Overview
Following the global economic crisis, financial pyramid schemes such as the one Bernard L. Madoff Investment Securities LLC ran based on the principle of the Ponzi scheme resulted in tremendous losses for investors of as much as $65 billion.
In Bulgaria, a financial institution, Corporate Commercial Bank ("CCB",) in what appears to be also a financial pyramid scheme, has potential losses which could be more than 2% of the GNP of Bulgaria.
The Bulgarian National Bank ("BNB") took control of CCB in July 2014 when the latter bank was unable to meet its liquidity needs.
After months of debate and speculation, the Bulgarian Parliament eventually rejected any possibility that the state would rescue the bank and finally the BNB revoked the license of CCB, which will automatically go bankrupt if the decision of BNB enters into force.
In that respect, Bulgarian legislation has a specific Law on Bank Bankruptcy (the "LBB") which in most of its aspects provides for specific rules derogating the bankruptcy rules for companies.
The authorities which play a role in bank bankruptcy proceedings
The authorities involved in bankruptcy proceedings are the BNB, the Fund for the Guarantee of Deposits (the "Fund"), the administrator(s) nominated by the Fund, and the District Court.
Bulgarian law provides the BNB with the right to revoke the license of a bank under specific conditions (such as negative capital) and file a claim for bankruptcy before the district court in order to begin bankruptcy proceedings.
Role of the Administrators of the Bank
Upon the beginning of the bankruptcy proceedings, the court appoints at least two "Administrators of the Bank" indicated by the Fund.
The Fund may at any time change the Administrators if it considers that they are not fulfilling their obligations or jeopardizing the interests of the creditors of the Bank.The main duties of the Administrators are:
Their most important activities are subject to prior consultation with, and approval by, the Fund and/or court. They are recorded on a monthly basis or at the request of the Fund. The creditors have the right of access to their reports.
Administrators may not, directly or by related persons, acquire the assets of the Bank and are liable for the damages caused to the Bank and the creditors.
Role of the Fund
The Fund plays an important role in bank bankruptcy proceedings. As mentioned above, it will appoint the Administrators of the Bank, oversee and approve their actions, their expenditures, and may replace them at any time, etc.
It is important to note that protection of the interest of the creditors of the Bank is vested only and solely in the Fund, as under the LBB there is no institution such as a council of creditors.
The Fund is automatically subrogated in the rights of the deposit holders up to EUR 100,000 guaranteed by the Fund.
One of the most important prerogatives is the approval of the redemption plan for the Bank's assets and the supervision of its implementation. The Fund also approves the distribution of funds received from the liquidation of assets to the creditors, gives permission for the conclusion of transactions for assignment or sale of receivables and other methods of settlement of claims and obligations of the Bank, etc.
Role of the District Court
The Court is responsible for the judicial control of the activities of the authorities above. However, some of the activities of the Fund are not subject to judicial control, such as:
Beginning of bankruptcy proceedings
Once the license of the Bank is repealed, the BNB is obliged to make a request before the District Court where the seat of the Bank is for the beginning of bankruptcy proceedings for the Bank and to notify the Fund.
If the decision of the BNB for the revocation of the license enters into force, the Court begins bankruptcy proceedings.
Consequences of the beginning of bankruptcy proceedings
From the moment of the beginning of bankruptcy proceedings:
Redemption of assets
The Administrators, with the approval of the Fund, have to establish a redemption plan.
The Administrators can cash all assets/receivables of the Bank by selling them (individually or as an aggregate) through a public sale. An alternative is to sell the Bank's on-going concern (which includes its assets and liabilities) without the need to carry out a public sale, i.e., through direct negotiation with potential buyers.
Order of the Claims
The claims of Bank's creditors will be reimbursed in the following order:
Guaranteed deposits
The Bulgarian state guarantees all the deposits and accounts (deposit, current, savings, joint-deposits etc...) to an amount of BGN 196,000 (100,000 Euros) in one Bulgarian bank.
The State does not guarantee deposits, which, among other issues:
Repayment of Guaranteed Deposits
Payment of guaranteed deposits begins not later than 20 working days as of the revocation of the license of the Bank. If there are exceptional circumstances, this period may be extended by another 10 working days.
The Fund announces with a notice in at least two main newspapers the date on which the payment of guaranteed deposits at the Bank will begin and the banks where the accounts can be opened.
The Fund heralded that starting as of 4th December 2014 the guaranteed deposits will be available to CCB's depositors in nine different banks licensed in Bulgaria.
The guaranteed deposit can be paid in cash, by order of transfer to another account specified by the depositor or may be left as a deposit in the new bank.
Deposits in foreign currency will be paid in BGN equivalent to the guaranteed amount at the BNB rate for the day specified by the Fund as the starting day for the payment of the guaranteed deposit.
CONCLUSION
After the entry into force of the LLB in 2001, Bulgarian authorities had the occasion to implement it only once, in 2005, for the bankruptcy of a very small bank - the International Bank for Commerce and Development (approx. EUR 30 million in assets). Most of the public did not even notice that this bank went bankrupt.
There is still much uncertainty surrounding, and lack of familiarity with, the LBB which allows for some subjective interpretation by the bankruptcy authorities and the threat of political pressure cannot be excluded from what should be a technical procedure.
However, this time around, the entire public and international business community is focused on the bankruptcy proceedings of the fourth largest bank in Bulgaria and the bankruptcy authorities will be under great pressure to implement it with transparency and without political pressure, otherwise the image of Bulgaria would suffer.
ADDITIONAL RESOURCES
- Bulgaria Seizes Lender Part-Owned by VTB After Run on Bank, Elizabeth Konstantinova, Bloomberg Troubled bank rescued by Bulgarian state, BBC News Investors hold talks with Bulgaria's authorities aimed at rescuing CCB, Bulgarian National Radio What On Earth Is Going On In Bulgaria?, Frances Coppola, Forbes magazine Bulgaria's CorpBank: A Tangled Web Of Fraud, Frances Coppola, Forbes magazine Corporate Commercial Bank sees licence revoked, StandartNews
