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One of the most important and pressing issues in the current global economic crisis is related to payments between economic entities, and the so-called large intercompany indebtedness. The deteriorated economic environment creates grounds to multiple delayed payments, and most trade persons should conform their company behavior with this new phenomenon that emerged and intensified after 2008 when global economy went down into total recession, which also affected Bulgarian economy. So, what shall we do to collect our claims? Which one is the best approach? Which are the conditions and prerequisites for success in this complex undertaking? To answer these questions we need to get acquainted with practically proven methods, approaches and solutions for successful collection of receivables and requesting performance on the part of the debtor. Ultimately, we should be well prepared for this pathological development of relations between credit providers and debtors. Otherwise, our naivety and unpreparedness in commercial activity can be penalized not only with high financial losses, but also with the loss of large amounts of time, efforts and nerves.

Many trade entities are not aware of changes in legislation related to payments in connection with Directive 2011/7/EU of the European Parliament and the European Council dated 16.02.2011 on the measures on dealing with late payment in commercial transactions. The directive aims to introduce legislative measures to counter act to the established practice (particularly negative during the crisis) of late payments on commercial transactions between various enterprises or payments between companies and the state.

The following amendments in the Commercial Code with view to introducing the requirements of Directive 2011/7/EU of the European Parliament and the Council dated 16 February 2011 on dealing with late payment in commercial transactions were promulgated in the State Gazette, issue No 20 of February 28, 2013.

Amendments to the Commercial Code, effective as of March 4, 2013, are related to the period of fulfillment of monetary obligations in commercial transactions and the consequences of non-fulfillment, and they will apply to agreements concluded between companies after March 15, 2013.

Parties in commercial transactions can now agree on a deadline for fulfillment of monetary obligations, which, however, cannot be longer than 60 days. A longer period can be negotiated in exceptional cases, when required by the nature of the goods or services or due to another important reason, if this is not grossly unfair to the credit provider and is performed with good intentions.

When the debtor is a public contractor, as per the meaning of the Public Procurement Act, the parties may agree on a deadline for implementation of a monetary obligation for no longer than 30 days. By exclusion, they can agree on a longer period, but not longer than 60 days.

In the event that the parties in a commercial transaction do not agree on a payment deadline, a monetary obligation must be fulfilled within 14 days as of the date of receiving an invoice or another payment request.

When a contract or law stipulates examining or acceptance of a product or service, the payment period shall be 14 days as of the date of acceptance or completion of examination, if the invoice or payment request have been received before that.

In rare cases, these rules are not applicable to promissory liabilities, liabilities in open bankruptcy proceedings, and compensations for damages, including insurance compensations. When the credit provider has fulfilled their obligations under a particular commercial transaction, and the debtor is in default of payment, unless otherwise agreed, the credit provider shall be entitled to compensation amounting to the statutory interest rate as of the day of delay, as well as compensation for costs of collecting receivables, amounting to not less than BGN 80, without the need for an invitation.

There has always been a risk of non-payment and the need for securing receivables. Problems that credit providers face in collecting liabilities are almost entirely related to the legal framework governing the sentencing of debtors and the procedure for compulsory collection of due amounts. In many cases, problems can be minimized by carrying out proper credit policy and using collaterals.

It’s a matter of estimation of each individual case on whether to sign an agreement under the terms of which we will find ourselves in the position of a credit provider and what provisions shall be included in this agreement, in order to ensure its fulfillment.

Analyzing the debtor is the first and most important step that we have to perform. It is very important to know the counterparty who will be a debtor after signing an agreement and delivering goods or performing a service. In Bulgaria companies seek information about the reputation of the counterparty or debtor mostly from friends and colleagues. However, information can also be obtained by a number of public records of the court, property and commercial register. In Western European countries and the United States companies use the services of credit reporting agencies. Such agencies draw up credit reports, which contain assessments of payment morality, credit rating, and they can also include credit limits. Since most cases are related to commodity supplies with payment period of up to 30 days, the credit limit is the amount that the agency believes can be reasonably provided to the counterparty for a 30-day payment period without guarantees. The Agency collects information from official sources, other suppliers, their own information of cases of unpaid liabilities of the debtor, the press, public records, etc. This type of study of the counterparty is not widespread in Bulgaria. Commercial companies here seek the services of such agencies when it is already too late and they have to collect their liabilities forcefully. Prevention management of receivables is always a better and cheaper option than solving the problem at a later stage when we most often face additional costs and the cumbersome judicial system.

As a result of researching our potential customers and counterparties, we can make a decision on:

whether to conclude an agreement or not;

what credit limit we can set;

what collaterals and guarantees we can use. 

The correct answer to these questions would truly save us a lot of costs, time and nerves in the future.

We should keep in mind that according to Bulgarian and international legislation, an agreement has the force of a law - PACTA SUNT SERVANDA. After its conclusion, the principle of freedom of agreement is transformed into PACTA SUNT SERVANDA (to observe what is agreed upon). In Bulgarian legal system termination of an Agreement is only possible by an arrangement between the parties, as stipulated by law (Art. 20a, para. 2 of the Contracts and Obligations Act). Unilateral termination constitutes a refusal to perform obligations, but it cannot have as a consequence dropping out of the contractual agreement (Ruling dated 05.02.2008 as per Higher administrative case No 77/2007).

As emphasized at the beginning, a decision on what type of agreement we need to conclude and with whom it shall be concluded, shall be made in each individual case, as our decision must be based on information from such kind of analysis. When we conclude an agreement under which we will find ourselves in the role of credit providers, we do not do anything different from what a bank does when providing credit. It is therefore quite normal to use tools to secure our payment as per the agreement, just like any bank does in its practice. It is quite normal to stipulate a delay payment default in an agreement, as well as joint liability, pledge, and in rare cases a bank guarantee and mortgage, as well as a promissory note, which is still used as collateral, despite its contradictory legal application. Fulfillment of an agreement can also be facilitated by inclusion of an arbitration clause or a clause for changing local jurisdiction. One shall mandatorily seek qualified legal assistance from an experienced lawyer for the use of collaterals and drawing up of an agreement. In my practice I always advise my clients to resort to agreements with notarized signatures of the parties.

An agreement with notarized signatures forms extrajudicial grounds for enforcement, as the regular party may request the court to issue a writ of execution as per procedural order for issuing a writ of immediate execution as per Art. 417 of the Civil Procedures Code. An objection on behalf of the debtor shall not suspend enforcement proceedings and this way the credit provider can quickly force their debtor with all available methods of execution - attachment of bank accounts, attachment of property, inventory and sale of movable properties owned by the debtor, etc. It is important to know that court has the powers to suspend enforcement in certain situations - when the debtor provides a security or when there are strong written pieces of evidence that the amount is not due.

Late payments have a negative impact on liquidity and make the financial management of enterprises more complex. They affect competitiveness and profitability when due to late payment the credit provider needs to obtain external funding. The negative consequences are increased during an economic turn-down and recession when access to funding is more difficult.

A debtor must fulfill their financial liability in an accurate and timely manner. A debtor who has a financial liability cannot rely on force majeure reasons. This basic situation is stipulated in Art. 81, para. 2 of the Contracts and Obligations Act and is applied in civil and commercial law. The fact that a debtor does not have the funds to fulfill a liability does not relieve them from responsibility. In my practice I have been observing two types of pathological development cases of contractual relations in terms of fulfillment of financial liabilities. The first type is when a delay is short and there is room for negotiation with the debtor for rescheduling the debt and its additional funding. The second type of pathological development of relations is when we have let a delay become too long and the debtor is unable to reschedule their liability and they do not want to negotiate with us. Then we only have the opportunity to resort to legal proceedings to collect our receivables. 

I often point out that the collection of receivables is a right, just like it is merely psychology. We need to know the right time, and apply the right approach and tools to motivate the debtor to pay. We must also take into account the principle of time, stating that newer liabilities are collected more easily, but older ones are collected more difficultly. Higher delay in fulfillment of an obligation increases the chance of occurring of new circumstances, limiting the opportunities for collection of receivables.

Where a liability remains unpaid on its due date, the lender is the one who should be the first to take prompt and effective measures.

Good management of the risk of non-payment means that the credit provider’s accounts must be in good order, which means monitoring of delayed payments of their customers. At the very first day of delay the debtor must receive a call, which shall remind them about the maturity of their debt and the fact that it is still unpaid. If no payment is obtained within two weeks, a letter shall be sent to the debtor by the credit provider, which shall prompt them to pay their debt, highlighting the negative consequences for the debtor, arising from non-payment of the liability.

The emphasis is on the fact that the credit provider cares about their client and wants the two parties to maintain their good relations, the way they have been until the delay. In case a payment is still not made, the credit provider must send one final but bitter letter to their debtor. If after sending such a letter the debtor fails to fulfill their obligation, the credit provider shall seek the help of a lawyer or a specialized credit collecting company. A mistake that is commonly made by many lenders is that they leave the liabilities of their debtors to “mature” in time. There is an expression saying: “When a person spends a night having someone else’s money, they consider it their own”. Therefore, it is necessary that the above actions - making phone calls and sending letters - to be made promptly. According to generally accepted criteria, a 90-day delay makes a liability doubtful, and a 180-day delay makes it almost impossible to collect. In the event that the credit provider is unable to voluntarily collect its receivables, they are often directed to the so-called order proceedings in both varieties of law, as per Art. 410 and Art. 417 of the Civil Procedures Code for the issuance of an enforcement order and a writ of immediate execution.

According to Art. 410 of the Civil Procedures Code, “The applicant may request issuance of an enforcement order: 1. for receiving monetary amounts or replaceable items when a claim has fallen under the jurisdiction of the district court; 2. for the transferring of movable property which the debtor has received with an obligation to return or is encumbered by pledge or transferred by the debtor with an obligation to return its possession, when the respective claim has fallen under the jurisdiction of the district court.”

Execution proceedings in the new Civil Procedures Code have been borrowed by the laws of Germany and Austria. As per the old Civil Procedures Code there was also an opportunity for quick civil proceedings in absentia, but only for certain circles of credit providers, such as: banks, the state telecom, heating companies, water and sewerage companies, as well as credit providers with notarized contracts and promissory notes.

Now any credit provider shall issue a writ of execution, regardless of the origin and grounds of the liability, as long as it is below BGN 25,000.

A credit provider has to file an application to court, claiming that they are due a certain amount of money, and possibly, an interest, penalty and costs. The court only verifies the formal side of filing the application without going into the case in order to decide whether the money is owed or not, and issues an enforcement order. The debtor receives the latter at their address, as the document states that they are obliged to pay the amount requested by the credit provider. It is also stated that if they do not owe the money, they must write an objection to the issuance of the order.

This objection is made by only requiring the debtor to write the statement “I object” on the order that they have received. They may, but they are not obliged to explain why the amount of the order is not due. If a debtor has objected, the credit provider shall not be issued an executive order, and they will be sent a notification that they are obliged to file a claim for establishing their receivables. This way the order procedure is transferred into ordinary judicial three-instance proceedings, for which the general rules of the Civil Procedure Code are valid. In the event that the debtor does not object, the court issues a writ of execution to the credit provider and the liability is stabilized.

According to Art. 417 of the Civil Procedures Code, the applicant may request the issuance of a writ of execution, when the receivable, regardless of its price, is based on:

1. an act of an administrative authority, as per which the execution is assigned to civil courts;

2. a document or an extract of accounting books, which establishes claims of government agencies, municipalities and banks;

3. a title deed, agreement or other contract with notarized signatures on the obligations to pay monetary amounts or other replaceable items, as well as obligations to deliver certain items;

4. an extract from the register of pledges for a registered security and for starting of implementation - regarding the transfer of pledged property;

5. an extract from the Register of Pledges for a registered sales contract with retaining the ownership until payment of a lease price – in relation to the returning sold or leased property;

6. an agreement for pledge or mortgage as per Art. 160 and Art. 173, para. 3 of the Obligations and Contracts Act;

7. an effective act for the establishment of a private municipal or state liability when its implementation is performed as per this Code;

8. act of deficiency;

9. promissory note, bill of exchange or equivalent securities, as well as bonds or coupons related to the aforementioned.

When a credit provider submits one of the documents listed in Art. 417 of the Civil Procedures Code, the court shall issue a list of execution, along with the enforcement order. As per Art. 410 of the Civil Procedures Code there is a limitation to the amount of the liability – BGN 25,000, but in this case there is no such limitation - the order and the writ are issued regardless of the liability amount. Enforcement case is established and by the summons for voluntary execution the debtor is informed about the ongoing legal proceedings against them. At this point liens and foreclosures are imposed on their property to ensure successful recovery of the due amounts. The debtor may appeal again and this appeal forces the credit provider to file an establishment claim for their liability. Unlike Art. 410 of the Civil Procedures Coder, however, the appeal does not suspend the enforcement actions.

An exception to the rule is only an order issued based on a promissory note. In the latter case, the enforcement proceedings will be suspended until the conclusion of the case as per the establishment claim – i.e. until the court rules if the amounts under 33 are due or not. Liens and foreclosures on the debtor's property will remain, regardless of whether the debtor has filed an appeal and the enforcement case has been suspended. An action for establishing receivables is stipulated in Art. 415 of the Civil Procedures Code – “When an objection is filed in due time, the court shall instruct the applicant that they have the right to file a claim for establishing receivables within a period of one month, by paying the additional state fee due. If the applicant does not provide evidence that they have brought the claim within the stated period, the court shall invalidate the enforcement order partially or totally, as well as the writ of execution issued as per Art. 418”. Upon filing an establishment claim, they shall pay an additional state fee, amounting to 2 percent. This way the total paid percent becomes 4%, as 2% are paid upon filing an application as per Art. 410 or Art. 417 of the Civil Procedures Code, and 2% for the filing of an establishment claim.

When things become irreversible and any extrajudicial tools and negotiations do not help to motivate the debtor to at least partial fulfillment of their obligation, then we have to resort to using the assistance of court, but a specific method – order proceedings, general claim procedure, preliminary security measures or initiating bankruptcy proceedings should be chosen by a competent and experienced lawyer, who shall conduct preliminary investigation of the case and obtain information about the debtor, so they can offer the best strategy for collecting your money. 

Hristo Vasilev, Attorney at law

17.04.2014