has an underlying secured claim1.

Parallel debt clause

Parallel debt clauses are another alternative proposed to deal with the lack of an underlying loan claim in the agency scenario (above). Parallel debt clauses contractually set out an additional obligation to pay a single person, acting as a parallel creditor and security agent, an amount equal to the total outstanding claims of all lenders. Such an “artificial” loan repayment claim, however, may turn out to be unenforceable since it is lacking the mandatory consideration that loan transactions must have.2

Joint and several creditors clause

Contractual arrangements for joint and several creditors seem to accommodate the idea of a parallel debt into the framework of a familiar and enforceable legal concept and are therefore favoured by many practitioners in continental Europe. Under such arrangements it is set out contractually that a security holder is, alongside each individual lender, a joint and several creditor of each obligation of the borrowers, and thus is eligible to hold security for all secured obligations in its own name. This structure does not give rise to a new (parallel) obligation, which, to become enforceable, would have to be justified by valuable consideration, so the problem associated with parallel debt clauses would be avoided.

Such contractual arrangements for joint and several creditors are not expressly regulated in Bulgaria, so there was some doubt until recently as to whether they would be enforceable3. In 2014, however, the Supreme Court of Bulgaria upheld their enforceability in a judgement granted under a special ground of appeal, ie, clarifying a contentious matter of law4. The Supreme Court held that multiple creditors with claims towards a debtor may either grant a power of attorney to one of the creditors to enforce all claims, or may establish joint and several creditorship whereby payment by the debtor to any of the joint and several creditors would be sufficient to extinguish his obligations.

There is one further Supreme Court judgement worth mentioning in this respect5. It was granted to provide mandatory interpretation to inferior courts on the concept of “inseparable obligations“6 in Bulgaria. This judgement is relevant because if the parties agree that an obligation is “inseparable” and is assumed in favour of more than one creditor, “performance has to be made to all creditors” (in accordance with an express statutory rule), and courts interpret this as involving a right for each creditor to claim performance of the whole obligation, thus almost equating the concept to joint and several creditorship. In such a scenario the Supreme Court held that one of the creditors may validly hold a security interest for all other creditors under an inseparable obligation, which in turn is a strong argument that the same should apply to the similar joint and several creditorship scenario7.

All lenders becoming parties to the security documents

It is common for all lenders in a syndicate to take security in their own name in Bulgaria and this may be regarded as the market standard approach. There is no technical obstacle under Bulgarian law when registering security interests to list more than one person as a secured creditor and to describe the secured obligation as encompassing different claims, thus creating a first-ranking security in relation to multiple claims of lenders. This construction is favoured by banks wishing to avoid potential insolvency risks associated with a single security agent. Problems may arise however when it comes to assignment or enforcement of claims secured in this manner, because certain local registries would regard all lenders registered as secured creditors as a single creditor and would request consent from each of them before registering an assignment / commencement of enforcement. Therefore a failure by one lender to grant a requisite consent may prejudice the rights of other lenders.

To overcome such problems that the market standard approach may lead to, it seems reasonable alongside the market standard where all members of a bank syndicate are registered as holders of security in Bulgaria, to stipulate cumulatively that one of these creditors (a security agent) acts as a joint and several creditor under each secured obligation and to register that security agent as a secured creditor not only for his claims but for the claims of all remaining creditors as well.

A 2014 Bulgarian Supreme Court judgement upheld the validity of contractual arrangements for joint and several creditors – which may serve as a basis for a security agent to take security in favour of multiple lenders, thus providing additional options for bank syndicates in Bulgaria.


1A mandate agreement may serve as a basis for an agent to hold the security interest, only in a scenario where the agent is the sole creditor and has actually extended the whole loan. In such a scenario however, the other creditors would not have a direct claim against the borrower but only against the agent.
2The typical (mandatory) consideration for a loan repayment claim to be enforceable is the prior extending of a loan by the creditor. Although there are some transactions under Bulgarian law where the parties are permitted to agree on any valuable consideration as a causa of an enforceable claim, loan transactions do not fall into this group as consideration for loans is regulated by law. Therefore propositions by some Bulgarian lawyers that loan claims under parallel debt arrangements would be enforceable having as a consideration: (i) a reduction in security perfection costs (as a single security agent would hold the security, rather than multiple lenders) and (ii) a facilitating assignment of secured claims seems problematic.
3Such arrangements used to be regulated at a statutory level until 1951, but were allegedly used to circumvent payment of taxes on gratuitous transactions and some mandatory rules under the law of succession and were therefore abandoned under the relevant Bulgarian legislation applicable after 1951 (see Kojuharov, A., Law of Obligations, Volume 2, (updated by O. Gerdjikov), 1996, Sofi‑R, Sofia, p.77).
4See Judgement No131 of 21 March 2014 of the Supreme Court of Cassation, Commercial Department, 1‑st unit, chaired by Justice Liubka Ilieva.
5See Interpretative Judgement No30 of 17 June 1981 of the General Assembly of the Civil Law Departments of the Supreme Court of Bulgaria, reported by Justice Hristo Studenchev.
6The regulation of inseparable obligations (obligations indivisible) in Bulgaria follows the model of art.1218 et seq of the French Civil Code (unofficial English translation available at:
7It is worth mentioning that in civil law systems recognising the concept of inseparable obligations, it is proposed that creditors may gain maximum protection if alongside a stipulation for joint and several creditorship they agree that the obligation be inseparable (see to this effect Ambroise Colin et Henri Capitant, Cours élémentaire de droit civil français, tome II, sixème edition, 1931, p.243). Although this understanding is based on sound arguments, an “inseparable obligations” clause is difficult to be accommodated in a typical LMA syndicate financing.

author: Tsvetan Krumov