Priority of Claims in Insolvency and Enforcement
A creditor (Bank A) has a mortgage on a debtor's factory. The debtor also owes 100,000 BGN to employees for unpaid wages and 50,000 BGN to the tax authority. The debtor's property is insufficient to satisfy all claims. Bank A initiates enforcement, and the bailiff attaches the factory. Subsequently, an insolvency proceeding is opened against the debtor. The bailiff must determine how to distribute the proceeds from the sale of the factory, considering the claims of the bank, employees, and tax authority. The factory sells for 300,000 BGN. The bailiff is unsure about the interaction between enforcement and insolvency, and the priority rules under Bulgarian law.
1. What is the effect of the insolvency proceeding on the pending enforcement? How should the bailiff proceed?
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Under Article 6(1) of the Commerce Act (Insolvency), the opening of insolvency proceedings stays individual enforcement actions against the debtor's property. The bailiff must suspend enforcement and transfer the case to the insolvency court. The proceeds from the sale of the factory, if already collected, must be deposited with the insolvency court for distribution. The bailiff should not distribute the proceeds but await the court's instructions. The bank's mortgage remains valid, but its enforcement is subject to the insolvency proceedings. The bailiff's role is to cooperate with the insolvency administrator. Therefore, upon learning of the insolvency, the bailiff must cease enforcement and hand over the proceeds.
2. Assuming the insolvency court distributes the 300,000 BGN, what is the priority order among the bank, employees, and tax authority under Bulgarian law?
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Under Article 722 of the Commerce Act, the order of priority is: (1) expenses of the insolvency proceedings; (2) claims secured by a mortgage or pledge (Bank A); (3) claims for wages (employees) up to a statutory limit; (4) tax and social security claims; (5) unsecured creditors. However, Article 723 provides that wage claims have priority over mortgages for a portion (e.g., up to three months' wages) if the mortgage was created after the wages became due. In this case, the bank's mortgage likely predates the wage arrears, so the bank has priority. But the employees' wage claims may have super-priority for a limited amount. The tax authority ranks after the bank and employees. Thus, the bank is paid first from the factory proceeds, then employees (subject to limits), then tax. The bailiff must follow the insolvency court's distribution, which will apply these rules. The bailiff should not independently distribute but ensure the proceeds are transferred.