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Features in implementing a pledge of shares of companies

Lyuba Bozova-Peshovska
Lyuba Bozova-Peshovska

The pledgee is entitled to exercise their right outside court

Although the law traditionally requires transferring of the pledged property, the Law for the registered pledges regulates the pledge to be established without transferring the holding, or this is the so called registered pledge, whose species are listed exhaustively in the LRP. The registered pledge arises from a formal contract between the pledgor and the pledgee, which is concluded in writing and when the subject of the pledge is a commercial enterprise or a share of a commercial company, the contract is concluded in writing with notarized signatures. Under the terms and conditions of the LRP, there can be established registered pledges on “shares of general partnerships, limited partnerships, partnerships limited by shares or limited liability companies”, as well as on a commercial enterprise as a set of rights, obligations and factual relations etc.

It is important to be mentioned that the pledge on shares has to be entered in the Commercial Register. After the establishment of the pledge on a share of a partner, the partner remains owner of the pledged shares. Subject of the pledge will be the share of a partner, forming part of the assets of the company, whose amount is determined according to its basic share, unless otherwise is agreed. The intangible rights of the partner cannot be subject of a pledge, because they have invaluable and personal nature. Therefore, only substantive rights can be subject of a pledge, since only the latter can be directed enforcement procedure.

Enforcement under the Law for the registered pledges

The indisputably advantage of the LRP: is that the pledgee is entitled to exercise their rights outside the court. The special nature of the enforcement is shaped by the specificity of the subject of the pledge. Below we will examine the hypothesis of corporate interest in a limited liability company. In this connection the LRP expressly refers to the provisions of the Commerce Act, regulating the rumination of membership of the partner, under which one partner has the right to terminate their participation in the company with a written notice, sent at least three months prior the termination.

LRP provides a possibility for the pledgee to exercise the right of the partner for a unilateral termination of the membership in the company and the corresponding obligation of the company to pay the share of the partner pledgor. The LRP provides the statement for beginning execution to be accompanied by an extract from the register of the registered pledge (certificate of good standing, issued by the CR in the account of the company).

Since the legal entity – a limited liability company differs from the partner, the statement has to be addressed to the company itself. The law does not provide any term for termination of the membership, but the court practice assumes that the termination is considered to have occurred by the time of expiry of the written notice and that the termination is not associated with other formalities (i.e. the general meeting of the partners).

As a consequence of the termination the pledgee can be satisfied by the price of the pledged property, as the company is obliged to pay the share of the partner pledgor. In accordance with the provision of the CA the consequences of the termination shall be regulated on the basis of the balance sheet at the last day of the month of termination of participation. It has to be mentioned that the pledge is a right of satisfaction from the price of the pledged property and the acquisition of the pledged object cannot in any way be allowed (i.e. shares).

Moreover, the law does not provide guarantees against a possible reduction of the capital of the company. The company itself is considered as a third party to the contract between the pledge and the pledgor partner. Therefore, there is a legal risk the liquidation share to be reduced during the operation of the company. Furthermore, in case of failure to sell shares (i.e. the partners are reluctant to buy them), there is a risk the company to be terminated and subsequently put into liquidation. However, there is e legal possibility for the pledge to exercise their rights in court.

Enforcement under the Code of Civil Procedure

According to the CPC the procedure starts at the request of the pledgee by the bailiff to send a security notice to the Commercial Register in the company’s file of the respective company. The security is effective from the moment of its entry, and from that moment the debtor partner does not exercise their right to dispose with the shares secured.

In case of failure to satisfy the creditor (i.e. non-payment), there is a risk for the company to be terminated with a court decision (the district court at the seat of the company). The bailiff sends to the company the statement of the creditor to terminate the participation of the debtor partner in the company. After the expiry of three months the bailiff must empower the pledgee to file a statement of claim for its termination before the district court at the seat of the company. The court rejects the request if it decides that the company has paid to the pledgee the share of the property, which belongs to the partner. If it finds that the claim is justified, the court shall terminate the company. The termination has to be registered officially and then the liquidation is carried out.

The liquidation procedure is carried out in the Commercial Register in the company’s file of the respective company and the company is subsequently deleted. It is believed that the consequences of termination are regulated on the basis of the balance sheet at the last day of the month of termination of participation of the partner. Attention has to be paid to two hypotheses. In case the company has been terminated and liquidated by a court decision, the value of the debtor partner’s share should be their liquidation share and this is specified after regulating all liabilities of the company. Therefore, there is a risk, the liquidation share to be reduced during the operation of the company of the obligations of the company to be significantly increased and as a consequence the pledgee not to be fully satisfied with the price of the pledged property. In case of voluntary payment of the debt by the company, the amount of the shares is determined according to the last balance sheet of the company. From the practice it can be concluded that the pledgee often tends to focus on the enforcement procedure under CCP.

The article has been published in Bulgarian, in Capital Daily.