Directors in private limited companies (abbreviated in Bulgarian as ‘OOD’) and public liability companies (abbreviated in Bulgarian as ‘AD’) have a gamut of responsibilities and attendant liabilities. We review below three kinds of liability in Bulgarian law: civil liability; administrative liability and criminal liability.
Disciplinary liability – a creation of labour law – is left aside for the purposes of this note. Conceivably, a director may be liable as an employee of a company, but this does not arise from his director’s service agreement, but requires the director to be performing an additional role at the company, for which he or she may then be disciplinarily liable.
Liability to the company
At a general level, civil liability in Bulgarian law is based on the duty to repair loss caused to another where the loss arises through fault (including negligence), including non-compliance with statutory duties. Therefore the directors of both OODs and ADs are liable for such losses as they unlawfully cause to the company of which they are officers. Such liability requires negligence or fault, whether through action or omission.
In companies with multiple directors, each director is jointly and severally liable for loss. However, each director may seek to individually avoid his or her liability on the basis of lack of fault, among other things. Thus, for example, directors are not liable for decisions taken by their predecessors.
For a company to bring a claim against a director, its members must resolve in general meeting in favour of a claim. The director may be liable (subject to a court order):
(i) to compensate the losses;
(ii) pay interest and
(iii) in certain cases to pay additional penal damages which may follow from the director’s service agreement.
Conversely, the company may resolve in general meeting to waive any liability of the director and such a resolution, once validly passed, is irrevocably binding on the company.
Liability to shareholders and to third parties
The director may also be liable to the shareholders and to third parties (e.g. to the company’s creditors for false formal statements made upon a capital reduction).
Unlike an OOD, the directors in an AD are legally required to provide the company with a guarantee in an amount not less than the equivalent of a quarter of their annual remuneration. This guarantee may be provided in various ways, including by depositing cash directly with the AD or in its bank account; issuing a bank guarantee in favour of the AD; or by conditionally pledging securities in favour of the company, etc. The guarantee is released on termination of the director’s appointment.
Example breaches of statutory duty
Below are examples of statutory duties giving rise to civil liability to creditors or third parties. These are non-exhaustive, and in any event are additional to the more general class of duties which directors owe not to harm the company or certain third parties, described above.
In the Commerce Act 1991:
In the Tax and Social Security Procedure Code 2005:
The withholding could conceivably take place occasion when:
the director declares (personally or, arguably, through an agent such as the company’s accountants) information to the tax authorities, for example in a tax return or a payroll return;
during a tax audit;
when the director withholds information from a bailiff in the course of enforcement proceedings, e.g. by failing to declare assets of the company.
acts which constitute hidden distributions of profits or dividends or transfers of assets or of the going concern, either for no value at all or for a value which is materially lower than the market price of the assets; or
causes an encumbrance to be created over the company’s assets, etc. as a security for another person’s debt, and the encumbered assets are subsequently disposed.
In such cases, the director is liable up to the value of assets disposed of.
The range of possible situations of bad faith appears wide. For instance, where:
the relevant act of bad faith is performed within one year of the tax obligation arising or being declared (whichever is later); and
when the relevant act is performed in the period from the commencement of a tax audit pursuant to the Code and up to 6 months from its end or, in the case of a tax inspection, within 6 months of the formal initiation of the inspection.
The liability of the director in both situations above is subsidiary to that of the company: he or she would be required to pay the tax due insofar as it cannot be collected from the company.
In the Credit Institutions Act 2006:
In the Public Offering of Securities Act 1999:
The administrative liability of directors arises under administrative law, i.e. law providing a public body with powers in certain area of public life. Such breaches typically result in fines and sometimes in other consequences.
Some examples are:
In the Protection of Competition Act 2008:
In the Public Offering of Securities Act 1999:
In the Corporate Income Tax Act 2006:
Criminal liability arises when an individual commits a crime with the requisite state of mind. This liability is always personal and is typically triggered by intentional action or inaction, but sometimes, when expressly provided by the Criminal Code 1968, also by negligent action or inaction. All criminal offences and their respective punishments are exhaustively laid down in the Criminal Code 1968. The act complained of must be criminalised at the material time.
A director may commit a crime in the context of carrying out his or her duties in a range of cases.
Please contact us for more information.
Authors: Yavor Markov and Kamen Shoylev
An ~€1M claim on behalf of real estate consultants
NBLO’s dispute resolution lawyers represented UK-based real estate consultants who had structured a € 40-million-worth commercial property project on the Bulgarian Black Sea coast. In breach of an applicable contractual obligation, the consultants had not been paid the agreed success fees for their services. The then director of the defaulting party had been tragically shot dead in the meantime.
Following a hotly contested first instance, with below-the-belt attempts by the other side (the least untypical perhaps being the claim that the contract had been a forgery and a trial-within-a-trial on the issue), our team succeeded in obtaining a judgment at first instance. The parties were then able to achieve a significant settlement.
The key skills we were able to bring to bear in providing a solution included searching for solutions across the problem domain; appropriately involving representatives of Bulgaria’s EU partner member-states to buttress judicial independence; and resourcefully dealing with heterodox approaches by our judicial opponents.
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