Bulgarian Coronavirus Payment Moratorium and its effect on cross-border financial transactions

1 Emergency and temporary character of the Moratorium in Bulgaria

On 24 March 2020 in the State Gazette of Bulgaria, the Measures during the Emergency Situation Act [Закон за мерките и действията по време на извънредното положение, обявено с решение на Народното събрание от 13 март 2020 г.] (the "Act") was published, whereby the Parliament of Bulgaria inter alia imposed various measures (most of them being applicable as of 24 March 2020, but some having a retroactive effect – see below) that can affect financial transactions, which will be briefly reviewed in this update (collectively referred to as the "Moratorium"). The Moratorium will apply only for the duration of the emergency [coronavirus] situation which was in turn imposed via resolution of the Parliament of Bulgaria for the period of 13 March 2020 until 13 May 2020.

2 Disapplication of any payment default consequences

With respect to all individuals, corporates and other private law persons [частноправни субекти], the Act disapplies the consequences (i) of payment default - as default interest and liquidated damages; as well as (ii) of all non-monetary consequences - as debt acceleration, rescission of contracts and retaking of property. Normal contractual interest (i.e. different from default interest) will continue to accrue. This may be deduced both from the wording of the Act, as well as from the fact that during the debates on the Acts, a draft proposal to disapply any payment of interest obligations was rejected by the Parliament.

The rule disapplying payment default consequences will apply retroactively as of 13 March 2020.

There is a draft bill (approved by the Parliament's legal committee on 5 April 2020) whereby the rule described in the current item 2 will be limited only to credit transactions and other forms of financing (forfaiting, factoring, etc.). Further – if the draft is enacted into law it will no longer disapply "any" payment default consequences, but only the "contractual" ones, as well as debt acceleration, rescission of contracts and retaking of property. However, until the draft bills are voted on by the Parliament and become binding in law, any payment default consequences under any transaction will be disapplied.

3 Additional regulatory requirements to short-selling transactions

As opposed to a number of other EU jurisdictions, the Bulgarian Moratorium does not provide for a prohibition on short-selling transactions during the emergency situation. However, the temporary measures announced by the European Securities and Markets Authority forcing investors to reveal more information about their short-selling positions by halving the threshold for disclosures should apply directly in Bulgaria under Regulation (EU) No 236/2012.

4 Freeze on enforcement procedures

As per the Act, public sales and other court-bailiff enforcement procedures shall be suspended, this being applicable as of 24 March 2020.

Out-of-court enforcement procedures (incl. procedures under the Financial Collateral Agreements Act, transposing in Bulgaria Directive 2002/47/EC) are not mentioned expressly but as far as the trigger for such enforcement procedures may be payment default, indirect restrictions seem to be arguably in place.

5 How does the Act affect close-out netting and flawed-assets arrangements?

Currently the Moratorium disapplies the payment default consequences under any transaction so not only credit transactions but other financial transactions as derivatives, repo transactions and lending of securities may be affected as well. There is no express rule in the Act relating to close-out netting arrangements. Arguably, in as far as the latter involve termination of all mutual transactions the Moratorium may be an obstacle.

Concerning the flawed-assets arrangements, respectively – the special arrangements in lieu of such arrangements as per Section 2(a)(iii) of the 2002 ISDA Master Agreement under French law, these arrangements resemble the right of retention (ius retentionis) under Bulgarian law, being agreed however via contract. The statutory right of retention - as per the relevant Bulgarian law of contracts, consists in the right of a party to retain/refuse its performance (of any type) until the counterparty performs its contractual obligation. This right is not premised on the occurrence of a payment default. So, it is not a sanction for or consequence of "payment delay" (the latter being in the focus of the Moratorium) but rather a mechanism to preserve the equivalence in the parties' relations at an early stage.

By parity of reasoning, contractual arrangements, whereby performance by a par-ty to a derivatives transaction is made dependent, or conditional on the perfor-mance by the counterparty of the latter's obligation, should not be viewed as re-stricted by the Moratorium. Therefore recourse may be taken to mechanisms like those in Section 2(a)(iii) of the 2002 ISDA Master Agreement, in case of potential payment default by a Bulgarian counterparty to a derivatives transaction.

If the current Moratorium is limited to credit transactions only (as mentioned in item 2 above), payments under derivatives should cease to be affected by the Moratorium so close-out netting and flawed assets arrangements should apply with no limitations.

6 Events of default in financial transactions in the context of the Act

As far as certain factual matters may be agreed as being events of default in financial transactions, complex issues may arise as to the effect the Act may have in view of their occurrence. Very often for the occurrence of the grounds for opening of insolvency proceedings against a counterparty (e.g. inability to pay or balance sheet over-indebtedness) may be agreed upon as events of default with respect to that counterparty. The Act does not displace the effects of such occurrences and the latter will continue to be events of default. Further as far as the filing for opening of insolvency proceedings by a creditor of the insolvent debtor is not disapplied, events of default referring to the "filing of an application" as the triggering event, should continue to apply. In practice all court proceedings in Bulgaria (subject to minor exceptions) are suspended so events of default referring to filing of applications for opening of insolvency proceedings that have not been rejected by the court within a certain time frame, will be affected, as far as there would be no court hearings on which rejection may take place. Under the Act all statutory deadlines expiring during the emergency situation shall be extended by one month after termination of the emergency situation. Thus events of default referring to the mandatory filing for the opening of insolvency proceedings by a company's management body (having an obligation to do so within 30 calendar days following the occurrence of the grounds for insolvency), may be affected as well.

7 Cross-border application of the Act

There are no special rules in the Act for cross-border scenarios, nor any rule modifying or disapplying the general conflict of laws and jurisdiction rules for payment obligations.

Should Bulgarian courts be competent on a dispute they may arguably apply the Moratorium rules as overriding mandatory provisions under art. 9 (2) of Regulation (EC) No 593/2008 (the "Rome I Regulation"). The courts would have a discretion whether to do so, as far as the Moratorium (as opposed to some other jurisdictions, as in Italy) is not self-proclaimed by the Bulgarian parliament to constitute overriding mandatory provisions.

If other EU courts are competent (which is quite often agreed in Bulgarian cross-border financial transactions), and the place of performance is not in Bulgaria, the restrictive wording of art. 9 (3) of the Rome I Regulation would prevent them from directly applying the Bulgarian Moratorium. Some guidance as to the possible route to give effect to a foreign piece of law (as the Bulgarian Moratorium) was provided by the European Court of Justice ("ECJ") in Judgement in Case C‑135/15 of 18 October 2016 (Greece v Nikiforidis) in the context of the application by German courts of Greek emergency financial laws. In particular such laws may be applied "as a matter of fact" by the competent foreign court in accordance with the reasoning of ECJ if the domestic private international law of the forum contains a rule similar to art. 7(1) of the 1980 Rome Convention on the law applicable to contractual obligations (the "Rome Convention"), which was the case in Greece v Nikiforidis as per art. 34 of the German Einführungsgesetz zum Bürgerlichen Gesetzbuch. By way of comparison, art. 46(2) of the Bulgarian Private International Law Code [Кодекс на международното частно право] (similarly to German law) reproduces art. 7(1) of the Rome Convention, so should Bulgarian courts be competent (which would be a rare case in cross-border financial transactions), they may apply foreign laws similar to the Bulgarian Moratorium as a matter of fact despite the restrictive wording of art. 9 (3) of the Rome I Regulation.

Another potential route whereby Bulgarian courts may give effect to the Moratorium in a cross-border scenario is by refusing to recognise and enforce a foreign judgment, applying a rule incompatible with the Moratorium) as "manifestly contrary to public policy" of Bulgaria (under art. 45(1)(a) of Regulation (EU) No 1215/2012 (the "Brussels I Regulation Recast"). However this ground to refuse recognition and enforcement is so rarely applied by courts that any attempt to predict if the Moratorium represents a part of the Bulgarian public policy would be quite uncertain.

As far as enforcement is concerned, under Brussels I Regulation Recast the courts of the Member State in which the judgment has been or is to be enforced are competent so the Bulgarian enforcement restrictions set out in item 4 above would apply in case the enforcement takes place in Bulgaria.