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Policy and Legal Environment for the Growth of the SME Sector in Bulgaria
 

 

 

2.1 ACTION LINE 2.1: IMPROVING THE INSTITUTIONAL FRAMEWORK FOR SMALL AND MEDIUM SIZE ENTERPRISES

2.1.1 BACKGROUND
2.1.2 OBJECTIVES
2.1.3 ACTIONS
COURT SYSTEM
NOTARY SYSTEM
COMMERCIAL REGISTRY SYSTEM
COMMITTEE ON PROTECTION OF COMPETITION POWERS
2.1.4 EXPECTED RESULTS

2.1.1 BACKGROUND

Bulgaria has completed, by and large, building the institutional framework to implement laws affecting small and medium size enterprises (SMEs). Many government institutions were in place before 1989. Others, such as the Constitutional Court, the Supreme Judicial Council and the Committee on Protection of Competition, have been created in the last several years and are now functioning. Still, there still remain many gaps which directly affect SMEs.

 

2.1.2 OBJECTIVES

The objective of this action line is to facilitate the process of institution building and operation so that a better institutional framework for SMEs can be put in place as quickly as possible. Lack of institutions, such as a fully developed court system, a functioning notary public system and a nationwide commercial registry system, has a great negative impact on the functioning of SMEs.

 

2.1.3 ACTIONS

The actions foresee:

  1. the completion of the structuring of the court system (COURT SYSTEM);
  2. the creation of a private notary system (NOTARY SYSTEM);
  3. the creation of a nationwide commercial registry system (COMMERCIAL REGISTRY SYSTEM);
  4. improvement of the Committee on protection of Competition efficiency (COMMITTEE ON PROTECTION OF COMPETITION POWERS).

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COURT SYSTEM

Background

The Law on the Structure of the Judicial System was passed in 1994. Pursuant to this law, Bulgaria must establish a four-tier system of courts to implement a three-instance procedure (that is, four different courts that guarantee a trail and two appellate reviews). The Bulgarian Constitution required the courts to be established by July 1992.

Recommendation

Politicians are responsible for implementing existing court structure legislation. Creation of the Courts of Appeal should take place as soon as possible. SMEs suffer greater consequences relative to large corporations from the inoperable court system. Implementation of the courts should be preceded, however, by the development of procedural rules (administrative, civil and criminal) tailored to meet the requirements of the new system. Experts from academia, the SME sector, NGOs, and practicing judges and lawyers could assist court administrators in the development of procedural rules.

 

NOTARY SYSTEM

Background

As in most countries, Bulgarian legislation requires that real estate and automobile transactions, mortgage executions and other transactions to be witnessed by a notary public. In many cases, the law requires signatures to be notarized, dates or contents of documents to be verified, or copies of documents to be certified. Absent the notary’s seal when required, transactions are usually invalid.

Although standard international practice operates under privatized notary systems, Bulgaria currently relies on a very limited number of notaries who function as state officials. It is not uncommon to wait weeks to execute a mortgage or buy real estate, and the otherwise simple signature notarization process usually takes over an hour. The inoperable and uncertain notary system has a stifling effect on SMEs because of its time and monetary costs.

To remedy this situation, Parliament recently passed a Law on Notaries. The law follows the model of Austria, Germany and other European countries and provides for the development of a private notary system.

Recommendation

The private notary system will reduce transaction costs, further develop the private administration system, and free the government from the burdensome notary responsibility. Now that the law has been passed, the government should work with experts from academia, the SME sector, NGOs, and practicing notaries and lawyers to expedite the implementation of the law and educate notaries about working under a private notary system.

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COMMERCIAL REGISTRY SYSTEM

Background

Property registries are created to provide a publicly available record of the ownership of property, its type, size or shape, and whether or not it is encumbered. As in most countries, Bulgarian legislation requires that properties and information about them be registered. While registries exist in Bulgaria, there is no central system.

Information on real estate, for example, can be found in any of over 100 registries located throughout Bulgaria. To locate the property of a bankrupt debtor or the property owned and encumbered by a prospective borrower, creditors must check each registry by physically visiting each location.

There are also 29 commercial registries located throughout the country. To conduct due diligence on the legal standing of a prospective partner or purchase, one might be required to visit a registry in Varna, Blagoevgrad, Russe, or almost anywhere else. Such inconvenience is not necessary in a country the size of Bulgaria and in a modern era of computer technology.

Recently, Parliament passed the Law on Registered Pledges which provides for a central pledges registry with the Ministry of Justice. Creating the registry institution is critical for putting the new law in operation. Through the central registry both debtors and creditors will be able to make security interests public, secure priority of security interests and safeguard against relying on property already encumbered by third party security interests.

In general, registry information is difficult to obtain. Officials do not have proper understanding of the concepts of freedom of information and often create (voluntarily, or not) obstacles to free access to information. Such obstacles seriously encumber SMEs who often lack the resources to hire lawyers and consultants and have to fight the bureaucratic impediments themselves.

Recommendation

Ultimately, a system of computerized central registries needs to be created. Focus should be placed first on creating a computerized central pledges registry with a central database and numerous terminals, and operating under a simplified administrative procedure. The experience from creating and operating this registry should be studied carefully and carried over to other existing or future registries.

One action that can be taken in the short term, however, is to create uniform formats for national computer databases. When such formats are developed, they can be made available to local registries that can begin recording information according to the standardized national form. When a national computer system is developed, the locally produced information should be easily transferred to the national system.

In general, free access to information should be adequately provided for by law, so that looking for and finding publicly available information is an efficient process. The EU First Council Directive of 9 March, 1968, regarding public availability of commercial registry information needs to be observed.

 

COMMITTEE ON PROTECTION OF COMPETITION POWERS

Background

The Committee on protection of Competition has been in existence for over five years. Unfortunately, the powers provided to it by law are insufficient to tackle problems such as the counterfeiting of goods, monopoly positions and intellectual property rights infringements.

Recommendation

The Committee on Protection of Competition must be provided with clear-cut powers which would allow it to take direct action against agents of unfair competition practices. The current approach, where the Committee is only authorized to take court action against violators, must be abandoned and substituted with direct administrative powers. Thus, SMEs will be better protected against strong monopolies remaining from the communist economic period and against the producers and importers of counterfeited goods.

 

2.1.4 EXPECTED RESULTS

Implementing institutional reform will have a boosting effect on the development of SMEs. The cost of running a business will be significantly decreased by reducing the time and effort necessary to resolve legal disputes or to perform routine operations, such as notarizations and due diligence on registry information.


 
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