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

 

 

2.3 ACTION LINE 2.3: DRAFTING ADDITIONAL LAWS AFFECTING SMALL AND MEDIUM SIZE ENTERPRISES

2.3.1 BACKGROUND
2.3.2 OBJECTIVES
2.3.3 ACTIONS
FORECLOSURE LAW
LEASING LAW
CONSUMER PROTECTION LAW
ELECTRONIC COMMERCE LEGISLATION
CURRENCY EXCHANGE LEGISLATION
TRADE MARK LEGISLATION
GOVERNMENT PROCUREMENT LEGISLATION
SME LEGISLATION
2.3.4 EXPECTED RESULTS

2.3.1 BACKGROUND

Many steps have been taken towards creating an enabling environment for SMEs, many of which have been completed and some of which still need to be finalized. However, there are still a number of laws that need to be drafted in the near future. In drafting such laws, special attention should be paid to two factors. First, stability of the legal system should be preserved as much as possible in this process which implies change and motion. An unstable system of laws means a lack of a legal system. Second, special attention should be paid to prevent the passage of retroactive legislation which represents the worst form of legal instability. Failure to observe these two principles will compromise the entire reform effort: harming SMEs instead of promoting them.

New legislation should take into consideration that Bulgaria has entered into an Association Agreement with the European Union and filed a request for full membership in the European Union in December, 1995. As a consequence, Bulgaria has adopted a policy towards approximation of its internal legislation with EU law. Therefore, all steps must be taken to ensure that new legislation follows an appropriate direction, in terms of approximation with EU law.

 

.3.2 OBJECTIVES

This paper is not intended to propose an exhaustive list of laws that need to be drafted in order for the legal framework for SMEs to be completed. However, it suggests certain important pieces of legislation which are necessary for the development of the SME sector.

 

2.3.3 ACTIONS

The actions foresee:

  1. drafting modern foreclosure legislation (FORECLOSURE LAW);
  2. drafting amendments to leasing law (LEASING LAW);
  3. drafting consumer protection laws (CONSUMER PROTECTION LAW);
  4. drafting electronic commerce legislation (ELECTRONIC COMMERCE LEGISLATION);
  5. drafting modern currency exchange legislation (CURRENCY EXCHANGE LEGISLATION);
  6. drafting modern trade mark legislation (TRADE MARK LEGISLATION);
  7. drafting government procurement legislation (GOVERNMENT PROCUREMENT LEGISLATION);
  8. passing specialized legislation on SMEs (SME LEGISLATION)

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FORECLOSURE LAW

Background

Foreclosure is a difficult process in Bulgaria. Confidence in the legal mechanism for enforcing rights is low and private "enforcement" and racketeering groups flourish. The result of the difficult foreclosure process is that commercial turnover remains slow. Businesses attempt to avoid situations where money would be owed to them for fear that commitments will not be honored and enforced.

The existing foreclosure law does not recognize or allow for non-judicial methods of foreclosure (with the exception of the newly passed Law on Registered Pledges which, when it takes effect, will only allow out-of-court foreclosure on pledged movable property). Every creditor who has procured a writ of execution, regardless of whether it is a secured creditor, must go through a lengthy judicial process. Sale of a debtor’s assets must be effected at a court appointed auction. The initial auction price must be determined by a court appointed expert. If a creditor must foreclose on a combination of real estate and chattel, this must happen in two different procedures which do not necessarily run parallel in time. Debtors are not allowed to bid and creditor’s rights to bid are limited. Foreclosure on bank accounts is practically unworkable. Steps need to be taken so that the law will enable creditors to easily obtain information about the existence and location of bank accounts.

Current foreclosure legislation favors the debtor. Debtors have numerous opportunities to prolong the procedure. Fines for violation of procedural rules are outdated and low and do not deter procedural violations. Even when, after a lengthy process, the court has scheduled an auction, a debtor whose assets may exceed the value of the creditor’s claim, may delay the process by another two years. If prior to the auction, the debtor pays 20 percent of the claim and commits to pay ten percent every quarter, foreclosure is stopped. The result can be that the creditor is forced to accept payments over a two-year period from the debtor.

While this law was written to service a 1952 command economy, it is currently unsuitable. Although SMEs comprise a significant number of the debtors in the economy and an efficient foreclosure procedure may not work to their immediate advantage, SMEs will ultimately benefit from a more stringent legal framework applicable to them since it will enhance lending.

Recommendation

Organize a working group to draft and lobby for passage of a modern foreclosure law. The government will perform much better in providing a workable foreclosure legislation if it works closely with banks and other private businesses. By far, private businesses and banks are the ones who suffer most from the current foreclosure framework and could propose suitable solutions to most of the existing problems. In this way, it will be guaranteed that no problems will be left unresolved.

 

LEASING LAW

Background

Leasing is used in western economies as an effective means of "pay as you go" financing. It is particularly attractive for SMEs. Bulgaria has a long tradition, over ten years, of leasing relative to its Central European neighbors.

Leasing transactions were recently provided for in a newly passed division of the Law on Commerce. Still, certain problems remain which inhibit the development of leasing as a financial method.

Under VAT, finance transactions are tax exempt. Finance leasing transactions (where, simply put, money is borrowed to finance the purchase of equipment), however, are not classified as finance transactions under Bulgaria’s VAT law. The result is that a finance lease cannot compete with a finance loan.

Demand for financial leasing should be high in Bulgaria primarily because (1) the country faces a lack of financial resources for starting businesses, (2) suitable financing is difficult to obtain from Bulgarian banks and (3) the process for obtaining bank loans is usually long and arduous.

Recommendation

Consideration should be given to amending the VAT law to allow financial leasing to compete with other forms of financing. Also, work needs to be done in respect of protecting the lessor’s interests where the lessee defaults on the lease payment. So far, Bulgarian law does not recognize lessor’s right to repossession of leased goods. In this respect, the government would do better if new legislation is developed in dialogue with leasing companies and SMEs which are the most likely beneficiaries of financial leasing.

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CONSUMER PROTECTION LAW

Background

Bulgaria has not passed consumer protection legislation which seriously affects SME businesses since most of their clientele consists of consumers. Therefore, consumer protection laws will largely affect the volume of business of SMEs.

Consumer protection legislation will also have a disciplining effect on SMEs by allowing them to build better credibility with customers. Consumer credit in the form of vendor financing will be enhanced. In turn, this will increase the turnover of SMEs producing and trading in consumer goods.

Recommendation

Consumer protection legislation needs to be drafted. It needs to cover both sale of consumer goods and consumer credit. Consumer organizations, NGOs and SMEs have critical role to play in the public dialogue which needs to precede drawing up of draft laws.

 

ELECTRONIC COMMERCE LEGISLATION

Background

Electronic commerce is about to start making its way into Bulgaria. Analog telephone lines are being progressively replaced with digital high quality lines. Electronic mail is quickly becoming more and more popular and the Internet network is growing. In addition, computerized registries are starting to emerge.

Despite significant improvements in Bulgaria’s electronic business infrastructure, existing legislation still only addresses the concerns of business based on paper commerce. A contract made orally, over the telephone, or via fax or telex is often not enforceable, or if enforceable, it may be difficult or impossible to prove it in court. Paper filings into computerized registries increase the social cost of maintaining the registry.

Recommendation

Legislation inserting reliability in electronic commerce needs to be drafted and passed. While there are no obstacles under current law for transacting business via electronic means, it is almost impossible to utilize telecommunication technologies because there are no legal protections for such contracts. Therefore, new legislation must provide for security and encoding of electronic business information. A digital signature law is critical for enabling authentication of the signer’s signature and guaranteeing the authenticity of information. A digital signature law will enable electronic filing in computer based registries. The law of evidence needs to be changed in order for it to accommodate electronic documents which have not been provided for under current law.

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CURRENCY EXCHANGE LEGISLATION

Background

Currency exchange legislation now in effect was created in 1966 to provide the currency framework of a socialist economy existing in isolation from the international markets under a state currency monopoly. The most defining characteristic of this framework is the amount of restrictions in place and the amount of discretion maintained by monetary authorities to grant currency permits. Since current currency law is unsuitable for a market economy, currency exchange matters are now largely being regulated through secondary legislation. This causes instability of the framework and has a general inhibiting effect on the business of SMEs. Since the Bulgarian economy is largely dependent on imports, exports and foreign investment, the stifling effect of old-fashioned legislation is becoming even stronger.

Recommendation

New legislation on currency exchange needs to be drafted. In doing so, the government needs to study the experience of foreign investors and foreign and local trading partners. Studying the experience of banks both in Bulgaria and abroad is important, as well. The new laws should define clearly what is prohibited and what is freely allowed. Inserting clarity and stability in the legal framework will dramatically improve the climate for SMEs.

 

TRADE MARK LEGISLATION

Background

Current trademark legislation is clearly outdated and unworkable in the current market environment. The legislation providing for trademarks was created in 1967 and is suited to regulating the behavior of the agents of a centrally planned economy. Accession of Bulgaria to GATT places new requirements to trademark law, consistent with the modern international concepts.

Recommendation

New trade mark legislation should be drafted reflecting the modern internationally accepted standards for trade mark protection. The efforts of the Patent Agency of Bulgaria to create a new law should be supported by NGOs, lawyers and SMEs, both at the drafting and at the passage stages. After the new law is passed, work should be done to train lawyers and trade mark specialists in implementing the modern law. Enactment of this law will complete the process of reforming Bulgaria’s IPRs legislation.

 

GOVERNMENT PROCUREMENT LEGISLATION

Background

Government procurement laws do not exist in Bulgaria. This leaves the fields of dispositions with government property and funds, as well as awarding government contracts, totally unregulated. SMEs are among the potential government contractors and need strict and clear procedures for awarding government contracts. Without such laws, SMEs will undoubtedly lose many government contracts to powerful and influential economic agents.

Recommendation

Draft and pass government procurement laws. SMEs and NGOs should be part of the drafting and advocacy process. Only in this way government procurement rules will account for the legitimate interests of SMEs and will provide for a favorable legal framework for SMEs.

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SME LEGISLATION

Background

SMEs are a part of the economic reality which, like all other parts, are governed by the laws and agencies which regulate the activity of all economic agents. A legal framework favorable to business in general would be sufficient for a healthy SME sector. However, in recent years, SMEs have attracted increasing attention from regulatory agencies on a national and international level. The European Union issued a Commission Recommendation of 3 April, 1996, Concerning the Definition of Small and Medium Sized Enterprises. This and other pieces of legislation reveal that, on an international scale, SMEs are attracting the special attention of legislators and institutions. Therefore, the emerging SME sector in Bulgaria deserves even stronger support and attention on behalf of authorities.

Recommendation

Specialized legislation regarding SMEs needs to be passed. Whether in the form of a special law, or in the form of amendments to various laws, such legislation must provide for the following:

  1. preferential tax treatment of SMEs in terms of direct taxation;
  2. presenting SMEs with options to choose their accountancy and tax treatment (from among accountancy and tax treatment of individuals and general business entities);
  3. preferential tax treatment of transfers of title to SMEs among close relatives, including by inheritance;
  4. preferential customs treatment of imports and exports of SMEs (although the effects should be weighed since such treatment may run contrary to Bulgaria’s international obligations as a member of the WTO as well as other bilateral international obligations);
  5. preferential treatment of SMEs as employers and providers of social security;
  6. simplified registration procedures;
  7. creation of a SME Agency which shall be charged with monitoring the economic and legal climate for SMEs, maintaining relationships among SMEs and the Government, and formulating the Government policy towards SMEs.

 

2.3.4 EXPECTED RESULTS

If the described new legislation is drafted, the legal framework for SMEs will be almost complete. Participation of SMEs in the law drafting procedures will educate them into the process of maintaining a public dialogue on policy issues. SMEs will also get a chance to have a say in the process of creation of the legal framework governing their activities.


 
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