The Supreme Court of Cassation (SCC) is awaited to rule on whether the law encourages the bad-faith draining of companies.
Judging by the rich case law of recent years in Bulgaria, it is very easy to drain a company. It is enough to have a greedy manager or a majority shareholder ready to enter into immoral, but formally lawful transactions, through which the company's assets will be disposed of at a pittance or the company will acquire obligations and commitments. to which it was not necessary to become a party.
There are many examples. Within the framework of his legal competence (Art. 141 of the CA), any manager of a commercial company can drain the company by concluding, for example, a contract for the sale of assets for nothing, whether with a third party or with a related party, or by renting out assets of the company under obviously unfavourable conditions – low rental price, high penalties, for an extended period of time, etc. unfavourable conditions; by purchasing or renting [unnecessary] assets at an unreasonably high price, for an extended period, negotiated unfairly high penalties, in case of refusal and/or non-performance; conclude a loan agreement for funds from which the company does not need, whereby the money enters into an account specified by the manager, different from that of the company, and accordingly disappears, and the company remains obliged to repay the loan; conclude a pledge/mortgage agreement with the company's assets for a debt of a third party, with which the company objectively has no relations and/or for the personal debt of the manager, etc. The list is without claims for exhaustiveness and ingenuity, there are many other hypotheses in which the manager can "legally" drain the company and it has no chance to recover its assets, even when it is obvious that they are provided at a pittance to third parties.
On the other hand, the majority shareholder also has a mechanism to drain the company, insofar as it can "dress" the theft in a decision of the General Meeting (GA), including the misappropriation of an asset through such a decision. From the point of view of law, there are some differences in the legal classification of the grounds, but in practice the result is that the company's property passes into hands other than those of the bona fide partners.
And while in a joint-stock company some, albeit indirect, restrictions on the ability of the representatives to play the shareholders are permissible, in the case of an LLC there are many real opportunities for the manager and/or the partners, who can form a majority, to dispose of the interests/assets of the company in such a way that it and the shareholders who do not participate in the constraint lose.
The property liability of the manager does not solve this problem
Some lawyers point to as a panacea the provision of Article 145 of the Commerce Act (CA), according to which the manager is financially liable for the damages caused to the company. This is undoubtedly true, but post factum retribution to the manager will not return the assets of the company to his patrimony. At best, only their value after many years of litigation. in which this possibility is not able to lead to real compensation for the company: 1. the manager does not have property with which to compensate for the damage; 2. in order to hold the manager liable, a decision of the General Assembly of the company is necessary (Art. 137, para. 1, item 8 of the CA), and it is possible that a majority for such a decision may not be collected if some of the shareholders are in collusion with the manager who has drained the company with their prior "blessing".
It is the disputes about how cases where there is a transaction detrimental to the company, concluded by a manager, that led to the initiation of Interpretative Case No. 4/2025 of the General Assembly of the Civil and Commercial Chambers (OGTC) of the Supreme Court of Cassation. The question raised in this case is: "Is the provision of Art. 40 of the Law on Contracts and Contracts for the Body Representation of a Commercial Company"? It probably sounds like an enigma to non-lawyers. "Translated" into colloquial language, it means whether a transaction concluded by the manager to the obvious detriment of the company can be declared invalid, i.e. as if it had not happened for the company. Or: if the proxy sells, for example, real estate, at a price that is obviously understated, respectively the buyer is aware of this (which is easily ascertainable as long as he is a participant in the civil turnover), the represented seller (the company) may challenge the transaction, and the court, finding that the agreed price does not correspond to the objective (market) conditions at the time of sale, to declare the sale invalid.
The provision of Art. 40 of the Law on Contracts and Contracts says: "If the representative and the person with whom he negotiates agree to the detriment of the represented, the contract shall not have effect on the represented." The dispute is as to whether it is applicable to contracts concluded by the company's manager, in so far as there is conflicting case-law on this point.
In some of the court decisions issued on such disputes, the thesis is accepted that whatever the legitimate manager contracts is unconditionally binding on the company, regardless of whether it damages it or not. With this understanding, the protection of the company, respectively of the shareholders, from the harmful actions of the manager chosen by them is an internal company matter. The contrary understanding is that, although the disputed transaction was concluded by a legitimate director, the other party should be held liable if the agreed terms and conditions lead to a lack of equivalence of considerations, i.e. to visible or easily identifiable damage to the company. Liability is realised by challenging the transaction on the grounds of "to the detriment of the represented" and/or "violation of good morals" and proving in the court process at the same time that the company was damaged and the opposing party knew or should have known that the specific arrangement was not fair.
The fair answer to the question put for interpretation is "Yes! The injured company may invoke Art. 40 of the Law on Contracts and Contracts". And if there is sufficient evidence of harm, knowledge, etc. characteristics of the misconduct, the company has grounds to return the asset to its patrimony. Because this is the most real, practical opportunity for protection. A possible negative answer to the question posed would mean that the court encourages "midday robbery" with the argument that it is in accordance with the formal limitations of the law. And the unscrupulous manager should be free to drain the company and benefit third parties, including related parties (some of the partners, their relatives, himself).
One of the cases, on the occasion of which the interpretative case was initiated, is about a case in which a manager of a company signed an employment contract, by which he provided for 12 salaries of compensation (BGN 111,240) for his mother, upon termination of the employment contract on any grounds. And in this case, it is not about compensation upon retirement, The employment contract was concluded after the woman had acquired and exercised her right to a pension.
It is appropriate to note here that the situations in which a commercial company may find itself due to the bad faith of its manager arise objectively and regardless of how carefully the partners have considered who to appoint as a manager and/or how they distribute the shares among themselves and other safeguard clauses that are provided for in the articles of association. One of the arguments against the application of Art. 40 of the Law on Contracts and Contracts with regard to unfair transactions carried out on behalf of a commercial company is that this happens due to the poor initial assessment of the shareholders about the personality of the manager. But every reasonable person knows that no matter how careful the selection was, people and the circumstances around them change.
At the same time, it is important to emphasise that for transactions that have been concluded under conditions that meet the market conditions at the time of conclusion, the hypothesis of Art. 40 of the Law on Contracts and Contracts would not be applicable, even if the funds received under these transactions have been diverted by the manager and are not available in the company. for which, although on unfavourable terms for the company, are found to be useful for the company and/or are for the achievement of other legitimate goals.
Otherwise, formal arguments for "security of trade turnover" and other similar clichés, without taking into account what is happening in real life, will be found, but life is what happens while someone puts it in a scientifically based mould.
Despite the understanding that security/predictability in turnover takes precedence over limiting the possibility of unfair enrichment of the party that takes advantage of the unfair behaviour of the representative, then, at the same time, the institutions of commercial law should not contradict basic principles of the legal order related to the validity of contracts and the prohibition that they violate good morals. Justice is not a subjective category, It has a determinable scope and it is it that guarantees the legal certainty of civil and/or commercial turnover. The exchange of goods between traders should not be subject to different from the civilised rules for equivalence of services, i.e. commercial transactions are expected to comply with the rules of good morals and morals. This is the understanding of the legal doctrine and case law of many European countries, including the existence of special acts in the law of the European Union in the explicit protection of the interests of the participants in a commercial company whose share of the capital is minority[1]
Bulgarian law recognises "good morals" as a significant element of the validity of the transaction, and when they are not complied with, the legislator has provided for such a transaction to be defined as "null and void", i.e. as if it had not happened. According to Bulgarian law, since ancient times, the disproportionality of the services has been considered a particularly serious defect of the transaction. Where the lack of equivalence, if not obvious, is at least easily identifiable. The concept of 'laesio enormis' [serious injury] is an up-to-date legal mechanism for opposing agreements in which fairness is compromised but their existence is justified by 'freedom of contract'.
And by recognising the understanding that morality is not mandatory in negotiations, the court would not only disembark from its main function, but even worse – it would encourage freedom and unpardonability, disguised as "freedom of contract". The autonomy of the parties' will to freely determine the content of the contract is limited by the provision of Article 9 of the Law on Contracts and Contracts. According to which the content of the contract should not contradict the imperative norms of the law and good morals. Our commercial law does not contain a derogation from this principle, even in view of the provision of Article 288 of the CA encourages its application to commercial transactions as well.
There is no specific legal definition for "good morals". The content of this concept is formed by the totality of the moral norms and ethical rules established in society, which express the generally accepted views on justice, good faith and integrity in civil turnover. Of course, the assessment of contradiction with "good morals" is expected to be made on the basis of the relevant facts for each specific case, including examining the possible reasons/grounds for which, although through the exchange of non-equivalent services, the transaction in question was only possible and in the interest of the company.
Namely, because of the restrictions on the freedom of contract, specified in Art. 9 of the Law on Contracts and Contracts, the stubbornness that a transaction signed by the manager, although visibly to the detriment of the company, cannot be invalid because of the presumption that it is inadmissible for the body representation (most often the manager) to have restrictions other than those explicitly specified in the law, is an expression of an end in itself formalism and a frank encouragement not to respect and, accordingly, to violate with impunity morals.
There is no doubt that only the morality of the legal representative of a legal entity would prevent him from signing a transaction that is to the detriment of the company and for the conclusion of which there is no logical/objective reason. The dispute is whether, once concluded, such a transaction is subject to challenge by the injured parties (all shareholders and/or only some of them and/or third parties who can establish their legal interest, e.g. creditors of the company whose manager has disposed of the property, so that the creditor has nothing to satisfy himself with, etc.) The United States, as well as England, unconditionally allow such transactions to be "checked" by the courts.
In this regard, the thesis that 'organ representation' should not be subject to the generally valid rules of good faith and fairness should be abandoned. The scope of 'organ representation' of commercial companies is not unlimited and there are no objective, substantive, in essence, legal arguments to justify that transactions concluded by the manager are permissible not to comply with the need for equivalence of considerations, for ethics in negotiations, for respect for the interest of the company, respectively of the individual shareholders. The "organic" representation, as well as any representation, can be carried out in a way that leads to intentional damage (collusion with a third party) or in case of obvious abuse when the conditions are so favourable that the acquirer, if he was in good faith, should have doubted the excessive profitability of the transaction.
In conclusion, as the provision of Art. 141, para. 2, sentence 3 of the CA provides peace of mind to the bona fide counterparty, insofar as it does not allow the company to invoke internal restrictions before the representative power of the manager or other than those provided for in the law, respectively this protects the commercial turnover when it is based on reciprocity and equivalence of the services, then against an unfair exercise of authority in collusion with the third party it is imperative to be It is permissible to oppose the sanction of Art. 40 of the ZZD. If the court adopts acounter-position in the interpretative decision, then it, albeit ostensibly argued with complex theoretical equilibrium about the essence of body representation and its autonomy, would practically put in fear and uncertainty any legal entity in which there is more than one participant. Because the theft of assets and unjustified debt can happen not only to commercial companies, but also to non-profit legal entities.
[1] Germany (Abstrak tionsprinzip and § 138 BGB): In principle, the transaction is valid even if the administrator has breached the internal limits, the exceptions being in the case of a collision (Kollusion): if the director and the third party knowingly act together to damage the company, the transaction is null and void due to a contrary to principles of morality (§ 138 BGB); or manifest abuse: German case-law assumes that if the damage is "obviously" to the third person (even if there is no direct "collusion"), the protection of the third person is dropped. This completely coincides with the thesis in your text;
Anglo-Saxon system (England and the USA): The doctrine of Fiduciary Duties applies here – the manager is a fiduciary and must act solely in the interest of the company, as in the case of Self-dealing: if the manager enters into a transaction with a related party or with himself (Conflict of Interest), the burden of proof is transferred to him and he must prove, that the transaction is "Entire Fairness" for the company; or Constructive Trust: if the third party knows that the administrator is breaching of fiduciary duty, the court may declare that the assets are held by the third party only as "trust property" and must be returned to the company.
France (L'abus de biens sociaux): French law is particularly strict with the so-called "biens sociaux".'misuse of corporate assets' and any action of the manager which is contrary to the interest of the company and is done for personal purposes or for the benefit of another company in which he has a connection/interest is considered null and void; provisions of criminal law are also often used, but in the civil aspect transactions concluded to the detriment of the company, They are easily attacked through the concept of lack of cause (reason) or abuse of rights.