Bulgaria: Self-Dealing Restrictions on Companies Represented by Identical Directors

The restriction of self-dealing is known to all modern legal systems. In Bulgaria it is regulated by Article 38 of the Obligations and Contracts Act, which prohibits a proxy from entering into contracts with itself or another person represented by the proxy. If a contract is executed in violation of this rule, the represented person may still confirm it. Without this confirmation, the contract is null and void.

Self-dealing in corporate law

The main problem is how this restriction should be interpreted in corporate law; that is, whether a managing director may enter into contracts with another company represented by the same managing director. This situation is quite common, for example, in holding structures.

Until the summer of 2012, there were contradictory opinions in the Bulgarian legal theory and jurisprudence, but the prevailing view was that such contracts were valid. Nevertheless, several Supreme Court of Cassation (SCC) judgments held that such contracts were invalid.

On 13 June 2012, the SCC issued a judgment (No. 176 on commercial case 1078 from 2010) stating that a contract between two limited liability companies (OOD) represented by the same managing director was invalid. The judgment also stated that it would not be possible to confirm such contract at a later stage because the possibility for confirmation does not apply in the case of a limited liability company. This judgment is contrary to a judgment in a similar case decided by the SCC (Judgement No. 99 issued on 1 July 2009 on commercial case 713 from 2008).

More confusion

One month after the above judgment, another department of the SCC issued a new judgment on this topic (Judgement No 37 issued on 26 July 2012 on commercial case No. 475 from 2011). This time the contract was signed between two joint stock companies (AD), which were also represented by the same managing director. In this case, however, the court held the contract valid because, with a joint stock company, the Board of Directors may confirm the contract.

Summary

Based on these latest two SCC judgments:

1. A contract signed between two limited liability companies (OOD) represented by the same managing director is null and void and cannot be confirmed at a later stage, even by the Shareholders Meeting.
2. A contract between a limited liability company (OOD) and a joint stock company (AD) represented by the same managing director is also null and void, even if confirmed by the Board of Directors of the joint stock company.
3. A contract signed by two joint stock companies (AD) represented by the same managing director is valid if the Board of Directors of each joint stock company has confirmed it.

Not helpful

The above conclusions are not very helpful to businesses and may endanger the validity of many transactions executed under the SCC’s old interpretation of the issue. The SCC should thus issue an explanatory judgment (which would bind all courts, including the different departments of the SCC). Or the legislator should pass special regulations in the Commercial Act.

The above contradictory judgments are a stark example of the continuing lack of judicial consistency in Bulgaria. The European Commission underlined this problem in its 2012 Report of the Progress in Bulgaria under the Cooperation and Verification Mechanism. The Commission emphasised that the SCC must “identify and address inconsistent interpretation of the law in all relevant areas”.

These conclusions are not very helpful to businesses and may endanger the validity of many transactions executed under the SCC’s old interpretation of the issue.

author: Dimitar Vlaevsky