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01 February 2015

Set-Off and Netting Against a Bulgarian Bank Placed Under a Moratorium

The validity of a set-off against a bank in reorganisation has become hotly debated among Bulgarian lawyers in the context of the reorganisation imposed on one of the largest local banks.

Set-off and netting are important risk mitigation techniques for transactions in derivatives, and the enforceability of such techniques is a key aspect of the business decision on whether to enter into dealings with a Bulgarian bank at all.

Their enforceability has become a hotly debated topic in Bulgaria in the context of a special supervision imposed recently by the Bulgarian National Bank (BNB) on the fourth largest Bulgarian bank, Corporate Commercial Bank (CCB). This article briefly outlines the differing arguments in the debate. This debate is important for the financial industry as the enforceability of set-off and netting will determine if the counterparties of CCB may reduce their exposures towards CCB. Such exposures are typically huge under derivatives transaction.

Special Supervision over Corporate Commercial Bank in Bulgaria: Facts

Special supervision is not a type of insolvency proceedings but a reorganisation procedure1 where BNB has inter alia stopped (спира) all payment obligations of CCB (Moratorium). Any action of the bank in violation of the Moratorium is rendered void, all enforcement proceedings against the bank must be stopped, it is deemed not to be in default and it owes no interest or liquidated damages for the delay.

Doubts concerning set-off and netting against CCB

As there is no express statutory rule allowing third parties to set-off with receivables towards a Bulgarian bank under a Moratorium, some Bulgarian lawyers insist that such a set-off is impossible. Their rationale is that it is a statutory prerequisite for a set-off that the receivables towards the person against whom the set-off is invoked must be due (изискуеми). And as the receivables towards the bank are, allegedly, not due (because of the prohibition for it to perform its obligations), it is asserted that a set-off during the Moratorium would be void.2

These doubts are similarly relevant for netting arrangements3 since they invariably include contractual acceleration of all mutual obligations (followed by their recalculation and replacement by a single payment obligation for one of the parties). Acceleration means that all obligations of the parties become due either automatically or after a notice (depending on the arrangements), so the problem of the enforceability of the set-off relating to whether the obligations are due (as a prerequisite for a set-off) is equally relevant for netting.

Arguments that set-off and netting may be invoked against CCB

We believe that a Moratorium is not an obstacle for set-off or netting against CCB.4 The Bulgarian statute expressly provides that only the actions of a bank placed under a Moratorium in violation of that Moratorium are void, and no similar rule exists for actions of third parties (eg, those invoking a set-off or netting against the bank).

Similarly, we believe a Moratorium is not an obstacle for the receivables against a bank to become due (and thus it is not an indirect obstacle for set-off/netting). Receivables under Bulgarian law become due at different moments depending on whether there is a maturity date, or an acceleration clause is agreed upon. The obligations of a bank with a fixed maturity date become due on that date, and as the Moratorium does not contain a fiction preventing such date from taking place, it may not be an obstacle for receivables to become due. Obligations of a bank under a Moratorium with a fixed maturity date that have been agreed to become prematurely due as a result of an acceleration notice served to the bank would require a special (case-by-case) analysis, but generally the Moratorium is not an obstacle for them to become due, since there is no prohibition for third parties to serve a notice to a bank under a Moratorium.


Note that the special supervision over CCB takes place in a situation where Bulgaria has not yet implemented the Bank Recovery and Resolution Directive 2014/59/EU (BRRD). The doubts raised by some Bulgarian lawyers as to the validity of a set-off against a bank under a Moratorium, as explained in this article, show how necessary it is to robustly transpose art.77, par.1 of BRRD, which requires EU member states to ensure that there is appropriate protection for set-off and netting agreements.

Bulgarian law provides that only the actions of a bank in violation of the Moratorium are void, which means that actions of third parties (eg, those invoking a set-off or netting against the bank) are not prohibited.


1We believe that the Bulgarian special supervision may be characterised as “reorganisation measures” in the sense of the EU Winding up Directive for Credit Institutions 2001/24/EC, and the EU Financial Collateral Directive 2002/47/EC.
2For arguments that such obligations are not due, see Damian Simeonov, Assignment of receivables under an account held with a bank that has been placed under a special supervision and a consequent set-off with such receivables, Capital Daily, No 1692014, 4 September 2014, page 22.
3For example, the close out netting provisions under the ISDA Master Agreements of 1992 and 2000 and the Global Master Repurchase Agreements of 1995 and 2011.
4For arguments to this effect, see Prof. Valentina Popova and Tsvetan Krumov, Can an obligor of a bank placed under a special supervision make set off with a receivable towards that bank?, Capital Daily, No 1712014, 8 September 2014, page 22, as well as Prof Ognian Gerdjikov, Are set-off operations legal while CCB is under a special supervision?, Capital Daily, No 1772014, 16 September 2014, page 22.

author: Tsvetan Krumov