Material amendments to the Bulgarian Special Pledges Act were enacted at the end of 2016. For details please refer to the attached newsletter.

1. Anna Saeva, Attorney-at-law
email: anna.saeva@saeva-legal.com
January 12, 2017, Sofia, Bulgaria
NEW RULES FOR THE
SPECIAL PLEDGES
Legal reform, Bulgaria
The present newsletter attempts to summarize the major amendments to the
Bulgarian Special Pledges Act, as promulgated in State Gazette, Issue No
105 of December 30, 2016, which reform the features of this security interest
in many important aspects. For details please refer to the text below.

2. 1/12/2017
1
Amendments to the Bulgarian Special
Pledges Act
Legal reform, Bulgaria
The Bulgarian Special Pledges Act (the “SPA”) took effect in 1997 and over the years
underwent multiple changes. It regulates commercial pledges, which until the SPA’s latest
amendments were set up by way of an agreement (in writing or with notarization of the
contracting parties’ signatures, as the case maybe) and perfected by way of a registration into
the Central Special Pledges Register (or other relevant register, as applicable). The setting up
and perfection of the pledge, however, did not and still does not require delivery of the
possession of the asset to the pledgee (or any pledgee’s nominee), as the pledgee is also entitled
by law to a private pledge foreclosure. In fact, these features distinguish this security interest
from the traditional possessory pledge, and triggered its qualification as “special”.
At the end of 2016, material amendments to the SPA were enacted, designed to eliminate
certain inconsistencies in the SPA application, increase legal certainty and boost the use of
this security interest on the local market. In brief, the new amendments, which in many
aspects are amounting to a legal reform, could be summarized, as follows:
Pledge Establishment
 According to a new rule of the
SPA a special pledge is established by way of a
registration of the pledge into the Central
Special Pledges Register (or other relevant
register for specific types of assets such as e.g.
dematerialized securities, going concerns, etc.),
based on a special pledge agreement. Similarly
to real property mortgages, the registration
becomes constitutional and an absolute
precondition for the validity of the security interest. As before, generally upon registration the
pledge becomes also effective against third parties. Registration of conditional sales and leases
under the SPA, however, remains a matter of perfection only, designed to protect the interest
of the seller or lessor, as the case maybe, when competing with third parties.
 The filing for registration of a pledge (or other eligible interest) or amendments
thereto shall be supported by documentary evidence (such as the special pledge agreement,
assignment contract, etc.). Such evidence should be in Bulgarian or accompanied by certified
Bulgarian translation.
 As of September 1, 2018 the officials dealing with the pledge registration shall
be empowered to evaluate whether the legal preconditions for the setting up of the special
pledge or other interest are met. Until this amendment becomes effective, the validity of the
contractual documentation and the eligibility of the relevant interests for registration shall
The registration of the special
pledge becomes constitutional i.e.
a matter of its validity

3. 1/12/2017
2
continue to be assessed by the contracting parties themselves, as the registration shall be
effected on the basis of properly filled in registration applications and paid registration fees.
The above new rules could pose certain practical challenges and result in delays in setting up
of the pledges or perfection of the leases or conditional sales not only for logistics reasons (e.g.
necessity of translation) but also on substantive grounds. Thus, for example it is unambiguous
that the pledge agreements should comply with and be governed by the SPA in order to be
eligible for registration as special pledges. However, the eligibility for registration of leases or
sales governed by foreign laws is not expressly regulated under law. In theory, such
registration should be admissible, if the transactions have the core features of the Bulgarian
law governed conditional sales or leases. The practical approach of the registry officials,
however, in the last scenarios is yet to be seen. In any case, if registration is declined, this
could encourage the parties to look for alternative techniques for protection of the creditor’s
interests, instead of facing difficulties at the enforcement phase. Thus, albeit the changes could
be viewed as a “red tape” trigger, perhaps they may prove to be valuable in the long run;
Eligible pledgees
Traditionally, the eligible pledgees under the SPA are merchants (sole traders, commercial
companies), shareholders in certain types of commercial companies, dematerialized securities
holders or IP rights holders. In addition, the new rules allow pledgees under the SPA to be also
entities, which do not qualify as merchants but on other legal grounds are allowed to perform
business activities, such as non-profit organizations, law firms, etc.
Eligible Assets
By the latest SPA changes, the assets eligible for pledging are split into groups corresponding
to the prevailing practical approaches. However, these changes are, more or less, a matter of
new wording, rather than a substantive amendment to the types of assets, which could be
subject to a special pledge. For completeness, such pledgeable assets include: movables;
machines and equipment; dematerialized securities; equity shares in certain types of
companies (such as LLCs); registered marks, patents and other industrial property rights;
receivables; agricultural production; aggregations of assets and going concerns. Ships and
aircraft remain out of the scope of the special pledges regime.
Increased Protection for Prior Ranking Pledges
 Second and next ranking
pledges, encumbering the same assets, may
be registered only with the consent of the
pledgee/s, having prior ranking pledge/s;
 Enforcement of a second or
next ranking pledge may be effected only
with the consent of the first (or prior
ranking) pledgee. In the absence of such a
No new pledges or pledge
foreclosures are admissible
without the consent of the
prior ranking pledge
creditor

4. 1/12/2017
3
consent, the follow-up pledgee must first settle the claim secured by the prior ranking pledge/s,
and only after this shall be allowed to foreclose its pledge. These rules appear to be designed
to prevent abuses where subsequent creditor sells the pledged property at a low price to the
detriment of the prior ranking creditor.
Disposal of Pledged Assets
 Disposal of pledged assets out of the ordinary course of the business of the
pledger requires prior consent of the pledgee, which shall be entered into the Central Special
Pledges Register or other relevant register. In the absence of such a consent the new owner of
the pledged assets acquires them encumbered by the pledge and has the position of a pledger.
This rule applies in respect of any follow-up acquirer of the pledged assets, other than those
which could establish that they were in fact acting in good faith i.e. without knowing that the
assets were encumbered by the special pledge;
 It is re-confirmed that when the start of the pledge foreclosure is registered,
the pledger may not further dispose of the pledged assets (including in the ordinary course of
its business). Any disposal made in breach of that prohibition is null and void vis-à-vis the
pledgee and the other joined creditors (i.e. creditors allowed by law to obtain foreclosure
proceeds).
Pledge Foreclosure
 The right of the pledgee for private foreclosure has been preserved but
subjected to new requirements for proper announcements by the pledgee of the sale terms;
 More detailed rules were introduced for the foreclosure of pledges on going
concerns. As a result, it became unambiguous that the debt secured by a going concern pledge
could be settled by: proceeds from the operation of the going concern, proceed from the sale of
assets-elements of the going concern or proceeds from the sale of the going concern as a whole
(i.e. as an aggregation of assets, liabilities and goodwill);
 A private foreclosure under the SPA “frees” the sold assets from the registered
special pledges only, while all other collateral (e.g. mortgages on real estates-elements of a
pledged going concern) and conservation measures are preserved;
 In the case of competition between pledge foreclosure under the SPA and other
enforcement proceedings (governed by the Civil Procedure Code or the Tax and Social
Insurance Procedure Code), the claim secured by a special pledged shall be settled within the
proceedings, which have commenced first. This principle applies also in the scenarios where
bankruptcy proceedings have been instituted against the pledger. As opposed to the previous
rules, if the start of the pledge foreclosure has not been registered before the institution of the
bankruptcy proceedings, the
secured claims of the pledgee shall
be settled within the bankruptcy
proceedings. It seems that this
rule is designed to increase the
chances for recovery of the
insolvent debtor to its benefit and
the benefit of its creditors.
No private pledge foreclosure is
admissible, if bankruptcy
proceedings are instituted first

5. 1/12/2017
4
However, many of the Bulgarian bankruptcy proceedings end up with liquidation of the assets
of the bankrupt debtors as the time between the institutions of the bankruptcy proceedings
and the liquidation of the bankruptcy estate could be years. In such cases the prohibition of
the private foreclosure of the special pledges could be seen as unnecessary frustration of the
special pledgee’s rights and a major new downside of this type of security interest.
Central Special Pledges Registry
 New by-laws relating to the application of the SPA should become effective not
later than by April 1, 2017. Upon this the Registry Agency, (which keeps inter alia the
Bulgarian companies’ register) will become responsible for the keeping of the Central Special
Pledges Register, instead of the existing administrative unit within the Ministry of Justice.
Thus, all major circumstances relating to
sole traders and commercial companies
shall be registered by one and the same
administration;
 By September 1, 2018 the
Central Special Pledges Register should
become fully electronic i.e. all filings with
the Register will be able to be done in
electronic form. From this date on, free
internet access to the Register and its
records is expected to be given to the public.
These changes are long overdue and for sure will be welcomed by all players on the local
market.
Please note that the above newsletter does not represent legal advice and is prepared for
information purposes only. If you need any specific advice or help, please feel free to contact the
author at the email address specified above.
By September 1, 2018 the Central
Special Pledges Register is
expected to become fully
electronic and “truly” public.