Boost To Creditors' Rights On Pledged Receivables

"Banks may now agree to collect pledged receivables prior to accelerating the secured debt under floating charges like security interests." Tsvetan Krumov

The most popular Bulgarian security interests under credit transactions are special pledges, resembling English floating charges.

Problems under the statutory framework until recently

Under special pledges over receivables in Bulgaria, collateral providers until recently retained their right to collect the receivables until collateral takers registered the commencement of enforcement in a special public register and the collateral provider was notified thereof. Collateral takers could notify debtors under pledged receivables and start collecting them in an out-of-court procedure to satisfy the debt due to them only after these formalities. As prerequisites for rerouting payments under pledged receivables, these formalities used to be a concern for banks, which typically act as collateral takers under receivable pledges. When banks decide to resort to pledged receivables, they wish to reroute payments as quickly as possible. Major foreign banks have often asked us to make such arrangements so they could start collecting receivables immediately. This was impossible under the former framework, as it did not allow banks to reroute payments merely via unilateral notice to the debtor instructing it to start making payments to the banks. Banks also had to contend with the rule that payments could only be rerouted upon commencement of enforcement, which requires the acceleration of secured debt, as collateral takers should specify the amount of payable secured debt they enforce when registering commencement of enforcement. This may block pre-insolvency resolution measures for collateral providers and be expensive for banks, as holding accelerated bad debt triggers the need to make provisions for such bad debt.

New statutory framework and options for collateral takers

Such concerns have been alleviated by a statutory amendment that came into force at the beginning of 2017, allowing different arrangements regarding the moment at which rerouting payments under pledged receivables takes place. As commencement of enforcement is no longer the only prerequisite for rerouting payments, the statutory amendment allows pledge agreements to stipulate that collateral...