Business in Bulgaria under the new State of Emergency Law of 13 March: Suspended and postponed, but no actual economic support

30 March 2020 | bulgaria newsletters

Over the last few weeks, world leaders have likened the fight against COVID-19 to a war. Urgent measures are required to protect health and lives, justifying a wide range of economic measures, irrespective of their consequences.

In Bulgaria, after the parliament declared a state of emergency on 13 March (currently in effect until 13 April), several documents binding on citizens and businesses have been quickly adopted. As early as 13 March, the Minister of Health declared which sites (commercial and non-commercial) can continue to operate. Less than a day later, a new less restrictive order was issued. Administrative and court bodies also adopted special rules applicable during the state of emergency. Thus, the Commission for the Protection of Competition announced its temporary rules of work on its website (https://www.cpc.bg/storage/file/2020/zapoved.pdf; https://www.cpc.bg/storage/file/2020/zpo32.pdf), applicable until 13 April. The courts represented by the Supreme Judicial Council also announced their new work regime, applicable until 13 April.

It is no secret that drafting laws in Bulgaria is typically a dynamic process. Two entirely new bills were put forward to parliament – the Law on Measures and Acts during the State of Emergency (the "State of Emergency Law") and the Law on the Suspension of Terms Under Civil, Penal and Executive Proceedings. Currently, both drafts are united in one – the State of Emergency Law, which was published on 24 March in the State Gazette.

Below we provide a brief analysis of how the new law will affect businesses and answer some of the most frequently asked questions in Bulgaria within the last few weeks.

Retroactive force of the State of Emergency Law

With a few exceptions, which are explicitly listed, the State of Emergency Law provides for retroactive force of the law as of 13 March. In other words, the rights and obligations prescribed under the new law will apply as of the date when the State of Emergency was declared, and not from the date when the new law was promulgated in the State Gazette, as is usually the case.

Suspension of procedural and prescription terms

Under the State of Emergency Law, all procedural terms under court, arbitral and executive proceedings are suspended. Such terms are, for instance, the term to submit an answer within an open court of arbitral proceedings, the term to submit an appeal to a court decision, terms to submit court evidence and others. An exception to the suspension is provided for penal proceedings and the terms under the Extradition Law and the European arrest warrant.

Administrative proceedings are not explicitly listed among the proceedings to which the suspension of the procedural terms applies. Other language in the State of Emergency Law, however, provides that "all other terms, upon the expiry of which rights shall be terminated or obligations of private persons shall be created" will be suspended. Theoretically, this can be interpreted as being applicable to administrative proceedings. It is unclear, however, if this is the case. Why were administrative proceedings not explicitly included in the text regarding suspension of procedural terms, as was been for court, arbitral and executive proceedings? Since these proceedings were not explicitly included, it would be a matter of court interpretation whether administrative proceedings also enjoy suspension of procedural terms. In any case, if we were to interpret terms under arbitration proceedings as being included (under the definition of "all other terms"), procedural terms would not be suspended for public bodies, since the provision clearly states "private persons".

Overall, we believe that the suspension of the terms would be favourable for most parties under open proceedings given teleworking, which has been largely implemented in Bulgaria, and the impossibility of a timely response. On the other hand, the suspension of the terms will also delay the entry into force of decisions that are beneficial for the parties that have requested them. Thus, if a party (a natural person or entity) has requested the issuance of an administrative act that was notified to the parties shortly before the state of emergency was declared (e.g. on 10 March), this act most likely would not enter into force, since each act can usually be appealed within seven days, 14 days or a month (even an act that is favourable for the party that requested it).

It is also important to note the retroactive force of the State of Emergency Law. Therefore, acts which entered into force between 13 and 24 March (after the respective term to appeal has expired) were legally binding in this period.

As of the promulgation of the new State of Emergency Law, however, some of these acts will no longer be considered in force and binding upon the parties, as the law applies from 13 March, while usually a certain appeal period would have to expire before the acts could be seen as being binding upon the parties and third parties.

One notary on duty per 50,000 people

The State of Emergency Law provides that notary proceedings will be limited to "urgent" cases, while the Notary Chamber will ensure notaries on duty for the respective region. The law also provides that one notary on duty will service 50,000 people (currently one notary services 10,000 people). However, the new law does not define what is an "urgent" notary proceeding, so it is unclear which transactions would be classified as such. It is also unclear who would make the assessment for "urgency" – the public notary, the Notary Chamber or another body.

Regardless of who will perform the assessment, the logical conclusion that can be drawn is that all planned and pending notary transactions for the transfer of property or a vehicle may be postponed during the State of Emergency due to the lack of objective urgency.

We welcome the quick reaction of the Notary Chamber, which announced a list of notaries on duty while the State of Emergency Law was still in the bill phase.

Transactions with company shares and corporate changes in the state of emergency

Regardless of how an "urgent" case is interpreted, the restriction of notary certifications will have consequences for transactions with company shares and corporate changes in limited liability companies. This is because even certain very basic changes in the corporate status require a visit to a notary public.

Under the Bulgarian Commercial Code, the signatures on and content of a share transfer agreement for shares in a limited liability company must be notarised. Certain shareholder resolutions, such as resolutions to appoint a new managing director, capital increase or capital reduction also require notarisation of the signatures and content. Therefore, planned transactions with company shares or changes in the management or registered capital of the company may be hindered by the restrictions imposed. Delaying certain transactions and changes is understandable in a state of emergency and usually a reasonable compromise can be reached between the parties. However, delays can also bear risks for the company when actions need to be conducted swiftly, for example where a new managing director needs to be appointed right away.

With regard to shareholder resolutions, a convenient way to avoid a trip to the notary is to repeal the notarisation requirement in the company's articles of association. Therefore, a number of corporate actions remain possible without a notary if the current articles of association so provide. If the articles of association do not stipulate that simple written form is sufficient for shareholder resolutions, the articles may be amended. The shareholder resolution to amend the articles of association does not require notarisation, but can be adopted in simple written form. However, there is no such option with regard to the share transfer agreement, because the provision is imperative.

Both the transfer of shares and the described corporate changes must be registered in the Commercial Register. Fortunately, the Commercial Register is organised as an electronic database, which allows not only online references in regard to the status of a company but also electronic filings. A prerequisite is an electronic signature to sign the application and a paid state fee, which can also be transferred via internet banking. If the applicant does not have an electronic signature, the application can be submitted by a lawyer based on a power of attorney. Thus, a physical visit to the Commercial Register is not necessary, and any corporate change can be made electronically. The offices of the Commercial Register nevertheless are open and continue to operate, like most government institutions, only admitting as many people at a time as there are open counters to serve them. Other visitors are instructed to wait in line outside the building, keeping a distance of at least two metres between them.

Triggering a force majeure clause?

In the context of the suspended procedural and limitation periods, as well as the inability to carry out normal actions before a notary public, the question of invoking a force majeure clause is often raised.

The State of Emergency Law itself does not include specific provisions on force majeure and its consequences. At the same time, however, under the existing legislation a state act explicitly prohibiting our activities does not have to be adopted to allow us to invoke force majeure. The pandemic itself can be defined as an event falling within the definition of force majeure under Bulgarian law. In some cases, epidemics are also referred to in force majeure clauses. Therefore, contractors, including those under public procurement contracts, may invoke force majeure if they are objectively prevented from fulfilling their obligations. Force majeure situations may be diverse. For example, the production process is stopped because an employee is infected with COVID-19 and a temporary quarantine is imposed on all other employees in the company. If the client expects certain products with precise parameters and these goods cannot be delivered due to the border closures, we will again have reason to refer to force majeure. However, the implications for the contract will depend on the case and the parties' conduct.

As a first step, it is necessary to identify the force majeure clause, what consequences are envisaged upon its occurrence, and whether there are deadlines for notifying the counterparty that must be complied with. A number of contracts contain only a repetition of Article 306 of the Commercial Act, which sets out the basic regulation under this topic, but in certain cases it may be insufficient. The Commercial Act provides that compensation or forfeit are not due when force majeure has prevented the delivery of the goods and services. In addition, for the period of force majeure, the contract is "frozen" and neither party is obliged to continue to fulfil its obligations.

A common mistake is the hasty triggering of the force majeure clause without assessing the effects on the rights and obligations under the contract as a whole and the risks associated with its early termination. For example, if a company expects the repair and delivery of key spare parts for its equipment, the surprise notification of force majeure could cause serious complications. The company will therefore be forced to quickly reorganise its activities and may choose to terminate the contract, claiming that it has not been performed on time and that the force majeure does not affect the specific delivery obligations. The results – loss of a client, claims for forfeit, litigation over force majeure – could be avoided through skilful communication and appropriate legal actions.

Next, it must be determined whether the force majeure occurred before the contractor was in delay, i.e. before the delivery deadline expired. Only when force majeure precedes the delay does the contractor have the right to invoke it. The starting point of the force majeure should be fixed on a case-by-case basis and should not necessarily coincide with the period of emergency.

How can we minimise the damage of a pandemic?

The period until the commencement of default under the contract is time that may be used for active negotiations with the client on the coordination of amendments to adapt the contract to the emergency circumstances, such as changing delivery schedules, rescheduling of payments, price change provisions, early termination options without forfeit and more.

If an agreement to modify the contract cannot be reached, invoking force majeure may be the only way out. In this situation, however, it is not enough to just send out a notice of force majeure and sit on one's hands while it continues. On the contrary, it is essential to create and retain evidence of how the force majeure affects the specific performance of the contract. These could be documents on the impact of the pandemic on employees' health, obstacles to sending them to the workplace, causes for delays in the supply chain, force majeure certificates issued by chambers of commerce, as well as internal measures to prevent and limit the effects of the force majeure. The timely preparation of these documents could be a decisive factor in a possible dispute between the parties over the application of a force majeure clause to the contract.

However, some companies will have to continue executing contracts in a state of emergency, because for one reason or another they cannot invoke force majeure. In this situation, contractors under works contracts (construction works, for example) could request a change in their remuneration if they were able to prove that the changes in materials and labour prices were due to external causes beyond the contractor's control that go beyond normal commercial risk. As a last resort, the companies concerned may also initiate legal proceedings to amend or terminate the contract on the basis of economic intolerance.

Procurement contracts also have specific options for contractors in difficulty to address the economic impact of a pandemic. The Public Procurement Act allows contracts to be amended when, due to circumstances which the assignor could not foresee, a need for amendment has arisen that does not lead to a change in the subject matter of the contract. The replacement or inclusion of an additional subcontractor is also possible if the current subcontractors are adversely affected and are unable to fulfil their share of assigned obligations under the contract.

Economic support for businesses?

Although the State of Emergency Law is highly anticipated for its potential economic benefits and financial support for small and medium businesses most severely hit by the virus, in practice, the social and economic measures represent only a fraction of the law. Thus, while some other countries (such as Germany and France, which were more severely hit by COVID-19, as well as Poland, which is experiencing a moderate outbreak) took a series of economic measures, including financial packages, the State of Emergency Law does not set out what financial aid the government is willing to grant to businesses and under what conditions.

As far as specific financial policy is concerned, the only texts have to do with unilateral amendment of state aid contracts and for the possibility to grant financial aid under a simplified procedure, including without publishing an invitation. Such measures, however, while theoretically having the potential for positive results, are not comforting in the context of the Bulgarian spending of European funds and granting of financial aid.

Likewise, while postponing the deadlines for tax, social insurance and other payments may seem like temporary relief for businesses, such measures cannot be expected to help if all accumulated obligations become automatically due once the state of emergency ends.

 

Galina Petkova

Attorney at Law

T: +359 2 93310 83
g.petkova@schoenherr.eu

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