Bulgaria: Secured Lending Comparative Guide

1 Legal framework

1.1 Beyond general commercial and contract laws, what other specific laws and regulations govern secured finance in your jurisdiction?

The general regulations which apply to secured finance are set out in:

• the Obligations and Contracts Act;
• the Commercial Act;
• the Registered Pledges Act;
• the Credit Institutions Act; and
• the Financial Collateral Agreements Act.

Certain special provisions are also included in, among others:

• the Public Offering of Securities Act;
• the Industrial Design Act;
• the Trademarks and Geographical Indications Act;
• the Patents and Utility Models Registration Act;
• the Civil Aviation Act; and
• the Energy Act.

These special provisions set out specific rules applicable to the respective type of collateral (eg, additional regulatory permissions) and perfection requirements (eg, registration in the competent register).

Bulgarian law regulates possessory and non-possessory pledges. The procedure for the perfection of non-possessory pledges is very formalistic and requires registration in the competent public registers (which vary depending on the type of collateral). Valid perfection may require registration in more than one register. Registration in the competent register (in the case of multiple registers, this applies to the main register in which the pledge must be initially recorded) is a requirement for the validity of non-possessory pledges, which was previously not the case – registration was formerly required for opposability only.

Bulgarian law also regulates floating charges, such as going-concern pledges and charges over pools of assets, equipment or inventory. The case law is still developing and is not always consistent regarding the ranking of creditors' claims in case of enforcement of floating charges or enforcement over assets forming part thereof. Therefore, it is vital that security is structured carefully, so that creditors' rights are safeguarded to the highest extent possible.

1.2 Do any bilateral and/or multilateral treaties or trade agreements have particular relevance for secured finance in your jurisdiction?

No special treaties or agreements apply, save for the double tax treaties between Bulgaria and other countries (see question 9 for further details).

1.3 Beyond normal governmental institutions, are there regulatory or tax bodies that play a particular role in secured finance your jurisdiction? What powers do they have?

No special bodies are assigned with the task of controlling secured financing. The Bulgarian National Bank, among others, supervises banks, financial and payment institutions, as well as e-money issuers. All lending institutions (ie, banks, financial and payment institutions, and e-money issuers) are subject to certain reporting obligations concerning the loans disbursed by them.

The Bulgarian National Bank maintains a special loan register – the Central Credit Register – in which banks, financial and payment institutions, as well as e-money issuers must report the loans disbursed by them. The reporting obligations regarding the Central Credit Register do not distinguish between secured and non-secured loans, but rather aim to ensure that a record of the borrowing history of individuals and corporations is maintained.

The Consumer Protection Commission has certain powers in the case of consumer credits (irrespective of whether such loans are unsecured, mortgage loans or loans secured by other collateral).

The Central Special Pledges Register is the body with which most non-possessory pledges are registered (e.g. receivables pledges, floating pledges, movables and inventory pledges, etc.). The Property Register includes information concerning real property which may be pledged as part of a going-concern floating charge or mortgaged. Further information is maintained in special registers such as:

• the Commercial Register (in which going-concern pledges and pledges over shares in a limited liability company, general and limited partnerships are recorded);
• the Central Depositary (which is competent, among other things, for the registration of non-possessory pledges over electronic shares in a joint stock company); and
• the Patent Office.

1.4 What is the government's general approach to secured finance in your jurisdiction? Are there government guarantee/support schemes available to lenders, and if so what are the qualifications to that support?

Secured financing is a standard form of financing which is also well accepted by regulators. In recent years, several stress tests and asset quality reviews have taken place in Bulgaria. Thus, banks in particular take a very strict approach to security, in order to ensure compliance with capital requirements and to be able to successfully pass stress tests and asset quality reviews.

Guarantee and support schemes are launched from time to time. However, they either address a specific sector (eg, innovation) or a specific economic situation (eg, the COVID-19 crisis).

2 Secured finance market

2.1 How mature is the secured finance market in your jurisdiction? Are the majority of the transactions purely bilateral and domestic, or is there an international syndicated market for secured financing under your domestic law?

The local finance market is developing, according to the size of operations and the economy. Vanilla finance is still the most common type of financing, with relatively small operations on the capital markets and alternative forms of financing. The standard form of financing is usually bilateral and domestic. Loans exceeding €10 million are often syndicated; however, in a large number of financings the second financing institution is a foreign bank which owns a local bank in Bulgaria.

The biggest local banks are primarily parts of international banking groups active in the region (eg, UniCredit, OTP, KBC and Raiffeisen). Local syndicates have increasingly been seen in recent years, but this is still rather the exception. International syndicates are usually active locally whenever the financing is granted to a big international group which includes subsidiaries or other forms of establishments in Bulgaria.

2.2 Are there any bodies in your jurisdiction/region that promote the use of standard documentation and best practices in secured finance transactions? If so, are these widely used and followed?

Banks and financial institutions have formed different associations. However, as purely local financing is still based on rather simple form documents, each bank tends to develop and use its own sample agreements. As the market is rather small, a large number of almost identical clauses may be identified in the different sample agreements which have been developed by the banks independently in-house.

Loan Market Association (LMA) documentation is well known to local banks participating in international syndicates; and in recent years we have also experienced a number of cases in which banks tried to develop their own documentation based on LMA templates, but tailored to Bulgarian law.

2.3 What significant secured finance transactions have taken place in your jurisdiction in recent times?

Landmark transactions in recent years include the following:

• the financing of the concession for Sofia Airport;
• the financing of ICGB AD in relation to the bidirectional pipeline between the natural gas systems of Greece and Bulgaria;
• the financing for the acquisition of the Bulgarian subsidiaries of CEZ by Eurohold;
• the refinancing of the Business Park Sofia;
• the financing of Park Lane Office Center;
• the financing of the Balkan Business Center;
• the refinancing of the Ring Mall in Sofia;
• the financing of NV Tower in Sofia;
• the financing of Office X;
• the syndicated credit facility to leading Bulgarian agribusiness company Oliva;
• the refinancing of the Karadzhalovo PV Park;
• the financings of United Group in respect of the acquisition of Vivacom, Net1 and N3; and
• the financing of MET Renewables AG (Switzerland) for the acquisition from Enel (Italy) of a 42 megawatt wind park in Northeast Bulgaria.

3 Secured finance providers

3.1 Who are the key providers of secured finance in your jurisdiction? Is there a thriving alternative credit market (beyond bank lenders)?

Banks are the key providers of secured finance. The alternative credit market is still not well developed.

3.2 What requirements and restrictions apply to secured finance providers in your jurisdiction? Do these vary depending on (a) the type of entity; (b) whether the lender is domestic or foreign?

There are no limitations on any entity providing secured financing. Secured financing in Bulgaria is usually provided by banks. However, where the lending activity meets certain thresholds, the respective lender must register as a financial institution with the Bulgarian National Bank. This applies whenever the lending activity of a certain company exceeds 30% of its total activities. The calculation rules are set out in Ordinance 26 of the Bulgarian National Bank, which regulates the activities of financial institutions. The 30% threshold is based on the revenues from lending activities compared to the revenues from overall activities, or the value of the assets attributable to the lending activity compared to the value of the overall assets of the company. In such case the type of loans (ie, secured or unsecured) is irrelevant, as the regulations aims to capture, among others, consumer credit providers which tend to provide unsecured loans but also to ensure general stability and consistent rules applicable to the lending market.

Whenever the thresholds are met and a company qualifies as a financial institution, it must also comply with a number of requirements concerning capital, which may not be less than BGN 1 million. The managers and directors of a financial institutions must also meet certain ‘fit and proper' requirements, including education, professional experience, clean record and so on. Whenever a company's lending activities are performed as part of its wider operations, the 30% threshold may not be met even if the lending activities generate revenues in substantial amounts. On the other hand, companies which are focused on lending must register as such the moment that the 30% threshold is met (which may in principle be the first loan disbursed by them) and ensure that they comply with the BGN 1 million minimum capital requirement. The capital requirement concerns both registered capital and equity.

4 Secured finance structures

4.1 What secured finance structures are most commonly used in your jurisdiction?

Depending mainly on the borrower and its business, security may be structured as primarily cash-flow driven or asset driven.

Mortgages are a very efficient and established security tool. However, they are not as flexible as pledges and involve considerably higher costs, as registration fees are based on interest. In contrast, the perfection requirements for pledges (apart from the notarial certification of certain pledge agreement, if applicable) are fixed and are based on the number of pages submitted for registration.

On the other hand, out-of-court enforcement of non-possessory pledges does not lead to the deletion of the existing mortgages and also involves certain risks.

Depending on the type of financing and the available collateral, therefore, a balance is sought so that creditors have at sufficient flexibility but are also well secured in case of an event of default.

4.2 What are the advantages and disadvantages of these different types of structures?

Cash-flow driven security structures enable the lender to enforce its loan receivables promptly by collecting cash proceeds and applying them directly towards repayment of the outstanding and overdue loan receivables. Cash-flow driven security packages include account pledges, receivables pledges and financial collateral pledges. They are often provided in the form of floating charges, giving lenders additional flexibility and the option to enforce by benefiting from the available court and out-of-court procedures. Additional flexibility is also provided to the borrower, such as, the right to collect its receivables and to operate its accounts rather than having to delegate these activities to the lenders. In case of the borrower's default, however, the right of the borrower to operate the collateral in the ordinary course of business means it may jeopardise enforcement of the lenders' rights. The rights of the borrower to operate the collateral are suspended upon an event of default. However, this poses a number of practical challenges and options of the borrower to continue operating despite an existing event of default. Therefore, lenders should ensure in advance that they have the appropriate tools to gain control over the collateral immediately upon an event of default.

Individual assets pledged as part of a floating charge are released from the pledge upon a sale or transfer in the ordinary course of business. Mortgages and non-floating pledges are not subject to similar release rules and do not expire in case of a sale. The collateral transfers together with the respective security (ie, pledge or mortgage), which gives the lenders strong protection.

Naturally, whenever the collateral includes real property or shares, this usually involves slower and more formalistic enforcement, the price may vary and the collateral is not as liquid as receivables. In some cases, such as pledges over shares in a limited liability company, the security may be enforced only by liquidation of the company whose shares have been pledged, which is not usually a preferred solution for lenders. Therefore, share pledges are generally created in Bulgaria in order to limit the risk of sale of the respective entity and change of control.

4.3 What other factors should parties bear in mind when deciding on a secured finance structure?

Mortgages in Bulgaria have a validity of 10 years. In order to preserve the ranking of the security, the mortgage must be renewed prior to the expiry of the 10-year term.

If the renewal does not take place within the specified timeframe, the security may be registered again, but it will have a ranking from the new registration when new hardening periods may be triggered.

The registration of a mortgage involves higher costs, which include notarisation of the mortgage agreement and the fees of registering in the Property Register.

Registered pledges (ie, in general, non-possessory pledges) have a validity of five years as from the initial registration date, irrespective of whether any amendments are made to the initial pledges. They must be renewed prior to the expiry of the five-year term in order to preserve their ranking from the initial registration. Registered pledges involve lower costs and are therefore strongly preferred by borrowers.

Real property may be encumbered by a mortgage. Real property and other real rights may be pledged only if the respective right forms part of a going concern which is pledged as security to the loan. If the lenders are happy to consider the borrower's cost preferences, it is recommended to consider a mortgage for all material properties only, and not over smaller, lower-value properties, as the costs of perfection relate to the total amount of the secured financing. Thus, a mortgage over a smaller property will trigger the same fees as a mortgage over a larger real property if the secured claims are the same (which they usually are).

An alternative approach is to mortgage the properties by stating that they cover only part of the loan, so that perfection costs are calculated based on the value of the property rather than the value of the whole financing.

Non-possessory pledges are generally a very flexible, cheap and thus common security tool. However, under the law, in the case of floating charges (described in more detail below), any asset forming part of the collateral may be transferred by the pledgor free of any encumbrances to a third party to the extent that this takes place in the course of ordinary business. In order to mitigate this risk and ensure the opposability of the security after a transfer, the standard practice is to use a mix of floating and non-floating non-possessory pledges (ie, pledges over explicitly specified assets). Unlike in the case of floating charges, explicit pledges follow the collateral in case of a sale, irrespective of whether this takes place in the course of ordinary business.

5 Security

5.1 What types of security interests are available in your jurisdiction? Which are most commonly used and which are recommended (if different)?

Bulgarian law regulates possessory and non-possessory pledges, mortgages, suretyships, co-debtorships, bank guarantees and financial collateral agreements. Pledges over future assets and receivables are also permitted.

Possessory pledges are created by virtue of the Obligations and Contracts Act. They require delivery of the collateral and delivery of the documents evidencing the pledge of receivables to the pledgee. In case of possessory receivables pledges, the pledgee must also collect the interest and the principal. To this extent, possessory pledges are not entered into by professional lenders, since they are not practical.

Non-possessory pledges may be created over the following assets:

• movables;
• machines and equipment;
• receivables;
• electronic shares;
• shares in collective investment schemes;
• shares in limited liability companies;
• general and limited partnerships;
• IP rights;
• going concerns; and
• inventory.

Bulgarian law also regulates floating charges, which may include floating pools of receivables, movables or inventory, goods, materials and shares issued electronically or shares in collective investment schemes. The pledge over a going concern is also a type of a floating security regulated by local law.

Mortgages are created over real property only. They require:

• execution of a notarial deed;
• registration in the Property Register; and
• payment of notarial and state fees, both of which are substantial.

However, mortgages are a strong security tool. Moreover, as mortgages are among the oldest security instruments, their creation, amendment, release and enforcement have been reviewed in depth by the courts. Therefore, there is sufficient case law on diverse issues related to mortgages and their enforcement.

Suretyships are usually required in the case of consumer loans. In the case of corporate financing, the practice in mid-size financings is to request the provision of co-debtors as an additional security tool.

Bank guarantees are among the limited abstract security instruments regulated under Bulgarian law. However, they are not a common security tool in the case of corporate finance and larger finance agreements.

Financial collateral agreements were first introduced in Bulgaria in 2006. The provisions of the law implement the provisions of the EU regime. Financial collateral pledges are not subject to any complex formal requirements and are easy to perfect and enforce. Moreover, financial collateral benefits from the special option of close-out netting, which makes it a preferred tool for banks and generally a part of any bank finance agreement with a qualifying borrower. However, as under the relevant EU case law, disposal of the collateral (ie, the cash available in the bank account) must be limited as a validity requirement under financial collateral arrangement agreements – that is, the account holder will be prevented from disposing of the moneys deposited in the pledged account – the practicality of this instrument has also been challenged.

Going-concern pledges and pledges over floating pools of receivables, equipment, machines and inventory are commonly used.

5.2 What are the formal, documentary and procedural requirements for perfecting these different types of security interests (ensuring that they are enforceable against debtors and third parties)?

The following steps are required to perfect the different types of security:

Possessory pledges:

• Movables pledges:
• • Delivery of the collateral.
• Receivables pledges:
• • Delivery of the original documents evidencing the receivable;
  • Notification of the debtor.

Non-possessory pledges:

• General requirements applicable to all pledges:
• • Signing of a pledge agreement in writing;
  • Signing of a notarised declaration of the absence of overdue public obligations of the pledgor; and
  • Registration of the pledge agreement with the Central Special Pledges Registry.
• Receivables pledges:
• • Notification of third-party debtors, including the minimum information prescribed by law.
• Going-concern pledges:
• • Resolution of the general meeting with the required majority and in the required form;
  • Registration of the going-concern pledge in the Commercial Register;
  • Registration of the pledge in the Property Register with respect to real properties that form part of the pledge; and
  • Registration of the pledge with other registries (eg, the Patent Office), depending on the assets which form part of the collateral.
• Pledges over IP rights:
• • Registration with the competent IP rights registry (eg, the Bulgarian Patent Office).
• Pledges over shares in a limited liability company or a general or limited partnership:
• • Pledge agreement with notarized signatures and content;
  • Registration in the Commercial Register;
  • Registration in the Central Special Pledges Register with respect to the pledge of dividends, if any; and
  • Notification to the company that the claims for dividends are also pledged, if applicable.
• Pledges over electronic shares in joint stock companies:
• • Registration with the Central Depositary;
  • Registration in the Central Special Pledges Register with respect to the pledge of dividends, if any;
  • Notification to the company that the claims for dividends are also pledged, if applicable; and
  • Recording of the pledge in the shareholders' register.
• Pledges over shares issued as hard-copy share certificates in a joint stock company:
• • Endorsement in pledge;
  • Delivery of the share certificates;
  • Notification to the company that the claims for dividends are also pledged, if applicable; and
  • Recording of the pledge in the shareholders' register.
• Aircraft pledges
• • Registration in the Civil Aircraft Register.

Mortgages:

• Resolution of the general meeting with notarised signatures;
• Execution of a notarial deed;
• Signing of a notarised declaration of the absence of overdue public obligations; and
• Registration of the mortgage in the Property Register.

Each type of security is subject to signing of a standard form notarised declaration of the absence of any public obligations of the pledgor (which generally refers to social security contributions and taxes).

Each type of security is pledged or mortgaged, as applicable, by paying the respective registration fees, as applicable.

5.3 What are the main types of collateral used as security in your jurisdiction and what specific points should be borne in mind regarding each?

The most common security instruments include mortgages, non-possessory pledges, financial collateral agreements and co-debtorship structures.

5.4 Can security be taken over property, plant and equipment in your jurisdiction? If so, how?

Yes, security can be taken over real and movable property, plant and equipment, inventory and so on.

Real property is usually mortgaged. It may also be pledged as part of a going-concern pledge.

Movable property may be pledged by virtue of a possessory (not practised) or non-possessory pledge.

Plant and equipment may be pledged jointly as a part of a going-concern pledge or floating charge.

For details of the perfection requirements applicable to each separate type of security, please, see question 5.2.

5.5 Can security be taken over cash (including bank accounts generally) and receivables in your jurisdiction? If so, how?

Yes, security can be taken over cash (including bank accounts) and receivables. This may take place in any of the following forms:

• possessory pledge over cash (not used in practice);
• non-possessory bank account pledge, which is a type of receivables pledge;
• financial collateral agreements in respect of bank accounts; and
• Possessory (not applied in practice) and non-possessory pledges over receivables, whereby receivables may also be pledged as part of a going concern or through a floating charge.

For details concerning the perfection requirements applicable to each separate type of security, please see question 5.2.

5.6 Can security be taken over company shares in your jurisdiction? If so, how?

Yes, under Bulgarian law, security may be taken over company shares. Depending on the type of company and shares, different perfection requirements may apply as follows:

• Shares in a limited liability company, a general partnership or a limited partnership:
• • Signing of a share pledge agreement with notarised signatures; and
  • Registration in the Commercial Register.
• Materialised shares in a joint stock company (ie, shares issued on paper):
• • Endorsement in pledge; and
  • Delivery of the share certificates.
• Electronic shares in a joint stock company and other electronic securities:
• • Registration of the pledge with the Central Depository in another respective register (eg, public bonds register).

The standard market practice is to pledge dividends explicitly as part of a receivables pledge and to perfect such pledge accordingly (ie, by registering it in the Central Special Pledges Register, notifying the company of the pledge and recording it in the shareholders' register in the case of a joint stock company).

For details of the perfection requirements applicable to each separate type of security, please see question 5.2

5.7 Can security be taken over inventory/moveables in your jurisdiction? If so, how?

Yes, security can be taken over inventory and movables by virtue of any of the following:

• Possessory pledges – rarely applied in practice in the context of secured corporate finance.
• Non-possessory pledges:
• • As part of a going-concern pledge:
  • • Signing of a going-concern pledge agreement with notarised signatures;
    • Resolution of the general meeting of shareholders with the required majority;
    • Notarised declaration that the company has no overdue public obligations;
    • Registration of the pledge in the Commercial Register; and
    • Registration of the pledge in the Central Special Pledges Register.
  • As part of a floating pledge over movables and inventory:
  • • Signing of a pledge agreement;
    • Notarised declaration that the company has no overdue public obligations; and
    • Registration of the pledge in the Central Special Pledges Register.
  • As part of a specific movables and inventory pledge:
  • • Signing of a pledge agreement;
    • Notarised declaration that the company has no overdue public obligations; and
    • Registration of the pledge with the Central Special Pledges Register.

5.8 What charges, fees and taxes (including notary and similar fees) arise from the perfection of a security interest? Do these vary depending on the type of assets used as collateral?

The following fees should be considered when creating security in Bulgaria.

Notarial fees: Notarial fees depend on the type of document (eg, notarised signatures, notarised signatures and content, notarial deed). They are calculated based on the respective secured interest. The general rule is that the secured interest is equal to the total amount of the secured claims (eg, usually the total loan amount, interest, default interest etc); if the secured claims are not set out in exact numbers, the notarial fees will be calculated based on the amount of the principal. Notarial fees are generally capped at BGN 6,000 (per document.

Mortgages: In the case of mortgages, a state fee of 0.1% of the amount of the secured claims is due to the Property Register. Similarly to the notarial fees, if the secured claims are not set out in exact numbers, the state fee will be calculated based on the amount of the principal.

The state fee due to the property register is due in respect of mortgages over real property.

Notaries have territorial competence with regard to mortgages. Thus, the costs may be reduced where a few properties are mortgaged by virtue of the same mortgage deed. However, this works only if the properties are located in the same region. Any property or other real right outside such region must be pledged before a notary who is competent for the respective region, which triggers payment of the same costs. This cost burden may be partially resolved by creating mortgages as a security for part of the loan only and considering the property's value rather than the whole loan amount.

Pledges: Real rights may be pledged as part of a going concern. After registration of the going-concern pledge in the Property Register, the pledge shall also be recorded in the Property Register. The fee payable to the property register for this is BGN 80.

The most commonly required fees for pledges are set out below:

• Central Special Pledges Register: The fees due for registration of pledges in the Central Special Pledges Register are much lower, at BGN 40 for the first page and BGN 10 (for each subsequent page of the filing.
• Central Depository: The same fees are due in case of pledges which are subject to registration with the Central Depository (ie, pledges over electronic shares in a joint stock company) together with a handling fee of 0.3% (and no less than BGN 300).
• Bulgarian Patent Office: The fees for registration of pledges over IP rights (eg, trademarks, patents and utility models) amount to BGN 60.

5.9 What are the respective obligations and liabilities of the parties under the security documents?

Usually, the security provider undertakes an obligation to maintain the collateral and not to dispose of it without the consent of the pledgee.

Moreover, the security provider must insure the collateral against the usual business risks. In case of an insurance event, a pledge also extends to the insurance proceeds.

The security provider must inform the lender in case of damage to the collateral, disputes concerning the collateral or third-party rights arising in relation thereto.

5.10 What other considerations should be borne in mind by all counterparties when perfecting a security interest in your jurisdiction?

The perfection of security is an extremely formalistic process. Therefore, it is of utmost importance to ensure full compliance with the applicable law. Breaches can easily cause the invalidity of security.

Pledges and mortgages under Bulgarian law constitute accessory security. Thus, if the secured claims expire for whatever reason (eg, settlement, waiver, statutory limitation), so too does the security.

Security expires after a certain period (five years for pledges and 10 years for mortgages), unless it is renewed prior to expiry. Renewal is usually applied for unilaterally by the secured party (ie, the lender). Often, the sample security documents used on the market include special provisions stating that the borrower undertakes to renew the security prior to its expiry. In practice, this is not possible, as usually an additional proxy in favour of the pledgor/mortgagor is required by the pledgee/mortgagee. Moreover, if the security provider fails to renew the security, the secured party will be unable to remedy this breach (claiming damages will not usually be an adequate remedy). A new registration will have a ranking from the new registration date. Potential hardening periods will also be assessed in respect of the new registration date.

6 Guarantees

6.1 What types of guarantees are available in your jurisdiction? Which are most commonly used and which are recommended (if different)?

Bulgarian law regulates bank guarantees, suretyships and co-debtorship. Tools such as promissory notes are also regulated.

However, Bulgarian law does not regulate corporate guarantees and similar tools that are commonly used – in particular, in the case of cross-border financings. In order to mitigate the risk of local courts rendering corporate guarantees invalid, they are usually made subject to foreign law. However, this also presents certain risks where the nexus to the respective foreign law may be immaterial, as the courts may find that the foreign law has been chosen purely to circumvent certain limitations under Bulgarian law.

A similar tool which is regulated under Bulgarian law is the suretyship. However, suretyship is strictly accessory.

Another option to structure a tool similar to the guarantee is the co-debtorship. This is also very commonly used, as it is a cheap and effective tool to protect creditors, in particular, where the guarantor (ie, in this case, the co-debtor) is a solvent and fully operational company.

6.2 What are the formal, documentary and procedural requirements to perfect a guarantee?

A bank guarantee is usually issued in original or by SWIFT messages. A co-debtorship is usually part of the loan agreement.

A suretyship or a corporate guarantee is signed in writing as a separate agreement.

No special perfection requirements apply in these cases. However, under Bulgarian law, claims for amounts exceeding BGN 5,000 must be proved before the local courts based on written agreements.

6.3 What charges, fees and taxes (including notary and similar fees) arise from the perfection of a guarantee?

Any guarantee or similar tool may be signed with notarial certification. This may facilitate enforcement. However, no special form or registration requirements apply to guarantees.

If the parties decide at their discretion to sign a guarantee agreement with notarised signatures, notarial fees will be charged based on the secured interest – usually calculated on the basis of the principal and capped at BGN 6,000.

6.4 What are the respective obligations and liabilities of the parties under the guarantee?

Although a standard security instrument in international financing, corporate guarantees are not regulated as such under Bulgarian law. Whenever they are used in local transactions, they should include a commitment of the guarantor to settle the obligations of the main debtor in case of breach. To the extent that the closest instrument regulated under Bulgarian law is a suretyship, in order to mitigate, to the maximum possible extent, the risk of the guarantee being rendered invalid, the parties may consider entering into a suretyship agreement instead.

The suretyship agreement includes a commitment of the guarantor to be held liable for the borrower's obligations. A surety may cover all or part of the borrower's obligations. However, the surety is strictly accessory. Thus, the guarantor cannot undertake more obligations than the borrower. The surety covers all ancillary obligations of the borrower, such as interest, default interest and enforcement costs. Where there is more than one guarantor under the surety, each guarantor may be held liable for all the obligations (ie, they are considered jointly and severally liable by law), unless the parties have explicitly agreed otherwise. The guarantor may raise any objections of the borrower (eg, absence of default, expiry of limitation periods). The guarantor does not forfeit these rights even where the borrower has waived them. A guarantor is also entitled to offset the guaranteed claims against claims of the borrower. In the case of multiple guarantors, whenever one of them settles all the obligations, it may claim against each of the remaining guarantors in proportion to its respective guarantorship obligations.

Even if a guarantor has limited its guarantee for the duration of the main obligation, it may be held liable after the expiry of this term, provided that the lender initiates proceedings against the borrower within six months thereafter.

6.5 What other considerations should be borne in mind by all counterparties when taking the benefit of a guarantee in your jurisdiction?

The main considerations relate to the fact that the corporate guarantee is not regulated in Bulgaria. Thus, similar arrangements may be rendered invalid by the local courts in case of a dispute.

7 Financial assistance

7.1 What requirements and restrictions apply with regard to the provision of financial assistance in your jurisdiction? What specific implications do these have for secured finance transactions?

Under Bulgarian law, the requirements and restrictions for financial assistance are regulated with respect to joint stock companies only (ie, not for limited liability companies).

In this regard, the Commercial Act does not permit a joint stock company to advance funds, make loans or provide securities with a view to the acquisition of its shares by a third party. Considering the above, Article 187(f) of the act expressly prohibits joint stock companies from granting loans or securing the acquisition of their own shares by third parties.

However, this prohibition does not apply to banks and financial institutions where such transactions are made in the ordinary course of business.

8 Syndicated lending

8.1 Is the concept of an agent or trustee recognised in your jurisdiction? If not, how is security taken for multiple lenders?

The concept of a security agent is not regulated under Bulgarian law. The general concept is that security is strictly accessory. Therefore, it is arguable whether a similar structure may be applied in Bulgaria. The safest and most secure approach is the creation of security in favour of all lenders.

An alternative approach, which has not yet been confirmed by a binding court decision, is that all lenders be declared as joint and several lenders for the purposes of the security and the security be created in favour of one of them (ie, the security agent) for everyone. However, this contradicts some of the general principles of syndicate lending – for example, that lenders are not joint and several creditors or debtors.

The concept of parallel debt is also not regulated in Bulgaria. However, we have already seen a number of cases in which security over collateral governed by Bulgarian law was taken by a security agent by virtue of a parallel debt. There is also no binding case law resolving the treatment of parallel debt under Bulgarian law. However, there are good arguments in favour of the concept of parallel debt. In particular, assuming that the parallel debt is a valid claim under the respective law which governs it (usually foreign law, such as the law of England and Wales), there should be nothing to prevent such claim from being secured. Moreover, the concept is not unknown in local law, as it is regulated in respect of the agent of bond holders.

In any case, security will follow the general rules – that is, pledges and mortgages are strictly accessory and will expire once the secured obligations have been settled, irrespective of whether this takes place by waiver, performance or otherwise.

8.2 What requirements and restrictions apply with regard to syndicated lending in your jurisdiction?

Syndicated lending is not regulated explicitly under Bulgarian law. However, there also no restrictions which would make it impossible.

The main issues concerning syndicated lending relate to the security.

8.3 What other considerations should be borne in mind by all counterparties when engaging in syndicated lending in your jurisdiction?

Historically, syndicated loans were usually governed by the laws of England and Wales. However, in light of Brexit, recognition and enforcement of foreign judgments may become harder as the United Kingdom is no longer subject to the respective regulations (mainly Regulation (EU) 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, known as ‘Brussels Recast', but also all other EU regulations which concern the facilitation of enforcement).

9 Taxes, charges and fees

9.1 What taxes and similar charges are levied in the secured finance context in your jurisdiction? Do these vary depending on whether the lender is a domestic or foreign entity?

If the lender is a local tax resident entity, any interest income will form part of the corporate tax base. The taxable base, as determined by the local legislation, is subject to a 10% tax (flat).

In the case of foreign lenders, interest accrued by a local debtor will be subject to a 10% withholding tax, which is withheld and remitted to the state budget by the interest payee (ie, the borrower).

9.2 Are any exemptions or incentives available?

The interest expenses of the local borrower may be deductible for tax purposes, subject to observing certain domestic interest limitation rules.

In case of a foreign lender, depending on factors such as its status and tax residency, partial or full relief from Bulgarian withholding tax may be claimed under an existing double tax treaty or, in some cases, EU law.

9.3 What other significant costs will be incurred by the counterparties in entering into a secured finance transaction? Do these vary depending on whether the lender is a domestic or foreign entity?

See questions 9.1 and 9.2. Bulgaria has no stamp duty or similar charges applicable to loan agreements.

9.4 What strategies might the counterparties consider to mitigate their tax and other liabilities in the secured finance context?

Several standard approaches may be considered:

• tax gross-up clauses ensuring that the net proceeds of the lender will remain unaffected by the different taxes (eg, withholding tax) which may have to be withheld by the borrower on the interest payments;
• qualifying lender clauses which aim to protect the borrower from the lender assigning the loan to another lender located in a different state (eg, with no double tax treaty between the state of the borrower and the state of the lender), which may lead to increased payment obligations of the borrower;
• cooperation clauses ensuring that the parties will cooperate with each other in good faith in order for each, as applicable, to obtain tax relief in their relevant jurisdictions;
• tax credit clauses, which in general provide that where a lender has obtained tax relief on an additional payment made by the borrower to cover taxes due by the lender), the lender must repay the excess of such payment back to the borrower so that the lender's net position is the same as it would have been had the additional payment not been required; and
• where treaty relief is not available, assessment of the potential application of EU rules allowing for the recalculation of the withholding tax base to a ‘net' basis instead of applying withholding tax on the gross amount of interest accrued, subject to further review of specific provisions under local law.

10 Judicial enforcement

10.1 In the event of default, what options are available to enforce a security interest or guarantee? Is self-help available in your jurisdiction in connection with the enforcement of security (if so, in what circumstances) or must enforcement action be pursued through the courts?

The enforcement of security depends on the type of security which has been granted.

Mortgages: Mortgages may be enforced under the Code on Civil Procedure. The process is prescribed by law and the procedure takes place before the official enforcement authorities and the courts.

Pledges: Possessory pledges are seldom entered into in the corporate finance space. Possessory pledges are enforced only where the parties to the transaction are not eligible under the Registered Pledges Act (eg, an individual is not generally an eligible pledgor under the Registered Pledges Act, except in certain cases, such as the pledge of shares in a limited liability company). The enforcement of possessory pledges (irrespective of whether the collateral includes movables or receivables) is also regulated by the Code of Civil Procedure and follows the general court enforcement rules.

Registered pledges: Registered pledges in Bulgaria, which are also referred to as ‘non-possessory pledges', may be enforced through an out-of-court procedure involving a depository. Registered pledges at the choice of the pledgee may also be enforced under the rules of the Code on Civil Procedure following the general court enforcement rules

Receivables pledges may be enforced under the Registered Pledges Act by collection (applicable for monetary claims only) or sale of the receivables at the pledgee's discretion

Going-concern pledges may be enforced by sale of parts of the collateral or by sale of the whole going concern. The latter involves the appointment of a special director of the going concern. Registration of the special director is also a termination event in respect of the company's management bodies. Real property that forms part of the going concern may be sold under the out-of-court procedure prescribed by the Registered Pledges Act or under the general court procedure set out in the Code on Civil Procedure. There are some additional rules to be observed – for example:

• the commencement of enforcement is subject to registration;
• in case of the sale of the collateral in parts (rather than the whole going concern), the pledgee must first sell the assets which are the least important for the operation of the company; and
• when commencing enforcement, the pledgee must also indicate the anticipated type of enforcement (ie, the whole going concern or parts thereof). The special director must obtain additional insurance.

The pledge of shares in limited liability companies and general or limited partnerships may be enforced through liquidation of the company or termination of the participation of the shareholder whose shares are pledged.

The enforcement of security which is not first ranking requires the consent of all higher-ranking creditors. Alternatively, a lower-ranking creditor may satisfy the claims of creditors with a higher ranking and only then proceed to enforcement. Notably, this requirement does not apply to lower-ranking security such as a mortgage.

10.2 How long does the enforcement process generally take and what steps does this typically involve? Do these vary depending on any applicable requirements or restrictions (eg, requirement for public auction or regulatory consents)? Do these vary depending on whether the lender is a domestic or foreign entity?

The timing of enforcement proceedings may not be estimated in advance as it generally depends on the liquidity of the collateral.

The court enforcement procedure includes, as a first step, an invitation for voluntary performance within two weeks. There are certain options to appeal against enforcement. Such appeals are reviewed by the competent court. They generally do not suspend enforcement, unless the court has ruled otherwise. However, in practice, enforcement bailiffs will delay enforcement until a final court decision has been issued. The respective collateral must first be frozen. In the case of movables, the sale procedure may require a second tender if the first tender is unsuccessful for a period of three months.

Real property may be sold through a procedure which involves a public tender and no less than one month for submission of tender offers. If the tender is unsuccessful, a second tender will take place, which may commence no earlier than one month after completion of the first procedure.

Movables, immovables, materialised securities, separable parts of going concerns and the rights over intellectual property may be enforced through an electronic public tender using the online platform of the Ministry of Justice. The bidding lasts for seven days.

Enforcement under the Registered Pledges Act involves applying for registration of the commencement of enforcement. The pledgor must be notified of the commencement of enforcement. The sale of the collateral may not take place until two weeks after registration of the commencement of enforcement.

Additional steps may have to be taken in the case of regulated business where the consent of the competent regulator is required.

The enforcement of securities which are not materialised (eg, electronic shares or bonds, including all listed securities) also requires the involvement of an investment intermediary.

10.3 What other considerations should be borne in mind when enforcing a security interest or guarantee in your jurisdiction?

In order to mitigate the risk of enforcement being challenged, lenders must also ensure that the collateral has been valued properly. Otherwise, the pledgor may raise a claim for damages stating that the collateral has been sold at a lower price.

It is standard market practice that share pledges in Bulgaria include additional clauses such as the following:

• an irrevocable power of attorney from the pledgor to the pledgee to represent the pledgor as a shareholder in the company's general meeting; and
• an irrevocable power of attorney from the pledgor to the pledgee to be able to sell the pledged shares in case of an event of default.

Although this may be considered as market practice, powers of attorney are not irrevocable under Bulgarian law, even if the parties have explicitly agreed otherwise. Thus, the pledgor may limit the pledgee's enforcement rights merely by withdrawing the respective power of attorney, even though the parties have agreed otherwise in the pledge agreement.

Moreover, the right of the pledgee to sell the collateral contradicts mandatory provisions of Bulgarian law (which, in general, limit the right of the parties to agree in advance how the pledgor can seek satisfaction of its claims in case of event of default).

The potential invalidity of both clauses above will usually also trigger the invalidity of any provisions stating that in case of breach of its obligations, the pledgor will be liable for payment of a penalty.

Enforcement under the Registered Pledges Act does not clear the security interest created over the same collateral by virtue of other laws (eg, mortgages) as well as any preliminary measures.

10.4 Are direct agreements with contractual counterparties well understood in your jurisdiction?

Yes, in principle, any dispute may be settled by a mutual settlement agreement. This may take place in the course of enforcement or directly between the parties.

10.5 What other avenues are available to a lender to safeguard its position in connection with security or guarantees?

In general, the structure of the security should be appropriate and based on the available collateral.

Enforcement should also consider any other security or preliminary measure concerning the collateral, to ensure that the enforcement succeeds and the proceeds are as high as possible.

11 Bankruptcy

11.1 How (if at all) do bankruptcy proceedings impact on the enforcement of security by a creditor?

The commencement of bankruptcy proceedings restricts the debtor's freedom to operate freely. Moreover, once bankruptcy proceedings have commenced, generally, creditors cannot satisfy their claims outside of these proceedings.

Therefore, under local law, upon the commencement of bankruptcy proceedings, any judicial or arbitration proceedings in civil and commercial cases against the debtor will be stayed ex lege from the date of the commencement of bankruptcy proceeding. Certain exceptions exist, but they are rather limited.

These rules do not apply to cases involving pecuniary claims secured by property of third parties. The reasoning behind this exception is to ensure that the creditor can act against a third party whose property has been provided as collateral of a debt for which an enforceable court decision is required. However, this does not mean that it is possible to act individually directly towards the bankruptcy estate outside of the insolvency proceedings.

Moreover, Bulgarian law generally states that any new judicial or arbitration proceedings in civil or commercial cases against the debtor are inadmissible, other than the institution of bankruptcy proceedings, except, among other things, pecuniary claims that are secured by the property of third parties for the same reasoning as set out above.

11.2 In what circumstances can antecedent transactions be unwound for preference? What other similar measures apply in this regard?

The Commercial Act provides for a number of options to unwind antecedent transactions and eventually exclude the respective creditors' claims from the bankruptcy proceedings.

Transactions that took place after the date of the commencement of bankruptcy proceedings are considered invalid with regard to the bankruptcy creditors, if the special order prescribed in the statutory provisions that regulate bankruptcy proceedings was not complied with. Such transactions include:

• the settlement of obligations that arose prior to the date of the commencement of bankruptcy proceedings;
• any pledge or mortgage created over assets that form part of the bankruptcy estate; and
• set-offs, subject to certain limitations, which aim to ensure that the offsetting creditor's claims do not receive a settlement which is higher than that which would have been recovered based on the ranking of such claims (ie, a creditor with a lower ranking cannot receive higher proceeds due to the set-off).

The second group of transactions which may be unwound (although not invalid by law) include transactions which took place between the initial date of the bankruptcy (ie, illiquidity or overindebtedness which arose prior to the commencement of bankruptcy proceedings), but within a certain timeframe before submission of the petition for bankruptcy, as set out below:

• the performance of a monetary obligation which is not due (eg, pre-payment of a loan) in the year before the commencement of bankruptcy proceedings;
• the performance of a due monetary obligation in the six months before the commencement of bankruptcy proceedings; and
• the creation of a mortgage or a pledge to secure receivables of the debtor which were previously unsecured in the year before the commencement of bankruptcy proceedings.

These transaction privilege one creditor over others and are thus detrimental to the rest of the creditors. The legislature has doubled the above time limits in cases where the creditor knew that the debtor was bankrupt and thus acted in bad faith.

Notwithstanding the above, the law sets out a list of exceptions, such as the following:

• the performance of a monetary obligation is valid if it occurred in the ordinary course of business and according to the terms agreed between the parties and simultaneously with the provision to the debtor of goods or services of equal value or within 30 days of the due date of the payment, or if after payment is made the creditor provides the debtor with goods or services of equal value; and
• The creation of a mortgage or a pledge to secure receivables from the debtor which were previously unsecured is valid if this is established:
• • prior to or simultaneously with the granting of the loan;
  • to replace another security, which may not be challenged in the bankruptcy proceedings; or
  • to secure a loan granted for the purposes of acquisition of the asset forming part of the collateral under the respective security interest.

Additionally, certain other acts and transactions of the debtor may be invalidated with respect to the bankruptcy creditors if they were carried out within certain periods prior to submission of the petition for the commencement of bankruptcy proceedings. They include the following:

• undervalued transactions which took place in the two years prior to filing of the petition for bankruptcy, but not before the initial date of bankruptcy;
• the creation of a pledge or mortgage, or the grant of a personal guarantee to secure a third-party obligation, in the year prior to filing of the petition for bankruptcy, but not before the initial date of bankruptcy;
• the creation of a pledge or mortgage or the grant of a personal guarantee to secure a third-party obligation in favour of a related-party creditor in the two years prior to filing of the petition for bankruptcy; and
• any transaction which is harmful to the creditors and is concluded with a related party in the two years prior to filing of the petition for bankruptcy.

The above also applies to actions and transactions concluded by the debtor in the period between filing of the petition for bankruptcy and issue of the decision on the commencement of bankruptcy proceedings.

The invalidity of such transactions not affect any rights which third parties acting in good faith acquired against consideration prior to the date of registration of the invalidation claim.

11.3 Are any types of entities excluded from the bankruptcy regime in your jurisdiction? If so, what alternative regimes apply?

Public entities that exercise a state monopoly or that have been established pursuant to a special act are excluded from the bankruptcy regime. The insolvency of such entities will also be governed by a special act.

Special bankruptcy regimes also apply to banks (the Law on Bank Bankruptcy) and insurers (the Insurance Code). The provisions of the Commercial Act will apply if these special acts are silent on a specific matter.

12 Governing law and jurisdiction

12.1 What law typically governs secured finance agreements in your jurisdiction? Do any specific requirements apply in this regard?

Transactions based on bilateral agreements between a local bank and a local borrower are usually governed by Bulgarian law.

Irrespective of the law governing the facility agreement, security documents concerning collateral located in Bulgaria are always governed by Bulgarian law.

Bulgarian law also applies in respect of preliminary measures before the local courts.

In the case of syndicate loans, the governing law is usually that of the facility agent – most commonly the laws of England and Wales. It remains to be seen whether and how Brexit will affect this common practice.

12.2 Is a choice of foreign law or jurisdiction valid and enforceable? In the case of a choice of foreign law of jurisdiction, will any provisions of local law have mandatory application? Are submission to jurisdiction provisions that operate in favour of one party only enforceable?

A choice of foreign law or jurisdiction is both possible and very common, particularly in the case of cross-border financings. However, a choice of law or jurisdiction may be null and void if it has been made purely in order to circumvent certain local provisions. In general, a choice of law cannot restrict the application of overriding mandatory provisions which would have applied had the parties not chosen the applicable law.

Jurisdiction clauses that operate in favour of one party only (ie, where only one party has the discretion to choose the competent jurisdiction) may be challenged successfully before the local courts, as they contradict mandatory concepts of Bulgarian law, such as the unilateral right of one party to amend contractual rights and obligations of the other party, which is generally deemed unlawful.

12.3 Are waivers of immunity enforceable in your jurisdiction?

A waiver of immunity will be assessed on a case-by-case basis, depending on the respective provisions granting immunity.

12.4 Will foreign judgments or arbitral awards be enforced in your jurisdiction? If so, how?

Whether a foreign judgment or arbitral award will be enforced in Bulgaria will depend on the origin of the respective award and whether the respective procedures which regulate the award have been complied with.

In general, in the case of EU member states, the general rules of the Brussels Recast Regulation will apply with regard to recognition and enforcement of court judgments and other enforceable acts.

With regard to arbitral awards, the rules of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards will apply.

Bulgaria has signed bilateral treaties with a number of countries which regulate the recognition of judgments, among other things.

If none of the above applies, the general provisions of international private law will apply.

Recognition can be refused on any of the following grounds:

• The foreign court was not competent to decide on the case, or its competence was based exclusively on the citizenship of any of the parties;
• The judgment was issued in default of appearance, if the defendant was not served with the document which instituted the proceedings;
• The judgment is irreconcilable with a judgment between the same parties in Bulgaria;
• Proceedings are pending before a local court and were initiated before the foreign court proceedings; or
• The judgment contradicts Bulgarian public order.

13 Trends and predictions

13.1 How would you describe the current secured finance landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

In response to the 2008 global financial crisis and the ongoing COVID-19 pandemic, local banks have adopted a conservative approach and structure security carefully and to the benefit of the lender. Banks still have considerable portfolios of non-performing loans which were only partially sold by some. In addition, the lending market is not developing as rapidly as previously. Therefore, banks in Bulgaria are liquid and have sufficient funds available for disbursement.

Vanilla finance is still the most common financing tool and this trend is not expected to change in the near future. However, the capital markets and alternative financing tools are developing, which is expected to transform the secured finance landscape.

14 Tips and traps

14.1 What are your top tips for the smooth conclusion of a secured finance transaction in your jurisdiction and what potential sticking points would you highlight?

Any lender – in particular, banks and financial institutions – should consider whether it has observed the provisions and procedures on establishment, freedom of services, passporting, notification and other applicable procedures in order to operate in Bulgaria.

In general, there is no problem for foreign lenders to provide loans to local borrowers. However, careful consideration is required to determine the exact place of the provision of services and whether an additional licence or permit is required.

The security taken under Bulgarian law should be structured in way that allows the lender to adopt a flexible approach in case of event of default and enforcement. Bulgarian law offers a wide variety of security instruments, but there are many specifics to be observed to ensure maximum security. In addition, despite the wide variety of security instruments available, enforcement requires compliance with a formal procedure.

Breach of the requirement to act in good faith may trigger the lender's liability. Thus, the approach adopted by the parties should be well thought through in order to mitigate the risk of claims by borrowers and security providers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.