Bulgaria: Self-Dealing Restrictions on Companies Represented by Identical Directors

→ Dimitar Vlaevsky

The Bulgarian Supreme Court issued two contradictory judgments in the summer of 2012.

The restric­tion of self-deal­ing is known to all mod­ern legal sys­tems. In Bul­gar­ia it is reg­u­lat­ed by Arti­cle 38 of the Oblig­a­tions and Con­tracts Act, which pro­hibits a proxy from enter­ing into con­tracts with itself or anoth­er per­son rep­re­sent­ed by the proxy. If a con­tract is exe­cut­ed in vio­la­tion of this rule, the rep­re­sent­ed per­son may still con­firm it. With­out this con­fir­ma­tion, the con­tract is null and void.

Self-dealing in corporate law

The main prob­lem is how this restric­tion should be inter­pret­ed in cor­po­rate law; that is, whether a man­ag­ing direc­tor may enter into con­tracts with anoth­er com­pa­ny rep­re­sent­ed by the same man­ag­ing direc­tor. This sit­u­a­tion is quite com­mon, for exam­ple, in hold­ing struc­tures.

Until the sum­mer of 2012, there were con­tra­dic­to­ry opin­ions in the Bul­gar­i­an legal the­o­ry and jurispru­dence, but the pre­vail­ing view was that such con­tracts were valid. Nev­er­the­less, sev­er­al Supreme Court of Cas­sa­tion (SCC) judg­ments held that such con­tracts were invalid.

On 13 June 2012, the SCC issued a judg­ment (No. 176 on com­mer­cial case 1078 from 2010) stat­ing that a con­tract between two lim­it­ed lia­bil­i­ty com­pa­nies (OOD) rep­re­sent­ed by the same man­ag­ing direc­tor was invalid. The judg­ment also stat­ed that it would not be pos­si­ble to con­firm such con­tract at a lat­er stage because the pos­si­bil­i­ty for con­fir­ma­tion does not apply in the case of a lim­it­ed lia­bil­i­ty com­pa­ny. This judg­ment is con­trary to a judg­ment in a sim­i­lar case decid­ed by the SCC (Judge­ment No. 99 issued on 1 July 2009 on com­mer­cial case 713 from 2008).

More confusion

One month after the above judg­ment, anoth­er depart­ment of the SCC issued a new judg­ment on this top­ic (Judge­ment No 37 issued on 26 July 2012 on com­mer­cial case No. 475 from 2011). This time the con­tract was signed between two joint stock com­pa­nies (AD), which were also rep­re­sent­ed by the same man­ag­ing direc­tor. In this case, how­ev­er, the court held the con­tract valid because, with a joint stock com­pa­ny, the Board of Direc­tors may con­firm the con­tract.

Summary

Based on these lat­est two SCC judg­ments:

1. A con­tract signed between two lim­it­ed lia­bil­i­ty com­pa­nies (OOD) rep­re­sent­ed by the same man­ag­ing direc­tor is null and void and can­not be con­firmed at a lat­er stage, even by the Share­hold­ers Meet­ing.
2. A con­tract between a lim­it­ed lia­bil­i­ty com­pa­ny (OOD) and a joint stock com­pa­ny (AD) rep­re­sent­ed by the same man­ag­ing direc­tor is also null and void, even if con­firmed by the Board of Direc­tors of the joint stock com­pa­ny.
3. A con­tract signed by two joint stock com­pa­nies (AD) rep­re­sent­ed by the same man­ag­ing direc­tor is valid if the Board of Direc­tors of each joint stock com­pa­ny has con­firmed it.

Not helpful

The above con­clu­sions are not very help­ful to busi­ness­es and may endan­ger the valid­i­ty of many trans­ac­tions exe­cut­ed under the SCC’s old inter­pre­ta­tion of the issue. The SCC should thus issue an explana­to­ry judg­ment (which would bind all courts, includ­ing the dif­fer­ent depart­ments of the SCC). Or the leg­is­la­tor should pass spe­cial reg­u­la­tions in the Com­mer­cial Act.

The above con­tra­dic­to­ry judg­ments are a stark exam­ple of the con­tin­u­ing lack of judi­cial con­sis­ten­cy in Bul­gar­ia. The Euro­pean Com­mis­sion under­lined this prob­lem in its 2012 Report of the Progress in Bul­gar­ia under the Coop­er­a­tion and Ver­i­fi­ca­tion Mech­a­nism. The Com­mis­sion empha­sised that the SCC must “iden­ti­fy and address incon­sis­tent inter­pre­ta­tion of the law in all rel­e­vant areas”.

These conclusions are not very helpful to businesses and may endanger the validity of many transactions executed under the SCC’s old interpretation of the issue.