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Comments on the Draft Law on Commercial Register by Mr. Scott Jacobs, Consultant, USAID
 
Briefing Sheet on the Draft

COMMERCIAL REGISTER ACT

The reform to create a modern commercial registry in Bulgaria will reduce burdens on new businesses, prepare Bulgaria's legal system and economy for integration into European markets, and, crucially, improve the functioning and capacities of the judicial system.
Experiences in other countries demonstrate how important this reform is in encouraging investment and job creation, and supporting the fight against corporate criminality throughout the economy.

At the request of the Council of Ministers, a draft of the "Commercial Register Act" has been prepared by a working group chaired by the Registration Agency in the Ministry of Justice. This draft is a substantial step forward in creating the efficient and transparent registry needed in Bulgaria:

- It removes registration from the courts and places it in the Ministry of Justice.
- It creates a unified national electronic registry, replacing the current paper registry scattered among 27 courts.
- It greatly improves access by the public to the information in the Registry.
- It converges with European directives on registration.

If the new registration system is to operate effectively and efficiently, however, some issues must be clarified in the draft law:


Absolute clarity in the documents needed for registration

One of the problems of the current registration system is that there are no standard procedures or documentation needed for registration. This has led to considerable confusion, delays, and risks for businesses who are asked to supply additional information to support their applications. The new registration system should clarify, without any ambiguity whatsoever, the documents needed for registration.

The current draft states that the Minister of Justice shall issue rules about what is needed. Such rules, when they are issued, should be complete, that is, the registrar should have no authority to ask for additional information beyond that specified in the rules. This clarity will protect the rights of businesses to be treated fairly and equally,

Current Bulgarian administrative procedure law has no such protections. The following text is suggested for the law:


Article 17. The Minister of Justice shall issue Rules about the maintenance and operating of the Commercial Register. Those Rules shall identify every document and item of information to be submitted sufficient for registration. The Registrar shall have no authority to ask for additional information or documents.


Searching for Directors Names across Companies

The practice of a single person acting as director in multiple companies is attracting increasing attention in Europe and elsewhere as a potential conflict of interest and source of corruption, particularly where contractual obligations exist between those companies. Disclosure of such relationships is given increasingly high priority in corporate governance. When market uncertainty is high, as in transition countries like Bulgaria, the names and relationships of directors are particularly important to investors and competitors.

Under the draft law, the names of directors are included in the new Registry, and are public information like all other information in the Registry. Yet, apparently for reasons of individual privacy, the public will be unable to search for the names of individual directors. Instead the draft law requires that a member of the public examine each individual company to determine its directors. This dramatically reduces the opportunity identify potential relationships and conflicts of interest among directors.

Since it can be important to know when one director is on the board of other companies, the capacity to search across all companies to identify directors is important. Since the names of directors are already public information in the registry, the safeguarding of personal privacy by restricting such searches is unjustified.

In the draft law, the prohibition on searching for the names of directors in Art. 35 should be deleted.


Keeping costs low: Setting fees for registration services

It is a priority of the European Union to increase business startups and entrepreneurship, as part of the Lisbon Agenda. The Commercial Registry should not become a means of taxing new businesses, particularly in Bulgaria where start ups and investment are so critical for future growth. Indeed, in some European countries such as Denmark, registration for new companies is free and tax subsidies are given to encourage them.

European Directives permit each country to determine which fees should be charged to companies for paper and/or electronic filing, but Directive 68/151/EEC, Art. 3 restricts what can be charged for access to information in the registry. This article states that copies must be obtainable at a price not exceeding the administrative cost necessary to provide them. In other words, no profit can be made by providing copies of information. The same principle should be applied to registration fees. Indeed. the Serbia law creating its new registration system stated that the fees for registration shall not exceed the costs of registering.

Bulgaria’s draft law should state that the fees charged for registration and services such as providing copies should not exceed the actual costs of registration, that is, the government should not use commercial registration to tax businesses.

The following text is suggested for the law:


Article 42….. Fees for registration and other services provided by the Commercial Registry shall be set no higher than the actual operating costs of the Registry.


Cost and staffing implications of full scanning

Earlier proposals were based on the registration system used through Europe. This is a system on which key data, such as company name and address, are available on an electronic database, while much of the background documentation, such as company bylaws, is kept in paper form in a central archive. This is because the cost of scanning large quantities of paper documents can be high.

Europe is moving toward more electronic forms of information, but European directives state that the high costs of producing electronic documents means that countries are not required to go back in time to scan all existing documents in commercial registries.

The draft law goes far beyond European requirements by requiring that all documents would be scanned for both new and existing businesses. This is a massive exercise, yet no cost estimates had been presented for this activity. In light of the need to keep the costs of registration low, in order to keep fees on businesses as low as possible, it is necessary to estimate the costs of several options, including 100% scanning, and scanning for only new businesses. Such an assessment has not yet been carried out, and therefore the cost of the draft law is uncertain.


Management and Organization of the Commercial Register

The Commercial Registry is intended to support a more transparent and certain market environment for businesses. The Registry itself must be credible to market players, that is, able to carry out its legal authorities professionally, transparently, and free from any political pressures. Its organization and accountability for performance are important aspects of the new system.

Operating the Commercial Register within the Registration Agency of the Ministry of Justice could, if the Registration Agency is well organized, speed up implementation and reduce costs. This is because the Registration Agency already exists, and the Commercial Registry can share an IT infrastructure with other registries, thereby reducing overall costs.

However, the draft law does not define the leadership or the organization of the Commercial Registry. These issues are to be defined later in a regulation issued by the Registration Agency, and the details are still unknown.

This leaves much ambiguity on key issues. The Registration Agency is responsible for overseeing the operation of several large and critical registries in Bulgaria, and its capacities are already over-stretched. Also, the registries are separate legal entities with different laws, expertise, services, and procedures, and governance might be easier if each had its own identify. More expertise and accountability are needed to ensure that the Commercial Registry is properly implemented, organized, managed, and solely accountable for its legal decisions. To improve legal security and accountability, sole responsibility for the legal decisions on commercial registration should be placed within a single individual, called the Commercial Registrar. The Commercial Registrar should be insulated from political and other pressures in order to retain credibility in making independent decisions.

These institutional issues will be decided after the the law is adopted. Certainly, a Commercial Registrar who is specialized in the Commercial Registry and legally accountable for carrying out the law will be needed. Additional organization options should be considered, such as those used in the remainder of Europe.

 
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