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Winding up a Bulgarian company (i.e. liquidation) is an option related to the growing financial and economic crisis as a result of the worldwide spread of COVID-19 virus and the difficulties many companies are currently experiencing which brings to the fore the question of voluntary company liquidation procedures. In 2020, many companies will face the only opportunity to cease operations because they will not be able to fulfil their obligations. Bulgarian Commercial Law provides for several possibilities for termination of a sole proprietorship or a limited liability company, the most commonly used of which is the voluntary liquidation of a Bulgarian company.
The liquidation procedure (also known as winding up of a company) is different from the insolvency procedure, as it can be conducted only in case the company is solvent, while bankruptcy is associated with serious and insurmountable financial difficulties where company cannot pay its debts.
The voluntary liquidation is a legal consequence of the decision taken by the shareholders to cease business and close their company. If you are considering to stop active business, the procedure is recommended instead of keeping your company, because even a dormant company is subject to compliance – registrations, annual reporting, zero tax returns filing, etc. For foreign shareholding companies keeping a dormant company is even more expensive as they need to keep registered address and a point of contact in Bulgaria. The fact that a company does not operate does not mean that its obligations to third parties, incl. the state and the various state bodies are extinguished and no new ones will be generated in the future.
Compared to insolvency, the voluntary company liquidation in Bulgaria is easier in practice because the intervention of creditors and court authorities is much less intense. In most cases, the trader himself, personally or through qualified persons – lawyers, accountants or other specialists, settles all issues related to the liquidation of the company and termination of its activities and declares certain circumstances to the respective authorities. The liquidation of a limited liability company takes about 8 months, for a sole proprietor the term is much shorter. Most of the necessary announcements can be made by electronic signature, if the company does not work with electronic signature it can use an authorized commercial lawyer who can deal with the liquidation of the company on behalf of the shareholders.
The closure of a company should begin with a decision of the company’s bodies – general meeting or sole shareholder – by virtue of which a liquidator is elected and appointed. This is usually the manager of the company. The liquidator has two very important tasks – to collect the receivables of the company and to satisfy all creditors.
The company is obliged to inform the other participants in the turnover, in particular its creditors and the respective state authorities, that liquidation proceedings have been initiated. In view of the above, the company sends several notifications and announcement. In the first place, the company announces a special invitation to its creditors, giving them a six-month term in which they can present their claims.
Voluntary winding up of a company is applicable only in case the company does not have outstanding public obligations. Therefore, the company notifies the National Revenue Agency (NRA) for the beginning of the liquidation. NRA makes a check whether the company has any liabilities to the state and if such are not found, the Agency issues a certificate to the Company which must be announced in the Commercial Register. If the company is VAT registered, it should be deleted from the VAT register before its liquidation and this de-registration can be made upon a tax audit of the company.
Another State Authority which needs explicit notification is the National Social Security Institute. If the company has or has ever had any employees during its existence, the closure of the company can happen only in case all files of the employees and payroll documentation has been handed to the NSSI.
Last but not least, at the end of the liquidation, the company distributes any assets left among its shareholders and announces final financial statements and balance sheet.
Upon the completion of the above steps, the company is terminated, struck off the Commercial Register and shall no longer exist as a legal entity.
There are examples of companies which try to conduct voluntary liquidation in the presence of preconditions for initiating insolvency proceedings and declaring insolvency. This is prohibited by Bulgaria legislation and there is an explicit provision in the Commercial Law, reading that even in case of initiated liquidation proceedings, if the the company turns out to be insolvent, it shall immediately change to insolvency proceedings.
In other words, it is inadmissible to close a company and distribute its property if there are unsatisfied creditors.
It is now expected by experts that due to the complex economic situation after the outbreak of the COVID-19 pandemic, some companies which have debts to customers or contractors will take this approach – to try to quietly liquidate their companies, hoping that their creditors will not notice this and will finally fail to file their claims. Therefore, if you are a creditor, it is advisable to keep a close eye on your debtors, and if they proceed to liquidation – to file your claims immediately.