General Characteristic and Regulatory Framework
The special pledge is one of the means for guaranteeing liabilities. The applicable regulatory framework consists of The Special Pledges Act, which contains special regime in comparison with the rules for the pledge that can be found in the Act for Obligations and Contracts and the Commercial Act.
The main characteristic of the special pledge is that it is established without transfer of the pledged property. Instead, an entry of the signed contracts for a special pledge in the Single Electronic Central Register of Special Pledges is required. The entry creates an irrebuttable presumption of knowledge of third parties and guarantees the enforceability of the pledged right against the claims of the creditors against the pledged property.
Special Pledge Agreement
The special pledge always has a contractual nature as The Special Pledges Act makes no provision for cases, in which it arises by virtue of the law. Under the Special Pledge Agreement, the pledged creditor could satisfy its claims preferentially from the pledged property in case of non-performance of the contractual obligations. The unilateral character of the agreement is a result of the fact that it creates obligations for only one of the parties, namely the pledgee.
Another main characteristic of the agreement is its formal character. According to the provisions of the applicable law, it should be concluded in writing or in writing with certified signatures of the parties, when expressly provided by the law, and it is subject to entry in The Single Electronic Central Register of Special Pledges. The special pledge is established after the entry is done.
The special regime of the special pledges is contained in The Special Pledges Act, but the rules of the Act for Obligations and Contracts and the Commercial Act are also applicable, depending on whether the transaction is commercial or not.
The special pledge is a commercial transaction and the Commercial Act provisions should be applied subsidiarily in two cases:
- when the pledgee is a commercial entity and the pledge is related to its profession.
- when the special pledge guarantees an obligation arising out of a commercial transaction.
When the pledge does not have the characteristics of a commercial transaction, the rules of the Act for Obligations and Contracts should be applied subsidiarily.
Who can be the pledgee?
The parties to the agreement are the pledged creditor and the pledgee. Any person can be the pledged creditor.
According to The Special Pledges Act the pledgee can be:
- a trader.
- individuals engaged in business activities or rendering personal services, or self-employed;
- a legal person,having the individuals engaged in business activities or rendering personal services, or self-employed as members;
- a spouse of a sole trader or of an individual engaged in business activities or rendering personal services, or self-employed;
- municipalities that guarantee their own debts under the provisions of The Municipal Debt Act.
- The Bulgarian Deposit Insurance Fund, when guaranteeing the loans it uses.
- Non-profit making organizations engaged in business activities – regarding these activities.
The non-profit making organizations that have the individuals engaged in business activities or rendering personal services, or self-employed as members can be pledgees irrespective of their activities, whereas the non-profit making organizations that do not have the mentioned individuals as members can be pledgees only regarding their business activities. The special legal requirement that a pledgee can be only a trader or an individual under Art. 2 of the Commercial Act does not apply when the pledged property consists of book entry securities and collective investment schemes‘ shares, company shares in general partnerships, limited partnerships, limited partnerships with a share capital and limited-liability companies, as well as rights over patents, utility models, registered trademarks, industrial design rights, topographies of integral schemes and certificates of plant varieties and animal breeds.
Pledged Property
The Special Pledges Act contains a list of the property that can be subject of a special pledge. In comparison with the Act for Obligations and Contracts and its provisions for the pledge, this list is a lot more extended since the special pledge agreement does not require the actual transfer of the pledged property.
Subject of a special pledge can be:
- Movable property, except for ships and aircrafts.
Unspecified items of property and futures can also be subject of a special pledge. Future crops can be pledged from the present or the following business year. An item to another person can also be subject to a special pledge. In that case, if the item has not yet become property of the pledgee at the moment of the forced execution of the pledged creditor’s claim, he/she could not exercise the pledged right. This would be the case if one natural person concludes a credit agreement with a bank for the funding of the sale of certain items (futures) that will be subject of a special pledge in favor of the bank.
If the pledged property is processed or incorporated to another one, the pledge follows the new item. The special pledge extends over the belongings and the natural fruits derived from the item.
- Machines and facilities.
- Receivables, book entry securities and collective investment schemes‘ shares. The special pledge of a receivable has effect on the debtor after the notification. The Special Pledges Act stipulates that the notification can be made by both the pledgee and the pledged creditor. The notification has to be in written form as the Special Pledges Act determines its content. The special pledge guarantees the receivable and all its interests and penalties.
- Company shares in general partnerships, limited partnerships, limited partnerships with a share capital and limited-liability companies.
- Rights over patents, utility models, registered trademarks, industrial design rights, topographies of integral schemes and certificates of plant varieties and animal breeds.
- Commercial enterprises.
- Agricultural production, raw materials, goods and commodities.
- Sets of receivables, machines and facilities, of goods and commodities and of book entry securities, as well as collective investment schemes ‘shares.
The special pledge of a set extends over each of its elements until its separation of the set. It also extends over the elements that will enter the set afterwards as the pledgee cannot exclude elements of the set after the pledged creditor has entered the forced execution of his/her claim in the Single Electronic Central Register of Special Pledges.
In case of collision between the rights of a creditor with a special pledge of a set and a creditor with a special pledge of an element of the set, the following individuals are privileged:
- Seller of an item or a right, whose claim about the price is guaranteed with a pledge of the item or the right.
- Individual who has loaned for the acquisition of the item or the right and has established in its favor pledge on that same item or right.
- Seller who has kept the property until the full payment of the price.
- Lessor.
Those individual’s rights are enforceable against the pledged creditor of the set, in case that the sale, respective the pledge or the leasing have been entered in the Single Electronic Central Register of Special Pledges within 14 days as of the date of the conclusion of the respective deal.
Form of the Special Pledge Agreement
To be valid, the agreement should be concluded in written form. There are several exceptions from this general rule, namely:
- The special pledge of a commercial enterpriserequires written form with notary certified signatures of the parties.
- The special pledge of company shares requires written form with notary certified signatures of the parties.
Entry of the Special Pledge
The special pledge should be entered in the account of the pledgee in the Single Electronic Central Register of Special Pledges. The register is public and every third party can make a reference or issue a certificate for the presence or the absence of the entered fact. The registered facts are considered to be known by other bona fide third parties (the so-called announcing effect of the entry). The established pledge is enforceable against the third parties from the moment of the entry in the Register. This means that the pledged creditor could satisfy its claims preferentially before all the debtor’s remaining creditors, as well as that every third party that the pledge is enforceable against, obtains the rights of the pledged property with the pledge and becomes a pledgee.
The entry’s effect is limited to 5 years and it can be renewed before the time period has expired.
The special pledge of book entry securities is not subject to an entry in the Single Electronic Central Register of Special Pledges, but in the Central Depository AD. If the subject of the special pledge are government securities, the pledge should be entered in the registers for government securities.
The special pledge of company shares is not subject to entry in the Single Electronic Central Register of Special Pledges, but in the commercial register in the account of the company that owns the shares.
The pledge of rights over patents, utility models, registered trademarks, industrial design rights, topographies of integral schemes and certificates of plant varieties and animal breeds is not subject to entry in the Single Electronic Central Register of Special Pledges, but in The Patent Office of the Republic of Bulgaria.
The pledge of a commercial enterprise should be entered in the commercial register in the account of the pledgee. In order to be enforceable against third parties that obtain rights over certain items of property within the commercial enterprise, the special pledge agreement should be first registered in the respective register (so-called secondary entry):
- for movables – in The Single Electronic Central Register of Special Pledges.
- for book entry securities – in The Central Depository AD or the registers for government securities, respectively.
- for receivables – in The Single Electronic Central Register of Special Pledges.
- for immovables – in the Land register.
- for intellectual property rights – in The Patent Office of the Republic of Bulgaria.
Enforcement of the Pledge
According to The Special Pledges Act the pledged creditor can sell the pledged property out-of-court (so-called private sale), given that he/she enters the forced execution of the claim in The Single Electronic Central Register of Special Pledges. Additionally, the law requires the pledged creditor to notify in written form the pledgee about the forced execution of the claim.
The sale conducted by the pledged creditor extinguishes only the pledges, established in accordance with the rules and procedure of The Special Pledges Act, while all other guarantees and protective measures over the pledged property remain.
The price after the sale of the pledged property is transferred to the so-called depositary, who can be an attorney or a registered auditor. The depositary prepares a list of the individuals that have rights over the pledged property according to the data in The Single Electronic Central Register of Special Pledges. If the pledged property is not enough for all the creditors, the depositary prepares allocation of the property.
