According to the statistics of the Bulgarian National Bank (BNB) in Q1 of 2023, the annual growth of credit to corporations continued its steady downward trend to reach 7.9% (10.4% at the end of 2022). The slowdown in the growth was influenced by both the downward dynamics of the overdraft, which fell to 12.3% (17.5% in December 2022), and weaker credit growth, excluding overdraft. The downward trend in inventories in the economy recorded since the end of 2022 resulted in weakening firms’ demand for financial resources for working capital and build-up of inventories, which contributed to the lower annual overdraft growth. According to the BNB’s Lending Survey data, in Q4 of 2022, interest rates had a downward impact on the demand for corporate loans, while on the supply side banks reported a tightening of credit conditions for firms in terms of both interest rates and spread, and premium for riskier loans. Volumes of newly extended loans to firms recorded a continuing upward trend over the Q1 of 2023.

Following the international trends, the investment institutions (exclusive banks), especially some international ones, have steadily increased their national footprint, further taking into consideration the growth of the national startups market, fintech ecosystem, etc. Further, increase is also evidenced in all types of investments of private equity and venture capital funds which are rarely structured and tracked as investments falling into the BNB statistics. Unfortunately in-depth, reliable statistics in this regard are missing.

Annual growth of credit to households remained high over Q1 of 2023, standing at 14.6% at the end of March (unchanged compared to December 2022). Persistently, high annual growth was retained in loans for house purchase and, to a lesser extent, consumer loans (17.8% and 12.1% respectively as of March 2023). Weak and slow transmission of increases in euro area policy rates to interest rates on new household loans in Bulgaria played a key role in sustaining high rates of credit growth to households, with rates on consumer loans remaining unchanged at historically low levels and on loans for house purchases declining in Q1 of 2023.

In real terms, taking into account annual inflation in consumer prices, the interest rates on loans for house purchase and, to a lesser extent, on consumer loans, remained strongly negative, thereby continuing to support household demand for loans. Newly extended household loans recorded a slight increase in volumes in Q1 of 2023 and a stronger rise in consumer loans.

The interest rates on new loans to corporations continued to increase gradually in Q1 of 2023. At the same time, in the household sector, lending rates on loans for house purchase remained broadly unchanged at a very low level, and those on new consumer loans registered a decline from the end of 2022. The ample liquidity and strong competition in the banking sector were the main factors behind the very limited transmission of euro area rate increases to the lending rates in Bulgaria and especially those on household loans.

Since the start of the war in Ukraine there is a certain slowdown by investors due to the rates’ hikes and more expensive financing, but there is no dramatic decline on a general level. In 2022, the majority of transactions (about 60%) were made by foreign strategic investors, being a good signal that Bulgaria is still attractive investment destination. In local and regional studies, a large number of the respondents confirmed that they were considering M&A and financing transactions in 2023. It should be noted thate investors have become much more selective regarding their transactions in the country.

As the Bulgarian Stock Exchange (BSE) is still relatively new and modest, compared to the global economic leaders, the high-yield market has little-to-no impact on loan policies. In the last couple of years, there have been some sporadic new issuances of bonds or other financial instruments. Thus, standard financing through credit institutions retains its primary role in Bulgaria. Funds investment has been a new trend in the past one to two years.

In 2018, the BSE was granted an approval by the Financial Supervision Commission of Bulgaria to set up the new SME Growth Market Beam (BM) – a special market organised by the Bulgarian Stock Exchange which allows small and medium-size enterprises in Bulgaria to become listed companies; ie, to have access to finances for their business projects through capital markets.

The main objective of the BM is to provide SMEs with an alternative to the banking finance of businesses by giving them the opportunity to raise funds within easier terms in comparison to those on the main BSE market. The BM is regarded as the first step of a company on the road towards getting listed on the main market.

The BM provides companies with a number of advantages compared to the requirements for issuers listed on the regulated market organised by the BSE. The relaxed requirements for companies are present in the admission to trading process and in their subsequent life as listed companies. The benefits include a lower requirement for capital threshold, facilitated process of accountability with rules (less reported requirements).

In July 2022, a specific regulation on the crowdfunding financing was adopted, aiming to facilitate lending and to create new and attractive instruments. Some of the largest crowdfunding platforms are entering the Bulgarian market, but considering the relatively new financing mechanism, the liquidity on these platforms remains low. This new type of financing is becoming increasingly popular, but mainly among individuals and non-professional investors.

In recent years, Bulgarian banks have produced and developed standardised documents when applying for a loan, regardless of whether they are lending to corporations or households, which follow and meet all international standards, which has set foreign investors at ease.

At the time of COVID-19, all Bulgarian banks began providing numerous online services to corporations and households, including online consultations, email exchange of highly confidential information, submission and review of documents, inspections (such as AML checks), etc. This has significantly eased the process of granting loans, especially to foreign international corporations in the country.

Bulgarian Parliament is closely following Regulation (EU) 2019/2088 of 27 November 2019, on sustainability‐related disclosures in the financial services sector and has also created various types of governmental, non-governmental and mixed working groups aiming to timely implement the Corporate Sustainability Reporting Directive in the local legislation.

The National Ethical Standards for Advertising and Commercial Communication in Bulgaria envisage principles regarding marketing communications of environmental claims. The principles aim to facilitate honest and truthful presentation of claims in advertising. In Bulgaria, marketing communications should not contain any statement which can potentially mislead the “reasonable consumer” regarding the environmental benefits of an advertised product, or the actions implemented by the trader aimed at protecting the environment.

Pursuant to the Commercial Act, the members of the boards of joint-stock companies should comply with the “duty of care” standard – ie, to act in the best interest of the company and its shareholders, which covers, to some extent, ESG considerations. 

An insignificant part of the local Bulgarian entities (those which are considered large under the Accountancy Act) are required to file a non-financial statement that should include information regarding, amongst others, environmental and social issues.

The corporations will face tougher scrutiny of how climate change affects the society/customers/consumers under new global rules aimed at helping regulators tackle exaggerated or false marketing claims about companies’ climate change commitments (so-called greenwashing). The new measures were drawn up by the International Sustainability Standards Board (ISSB) as trillions of dollars flow into investments that tout their ESG credentials. Bulgaria will have to decide whether to implement these new rules and require listed companies to commit to the standards, adding that the measures could apply to annual financial statements from 2024 onwards.

Pursuant to the Bulgarian Credit Institutions Act, exclusive banking activities (accepting deposits or other repayable funds from the public, accepting valuables on deposit and acting as a depository or trustee institution) could be performed by (i) local Bulgarian banks, including subsidiaries of EU and non-EU banks, licensed to operate in Bulgaria, (ii) branch offices of non-EU banks licensed to operate in Bulgaria, or (iii) EU banks which have passported their authorisation in Bulgaria.

While the license procedures of a bank and branch office follow international standards and are quite standardised worldwide, it is worth mentioning that the applicants for issuance of the relevant licence should pass very strict, detailed and formal procedures where, among others, the applicants should provide a specific set of documents and proof for the shareholders of the structure and ultimate beneficial owners, a detailed business plan, description of the management structure, proof of the skills and experience of the management members, description of the internal systems, etc. In some scenarios, the BNB should also conduct preliminary consultations with the applicants and with the supervision authorities in other EU member states before granting the respective licence. The licence of a branch office could not include activities that the bank is not entitled to carry out in its residential country.

A bank that is authorised in an EU/EEA state may conduct authorised business in Bulgaria. The bank can do this either through the provision of services or the establishment of a branch office. Based on the freedom to provide services and freedom of establishment, for activities which are mutually recognised, the bank needs a single authorisation – ie, an authorisation in the state where it is originally established. The bank must notify its home supervision authority of its intention to provide services or establish a branch in another EU/EEA state, as well as of any changes to such activities. The home supervision authority should inform the BNB about the bank’s planned activities.

Non-exclusive banking activities may be carried out by banks (if included in their licence) or by other non-banking financial institutions, which deal with certain categories of non-exclusive activities. The transactions that a financial institution can carry out are payment services within the meaning of the Payment Services and Payment Systems Act, issuing and administering other means of payment (traveller’s checks and letters of credit), financial leasing, guarantee transactions, trading for own account or for account of clients with foreign currency and precious metals except derivative financial instruments, provision of services and/or performance of investment services and activities, money brokerage, acquisition of credit claims and other forms of financing (factoring, forfeiting and others), issuance of electronic money.

When some transactions (financial leasing, guarantee transactions, acquisition of credit claims, factoring, forfeiting and other forms of financing, acquisition of shares in a credit institution or in another financial institution, granting of loans with funds that were not raised through public solicitation of deposits or other refundable funds) are carried out by occupation and are essential, the company should be registered as a financial institution in a special register with the BNB. The transactions are carried out “by occupation” when they are performed permanently, and not once, incidentally. They are significant when the net income from these activities or their book value exceeds 30% of the value of all net income or book value of the company. Therefore, upon reaching 31% of net income (book value) from any of the mentioned activities, the company is obliged to register as a financial institution in order to continue its activities by carrying out these transactions.

The financing could be provided by legal entities or individuals without having a licence, provided that this activity is not the main business activity of the financing party – ie, this applies to single financing operations.

The Bulgarian law does not foresee any restrictions or other impediments for foreign lenders to provide financing in Bulgaria. However, it is not a common practice to use financing outside Bulgaria, considering the hardships in providing the relevant securities (typically assets in Bulgaria) for utilisation of the loan. Nevertheless, these techniques are often used in bridge financings, cross-border transactions, syndicate financial projects in Bulgaria, etc.

The Bulgarian Currency Act requires such foreign lending exceeding BGN50,000 to be declared before the BNB for statistical purposes. 

There are no restrictions or impediments foreseen by the Bulgarian law in providing security or guarantees to foreign lenders, excluding the UN/EU sanctions related to the war in Ukraine.

There are no restrictions, controls or other concerns regarding the foreign currency exchange foreseen in the Bulgarian law, excluding the UN/EU sanctions related to the war in Ukraine.

The Bulgarian AML legislation imposes certain thresholds above which a declarative regime applies and the involved parties must fill in and provide declarations and supportive documentation proving the source of income of the funds concerned.

There are no restrictions on the borrower’s use of proceeds from loans or debt securities foreseen in the Bulgarian law, other than those provided in the specific contractual obligations between the parties and those imposed by UN/EU sanctions related to the war in Ukraine.

Generally, both concepts are not recognised by the Bulgarian law. The Contracts and Obligations Act (COA), however, foresees that the parties may freely determine the content of the agreement, as long as it does not contradict with the mandatory provisions of the law and good morals. In this way, to a certain extent, the parties may agree on having a documentary escrow agent (law firm, notary public, bank, etc) which will be obliged to hold and manage the respective security. However, considering the lack of sufficient case law, these mechanics encounter many practical issues when enforcing the granted security given the fact that the law, local courts and enforcement agents do not recognise such structures.

The lack of explicit recognition of these concepts could be overcome by subordinating the contract to foreign law and court/arbitration (eg, English law), but again, the enforcement procedures in Bulgaria will pose many practical issues.

Pursuant to the Bulgarian COA, any receivable might be assigned, unless the assignment of such receivable is prohibited by law, or the mere agreement or the nature of the receivable does not allow it. All accessory rights are also considered automatically transferred to the new creditor (securities, interests, etc) unless otherwise agreed between the previous and the new creditor. The accessory rights, if applicable, should be also registered in the various registers by the new creditor. The previous creditor is obliged to notify the borrower of the transfer of the receivables in writing. The transfer shall be considered valid in respect of third parties and the borrower as of the date of such notification. The Consumer Credit Act (CCA) provides for an exception from the general rule, where the previous creditor informs the consumer of the transfer of the receivables, except when the previous creditor, by agreement with the new creditor, continues to administer the credit in relation to the consumer. It is worth mentioning that in both cases, the written notification of the borrower is not a precondition for the effectiveness of the assignment of the receivables.

Another possible legal structure is the transfer of the whole contractual relationship where the lenders shall be changed together with all of the existing rights and obligations under the loan agreement.

The Bulgarian law also provides for a legal structure where a third party may step in as a co-debtor in a certain obligation by an agreement with the lender or with the debtor. If the creditor has approved the agreement for the stepping in of the co-debtor, this agreement may not be repealed or amended without his consent. The original debtor and the co-debtor shall be liable jointly and severally before the creditor for all obligations under the loan agreement and related securities.

The law also provides for substitution, where a third party may substitute the debtor only with the creditor’s explicit consent. The substituted debtor shall be discharged of liability to the creditor. All securities provided by third parties shall be cancelled provided such third parties do not consent that such securities keep serving the new debtor. Pledges and mortgages provided by the original debtor shall remain in full force.

Another permitted method is the novation agreement. In this scenario, the rights and obligations under the loan agreement are considered cleared-off and at the same time the parties (whether the lender or the borrower) could be changed. These mechanics of novation are not commonly used in Bulgaria due to the fact that the security provided under the loan agreement is not directly transferred to the new lender.

Debt buy-back by the borrower is allowed by the Bulgarian law. Usually, lenders include some stipulations where the borrower has to pay a termination fee in case of early repayment of the loan. Where loans are provided to individuals under the CCA, arrangements for a termination fee or similar sanctions shall be considered null and void.

Last but not least, specific rules apply in cases where loans are provided pursuant to the Distance Marketing of Financial Services Act, which allows consumers to withdraw from the contract without compensation or forfeit being payable and without giving any reason, within a period of 14 days.

The Bulgarian law does not recognise the concept of “certain funds” with respect to public or private acquisition transactions. Such concept, known quite well in most of EU member states, could however, be applied by the parties.

According to the provisions of the Public Offering of Securities Act, in case a transaction with shares in a listed company exceeds certain thresholds, the tender offer of the purchaser, prospectus and the appraisal of the shares performed by experts should be made available on a specific platform. The purchaser should then ensure that it possesses the necessary funds (which is to some extent similar to the “certain funds” concept) in order to pay for all outstanding company shares subject to the tender offer or squeeze-out procedure.

Depending on the magnitude of the transaction and the financing party involved (whether local Bulgarian banks, syndicate of banks, international banks) the documentation which is used might vary. In the smaller local transactions, the banks use standardised documentation for granting a loan for acquisition of the target. In larger transactions, especially when a syndicate loan is sought by the acquirer, the banks usually provide for much more documentation (which predominantly follows the London Loan Market Association models and standards). This documentation, however, is not publicly available to any third party.

Currently, there are no recent legal and commercial developments that have required changes in our legal documentation in assisting a financing transaction, except for the imposed UN/EU sanctions related to the war in Ukraine.

The Bulgarian law does not provide for any rules for limitations of the amount of the interest rate/amount for the business sector. The interest over interest (anatocism) shall be due if agreed between the parties.

There are some specific restrictions in the CCA for the determination of the upper limit of the interest rate/amount.

There are no rules and/or laws regarding disclosure of certain financial contracts, save for the reporting obligations of public companies, banks, insurance companies and pension funds which are obliged to provide the respective regulatory authority with certain information when executing specific transactions.

The Bulgarian AML legislation imposes certain thresholds above which a declarative regime applies and the involved parties must fill in and provide declarations and supportive documentation proving the source of income of the funds concerned.

Further, the Bulgarian Currency Act requires foreign lending exceeding BGN50,000 to be declared before BNB for statistical purposes.

The payments of principal and interest under domestic loans are not subject to withholding tax in Bulgaria. Such payments, however, will have to be considered for the purposes of calculation of the corporate income tax of the lender.

Some specific rules might apply to cross-border loans (treaties for the avoidance of double taxation, specific requirements of the relevant tax authority where the lender/borrower has tax residency).

Local companies are subject to corporate tax on their worldwide income and capital gains. Foreign companies incorporated outside Bulgaria, but carrying out business activities in Bulgaria, are liable to tax on income arising in Bulgaria.

In Bulgaria, transactions with financial instruments are exempt from VAT. In some cases, state charges and notary fees might apply in case of providing a mortgage as security under the loan agreement. Real pledges, special pledges and other types of security should not trigger stamp duties.

There are no such tax concerns.

In terms of lending and/or M&A transactions in Bulgaria, the most commonly used security packages include pledge over shares, non-possessory pledge over the whole or part of the going concern (commercial enterprise) of the target company, and non-possessory special pledge over specific assets or bank accounts of the target company.

Depending on the type of company, there are different rules which should be observed in pledging the quota or shares of the companies. The pledge over quotas (equity stakes) in the Bulgarian form of a limited liability company should be executed by a written agreement in notarial form and should be also registered with the Commercial Register. The materialised shares in a joint-stock company are pledged by i) endorsement for pledge on the reverse side of the share certificate (most commonly on the reverse side on the interim certificate due to the rather slow and complicated procedure for issuing physical shares) or on the alonge to the share certificate, and ii) delivery of the shares. The share pledge should be also entered into the shareholders’ book for opposability against third parties. The pledge over dematerialised shares should be executed by a written agreement in notarial form and registered with the Central Depository. In Bulgaria, pledges over shares or quotas (equity stakes) are always combined with special pledge over receivables of the shares from dividends and liquidation quota. These special pledge agreements should be concluded in a simple written form and registered with the Central Register of Special Pledges (CRSP).

The special pledge over the whole or part of the going concern (commercial enterprise) of a company is another often-used instrument in large transactions in Bulgaria. As a legal structure, the pledge over the whole going concern of a company includes all rights, obligations and pool of factual relations. The pledge should be executed by a written agreement in notarial form and should be also registered in the Commercial Register together with all necessary written consents and other accompanying documents. Depending on the assets of the company, further secondary registration of the respective asset should be performed in the relevant register (eg, for real estate – the Property Register (PR), for trade marks – the Patent Office, for movables – the CRSP, etc). Naturally, as a security under the Bulgarian law, a standalone mortgage over real estate might be established. In practice, considering the relatively high costs for establishment of such collateral, borrowers prefer to provide a security pledge over the going concern or part of it, thus also involving the real estate as part of the assets.

Another standard security in Bulgaria is the special pledge over receivables. This pledge presupposes signing of an agreement in simple written form, registration in the CRSP and notification of the debtor under the pledged receivables. The pledge agreement should specify in detail the receivables subject to the pledge. The financial collateral pledge is also part of the security package in terms of financing projects. Typically, this type of security is provided to the lender (bank or financial institution) by the borrower by means of agreement in simple written form.

In Bulgaria, the concept of floating charge is, to some extent, recognised in the special pledge over the whole or part of going concern, where a pool of rights, obligations and factual relations (including all present and future assets of the company) is provided as a security.

Companies in Bulgaria can give downstream, upstream and cross-stream guarantees. These company guarantees are well known and widely used within the terms of various transactions. There are some restrictions, however, in issuing an upstream guarantee.

There is one criterion that should be observed, namely, the management of the company is obliged to act in good faith and in accordance with the law, the stipulations of the articles of association, and in the best interest of the company. Thus, when issuing one of the discussed guarantees, the management of the company should take into account the best interest and related benefits of the company.

The prohibition on financial aid is applicable only to joint-stock companies. The joint stock company could not grant any loans or guarantees for the acquisition of its shares by a third party. Such restriction does not apply to transactions concluded by banks or financial institutions in the ordinary course of their business, if some specific requirements are met. There are no such restrictions on the other commonly used form of legal entity in Bulgaria – the limited liability company.

There are no significant costs associated with the grant of security or guarantees for loan agreements. No specific prior authorisation or consent by a work council or similar body is required.

Depending on the type of the security provided, there are different formalities to be met in releasing the respective security. Generally, the securities are typically ancillary to the secured obligations and thus they are considered as automatically terminated upon full repayment of secured obligations. In such cases, there are no specific formal requirements to release the security. In practice, however, the market standards have imposed the requirement of specific confirmations (pay-off letters, repayment agreements, etc) on the full repayment, in addition to the legally required documentation. In other cases of non-possessory securities, there are different requirements for release of the provided security. Naturally, when the relevant pledges are registered in the local Bulgarian registers, there are formal requirements for their release/deletion, such as written consent in notarial form accompanied by other necessary documents which have to be submitted for purpose of the deletion. Usually, the parties submit all such documents under documentary escrow agreement to the chosen escrow agent (typically law firm, notary public or bank). 

The Bulgarian law follows the principle first come, first served, based on the date of establishment and registration, if necessary, of the security, unless registration procedure is completed and priming liens are established, as specified in 5.8 Priming Liens.

Loan subordination agreements are common in private project financings. Breach of the debtor’s obligation under such an agreement usually qualifies as an event of default and can lead to acceleration of the debt. However, such agreements are not enforceable in a bankruptcy procedure, where the ranking of the various types of creditors is determined by mandatory legal provisions.

Intercreditor agreements are also used. However, such agreements are not enforceable in a bankruptcy procedure, where the ranking of the various types of creditors is determined by mandatory legal provisions.

Pursuant to the COA (Article 136), claims secured by a pledge or mortgage (satisfied out of the value of the pledged or mortgaged property) are among the listed claims that shall be satisfied preferentially.

Regarding security by operation of law, Article 60, paragraph 4 of the Credit Institutions Act provides for the right of a creditor (which has the capacity of a credit institution) to establish a mortgage by operation of law on the immovable property which has been acquired in whole or in part against the funds subject to the bank loan.

Such a mortgage shall be established by a unilateral statement on behalf of the bank, which shall bear notarised signatures of the bank’s legal representatives and shall be registered with the PR. The characteristics and the legal effects of a mortgage by operation of law are identical to those of a contractual mortgage.

In order for the mortgage by operation of law to be valid, the application for its registration shall specify the identity of the creditor, the identity of the owner, the identity of the debtor, the property that is serving as a collateral and the amount and legal ground of the secured receivable.

The receivables of creditors having mortgages established in their favour are satisfied in the order of their entry in the PR, meaning that the first (earliest) registered mortgage has priority, and only after the receivables it secures are satisfied, may it proceed with the satisfaction of the receivables secured with mortgages entered thereafter.

Secured loans may be enforced in the event of default of the debtor, most typically in the form of delay in payment of the instalments in accordance with the repayment schedule, or other breach of contractual obligation, as provided in the contract.

Depending on the type and the subject of the collateral, the Bulgarian legislation provides for different methods and procedures of enforcement, which may or may not include a before-the-court phase.

Under the Bulgarian legislation, any clauses for direct out-of-court enforceability of the loan, even if the agreement bears notarised signatures, are not directly enforceable. 

Enforcement of Mortgages and Pledges

If the loan is secured with a mortgage or a pledge, the lender will need to obtain a proper enforcement title and a writ of execution, in order to initiate an enforcement procedure. The enforcement of such collateral is always conducted by an enforcement agent.

The Civil Procedural Code (CPC) governs order for payment proceedings, which is a simplified and faster procedure for obtaining a payment order and a writ of execution, where the payment order substitutes the final and enforceable court ruling as an enforcement title, and allows the lender to start enforcing its receivables before such ruling takes place. Within that procedure, the order for payment proceedings and the writ of execution are issued based on certain documents, the following of which are widely used in enforcement of secured loans:

• excerpt of the books of account of a bank accompanied by the document from which the receivable has arisen (the loan contract), along with the annexes thereto, and the applicable general conditions, if any;
• a notarial deed or another contract bearing notarised signatures; and
• a contract of pledge or a mortgage deed.

The order for payment proceedings is initiated by the lender and unfolds before the relevant court. The court conducts simplified revision of the documents and if they meet the legal requirements the court issues a payment order and the writ of execution. Upon obtaining the writ of execution the lender may immediately initiate an enforcement procedure. The debtor is notified of the procedure upon receiving an invitation for voluntary payment by the enforcement agent. If the debtor objects to the obligation, the lender will have to bring its claims before court, but the enforcement procedure will develop along with the court case. The enforcement procedure initiated in this manner may be suspended under certain conditions provided for in the CPC.

Enforcement of Special (Non-possessory) Pledge

The special pledge as a form of collateral is governed by the Special Pledges Act. The contract establishing the special pledge shall be registered with the CRSP or the relevant register depending on the subject of collateral. It may be enforced with or without the assistance of an enforcement agent upon decision of the lender. The enforcement of this type of collateral is not predisposed by obtaining a writ of execution by court, however, the following conditions have to be met: (i) the lender needs to enter into the CRSP a commencement of the enforcement regarding the pledged assets; and (ii) the lender needs to notify the debtor of the commencement of the enforcement. If the subject of the pledge is certain receivables of the debtor from third parties, the lender has to also notify them. The enforcement procedure may commence at the request of the lender on the basis of an excerpt from the respective register ascertaining the registered commencement of the enforcement regarding the relevant pledged assets. If the lender decides to enforce the collateral without the assistance of an enforcement agent, the lender shall appoint a depositary who shall collect the proceeds received as a result of the enforcement in a special bank account opened for this purpose, and will make a distribution of the funds.

The enforcement of special pledge may develop along with the court case on the debt.

Being an EU member state, Regulation (EU) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I) shall apply as part of the internal state legislation of Bulgaria. Pursuant to the Rome I Regulation the parties are entitled to make a valid choice of foreign law to govern their contractual relations and such choice will, in general, be upheld by the Bulgarian courts. However, there are certain exceptions, such as if the foreign law provisions contradict substantial Bulgarian policy rules, the court may not uphold the parties’ choice and may not apply the relevant foreign rule. Also, the Bulgarian courts will apply the Bulgarian law provisions which are considered to be of significant importance for the public interests of Bulgaria.

Contractual provisions for submission by a Bulgarian party to a foreign court are also valid, as far as they concern matters that are not outside the competence of the Bulgarian courts. 

Waiver of immunity clauses are also generally valid and are upheld by Bulgarian courts. The rule is that all assets owned by the debtor are enforceable. If the debtor is a natural person, there are some restrictions for enforcement over some assets and income up to a certain amount specifically listed in the CPC. However, if the debtor voluntarily gives some of those assets as collateral, the aforesaid restrictions shall be considered to have been waived by the debtor with respect to these assets.

Foreign court judgments are enforceable in Bulgaria without the necessity of revision of the merits of the case by the competent authority, however there are different procedures provided for recognition and enforceability depending on whether the judgment or award subject to enforcement is issued by court of an EU state or non-EU state.

With respect to court judgments issued by a court of an EU member state, Regulation (EU) No 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 (Brussels I) shall apply, meaning that such court judgments shall be enforceable without re-examination or re-litigation of the matters already adjudicated.

On the other hand, the procedure for recognition and admission of enforcement of a court judgment issued by a court of a non-EU state is governed by the Bulgarian Private International Law Code. Although the code expressly provides that the competent authority does not decide on the merits of the case, in this procedure the debtor has the right to invoke objections based on facts that occurred after the decision was issued, such as an expired statute of limitations term. The authority has the right to rule on these objections and if it decides to uphold them, it may refuse to allow the enforcement of the judgment. The same regime shall apply to arbitral awards originating from a non-EU state.

Under the Bulgarian law, any documents presented in court proceedings need to be accompanied by a translation in Bulgarian language. It is not mandatory for the translation to be made by a certified translator, however if the other party objects to the translation, the court will oblige the party, which initially presented the relevant documents, to present a new translation made by a certified translator.

There are also certain specifics in enforcement of consumer loans, where debtors are granted enhanced protection. The court is obliged to check ex officio for the existence of unfair terms in a contract concluded with a consumer. If the court detects such clause, it may deny the issue of a payment order and writ of execution. If, after the issuance of such order and writ of execution, the court receives an objection by the consumer that the receivable originates from an unfair clause the court may suspend the enforcement of the loan until a final enforceable ruling in favour of the lender takes place.

Last but not least, arbitration procedures against consumers may not be initiated by the lenders and all such disputes might be only addressed for resolution by the state courts.

Upon filing the application for opening of an insolvency procedure the statute of limitation term regarding the receivable, which served as grounds for the application, ceases, and the statute of limitations term does not run while the insolvency procedure is pending. However, the main consequences of the insolvency procedure are related not to the opening of the procedure, but to the issuance of a court decision whereby the debtor is declared insolvent. Upon such decision the following occurs.

• All of the debtor’s obligations become immediately due. All of the non-monetary obligations of the debtor are transformed into monetary obligations.
• A secured lender preserves its rights on the collateral.
• The court specifies the initial date on which the debtor has become insolvent. This date is of great importance for the possibility for some transactions concluded by the debtor before the opening of the bankruptcy proceedings to be cancelled and some assets that the debtor disposed of to be returned to the bankruptcy estate.
• The court imposes precautionary measures over the entire property of the debtor.
• The court appoints a trustee of insolvency to supervise the activity of the debtor and to manage the bankruptcy estate. The bankruptcy estate is formed by all of the debtor’s assets available at the time of opening the insolvency procedure. Some assets that have been passed by the debtor after the initial date of insolvency, or within a certain period prior to that date, may be returned and included in the bankruptcy estate upon successful claims initiated by the trustee of insolvency. Upon declaring the debtor insolvent, any new commercial contracts and deals may be concluded only upon permission of the trustee of insolvency and in line with the precautionary measures imposed on the debtor’s property. However, if the court decides that there is a risk that the debtor will dispose of its property, the court may deprive the management bodies of the debtor of their right to manage and represent the debtor, and order that the debtor shall be managed and represented solely by the trustee of insolvency.
• All creditors are obliged to claim their receivables before the bankruptcy court within an overall period of three months as of announcement in the Commercial Register of the court decision for opening bankruptcy proceedings. The statute of limitation regarding each receivable ceases upon claiming the receivable before the insolvency court.
• Any receivables that remain unclaimed and any rights that remain unexercised within the course of the bankruptcy proceedings are deemed to be extinguished.

Upon opening of bankruptcy proceedings, any pending judicial and arbitration proceedings in property, civil and commercial cases against the debtor are suspended, with certain exceptions provided for in the law. Initiating any new judicial or arbitration proceedings in property civil or commercial cases against the debtor is inadmissible after the opening of bankruptcy proceedings, except for protection of the rights of the third parties who are the owners of movables or real property included in the bankruptcy estate, labour disputes, and monetary claims secured by the property of third parties.

Pursuant to the Commerce Act (CA), the creditors of the insolvent debtor are classified in several ranks, as their claims are satisfied from the amounts received from liquidation of the bankruptcy estate, in the following sequence:

• receivables secured by a pledge, mortgage, lien or foreclosure, entered in accordance with the Special Pledges Act – from the amount received upon realisation of the relevant specific collateral;
• receivables for which the right of retention is exercised – from the value of the relevant property;
• bankruptcy costs;
• receivables arising from employment relationships that arose prior to the date of the decision to open bankruptcy proceedings;
• alimony payable by law by the debtor to third parties;
• public receivables of the state and municipalities, such as taxes, duties, fees, mandatory insurance contributions and others, which arose before the date of the decision to open bankruptcy proceedings;
• receivables that arose after the date of the decision to open bankruptcy proceedings and are unpaid on maturity;
• the remaining unsecured claims that arose before the date of the decision to open bankruptcy proceedings;
• claims for legal or contractual interest on an unsecured claim due after the date of the decision to open bankruptcy proceedings;
• claims for credit granted to the debtor by a partner or shareholder;
• receivables under a gratuitous transaction; and
• the expenses of the creditors in connection with their participation in the bankruptcy proceedings, with certain exceptions.

When the funds are insufficient to fully satisfy all the claims, they are distributed proportionally among the creditors included in the relevant rank of order.

Usually, the insolvency procedure is time consuming and may take anywhere between a year-and-a-half and several years, meaning that the eventual satisfaction of the lender’s receivables is often significantly delayed. Satisfaction in full of all claims is rarely reached, however, pursuant to the CA, the secured lenders are classified as first rank creditors and are satisfied by privilege from the amounts accumulated from enforcement of the relevant collaterals. This makes their chances to collect a significant part, or even all of their outstanding receivables considerably better than the other ranks of non-secured creditors. The secured lenders also participate in the distribution of amounts accumulated from the enforcement over the assets included in the insolvency estate, other than the collaterals, ensuring their receivables, but as unsecured creditors of the rank of remaining unsecured claims that arose before the date of the decision to open bankruptcy proceedings.

The CA provides for the following procedures for preventing the debtor from becoming insolvent or if the insolvency is already a matter of fact, for recovery of the debtor and overcoming the bankruptcy.

Restructuring Proceedings (RP)

Effective as of 1 July 2017, the CA provides for RP for merchants who are not bankrupt, but are in imminent danger of bankruptcy. The procedure aims to avoid the bankruptcy. It starts voluntarily upon the debtor’s application to the relevant court. Along with the initiating application, the debtor is required to present certain documents on its activity and financial state, including a restructuring plan containing suggestions on restructuring the business of the debtor, and the manner, terms and conditions for repayment of its liabilities. The debtor also provides a list of all of its creditors, including those in favour of which the debtor has established collaterals in order to guarantee a third party’s liabilities. The list contains detailed information about the debtor’s obligations, and the collaterals granted. The debtor shall apply market evaluation of the non-monetary obligations. The main legal effects of the proceedings are as follows.

• Upon opening the RP, all pending enforcement proceedings against the debtor are suspended, as is the initiation of new enforcement proceedings (EP), and the entering a commencement of the enforcement in the CRSP pursuant to the Special Pledges Act, is prohibited. An exception is a new EP regarding claims of workers and employees of the debtor.
• Upon opening of the RP, the limitation term for all obligations of the debtor is considered suspended.
• As of the initiation of the RP, the merchant may not make any payments on any outstanding payables, arising prior to the date of initiation, except for public receivables such as taxes or mandatory social security contributions on behalf of its workers or employees.
• All of the non-monetary obligations are transformed into monetary obligations.
• The commercial activity of the debtor is placed under the supervision of an appointed-by-court trustee. If there is a risk to the creditors’ interests, the court may restrict or suspend the merchant’s right to manage and dispose of its property, and grant this right to the trustee.
• The restructuring plan endorsed by the court is binding for the debtor and the creditors having receivables arising prior to the date of the decision to endorse the plan. The plan shall have no effect for any creditor, who has not been included in the list of creditors or has not been provided with the opportunity to vote for the acceptance of the plan. All receivables included in the restructuring plan shall be transformed as provided for in the plan.
• Any creditor, who has not received full or partial performance in accordance with the plan is entitled to enforce its receivable. In this case the transformative effect of the plan with regard to the rights of such creditor shall be retroactively cancelled and the creditor may collect the outstanding part of its receivable.

Administration of the Enterprise Proceedings

The aim of this procedure is to give the debtor the opportunity to overcome the state of insolvency and to avoid termination of its activity and its deregistration as an entity. The proceedings may be initiated by the debtor, the trustee of insolvency, certain groups of creditors, certain groups of shareholders or 20% of the employees of the debtor, by suggesting an administration plan, containing suggestions for deferral or rescheduling of payments, partial or full discharge of the payables, reorganisation of the enterprise of the debtor, or reorganisation of the performance of other actions or transactions. Such plan may be proposed within a one-month term as of the announcement of the court resolution for approval of the final list of the creditors in the procedure of insolvency and may provide for establishment of supervision authority on the activity of the debtor. The main legal effects of these proceedings are as follows.

• The approval of the administration plan of the court terminates the insolvency procedure and establishes the supervision authority, proposed with the plan.
• Upon final approval of the plan the receivables of the creditors are finally transformed in accordance with its provisions.

If the debtor does not fulfil its obligations under the plan, the creditors whose receivables have been transformed with the plan and who represent not less than 15% of the total amount of claims against the debtor, or the supervisory authority, may request the reopening of the bankruptcy proceedings without necessity of proving that the debtor is insolvent or over-indebted.

Undertaking another recovery procedure is permitted.

The most significant risks for the lenders arising from the possible insolvency of the debtor or the guarantee provider are:

• if the insolvent debtor does not have enough assets to even cover the cost of commencement of the insolvency proceeding, the latter will be suspended. If, within one year of the suspension, none of the creditors of the insolvent debtor pays the costs necessary for the proceedings to commence, the proceedings will be discontinued;
• if a lender misses the term to bring its claim before the insolvency court the lender may lose it as it shall be considered extinguished; and
• the eventual satisfaction of the lender’s claims is always at risk of being delayed and rarely repaid in full.

A specific set of rules in relation to project finance does not exist, and the field is regulated by the general provisions of the Bulgarian and the EU law.

Project finance is primarily used for funding private projects in the field of renewable energy (mostly photovoltaic power plants) and commercial/residential real estate. Funds are provided by banks in the form of long-term, debt-financing special purpose vehicles (SPV) owning the assets provided as collateral. The financial self-participation of the investor versus the bank financing is usually at 40:60 or 30:70 ratios. The public infrastructure is predominantly funded by the state via EU funds, EU institutions, inclusive EBRD, and through public procurement road and railroad construction to a lesser extent, government concessions in regard to resource extraction, airport and port operation management, utilities and municipal transportation.

In 2013 the Public-Private Partnership Act (the “PPP Act”) came into force, providing special rules for PPP transactions in Bulgaria and making a clear distinction between a PPP and a concession. In 2018, the PPP Act was revoked and replaced by the Concessions Act (CA) in line with the concession’s legislation at EU level (Directive EU/23/2014). As of 2018, the concession is defined as a “PPP whereupon an economic operator executes works or provides services awarded by a contracting authority and/or by a contracting entity by way of a works concession or a services concession”, putting a mark of similarity between concessions and PPP.

The CA distinguishes three types of concessions (PPP).

• Construction concession – previewed for the construction of public asset(s), through which the public service shall be delivered.
• Service concession – envisages the provision, operation and management of one or more public services (other than construction) by a private partner.
• Sectoral concession – a newly introduced form, constituting the award to a private partner to carry out a particular economic activity related to the supply and operation of fixed networks for natural gas, heating, electricity, or the provision of a service to the public in the field of transport and postal services, exploitation of geographical area for the purpose of extracting oil or gas and exploring for, or extracting, coal or other fossil fuels as well as the provision of airports and maritime or inland ports or other terminal facilities.

PPP/concessions transactions may be carried out as a contract between the public partner and the private partner, via SPV set up specifically for the implementation of the project or as an institutionalised PPP, where the ownership of the company carrying out the project is shared between the public and the private entities.

Based on the contracting authority, the CA previews state concessions (in this case the authority is the Council of Ministers; the approval of the Parliament is required in case of provision of state guarantees) and municipal concessions (where the authority is the Municipal Council).

Under the Bulgarian law, the operational risk is transferred to the private partner, however, the private partner disposes of the right to collect revenues from the provided public service. Depending on the specific public assets or services awarded through PPP, other sector-specific legislation may apply.

In case of funding a private project, the Bulgarian authorities and courts would recognise a choice of a foreign law clause in the contract. Nevertheless, the court will apply mandatory rules under the Bulgarian law and the public order provisions.

In respect to the Bulgarian International Private Law Code and the relevant EU regulations, there are no obstacles for the parties to choose a foreign jurisdiction, except in the case of disputes related to immovable property, in which the principle of the “law of the place where the property is situated” applies (lex loci rei sitae). Subsequently, the Bulgarian law will apply in cases of enforcement of real estate collaterals (mortgage/special pledges).

In projects finance, where public authorities are the contracting party, the law does not explicitly mandate the choice of law, as the parties have the freedom to choose it. Nevertheless, in the implementation of regulated activities (construction, natural resources, energy, etc), the relevant mandatory provisions of the Bulgarian legislation must be observed and applied.

There is a clear distinction regarding property rights if the foreign individual or foreign legal entity has its domicile/seat in an EU/EEA state, or a third country.

All foreign citizens and foreign legal entities may acquire ownership rights and limited real rights over buildings (both residential and commercial) as well as limited real rights over land plots (right of superficies, servitude rights, etc) and land plots serving as accessory property for a building.

Regarding acquisition of land plots and in respect of the Treaty of Accession of Bulgaria to the EU, EU/EEA citizens and legal entities can acquire non-agricultural land plots without restrictions. To be able to acquire agricultural land plots, EU/EAA citizens must reside on the territory of Bulgaria for at least five years prior to the acquisition transaction.

Third-country nationals could acquire land exceptionally on the basis of an international treaty ratified and entered into force. At the time of writing, no such treaty has been signed between Bulgaria and another country. In addition, there is an explicit prohibition for non-EU/EEA citizens and Bulgarian companies, owned by third-country nationals, to acquire or own agricultural land plots. If a person, who does not meet the requirements to own certain land plot, inherits one, that same person is obliged to sell it to another eligible one, within three years of the succession.

The main points, which might be a prerequisite for structuring a project finance transaction, include the following.

• The financial structure of the deal regarding the financing of the project – ie, especially if funds provided by the bank/financial institution involve debt financing, equity financing or debt/equity financing. If the latter two are involved the bank will be directly involved in the implementation of the project, which might complicate the deal.
• Essence of the deal – depending on whether the deal is a transfer of shares or acquisition of a real estate asset (transfer of in rem rights) the latter will require the general rules regarding property and ownership rights in Bulgaria to be applied.
• Administrative burden related to the issue of complex permits – big, complex projects might presuppose granting approvals from several authorities on a national and local level (in different fields).
• General social and political risks, most notably issues related to the protection of environment – specific for Bulgaria in recent years has been the organisation of local referendums on granting of concessions and exploitation of natural resources and the implementation of large infrastructure and energy projects.
• General risk from an economical and financial point of view – for example, default/bankruptcy of the debtor, or abrupt change in the economic conditions.

The long-term policy of the authorities is to continue to encourage foreign investments in Bulgaria. In 2022, foreign direct investments (FDI) grew by 50% year-on-year. In respect to the national and EU rules, a general distinction between EU and non-EU investors exists. Taking into account that Bulgaria is a part of the EU and part of the European Single Market, FDI from other EU member states is considered to be facilitated by the principle of free movement of goods, capitals, services and persons.

Two forms of legal entities are usually used for project companies in Bulgaria – OOD (limited liability company) or AD (joint-stock company). Both provide limited liability of the shareholders to the amount of their monetary or in-kind contribution. In respect of company governance, an OOD can have one or more managing directors, assigned with the day-to-day management, while an AD could have a one-tier system (board of directors) or two-tier system (management board and supervisory board). AD has more flexible rules for the transfer of shares, as the OOD would require the acceptance of a new shareholder by the general meeting of the company.

The most common source of financing is debt equity financing by banks or by private equity funds. Some local, large-scale projects are being financed by EU funds, European Investment Bank, EBRD and the Bulgarian Bank for Reconstruction and Development. In some cases bond issues are used.

Natural resources are the exclusive property of the state. The state exercises sovereign rights to the continental shelf (coastline) and within the exclusive economic zone, the exploration, development, exploitation, protection and management of biological, mineral, and energy resources of maritime spaces.

The state can award concessions for these items and can grant authorisations for the performance of activities where these are specified and regulated by law (for example, the subsurface resources extraction concession can be granted under the terms of the Subsurface Resources Act).

There is no legal restriction on a foreign company participating in a concession procedure. Still, specific licences and authorisations might be required.

The main environmental, health and safety rules are issued on a national level in respect to the particular EU directives, recommendations and sustainability targets. The respective national and local authorities oversee and control the implementation of the rules. 

The following legislative acts regulate different aspects of environmental, health and safety-related activities:

• Environmental Protection Act;
• Liability for Prevention and Remedying of Environmental Damage Act;
• Climate Change Mitigation Act;
• Biodiversity Act;
• Water Act;
• Clean Ambient Air Act;
• Soils Act;
• Waste Management Act; and
• Safe Use of Nuclear Energy Act.

The Ministry of Environment and Water is the main actor regarding environment, health and safety laws as it develops and implements the state environmental policy, including preparation of legislative acts (legislative initiative), strategic planning – elaboration of national plans and strategies, as well as implementation of sector policies – water, waste, climate, air, etc – regulatory and control functions for prevention of pollution of the environment.