Bulgaria: Selected Issues Paper

Abstract

Bulgaria: Selected Issues Paper

Using Data to Assess the Efficiency of the Insolvency and Enforcement System in Bulgaria1

A. Background

1. An efficient debt resolution framework is an important element in addressing the high levels of debt in Bulgaria. While there has been some progress towards reduction of bad debts, banks report continued challenges with resolving the non-performing loans generated from pre-crisis credit exposures. Corporate NPLs represent the highest proportion of bad debts, significantly exceeding that of households (see Figure 1). High private sector indebtedness weighs on the Bulgarian economy and investment (see Figure 2). Institutional, legal, and market factors are all cited as factors contributing to the slow pace of debt resolution. Effective insolvency and debt enforcement frameworks are a necessary element to address high levels of private debt and the negative consequences of debt overhang.

Figure 1.
Figure 1.

NPLs in Bulgaria in % of Total Loans (as reported by the Bulgarian National Bank) 1/

Citation: IMF Staff Country Reports 2016, 345; 10.5089/9781475552492.002.A004

1/ Note that Q1 and Q2 ratios of 2015 are seriously affected by the new definition of NPLs applied as part of the EU harmonization of regulatory and financial information of credit.
Figure 2.
Figure 2.

Non-Financial Corporate Debt of Bulgaria as Compared to Selected Neighbor Countries

Citation: IMF Staff Country Reports 2016, 345; 10.5089/9781475552492.002.A004

Source: Eurostat

2. Debt resolution through judicial proceedings is generally perceived as lengthy and unpredictable. Inconsistent judicial practices often lead to high uncertainty and unpredictability of litigation outcomes. Some stakeholders also voiced concerns related to integrity of the judiciary. The high workload of certain courts, such as the courts in the Sofia district, translates into significant backlogs and delays. At the same time, in the absence of specialization in commercial matters, the lower provincial courts suffer from the lack of experience in adjudicating business disputes.

3. Some critical deficiencies in the insolvency system remain unresolved. As discussed in earlier Article IV staff reports for Bulgaria, the insolvency framework contains a number of gaps. While the latest 2013 reform has introduced a number of improvements, it did not fully address the existing problems2. The deficiencies commonly pointed by legal experts and market participants include:

  • (i) Wide-spread perception of the insolvency system as a vehicle used by debtors to evade obligations. Practices of forum shopping and claims fabrication are common and often result in allowing fictitious and/or related parties’ creditors to take control over the insolvency process;

  • (ii) Cumbersome requirements and lengthy procedures associated with the initiation of insolvency cases. For instance, the state of insolvency often has to be confirmed by an expert opinion due to the lack of insolvency presumptions; and filing by multiple creditors complicate the processing of the case;

  • (iii) Absence of an adequate framework for business restructuring, which in turn disincentivizes timely insolvency filings;

  • (iv) Lack of adequate rules on the stay of creditor actions and protection of post-petition finance undermining the possibility of reorganization of enterprises;

  • (v) Inefficiency in the procedures of verification of creditors’ claims. The inclusion of fabricated claims in the debtor’s filings, and further litigation on the formation of the list of claims significantly delay insolvency processes;

  • (vi) Lack of clarity in the interpretation of the rules on avoidance actions. The risks of nullifying legitimate transactions entered into in the period preceding the insolvency declaration pose impediments to lending to companies in financial difficulties; and

  • (vii) Weak adherence by courts to the procedurally prescribed deadlines. Lack of application of procedural deadlines combined with multiple disputes and appeals within the insolvency procedure, creates long delays, undermining credit recovery through insolvency processes.

The system for the individual enforcement of debts also faces some challenges. The enforcement system is based on judicial processes and the intervention of bailiffs (except for special pledges, which do not require a judicial decision for their enforcement). Market participants have raised the issue of the burdensome costs of debt enforcement: filing a debt claim in Bulgaria is subject to the upfront payment of a court fee of two percent of the claim, which is accompanied by another two percent fee in case of contested procedures. Objections and appeals are frequent, and this results in longer delays of the recovery of claims. Small and medium-sized enterprises (SMEs) in need of collecting substantial claims are particularly affected by such costs which, combined with the protracted time for litigation and the related legal and procedural expenses, complicate access to justice and the efficient recovery of claims. In addition, the enforcement of unsecured claims is subject to long delays. Mortgage enforcement seems marginally better; and the enforcement of special pledges is fast, but recovery rates are reportedly low, due to asset-stripping and dissipation of collateral. The extent to which market factors contribute to the slow pace of asset disposal and credit recovery is not fully clear. Stakeholders generally note the rebound in asset prices in Bulgarian central cities. However, weak market conditions appear to persist in rural areas.

B. The Importance and Multiple Uses of Insolvency and Enforcement Statistics

4. The relative impact of various deficiencies of the insolvency and enforcement system in Bulgaria would require a rigorous analysis of the data. The issues raised by the stakeholders point to a number of significant shortcomings of the system. Although there is broad consensus about the main problems and their negative impact, many claims relating to the inefficiency of the system cannot be backed by specific data. The lack of data impedes the effective measuring of the role and relative impact of different factors to the well-functioning of the system.

5. Bulgaria’s current statistical system does not allow a comprehensive analysis of the efficiency of the insolvency and enforcement procedures. Currently, Bulgaria has no reliable mechanism to measure the efficiency of the debt resolution framework and identify issues and bottlenecks based on actual performance data. At the court level, Bulgaria collects significant amount of data relative to different types of filed, ongoing, and closed cases. However, the use of such court-collected data is primarily limited to the monitoring of general workloads of the courts. The National Statistics Institute (NSI) also collects a substantial amount of data on insolvent corporates via the Trade Registry but does not publish or use this data in any analytical work.

6. Refining the methods for data collection and analysis could bring significant benefits. In order to enable a comprehensive assessment of the efficiency of insolvency and enforcement procedures, a more granular data collection is required. Availability of data could bring more clarity to the issues affecting the credit recovery process, which in turn could guide and inform targeted reforms of the legal and institutional framework, and also assist in the design of supervisory and regulatory actions in the banking sector.

7. Depending on the objectives pursued, different systems for data collection and analysis can be considered. The definition of clear objectives of data collection should determine any design considerations. Different models and methodologies for data collection used by countries also heavily depend on domestic specificities. The information related to the insolvency and enforcement system can be organized according to different methods, to serve different purposes: (i) general statistics on the number and type of insolvencies and mortgage foreclosures to monitor general economic trends; (ii) data collection focusing on the financial credit recovery mechanisms could provide a targeted assessment of the key issues faced by the banking sector in the context of NPL resolution; and (iii) data measuring the duration and costs of insolvency and debt enforcement proceedings, for the continuous assessment of the efficiency of the insolvency and enforcement system. These three approaches are discussed in greater detail below.

I. General Statistics on Insolvency and Enforcement

8. General statistics on insolvency allow for the continued monitoring of trends in the economy. Collection of statistical data on insolvency processes represents a widespread practice in advanced economies. Virtually all developed countries collect and publish insolvency statistics for the purposes of basic economic analysis. There are different models for the collection, elaboration and dissemination of general insolvency statistics (see text box below). The most common methodological approach is to rely on the collection of data by the courts, business registries or insolvency supervisory agencies. The data are then compiled by the national statistics agency. The degree of detail of these general statistics is variable, but at the very least, countries publish information about the global number of insolvency processes that have been initiated in the course of one year.3 A regular (i.e. year to year) comparison in the numbers and types of the newly initiated insolvency cases serves as a useful indicator of the evolution of the economic situation in a given country.

9. Bulgaria already disposes of efficient venues for data collection within the current system. Bulgaria’s NSI collects a significant amount of information related to corporates, including insolvency related information, via the Trade Registry. In particular, the information on the size of companies, number of employees, age of the enterprise, economic sector and region is already at the disposal of the NSI. However, the NSI does not publish any such data or conduct a basic economic analysis based on the information received.

10. Enabling the periodic aggregation and analysis of general insolvency statistics would contribute to a more effective monitoring of macro-economic trends. Using the current system of data collection, the NSI could provide for periodic publication of insolvency data which may usefully include: (i) number of newly filed insolvencies per period; (ii) number of pending insolvency cases; (iii) breakdown of insolvency filings by region, economic sector, size (e.g., by assets and turnover), and age of the company, and (iv) analysis of trends and any significant variation from period to period. Considering that the relevant data is already collected within the existing framework, their periodic publication (e.g., quarterly, semi-annual, or annual) would require only minimal costs while bringing potentially important synergies. Such statistics would provide useful information on the general health of the economy and sectorial vulnerabilities, and can assist in guiding policy priorities.

Comparison of Select Systems of General Statistical Data on Insolvency

  • Germany: The Statistics Agency (Destatis) collects and publishes insolvency data monthly, distinguishing between enterprises/consumers cases and providing year-to-year variation and estimated amount of claims.4 The methodology is based on the monthly submission of data by the courts to the different states. The data are then compiled at the federal level by the Statistics Agency.5The courts are obliged to submit information to the statistical offices of the Länder on the opening of the proceedings; the manner in which the opened proceedings have been terminated; the size of the claims determined and on the proceeds from the realization of the insolvent’s property; and whether or not the residual debt has been discharged.

  • France: The Bank of France collects and publishes monthly data on enterprise insolvencies, including year-to-year variation, economic sector, segmentation between SMEs, and large enterprises; and percentage of claims in insolvency as of the total of exposures declared by banks in the credit registry (central des risques).6 The methodology includes criteria to determine the size and sector of the enterprise, as well as total exposures. The existence of multiple procedures to address enterprise insolvency (redressement judiciaire, liquidation judiciarie, procédure de sauvegarde) requires that all the different insolvency procedures are covered, and that cases where an enterprise undergoes two successive procedures are treated as separate.7

  • England and Wales: The Insolvency Service produces quarterly insolvency statistics with a breakdown between enterprises and consumers; types of procedures used; and industry classification.8 The methodology is based on collection of the data from the Companies House and from the Insolvency Service itself (for compulsory liquidations). The Insolvency Service performs standard validation checks. The raw data are then tabulated by case type, industry classification, and the year and calendar quarter of the case start date. There is a need for some adjustment due to the time lag between initiation of the case and registration with the Companies House.

  • Spain: The National Statistics Agency collects and publishes insolvency data quarterly, with distinction between enterprises and consumers, type of initiation of the process (creditor-initiated and debtor-initiated), ordinary procedures and simplified procedures, legal form of the enterprise, economic sector, variation quarterly and yearly, size of the enterprise, number of employees, years in operation, region, and presentation of a plan proposal with the initiation of the procedure.9 The methodology is based on a standardized form that includes the following variables: number of bankruptcy proceedings presented at the court; number of bankruptcy orders (number of bankruptcies notified); tax identification number of the company declared bankrupt; type of procedure (ordinary/abbreviated); type of bankruptcy (voluntary/necessary); existence of anticipated proposals of agreement (Y/N); content of the proposal (debt reduction, rescheduling, arrangement with creditors, or another proposition);active mass of the company declared bankrupt (assets); and passive mass of the company declared bankrupt (liabilities).

11. Additional consideration could be given to the elaboration of mortgage foreclosure statistics. Such data, when collected continuously, are useful for monitoring developments in the real estate market; and are also used for social policy analysis. Spain provides a useful example of collection of statistics on mortgage foreclosures. The data are collected through the real estate registry at the stage of the initiation of enforcement proceedings and published quarterly, indicating the yearly variation, and disaggregated in residential and non-residential mortgages. The data on mortgage foreclosures could be further categorized by size/type of properties, country regions, time which took to finalize the property sale since it was first offered, and discount from original price. These specific data are helpful not only for the analysis of the real estate market trends but also an efficiency analysis of the enforcement regime (see below). The costs and complexity of setting-up such a system in Bulgaria require further analysis. Unlike the collection of insolvency-related data, the collection of foreclosure data in Bulgaria is not centralized and thus would be more difficult and costly to introduce this system in the short term.

II. Data Collection for Targeted Analysis and Assessment of Financial Credit Recovery Mechanisms

12. Data collection focused on financial credit recovery mechanisms is useful for assessing the specific impediments faced by banks in the process of NPL resolution. These data could enable the analysis of the relative use and economic efficiency of the different mechanisms used by banks to address NPLs. This, in turn, affords the opportunity of developing regulatory policies and supervisory actions adequately targeted to the problems affecting the behavior of banks as creditors.

13. The analysis of the efficiency of credit recovery is based on the fundamental indicators of time, cost, and recovery. The efficiency of credit recovery is measured, in the first place, by the time it takes to recover a claim. The cost of the use of credit recovery mechanisms represents the second consideration from the point of view of efficiency. Finally, credit recovery is determined by a number of different factors. In the case of secured credit, those factors are: the initial relation between the value of the loan and the value of collateral (over-secured, fully secured, or under-secured claims); the time and cost of the recovery mechanism; and the variations of value experienced by the collateral, due to depreciation, loss, or market trends.

14. Banks’ surveys are the most appropriate method for assessing the effectiveness of the NPLs resolution strategies. Data are collected through surveys among the banks, and can be compiled and treated by the banking supervisor. The advantage of surveys is that they can offer a complete picture of the methods used to deal with NPLs (for instance, by including informal restructuring agreements, and sales of NPLs) and allow comparisons of their relative use and efficiency. Surveys are also the best method to collect information about the cost that the use of each mechanism for credit recovery entails for the creditor. Finally, surveys also permit the inclusion of opinions, assessments, and other qualitative indicators. An example of the use of surveys for the purpose of assessing credit recovery mechanisms can be found in the recent survey conducted in Italy (see text box below).

15. However, the data collected through targeted survey presents some limitations. As the data are produced by the banks themselves, rather than by a neutral, public organization a natural limitation of this technique is that these surveys do not capture the functioning of the system from the perspective of non-financial creditors. In addition, the data may not even capture all the banking sector. Finally, surveys can be costly to replicate: the lack of continuity of surveys and the changes in the survey contents prevent the comparability of results over time.

16. In case of Bulgaria the banks’ survey approach could have benefits. In addition to enabling a focused assessment of the effectiveness of NPLs resolution, launching a banks’ survey could help raising awareness about the need for integrated databases for NPL management and allow banks an opportunity to review their established practices. If properly designed, the survey could create incentives for the systematic storage and periodic benchmarking of the relevant information on NPLs (including the debt collection activity), which in turn could contribute to improve internal control systems and NPL strategies.

17. At the same time, a comprehensive assessment of the efficiency of Bulgarian debt resolution regime requires a broader analysis. An effective assessment and monitoring of the overall efficiency of the system would need to take a more general view, and not be limited to the banking sector alone. In this context, and taking into account the importance of corporate debt, the approach based on a broad assessment of the insolvency and enforcement processes would be most appropriate.

Italian Banks’ NPL Survey

In 2015, the Bank of Italy conducted a survey on the efficiency of credit recovery procedures undertaken by 25 large banking groups in Italy, accounting for 78 percent of NPLs in the system. The survey was conducted via a questionnaire, which included:

  • Quantitative questions designed to obtain collect data on: a) characteristics of the various credit recovery and restructuring procedures (amounts involving in-court and out-of-court procedures, average age of the procedures at the end of 2014, collateral used); b) final recovery rate by different mechanisms used (e.g., out-of-court agreements, bankruptcies, arrangements with creditors, and foreclosures) and the percentage of initial credit recovered in each year after the procedure was started); and c) change in debtor company’s position in the four years following the start of the restructuring procedure.

  • Qualitative questions designed to seek banks’ opinions on factors negatively affecting the credit recovery process (e.g., court backlog, procedural complexity, lack of public creditors’ participation in restructuring, professionals’ fees, access to interim financing, and creditor coordination issues). Furthermore, the banks were asked for information on their internal organization and on credit recovery costs.

The results of the survey suggested the need for measures to shorten the procedures; and the desirability of regulatory changes that make it possible to close procedures formally. Furthermore, the survey revealed that the quality of the responses provided by banks occasionally reflected their lack of an integrated information system for NPL management, which in turn impacted the effectiveness of their respective NPLs strategies.

Source: Carpinelli, L, Cascarino, G., Giacomelli, S., and Vacca, V., 2016.

III. Statistics for the Assessment of the Efficiency of the Insolvency and Enforcement System

18. The analysis of the efficiency of the insolvency and enforcement system revolves around the basic concepts of time, cost and recovery rate.10 The measurement of the costs and recovery rates can present more practical complications than the measurement of time (see text box below), but time represents the most important indicator of efficiency of the system.

Measuring Time, Cost, and Recovery Rate in the Assessment of the Efficiency of Enforcement and Insolvency Procedures

Time: The appropriate way of measuring time would be from the formal initiation of the enforcement/insolvency process until credit recovery. The analysis of time in the process can be done at a much more detailed level, identifying the different phases of the process, including the delays derived from challenges and appeals inside the process. That analysis is especially helpful in identifying bottlenecks in the procedure. Furthermore, it may be possible to identify possible delays due to market factors, which may increase the time necessary for the sale of assets independently of the legal processes. Thus, distinguishing between time spent in legal proceedings and the time it takes to complete the sale of assets is important for the accuracy of the analysis of debt enforcement and insolvency.

Costs: The cost of debt recovery, as an indicator of efficiency, includes the global costs of the insolvency or debt enforcement proceedings. In the case of insolvency, the cost of the procedure can be reported as a percentage of the value of the assets/estate, and borne by all parties; the costs include court/bankruptcy authority fees, experts’ fees, asset storage and preservation costs, auctioneer fees, government levies, and other associated costs. In insolvency procedures, it is possible to measure the general costs of the process thanks to the widespread practice of keeping accounts reflecting the operations in the insolvency process, which are formally approved at the completion of the proceedings. These general costs do not reflect all the complexity of the issue of the costs supported by creditors: first, not all creditors bear the burden of costs proportionately and second, the analysis described before includes only the costs of the process, but it does not account for the costs incurred by creditors on account of their individual actions (for instance, costs of lawyers or consultants providing advice to the creditor). These costs are supported by each creditor and are not reflected in the documentation of the insolvency process. Finally, the analysis of the costs of the insolvency process must integrate a dynamic analysis of the insolvent business: if the business continues operating, it will generate revenue and additional costs, and both need to be included. On the other hand, measuring the costs of debt enforcement may be more straightforward, since the procedural rules allow the creditor to charge all its costs, so that the creditor recoups all costs in case that the recovery proceeds of the enforcement action are sufficient for this purpose. In this regard, the costs that represent a hurdle to the creditor are the upfront costs to initiate enforcement actions, which are generally easy to identify and quantify.

Recovery rate: The recovery rate is particularly difficult to measure as an indicator of the efficiency of the enforcement/insolvency system. In the analytical model of efficiency of insolvency and enforcement, the recovery for creditors is mainly determined by the time and cost of the procedures. However, the recovery rate depends on the initial proportion between the insolvency estate and the creditor claims, and, in the case of secured credit, on the relation between the value of the loan and the value of the collateral. In the case of complex insolvency procedures, the rate of recovery may also be affected by the continuation of the activity of the business of the debtor, the existence of post-petition finance, the treatment of executory contracts, and, ultimately, the preservation of the business as a going concern and the repayment of debts through the income stream generated by the business itself. In addition, the recovery rates may iciency of Enforcement and Insolvency Procedures be affected by the depreciation of the assets of the insolvency estate, or by losses (including asset-stripping).

19. The data collection has to be tailored to the nature of the processes and the peculiarities of domestic legal framework. Examples in comparative practice are limited. There is a general trend to make use of the data produced by insolvency systems, which may be collected through the courts’ statistics, the supervision regime of insolvency professionals, or the commercial registry. There is no standard or best practice in this area, but there are national models which include granular data and allow the elaboration of analytical work (see text box below on Spain and Australia). Recent reforms in countries like Latvia or Cyprus also took steps towards a more sophisticated use of statistical data to assess the effectiveness of the insolvency system. These statistics go beyond the usual scope of judicial statistics, and they represent a trend towards a better empirical analysis of the insolvency system to design targeted legal reforms. The lack of data for the design of reforms in insolvency and enforcement has been identified as a major weakness in the European context11.

Analysis of Insolvency Statistics in Spain and in Australia

Spain: Judicial statistics in Spain include information on insolvency processes collected and presented on a quarterly basis.12 The data include the number of insolvency procedures that are opened, the number of procedures closed for lack of assets (asset-less cases), and the milestones in the insolvency process (presentation of an insolvency plan, opening of the liquidation phase, initiation of a collective dismissal of workers, closure of the procedure). In addition, the data collected by the commercial registry (through the deposited accounts and other communications made by insolvent enterprises) allows for a granular and exact analysis of insolvency proceedings and insolvent enterprises. The analysis in Spain goes as far as to include a study of the financial variables of the insolvent companies, using the data included in the financial statements deposited with the commercial registry. These data go beyond the analysis of efficiency of the process, and could be used to check predictive models of insolvency of enterprises (Van Hemmen Almanzor, 2014).

Australia: In Australia, the Securities and Investments Commission (ASIC) prepares the general insolvency statistics. This is possible thanks to the supervisory role that ASIC has over corporate insolvency proceedings. At the same time, ASIC prepares a detailed analysis of the procedures. The Australian authorities compile exhaustive annual insolvency reports thanks to the compulsory filings that insolvency administrators need to submit. These data, arranged by economic sector and region, include: (i) size of the company; (ii) nominated causes of failure, (iii) possible misconduct and documentary evidence; (iv) assets, liabilities and deficiency; (v) unpaid employee entitlements; (vi) secured creditors; (vii) unpaid taxes and charges; (viii) unsecured creditors; and (ix) remuneration of administrators.

C. Developing a Model of Insolvency and Enforcement Statistics for Bulgaria

20. Bulgaria already has a system for the collection and production of judicial statistics; however, its use is currently limited to measuring the workload of the courts. Bulgaria, like most countries, collects judicial statistics to monitor the workload and general performance of its courts. These data are collected by the courts themselves, and statistics are compiled by judicial authorities. In the case of Bulgaria, judicial statistics are collected and published annually by the Supreme Judicial Council. As the current purpose of judicial statistics in Bulgaria primarily is to measure the courts’ workload, the statistics are of limited use for a comprehensive assessment of the efficiency of the debt enforcement and insolvency regime13.

21. The lack of granularity in the judicial data limits the usefulness of the statistics for the specific purpose of monitoring the efficiency of enforcement and insolvency processes. For example, Bulgaria’s insolvency-related statistics gathered by the courts currently include only the basic information on i.e., the number of cases pending at the beginning of reporting period, the number of new insolvency cases filed, the number of closed cases and the cases remaining at the end of the period. Furthermore, the statistics also provide for a three-year comparison of the number of judicial decisions taken in the context of different stages insolvency process (see Table 1, as published by the Supreme Judicial Council in its annual 2015 report).

Table 1.

Insolvency Statistics (Supreme Judicial Council of Bulgaria) Report on the workload of regional courts for 2015: Decisions on insolvency cases

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23. To allow the identification of specific bottlenecks, the data need to enable the measurement of the length of key procedural stages of enforcement and insolvency processes. In insolvency, the data useful for these purposes could include, among others, the following: (i) time to open the insolvency procedure, (ii) time for the approval of the list of claims; (iii) time for the satisfaction of secured creditors and for the full completion of the liquidation; (iv) overall time for the completion insolvency processes in cases of liquidation and restructuring, with the impact of appeals.14 All these additional and specific indicators could improve the accuracy of the analysis. The compilation of data could be done distinguishing by size (e.g., assets and employees) of enterprises so as to allow accounting for the different complexity in procedures affecting SMEs and larger corporates. The collected data also allows discerning the number of companies which entered the insolvency process with no assets. The system could account for the time spent in appeals at different stages of the process and attempts of restructuring prior to the initiation of liquidation, and can offer also a success rate in reorganizations, as opposed to liquidations, as the outcome of the insolvency process.

24. The Bulgarian insolvency process provides anchors that can be used to collect data to assess the efficiency of the system (see Table 2). The collection of data can be structured around points in the process that are relevant for the measurement of time (milestones), such as petitions, judicial rulings, and appeals. At the same time, there are also points in the process where substantive information is generated (data points), such as the production of the insolvency administrators’ report, or the submission of a reorganization plan. Both milestones and data points provide the anchors that would allow the identification of bottlenecks and the analysis of other problems and how they affect the functionality of the insolvency system. In particular, data points can be used to identify the petitioner of the insolvency case (the debtor, a financial creditor, the tax administration, suppliers, or workers), the causes for the insolvency of the enterprise (which are normally listed in the insolvency administrators’ report); the amount and classes of claims and the assets in the insolvency estate (these are included in the documentation submitted by the debtor, revised later by the insolvency administrator and approved by the court); and the amount of claims recovered (these can also be classified per category, and the information can be found in the accounts presented by the liquidator or in the contents of the reorganization plan).

Table 2.

The Insolvency Process in Bulgaria: Possible Milestones and Data Points

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22. The published data only allows discerning some trends in the workload of the courts in insolvency matters. Apart from that, the data raise more questions than answers and are not very useful for the assessment of the efficiency of the system. In particular, Table 1 shows a large number of assetless cases. In this context it would be useful to understand the duration of judicial review of such cases, as they in principle, should be promptly opened and closed rather than clogging the system. Separation of the assetless cases from others is also critical for a calculation of the average duration of insolvency proceedings to ensure the accuracy of analysis. Furthermore, it would be important to trace any delays in opening insolvency cases, which may be potentially connected with asset-stripping of the company and a subsequent closing of the insolvency due to the lack of assets.

25. In addition, it would be useful to collect data on the cost and recovery rate in insolvency proceedings. Recognizing the limitations in the objective measurement of the costs of insolvency processes through judicial data, Bulgaria may consider gathering basic information, such as the costs of the process as documented in the insolvency administrator’s reports.15 For credit recovery, it would be possible to collect information at the end of the insolvency process as compared to the total value of the assets estimated at the commencement and the total value recovered at the end of liquidation process. In Bulgaria this information is documented by the insolvency administrator and filed and stored both with the court and the Trade Registry. The aggregated analysis of such information could point to any systemic deficiencies in the initial asset valuation and value lost in the insolvency process, for different causes. Finally, the statistical system could collect information on the aggregate and median recovery in insolvency cases.

26. There are different possibilities for the compilation of the necessary insolvency data. The refinement of the current methodology of judicial statistics could provide a useful means for the collection and treatment of the data referred to insolvency processes. The Bulgarian insolvency framework foresees that all the acts related to an insolvency process should be included in a separate book at the court, which should be publicly available (art. 634 CA). The law foresees that this book can have an electronic format—which could particularly helpful for developing a more granular data collection system. There are also other alternatives: the main decisions of the insolvency process are recorded in the trade registry (arts. 623–624 CA), so the systems of the trade registry can also be used to collect and elaborate statistics. The Ministry of Justice, as the supervisor of the insolvency administrators, could also collect information relative to the insolvency cases through the establishment of information duties for the insolvency professionals. Finally, Bulgaria, as a member state of the European Union, should establish an insolvency register for cross-border insolvency cases, in accordance with the European Regulation on insolvency (see text box below). The establishment of this register offers another opportunity to set a modern and efficient data collection system. Given the need to coordinate efforts, it would seem appropriate to establish coordination mechanisms among the different authorities and agencies involved, possibly under the coordination of the Ministry of Justice, to produce insolvency and debt enforcement reports. The compilation and analysis of these data would result in a much more accurate picture of the insolvency and enforcement system, which could serve as the basis for future legislative interventions.

The Establishment of a National Insolvency Register According to the European Insolvency Regulation

The Regulation (EU) 2015/848 of the European Parliament and of the Council from May 20, 2015 on insolvency proceedings includes the obligation for member states to establish an insolvency register (art. 24). The national registers will be interconnected (art. 25).

The function of the register is to make publicly available information related to cross-border insolvency proceedings. According to the Regulation, the information needs to be published as soon as possible after the opening of such proceedings, and must include, among other data: (a) the date of the opening of insolvency proceedings; (b) the court opening insolvency proceedings and the case reference number, if any; (c) the type of insolvency proceedings; (d) if the debtor is a company or a legal person, the debtor’s name, registration number, registered office or, if different, postal address; (e) if the debtor is an individual whether or not exercising an independent business or professional activity, the debtor’s name, registration number, if any, and postal address or, where the address is protected, the debtor’s place and date of birth; (f) the name, postal address or e-mail address of the insolvency practitioner, if any, appointed in the proceedings; (g) the time limit for lodging claims, if any, or a reference to the criteria for calculating that time limit; (h) the date of closing main insolvency proceedings, if any; and (i) the court before which and, where applicable, the time limit within which a challenge of the decision opening insolvency proceedings is to be lodged.

These information items are mandatory and serve an important purpose for the protection of the interests of creditors in the European Union, but the Regulation also indicates that member states can include additional information or documents in the register. Therefore, each member state can decide whether to include additional information in its national system. This offers an opportunity for setting up a system that captures the relevant data for the analysis of the efficiency and performance of the insolvency system. The establishment of the register offers an opportunity to structure similar information for cross-border and national insolvency cases, also in view of new demands on insolvency statistics in other European instruments.

27. A comprehensive system should also include statistics on debt enforcement procedures. Although the procedures present significant differences from the legal point of view, it is entirely appropriate to analyze these different types of procedures together in order to assess the efficiency of the overall system of credit recovery. Creditors need to analyze different strategies for the collection of claims, depending on the availability of procedures, and on the relations with the debtor and other creditors. Insolvency processes are generally the last recourse and their use is relatively rare compared to the simple enforcement processes.

28. For the analysis of the efficiency of debt enforcement procedures the system must distinguish the different types and stages of enforcement. As procedures are different, distinctions should be made between the enforcement of different types of claim: mortgages, special pledges, and unsecured claims. In most cases, it will be necessary to distinguish the time it takes to complete the necessary judicial steps for enforcement, and the time it takes for the bailiff to complete enforcement until the creditor receives a payment. Time spent in different appeals within enforcement procedure should be calculated separately. In the cases of out-of-court enforcement (special pledge), only the bailiff’s intervention needs to be measured. At the completion of each enforcement action, it is possible to record the cost and the recovery for the creditor.

29. Given the diversity of actors involved, in the compilation of enforcement statistics the data collection needs to be centralized. Since enforcement can be partly under the umbrella of the judicial system, and partly under the action of the bailiffs, a complete measurement of the efficiency of the enforcement process in Bulgaria would require the combination of the data from the courts and the data relative to the action of the bailiffs. In this regard, the Ministry of Justice is in the position of obtaining information from the bailiffs, who are regulated and supervised by that Ministry, and also in the position of connecting the information obtained by the courts with that provided by the bailiffs. Considering that the main concerns reported by the market participants relate to the processes within the judicial system, the initial focus of the debt enforcement statistics could be on monitoring such judicial processes.

30. Continuous monitoring and periodic publication of enforcement and insolvency statistics could increase accountability16, predictability and confidence in the system. Enabling a comprehensive analysis of the efficiency of procedures, both at a national level and at the level of the different judicial districts, with the support of data could help to identify weaknesses both in the legal framework and at the institutional level. It would also allow a more targeted approach in further reforms, backed by a sound impact assessment of the proposed changes17. Furthermore, the added transparency regarding the functioning of the procedures could increase predictability and confidence in the system. Benchmarking the performance of courts with comparable case-loads would also help to shape measures to strengthen judicial specialization and optimize the allocation of cases. The analysis can contribute in significant ways to improve the effectiveness of the insolvency and enforcement system.

D. Conclusion and Recommendations

31. Building on its existing mechanisms for statistical data collection, Bulgaria should develop a mechanism for the continuous monitoring of the efficiency of the insolvency and enforcement system. To achieve these goals, two different approaches should be followed:

  • To enable a continuous monitoring of the trends in insolvency cases, Bulgaria should consider periodic publication of the data collected by the NSI aggregating such data along the categories of general number of insolvency cases newly filed, pending and closed, with the breakdown by economic sector, geographical region, and size of the insolvent company. These data would contribute to the analysis of macro-economic trends and could inform economic and social policy considerations.

  • To analyze and monitor the performance of the insolvency and enforcement system, Bulgaria should consider developing a mechanism for the continuous collection and analysis of data on duration, costs and recovery rate of different procedures of debt enforcement and insolvency. The analysis can vary in sophistication and granularity, and can be developed gradually by refining the current templates and methods for collecting and aggregating statistics on insolvency and debt enforcement procedures. The collected data should serve as the basis for the analysis and identification of bottlenecks and issues in the functioning of the system of debt collection. This analysis, in turn, can guide the, design of targeted reforms. Publication of the relevant data and its analysis both at the national and regional level (i.e., by court district) could help to increase transparency, improving the predictability of the legal and judicial system. Ultimately, the monitoring exercise should contribute to improve Bulgaria’s debt resolution framework, which would assist in addressing the high level of private sector indebtedness and would increase confidence in the legal system.

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1

Prepared by José Garrido and Natalia Stetsenko (both LEG).

2

It is understood that there is ongoing work on additional amendments to the insolvency framework which may address some of the identified weaknesses.

3

In the systems where there are both procedures for enterprises (including companies and individual traders) and consumers (i.e., individuals who are not traders), it is imperative to distinguish between these procedures to provide an accurate image of the situation, since each type of procedures corresponds with entirely different economic circumstances.

10

See Djankov et al., 2008. The conceptual analysis of the indicators of time, cost and recovery rate are at the base of the methodology of the Doing Business resolving insolvency indicator, although that indicator is based on the responses to a survey based on a standardized case scenario.

13

See the CEPEJ Guidelines for Judicial Statistics (GOJUST), 2008.

14

According to the statistics collected by CEPEJ (2016), 49 percent of decisions in insolvency procedures in Bulgaria are appealed.

15

As per article 733 of the Bulgaria Commercial Code the insolvency administrator is mandated to produce the reports on his activities and an account on the distribution of payments obtained as a result of liquidating the estate, and on the remaining outstanding claims.

16

The OECD suggests a correlation between the intensity of reporting and the duration of trials: the more statistics the shorter the trials. See OECD (2013), ’What makes civil justice effective?’, OECD Economics Department Policy Notes, No. 18 June 2013, at p.8.

17

Changes in the legal framework need to be reflected in the system for the collection of statistics: for instance, the introduction of a new pre-insolvency procedure, as foreseen in recent reform projects, will require to distinguish between pre-insolvency procedures and formal insolvency cases.

Bulgaria: Selected Issues Paper
Author: International Monetary Fund. European Dept.