BANK FINANCE AND REGULATION Multi-Jurisdictional Survey SECURITY OVER COLLATERAL. BULGARIA LIC Penkov, Markov and Partners

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1 BANK FINANCE AND REGULATION Multi-Jurisdictional Survey SECURITY OVER COLLATERAL BULGARIA LIC Penkov, Markov and Partners CONTACT INFORMATION Elina Dimova LIC Penkov, Markov and Partners Iztok District, bl. 22, entr. A, fl. 2 Sofia 1113, Bulgaria lawyers@penkov-markov.eu 1. Can assets be charged, liened and/or encumbered in your jurisdiction? Please insert any exemptions, if any. According to the Bulgarian legislation assets can be charged, liened and/or encumbered. A claim may be secured by a pledge on movable property, on a receivable or on other assets and by a mortgage on immovable property. Bank credits for acquiring immovable property are secured by a legal mortgage (established by virtue of the law). In case court or executory proceedigns are initiated against a debtor, the claim may be secured by a distraint over movable property and injunction over imoovable property. A distraint, securing a claim for pecuniary receivable, cannot be imposed on receivables against which enforcement may not be levied. The Bulgarian Civil Procedure Code determines some belongings and receivables against which enforcement may not be levied, aiming to ensure a minimum amount of belongings and income to the debtor. A specific kind of security are the mortgage loans in the hypothesis of mortgage bonds. Mortgage bonds are securities that are issued by banks on the basis of their loan portfolio and that are secured by one or more first mortgages on real property in favour of the banks (mortgage loans). Mortgage bonds outstanding are backed by mortgage loans of the issuing bank. To substitute any loans from the principal cover that have been repaid in full or in part, the issuing bank may include some of its assets in the cover of mortgage bonds and then claims under mortgage bonds from each issue shall be secured by a first pledge on the assets. Another type of security is the financial collateral. By a financial collateral arrangement a person transfers title or establishes pledge over financial

2 collateral in favour of another person for the purpose of securing or otherwise covering the performance of relevant financial obligations. Financial collateral shall be money claims or financial instruments. Money claims could be money credited to an account in any currency, or similar claims for the repayment of money without money in cash. 2. In your jurisdiction, under what circumstances may security arrangements be subjected to choice of law and/or choice of forum clauses (does it matter, whether the security itself is located abroad and/or governed by foreign law [e.g. a pledged claim])? What is the market practice in your jurisdiction? Is there a treaty on this in your jurisdiction, whether bilateral or multi-lateral? Are there any requirements for enforcement in your jurisdiction? As of the accession of Bulgaria to the European Union, Regulation 44/2001 of the Council regarding competence of courts, recognition and enforcement of court decisions enacted on civil and commercial cases is applicable. In cases which are outside the scope of the Regulation, for example where coutries, non EU members are concerned, these issues are regulated by the International Private Law Code. Both acts provide for rules for choice of law and choice of forum. A general principle is that the parties to a contract or other legal relationship may choose the law applicable thereto and the competent court. Parties may choose a forum only in case the rules of the applicable law do not grant exclusive competence on a specific court for certain matters. Accoring to the International Private Law Code the matters relating to enforcement or to security over immovable property shall be under the exclusive competence of the Bulgarian court. No other rules in this respect are explicitly provided for by the Bulgarian law or treaties in Bulgarian jurisdiction. 3. In your jurisdiction, are floating charges or security over the overall assets of an entity accepted, and if so in what terms? In Bulgarian jurisdiction security over the overall assets of an entity is acceptabled although it is not explicitly provided for in the applicable law. Explicitly provided for are pledges over business as ongoing concern, groups (aggregates) of receivables, of machines and equipment, of goods or materials. The pledge over a group shall attach to each one of its components, until the component has been separated from the group. Contracts for the pledge of an ongoing concern shall be executed in writing and all signatures shall be notarized and the contract has to be entered into the Commercial Register.If the contract for the pledge of an ongoing concern lists individual assets, the pledge shall remain attached to them even when they have been in the meanwhile separated from the enterprise. 4. In relation to the following types of assets, please explain in your jurisdiction the types of security that can be created or granted, if the security requires any type of registration or perfection requirements, an estimate of cost (including applicable taxes and any other duties/ costs) and timing for granting such security, and any special considerations regarding the asset type: (a) Aircraft; (b) Bank Accounts; (c) Animals, Crops (in ground and severed) and Timber; (d) Equipment;

3 (e) Intellectual Property; (f) Inventory; (g) Leases; (h) Mineral Interests, including Hydrocarbons; (i) Promissory Notes and Chattel Paper; (j) Real Estate; (k) Receivables (credit rights under contracts or invoices); (l) Rights under Contracts (excluding Receivables); (m)shares (in book-entry and certificate form and other securities); (n) Vessels; (o) Vehicles; (p) Business as an ongoing concern. Most of the above pointed assets are usually subject of special pledges since thus the pledgor is entitled to retain the possession of the respective asset while in case of ordinary pledge the asset need to be handed over to the pledgee. The contract for establishment of special pledge shall be executed in writing and if the subject thereof is ongoing concern, the signatures of the parties have to be notary attested. All contracts for special pledged need to be registered into the Special Pledges Central Register (SPCR). If the assets of the entitiy, the business of which are subject of pledge as ongoing concern, include real estates, the contract has to be entered into the registers of the Recordation Office where all transactions with real estates have to be duly reflected. In case subject of the special pledge is a receivable, the pledge shall be effective for the debtor only after the latter has been informed for the pledge. The fee for registration of the special pledge contract in the SPCR shall be BGN 40 (about EUR 20) for the first sheet of the application and BGN 10 (about EUR 5) for each next page. In case the signatures of the parties to the contract have to be notary attested, the notary fee shall depend on the material interest. The record in the SPCR shall be effective for five years from the date of the original recordingand may be continued if it is extended before it expires. The above mentioned is not applicable to: 1. Aircrafts - liens and mortgages over aircrafts shall be effected in writing and may be invoked against third parties following their recordation in the Civilian Aircraft Register. Transactions relating to liens (mortgages, privileges) on aircraft shall be effective as of the date of entry in the Civilian Aircraft Register. 2. Vessels - contracts for maritime mortgage on a vessel or on a vessel under construction, shall be concluded in writing with notarised signatures of the parties. The raising of maritime mortgage on a vessel or on a vessel under construction, shall be valid after entry on the special register. A maritime mortgage shall continue in effect for 5 (five) years after the date of entry, unless the said entry be renewed by the mortgagee. Financial obligations may be sucured by financial collateral. 5. Please explain briefly for each type of assets the procedure for enforcement (judicial and extra-judicial). Is it possible to enforce security governed by another jurisdiction? If yes, what is the procedure? Ordinary pledges may be enforced only after a judicial procedure. Based on a court decision a writ of execution shall be issued and thus the securiy may be enforced. Special pledges may be anforced without court procedures. In case of default on a debt secured by a special pledge, the pledgee may start foreclosure on the pledged property. In case of financial collateral by means of pledge in the event of default the the secured person is entitled, without court approval, to realise the financial collateral by selling the

4 financial instruments (if this is the security type) or by compensating the money claims used as collateral with the secured obligation. In case of financial collateral by means of transfer of title the secured person is entitled to satisfy without a court approval out of the financial collateral or its value. Security governed by another jurisdiction may be enforced after the respective application is submitted to the competent court for admitting the enforcement. 6. Can a trustee or security agent be used in your jurisdiction, or must security be granted in favour of all lenders? Generally, security shall be granted in favour of all lenders. However, a party to a financial collateral contract may be a merchant, other than a sole trader, who acts on behalf of one or more persons who are bondholders or holders of other forms of securitised debt. In case against a bank that has issued mortgage bonds insolvency procedings are initiated, the assets, covering the bonds, shall be managed by a trustee. 7. In bankruptcy or insolvency scenarios, what are the suspect periods, is clawback possible, and what other types of rights (tax debts, employees, etc.) have preference over security granted? Generally, the suspect periods are 1 year prior to the initiation of the bankruptcy proceedings and in case mortgaging, pledging or providing another security is in favour of a claim of a partner or shareholder not secured till that time - 2 years prior to the initiation of bankruptcy proceedings. Should the bankruptcy procedings be initiated against a bank, the period is 1 year before the date of insolvency. In case of insolvency no other types of rights have preference over security granted. 8. In your jurisdiction, can borrowers or guarantors subordinate their claims and if so in what terms? No answer supplied. 9. What are the consequences of a transfer, assignment or novation of an underlying credit in your jurisdiction (is new security necessary, is the security automatically transferred, etc.) In case the holder of the receivable transfers it, the sucurities with regard thereof shall be automatically tranfserred to the new holder. However, if the debtor is substituted, security provided by third parties shall be cancelled if such third parties do not consent that such security serve the new debtor. Pledges and mortgages provided by the original debtor shall remain in force. In case of novation the security for the previous obligation shall remain for the new one, if the persons who have provided it agree to this. 10. Can you have on top of a security in your jurisdiction, another layer consisting of an assignment of the collateral concerned conditional upon default by the debtor? According to the Bulgarian law securities "follow" the secured receivable and are transfered in case of transfer of the receivable. They are secondary rights and may not be separated and transfered or assigned without the receivable.

5 11. Are step-in rights lawful in your jurisdiction or does any action to take control require the creditors to go through a court process? In case a third person pays a debt to the creditor and this debt (obligation) is secured by mortgage on pledge, the third person is entitled to step in the rights of the cerditor, including the rights under the security and no court process is necessary in this regard.