12 February 2025
roadmap
bulgaria
Structuring Bulgarian law guarantees for foreign credit arrangements
Lenders under foreign law credit arrangements subjected to the competence of English or other non-EEA courts – whose judgments (as opposed to those from EEA courts) are not automatically recognised or enforced in Bulgaria – often seek separate guarantees, allowing them to directly sue Bulgarian guarantors (e.g. wealthy domestic subsidiaries of multinational borrowers) in Bulgaria and obtain local court injunctions. Using the typical Bulgarian law guarantee arrangements subjected to the competence of Bulgarian courts in such cases is problematic.
Problems with typical Bulgarian arrangements to reach this outcome
Using classic Bulgarian suretyships to reach the above result is problematic due to a domestic rule whereby lenders retain the guarantor's liability only if they bring a lawsuit against the main obligors (whose obligations are secured by the suretyship) for non-payment of any obligation no later than six months after its maturity. Likewise, assumption of joint and several liability under Bulgarian law for a main obligation governed by foreign law is problematic, because it may lead to the characterisation of guarantors' obligations as "not the same" as those of the main obligors.
Resolving these issues through a standalone Bulgarian procedural agreement – where only disputes are subjected to Bulgarian courts, while the guarantee is governed by the same foreign law as the main debt – should also be rejected. This approach carries the risk of erroneous application of foreign law, as it would be interpreted by Bulgarian courts rather than the foreign courts themselves. There is also the potential risk for Bulgarian law to be applied in lieu of the chosen one if the foreign law is not proven to the satisfaction of the Bulgarian courts.
Promissory notes offer a solution
The issuance of a promissory note (PN) by the guarantor solves the above issues, because the guarantor's obligation to pay a certain sum to lenders is completely abstract. However, PNs are governed by rigid rules ill-suited to modern credit arrangements and therefore require careful structuring. Thus, as opposed to classic loans, PNs may not be repaid in tranches, floating rate interest stipulations are banned and stipulations for interest generally are only allowed in very limited cases. Furthermore, the typical choice of law and court provisions in the PNs themselves renders them conditional and thus invalid according to the prevailing doctrine and case law.
The above restrictions on including standard credit arrangements clauses in a PN are in turn resolved by the issuer and payee agreeing on the problematic clauses in a separate agreement that is binding only on them (to which subsequent endorsees or other parties to the PN may accede). They may agree bilaterally in such an agreement on the applicability of Bulgarian law, the competence of Bulgarian courts, and the maximum amount that can be claimed under the PN, ensuring that the claim aligns with their underlying loan arrangements (that presumably would gradually decrease with each repayment). Thus, where default occurs under a foreign law loan, a payment claim (including a partial one) under the PN could be made that would quickly grant creditors all remedies in Bulgaria against Bulgarian guarantors.
author: Tsvetan Krumov
