The manager of a Bulgarian OOD or EOOD is, as a rule, not liable for the company's debts, but there are cases where he answers with his own assets: to the company for damage caused, and to the National Revenue Agency for unpaid taxes and social security. We explain when, for how long, and how to protect yourself.
In brief
- The manager and the controller are liable for damage caused to the company; the general meeting decides to sue and appoints the company's representative for the case, and in an EOOD the sole owner does (Arts 145, 137(1)(8) and 147(2) of the Commerce Act).
- For the company's taxes and social security, the manager is liable only in the cases in Article 19 of the Tax and Social Security Procedure Code: if he concealed facts he had to declare, or in bad faith reduced the company's assets through a hidden profit distribution, a gift or a sale far below market value, or security for someone else's debt.
- Bad faith is presumed where the act took place within a year after the debts were declared or assessed, or after a tax audit or check had begun (Art. 19(10) and (11) of the Code).
- Liability under Article 19 is established by a tax assessment, which can be appealed, and enforcement is directed first against the company's assets (Arts 21(1) and 20 of the Code).
A Bulgarian limited liability company answers for its obligations with its own assets, not with those of its partners and manager. The rule has exceptions, and they affect managers most often: towards the company, if they caused it damage, and towards the state, if they concealed facts or moved assets out while the company owed tax. Liability does not end automatically when the manager is released.
Liability to the company for damage
The manager and the controller are liable for damage caused to the company (Art. 145 of the Commerce Act). Typical cases are deals with related parties on unfavourable terms, expenses without documents or business purpose, general meeting decisions not carried out, missed deadlines that led to penalties, or competing business. Without the company's consent, the manager may not trade on his own or another's account, take part in other companies or hold management posts in them where the business is similar, and if he does, he owes compensation (Art. 142).
The decision to sue the manager is taken by the general meeting, which also appoints who will represent the company in the case (Art. 137(1)(8)). In an EOOD the sole owner decides (Art. 147(2)). The relationship between the company and the manager is also governed by a management contract (Art. 141(7)), which can set out duties, reporting and compensation.
Claims for damages are, as a general rule, time-barred after five years, and claims for compensation and penalties for breach of contract after three years (Arts 110 and 111(b) of the Obligations and Contracts Act). Which period applies depends on the basis of the claim and should be assessed at the outset.
Liability for the company's taxes and social security under Article 19
The manager is not automatically liable for the company's unpaid taxes. Article 19 of the Tax and Social Security Procedure Code lists the cases exhaustively:
- concealing facts and circumstances that the manager was required to declare to the revenue authority or the public enforcement officer, as a result of which the debts cannot be collected; liability is then for the unpaid debt (Art. 19(1));
- payments in cash or in kind made in bad faith that are a hidden distribution of profit or dividend, or disposing of assets, including the business, for nothing or at prices well below market (Art. 19(2)(1));
- encumbering the company's assets in bad faith as security for someone else's debt, where they are then sold for that third party (Art. 19(2)(2)).
In the cases under paragraph 2, liability is limited to the payments made or the reduction in assets (Art. 19(4)). Majority partners who decided on the acts bear the same liability, except those who did not vote or voted against (Art. 19(3)). Owners who received a hidden profit distribution are liable up to what they received, unless it was declared (Art. 19(9)), and majority partners who sell their shares in bad faith while the company is insolvent or overindebted are liable in proportion to the share sold (Art. 19(5) and (6)).
When bad faith is presumed
The law helps the Revenue Agency with two presumptions. Bad faith is presumed where the act was done after the debts were declared or assessed, within one year of the declaration or of the act assessing them (Art. 19(10)), and where it was done after a procedure under the Code to check compliance with tax or social security law had begun (Art. 19(11)). In practice the date of a payment or a deal often decides the case more than the manager's intentions, so documents on market prices and the business purpose of transactions should be kept.
How the Revenue Agency pursues this liability
A manager's liability under Article 19 is established by a tax assessment (ревизионен акт) (Art. 21(1)), which can be appealed to the Appeals and Tax and Social Security Practice directorate and then to the administrative court. Security and enforcement are directed first against the assets of the company whose debt is concerned (Art. 20). If the company's debt falls away by a final act, the manager's liability falls away too (Art. 21(3)). A manager's defence therefore often starts with defending the company against the underlying debt.
Liability after release from office
Release as manager ends his powers for the future but does not erase liability for earlier acts. Claims by the company under Article 145 of the Commerce Act and liability under Article 19 of the Code are judged as at the time of the act. A manager who wants to leave can ask to be removed by written notice to the company, and if the company does not file his release within one month, he can file it himself (Art. 141(5) of the Commerce Act). A release from liability decided by the general meeting (Art. 137(1)(5)) matters between the manager and the company, but does not bind the Revenue Agency or creditors.
When the company cannot pay
The riskiest period is when the company is insolvent or overindebted. The manager then has special duties, including to apply for insolvency in time, and payments to some creditors at the expense of others can be challenged. These issues are covered in detail in our guide to directors' duties in insolvency.
What a new manager should check
- The company's tax and social security debts and any checks or audits under way.
- The annual financial statements and whether they have been published in the Commercial Register.
- Contracts with related parties and payments to partners in recent years.
- Security given for other people's debts.
- Pending court and enforcement cases and attachments on the bank accounts.
- The management contract, the manager's powers and the general meeting's decisions.
How to protect yourself
- document the business purpose and market price of every significant deal, especially with related parties;
- do not pay dividends or repay partners' loans while taxes and social security are unpaid;
- ask for written general meeting decisions on deals outside the ordinary course of business;
- when leaving, ask to be removed under Article 141(5) and hand over the records against a signed protocol;
- during an audit, react while it is under way, not only against the final assessment.
Where a lawyer changes the outcome
- before taking office: a review of the company and a management agreement;
- in management: documenting decisions in a way that shows good faith;
- in a tax audit: objections and appeals where the tax authority seeks personal liability under the Tax and Social Insurance Procedure Code;
- on a claim by the company: defending against damages claims;
- when the company is in difficulty: timely steps that limit personal risk.
Petkova & Minkov Law Firm advises managers and partners and represents them in corporate disputes and in appeals against tax assessments. We work in Bulgarian, English, Russian and German.
How we can help
We defend managers and partners against claims by the company and by the National Revenue Agency, and advise new managers on what to check before they take on the role.
- We assess the risk of personal liability under the Commerce Act and the Tax and Social Security Procedure Code
- We appeal tax assessments that establish the liability of a manager or partner
- We represent the company or the manager in damages claims
- We review the company before a new manager takes over
- We draft the management contract and the decisions releasing the manager from liability