How the National Assembly introduced a "dry regime" for the sale of commercial enterprises

1. The latest amendments to the Commercial Code and their true purpose

On 22 December 2017, the Law on Amendments and Supplements to the Labor Code (“LALC”) was promulgated in the Official Gazette No. 102 of 2017 [i]. Most provisions entered into force on the day of promulgation [ii].

It is evident from the LIACC itself that the real goal of the legislative initiative is not to amend and supplement the Labor Code, but to introduce changes to other laws, including the Commercial Law ("CL"), with transitional and final provisions, which would create special privileges for workers and employees at the expense of investors.

2. What are the changes specifically?

2.1.In Article 15 of the Commercial Code, a new paragraph 4 was created, according to which:an enterprise in which there are employed workers or employees may be transferred,after the alienator has paid the due wages, compensation and mandatory insurance contributions to the workers and employees.

The change made in this way not only creates unnecessary bureaucracy, but is also unnecessary, since the Commercial Code already contains Article 16A, which aims to protect the creditors of the transferor and the legal successor of the commercial enterprise (including workers and employees).

2.2. Even more unacceptable is the change in Article 129, paragraph 1 of the Commercial Code, which regulates the procedure for transferring shares of limited liability companies [iii].

Under the new rules, if a partner in an LLC wants to transfer his share, the company must not have:

• unpaid wages due;
• compensation; and
• mandatory social security contributions for workers and employees.

First of all, this change in the Commercial Code is in itself extremely unfair for the following reasons.

The partner, the commercial company – employer, and the employee are three different persons. The partner is neither an employer nor represents the company. He is an investor in this company. It is absolutely possible that the partner does not even have control over the company, since the only decision that the General Meeting of a limited liability company takes unanimously is the decision to increase or decrease the capital – Art. 137, para. 3, second sentence of the Commercial Code. All other decisions (amendment of the partnership agreement, admission of new partners, appointment of a manager, etc.) can be made with a majority of ¾ of the capital, even in some cases less.

In this way, the General Meeting even creates opportunities for abuse. Under the new rules, it is hypothetically possible, for example, for the majority shareholder to appoint the manager, who in turn would appoint the majority shareholder as an employee of the company and not pay him any remuneration. In this case, the minority shareholder, under the current rules, cannot in any way transfer his company shares and exit this company.

Furthermore, the principle is that one of the basic powers that is part of the right of ownership of anything (including a share in a company) is precisely the ability of the owner to dispose of his private property.

According to the new amendments, however, this is impossible if the company has obligations to its employee or the National Revenue Agency. This means that the rights of an investor (partner) are limited because another legal entity (the company – employer) has obligations to a third legal entity (employee or worker). In this way, the Civil Code actually creates a kind of liability of the partner for the acts of others in order to regulate special privileges for workers and employees.

2.3. The most significant problem in practice

The most significant problem is that proving the absence of all these obligations is virtually impossible for the following reasons. Although the Commercial Act does not specify the ways in which the absence of unpaid wages and benefits can be proven, the Registry Agency refuses to enter in the Commercial Register transactions in which these circumstances are proven by declarations of absence of obligations. According to a statement [iv] of the Registry Agency, this circumstance should be proven by certification, which should be carried out by the EA "General Labour Inspectorate". The latter body, however, refuses to issue such certificates, since according to its statement it has no right to issue such certificates [v] - classic paragraph 22.

It turns out that with its latest amendments to the Commercial Code, the Supreme Court has de facto banned the transfers of commercial enterprises or company shares of the most common commercial companies in the Republic of Bulgaria.

Therefore, even if a commercial company ("TC") is truly an absolutely decent employer towards its employees, the partner of this TC simply cannot transfer his company shares, because the General Meeting regulates obligations without regulating a procedure for their implementation.

3. Contract employees have sufficient privileges to collect wages owed

I believe that employees do not need in any way the new rules in the Commercial Code, which limit the rights of partners-investors. Employees, in fact, have a number of privileges over other individuals who work as freelancers under contracts for production and/or order:

• employees may terminate their employment contract without notice when the employer delays payment of remuneration or compensation – 327, para. 1, item 2 of the Labor Code;
• Claims for remuneration brought before the court are heard in special expedited proceedings – Art. 310, para. 1, item 1 of the Civil Procedure Code;
• in such a dispute, the employee/worker proves only the existence of an employment relationship (through the employment contract), with the entire remaining burden of proof (including non-performance of the contract) falling on the employer as an exception to the general principle that each party must prove the facts from which it derives rights – Art. 154, para. 1 of the Civil Procedure Code;
• workers and employees can easily obtain an enforcement order and a decree for immediate enforcement – Art. 417, item 8 of the Civil Procedure Code;
• the claims of workers and employees benefit from preferential satisfaction – Art. 136, item 5 of the Employment Contracts Act; and
• A special state fund, financed by the National Social Security Institute, has been established to guarantee the salaries of employees and workers in the event of the employer's bankruptcy.

I believe that given these privileges for employees under an employment contract, the new rules in the Commercial Code are absolutely unnecessary and only lead to new bureaucratic obstacles to doing business.

However, if the legislator believes that workers and employees need even greater legal protection, then it could:

• repeal Article 42, paragraph 1 of the Bar Act - so that lawyers who are specialists in protecting the rights of workers and employees can advertise their activities in this area and clarify the ways to resolve disputes with unscrupulous employers;
• repeal Art. 36, para. 2, clause 2 of the Bar Act, which prohibits lawyers from freely negotiating attorney fees with the workers and employees they defend, giving the Supreme Bar Council the right to establish mandatory minimum fees; and
• expand the hypotheses of Article 38, Paragraph 1 of the Bar Act so that lawyers, at their discretion, have the right to work pro bono, defending workers and employees against their employers.

4. The new amendments to the Commercial Code contradict the Constitution

In addition to the above, I believe that there are arguments in support of the thesis that paragraph 6 of the LIDKT, which precisely introduces the amendments to the Commercial Code, contradicts the constitution on two different grounds.

First, the changes made to the Commercial Code are not reflected in the original Draft Law on Amendments and Supplements to the Commercial Code [vi]. The proposal [vii] was made between the first and second readings of the bill and contains neither detailed reasons nor an impact assessment of the proposal.

I believe that this constitutes an abuse of the right of legislative initiative and a violation of Art. 20, para. 2 of the Law on Normative Acts, according to which each draft law, code or subordinate normative act must be preceded by a (!) preliminary impact assessment. For this reason, I believe that an act of the National Assembly, which was adopted in violation of the rule-making procedure under the Law on Legal Acts, contradicts the principle of the rule of law under Art. 4, para. 1 of the Constitution of the Republic of Bulgaria (“CRL”), according to which the Republic of Bulgaria is governed according to the Constitution and the laws of the country. Secondly, according to Art. 17, para. 1 of the CRL, the right to property is protected by law. According to Art. 19 of the CRL, the economy of the Republic of Bulgaria is based on free economic initiative, and the law creates and guarantees to all citizens and legal entities equal legal conditions for economic activity.

I believe that the introduced prohibition on the disposal of company shares - private property - of one person due to obligations of another legal entity contradicts the above-mentioned provisions of the Civil Code.

5. The new regulations should be repealed, not amended

There are discussions in the public space that the new introductions should be changed so that the EA "General Labor Inspectorate" has the right to issue the necessary certificates after inspections. I believe that this will not solve the problem, since the additional administrative burden still remains, and it is even possible that the Inspectorate will not have the necessary human or capital resources to carry out inspections before the registration of all transactions for the transfer of commercial enterprises and/or shares of limited liability companies.

For all the above reasons, I believe that the new changes to the Commercial Law should simply be repealed. They do not benefit workers, as they already have enough privileges, but at the same time de facto block any transactions with commercial enterprises and company shares in Bulgaria.

[i] http://dv.parliament.bg/DVWeb/showMaterialDV.jsp?idMat=120933

[ii] LIDKT, § 9. The law shall enter into force on the day of its promulgation in the State Gazette, with the exception of § 2, item 2 and § 6, items 3, 4 and 5, which shall enter into force on March 31, 2018.

[iii] According to data in the Commercial Register, these are the most common and most preferred legal forms of commercial companies in the Republic of Bulgaria.

[iv] http://www.brra.bg/ContentManagementView.ra

[v] http://www.gli.government.bg/page.php?c=13&d=3364&seek=%D0%B4%D1%8F%D0%BB%D0%BE%D0%B2%D0%B5

[vi] http://www.parliament.bg/bills/44/754-01-40.pdf

[vii] http://www.parliament.bg/bills/44/754-04-72.pdf

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