Kolcheva, Smilenov, Koev and Partners Law Firm 23 years of perfection Significant changes to Bulgarian laws that have a material impact on foreign investments and banking operations in Bulgaria

Part One: The significant changes introduced to the Specific Pledges Act adopted with the Amendment and Supplement Act, SG No. 105/30 December 2016, effective 30 December 2016 WHAT is the SPECIFIC PLEDGE?

Amendments to Article 2: (1) Pledges shall be created by making an entry into the Central Pledge Register or another designated register on the basis of a registered pledge contract. (2) The registered pledge contract shall be in writing and if provided for herein - in writing with signatures verified by notary public. (3) The requirements to form referred to in Paragraph 2 shall apply for amendment of the registered pledge contract. Each and every consent of the pledge creditor shall be granted in writing with signature certified by notary public. When is the security in force/ when does a pledge effected? Requirement to form of contract – execution, amendment, consent of the creditor for deletion!

Amendments to Article 7, 8: (3) Any transactions of disposal of the pledged property, other than those specified in Article 7 (goods for sale in the ordinary business), shall require the consent of the pledge creditor, duly entered into the Central Pledge Register or any other respective register. (4) If the pledge creditor has not granted its consent under Paragraph 3, the acquirer’s rights to the pledged property shall be encumbered with the pledge and the acquirer shall be in the position of pledgor. This rule shall apply to each subsequent acquirer of pledged property, unless it is evidenced that such creditor has acted in good faith. Article 7 A pledge shall seize to exist if a third party acquires rights in the pledged goods incompatible with the pledge in a transaction professionally arranged by the pledgor acting within the scope of his business. A pledge may lapse? Then why does a creditor need a special pledge? Goods vs. inventory. Explicit consent of the creditor when the pledgor wants to make transactions with inventory! What if such consent is missing?

Problems and court practice when the prohibition has been breached! Amendments to Article 9 Art. 9 (4) The pledgor shall not dispose of any of the pledged property once commencement of foreclosure is entered. Transactions for disposal of the pledged property performed by the pledgor after enforcement is recorded are invalid in respect to the pledgee and the joint creditors under Article 40. When are transactions prohibited? Restriction on all properties – inventory and goods for sale. Problems and court practice when the prohibition has been breached!

Amendments to Article 10: Art. 10 (2) The pledge creditor can seek satisfaction according to the procedures in this Act: by selling the pledged property himself or according to the procedure of the Civil Procedures Code. Notice of foreclosure under the Civil Procedure Code at the request of the pledge creditor shall be effected on the basis of an extract from the respective register, proving evidence that a commencement of foreclosure in respect of the pledged property had been recorded. (5) The pledge creditor can at any time register the pledge against a third party which has acquired title to pledged property, unless the pledge has lapsed according to Article 7 (sale of goods in ordinary course of business). The choice of the pledgee regarding procedural rules New opportunity! The pledgee can register the pledge against the buyer

Amendments to Article 14: Art. 14 (1) The priority of registered pledges in the pledged property shall be determined by the sequence of registration. The consent of creditors whose pledge enjoys earlier entry in the register shall be necessary for the recording of each and every subsequent pledge on the property. This rule shall apply to the creation of a pledge on an asset falling within a pledged going concern under the term and conditions of Article 21 (3). FRAUDS WITH FICTITIOUS CREDITORS ARE PREVENTED

Amendments to Article 17: (3) The pledgor shall not have the right to dispose of or to pledge for a second time its pledged receivables without the consent of the pledge creditor. (4) Until the date of foreclosure commencement registration, the pledgor can collect the pledged receivables and their yields, unless otherwise provided for in the pledge contract. When the pledge contract stipulates a restriction on the debtor preventing from collecting pledged receivables or their yields, this restriction shall be listed in the notice to third parties obliged to pay in order to have effect on the debtor as regards the pledged receivables. (5) When an attachment is imposed on the pledged receivables prior to commencement of foreclosure by the pledge creditor according to the procedure of this Act, the pledge creditor shall satisfy its claims by joining the enforcement proceedings under which said attachment was imposed. Restriction for the debtor to collect the receivable!

Amendments to Article 21: (1) A going concern pledge contract shall be made in writing and signature of the parties thereto shall be certified by notary. This rule apples to decisions adopted according to Article 262 of the Commerce Act for creation of pledge. (3) A going concern pledge contract shall be having priority to third parties which have acquired rights in individual assets falling within a going concern, if the said pledge has been entered in the appropriate register for such assets as well. The provisions of Article 7 and Article 8, Paragraphs (3) and (4) shall apply accordingly. Resolution of shareholders is a mandatory condition to create a going concern pledge! The law does not require a inventory list of assets included in the concern anymore.

Amendments to Article 32: (4) The transactions of management and disposal of the pledged property concluded by the debtor after the record of commencement of foreclosure are not valid in respect to the pledge creditor and joining creditors under Article 40, who are satisfied from the proceeds from pledged property, despite the transactions made with it. (5) A creditor with a lower-ranking pledge can record a commencement of foreclosure only if higher-ranking pledge creditors give their consent. The signatures under the consents of pledge creditors referred to in the previous sentence shall be verified by notary public and entered in the respective register where the pledge has been initially recorded. (7) No commencement of foreclosure can be recorded by a creditor, whose pledge was registered after attachment on the property was recorded according to the procedure of this Act. The establishment of lower ranking pledges over the same property is practically useless. The pledge follows the property! The acquirer takes a risk if buying after registration of enforcement.

Amendments to Article 32a: (1) Pledged property, in respect of which foreclosure was directed according to the procedure of the Civil Procedure Code or the Tax and Social Insurance Procedure Code prior to commencement of foreclosure according to this Act, shall be liquidated by a bailiff or by a public bailiff. (2) Foreclosure according to the procedure of the Civil Procedure Code or the Tax and Social Insurance Procedure Code to property pledged under this Act shall not halt any foreclosure initiated under Article 32. Which procedure prevails?

Amendments to Article 35: (2) In case of a going concern pledge, a bailiff shall make sure the pledge creditor and the managing director designated by said creditor have possession of the premises where the enterprise’s business is located according to the procedure of Article 522 of the Civil Procedure Code and shall deliver the commercial ledgers of the pledgor to the pledge creditor. Whenever necessary, the enforcement agent shall take advantage of the rights under Article 431, Paragraphs 1 and 2 of the Civil Procedure Code. When foreclosure is directed at a real estate, which is part of the pledged going concern, the pledgee can request from the bailiff to be ushered into possession of the property according to the procedure of Article 522 of the Civil Procedure Code . Compulsory measures to put hand on the property! MOVABLE PROPERTY REAL ESTATE

Amendments to Article 37: (8) A sale made by the pledgee shall extinguish only the pledges created according to the procedures of this Act, whereas all remaining securities on the property sold and security measures imposed thereon, shall remain unaffected. Mortgage Prevails over Specific pledge The law does not take in consideration the time of establishment of each security – omission!

Amendments to Article 38 and Article 46: Art. 38 (1)Depository shall be appointed by the pledge creditor. He must be an attorney or a registered auditor. Art. 46 (5) Only an individual, who has graduated university education in economics or law and who has had no less than 5 years of experience in his field of expertise, can be appointed as manager of a going concern under Paragraph 4. The manager may not be the debtor or the pledgor, a creditor of the debtor or the pledgor, an affiliated aprty, nor a spouse or a direct relative without limitation, a collateral relative, or an in-law up to the third degree, of any one of the persons listed above. DEPOSITORY The attorney can be appointed as MANAGER of the enterprise as a going concern

Thank you for your attention! Mrs. Petya Kolcheva, Managing Partner Mr. Boris Elenkov, Partner Mrs. Dessie Alexieva, Senior Lawyer