Insolvency & Restructuring

Set-Off and Netting Against a Bulgarian Bank Placed Under a Moratorium

The validity of a set-off against a bank in reorganisation has become hotly debated among Bulgarian lawyers in the context of the reorganisation imposed on one of the largest local banks.

Set-off and net­ting are impor­tant risk mit­i­ga­tion tech­niques for trans­ac­tions in deriv­a­tives, and the enforce­abil­i­ty of such tech­niques is a key aspect of the busi­ness deci­sion on whether to enter into deal­ings with a Bul­gar­i­an bank at all.

Their enforce­abil­i­ty has become a hot­ly debat­ed top­ic in Bul­gar­ia in the con­text of a spe­cial super­vi­sion imposed recent­ly by the Bul­gar­i­an Nation­al Bank (BNB) on the fourth largest Bul­gar­i­an bank, Cor­po­rate Com­mer­cial Bank (CCB). This arti­cle briefly out­lines the dif­fer­ing argu­ments in the debate. This debate is impor­tant for the finan­cial indus­try as the enforce­abil­i­ty of set-off and net­ting will deter­mine if the coun­ter­par­ties of CCB may reduce their expo­sures towards CCB. Such expo­sures are typ­i­cal­ly huge under deriv­a­tives trans­ac­tion.

Special Supervision over Corporate Commercial Bank in Bulgaria: Facts

Spe­cial super­vi­sion is not a type of insol­ven­cy pro­ceed­ings but a reor­gan­i­sa­tion pro­ce­dure1 where BNB has inter alia stopped (спира) all pay­ment oblig­a­tions of CCB (Mora­to­ri­um). Any action of the bank in vio­la­tion of the Mora­to­ri­um is ren­dered void, all enforce­ment pro­ceed­ings against the bank must be stopped, it is deemed not to be in default and it owes no inter­est or liq­ui­dat­ed dam­ages for the delay.

Doubts concerning set-off and netting against CCB

As there is no express statu­to­ry rule allow­ing third par­ties to set-off with receiv­ables towards a Bul­gar­i­an bank under a Mora­to­ri­um, some Bul­gar­i­an lawyers insist that such a set-off is impos­si­ble. Their ratio­nale is that it is a statu­to­ry pre­req­ui­site for a set-off that the receiv­ables towards the per­son against whom the set-off is invoked must be due (изискуеми). And as the receiv­ables towards the bank are, alleged­ly, not due (because of the pro­hi­bi­tion for it to per­form its oblig­a­tions), it is assert­ed that a set-off dur­ing the Mora­to­ri­um would be void.2

These doubts are sim­i­lar­ly rel­e­vant for net­ting arrange­ments3 since they invari­ably include con­trac­tu­al accel­er­a­tion of all mutu­al oblig­a­tions (fol­lowed by their recal­cu­la­tion and replace­ment by a sin­gle pay­ment oblig­a­tion for one of the par­ties). Accel­er­a­tion means that all oblig­a­tions of the par­ties become due either auto­mat­i­cal­ly or after a notice (depend­ing on the arrange­ments), so the prob­lem of the enforce­abil­i­ty of the set-off relat­ing to whether the oblig­a­tions are due (as a pre­req­ui­site for a set-off) is equal­ly rel­e­vant for net­ting.

Arguments that set-off and netting may be invoked against CCB

We believe that a Mora­to­ri­um is not an obsta­cle for set-off or net­ting against CCB.4 The Bul­gar­i­an statute express­ly pro­vides that only the actions of a bank placed under a Mora­to­ri­um in vio­la­tion of that Mora­to­ri­um are void, and no sim­i­lar rule exists for actions of third par­ties (eg, those invok­ing a set-off or net­ting against the bank).

Sim­i­lar­ly, we believe a Mora­to­ri­um is not an obsta­cle for the receiv­ables against a bank to become due (and thus it is not an indi­rect obsta­cle for set-off/net­ting). Receiv­ables under Bul­gar­i­an law become due at dif­fer­ent moments depend­ing on whether there is a matu­ri­ty date, or an accel­er­a­tion clause is agreed upon. The oblig­a­tions of a bank with a fixed matu­ri­ty date become due on that date, and as the Mora­to­ri­um does not con­tain a fic­tion pre­vent­ing such date from tak­ing place, it may not be an obsta­cle for receiv­ables to become due. Oblig­a­tions of a bank under a Mora­to­ri­um with a fixed matu­ri­ty date that have been agreed to become pre­ma­ture­ly due as a result of an accel­er­a­tion notice served to the bank would require a spe­cial (case-by-case) analy­sis, but gen­er­al­ly the Mora­to­ri­um is not an obsta­cle for them to become due, since there is no pro­hi­bi­tion for third par­ties to serve a notice to a bank under a Mora­to­ri­um.


Note that the spe­cial super­vi­sion over CCB takes place in a sit­u­a­tion where Bul­gar­ia has not yet imple­ment­ed the Bank Recov­ery and Res­o­lu­tion Direc­tive 2014/59/EU (BRRD). The doubts raised by some Bul­gar­i­an lawyers as to the valid­i­ty of a set-off against a bank under a Mora­to­ri­um, as explained in this arti­cle, show how nec­es­sary it is to robust­ly trans­pose art.77, par.1 of BRRD, which requires EU mem­ber states to ensure that there is appro­pri­ate pro­tec­tion for set-off and net­ting agree­ments.

Bulgarian law provides that only the actions of a bank in violation of the Moratorium are void, which means that actions of third parties (eg, those invoking a set-off or netting against the bank) are not prohibited.

We believe that the Bul­gar­i­an spe­cial super­vi­sion may be char­ac­terised as “reor­gan­i­sa­tion mea­sures” in the sense of the EU Wind­ing up Direc­tive for Cred­it Insti­tu­tions 2001/24/EC, and the EU Finan­cial Col­lat­er­al Direc­tive 2002/47/EC.
For argu­ments that such oblig­a­tions are not due, see Dami­an Sime­onov, Assign­ment of receiv­ables under an account held with a bank that has been placed under a spe­cial super­vi­sion and a con­se­quent set-off with such receiv­ables, Cap­i­tal Dai­ly, No 1692014, 4 Sep­tem­ber 2014, page 22.
For exam­ple, the close out net­ting pro­vi­sions under the ISDA Mas­ter Agree­ments of 1992 and 2000 and the Glob­al Mas­ter Repur­chase Agree­ments of 1995 and 2011.
For argu­ments to this effect, see Prof. Valenti­na Popo­va and Tsve­tan Kru­mov, Can an oblig­or of a bank placed under a spe­cial super­vi­sion make set off with a receiv­able towards that bank?, Cap­i­tal Dai­ly, No 1712014, 8 Sep­tem­ber 2014, page 22, as well as Prof Ogn­ian Gerd­jikov, Are set-off oper­a­tions legal while CCB is under a spe­cial super­vi­sion?, Cap­i­tal Dai­ly, No 1772014, 16 Sep­tem­ber 2014, page 22.