This January a group of members of the Bulgarian Parliament submitted a bill for amendment of the Obligations and Contracts Act in its part on the amount of the statutory interest accrued in case of failure to fulfill monetary obligations. According to the proposal the statutory interest for late payment should not exceed the basic interest rate of the Bulgarian National Bank (BNB) plus 8 (eight) percentage points when owed by merchants. When owed by all other persons and entities such statutory interest should not exceed the basic interest rate of the BNB plus 4 (four) percentage points.
Current Status of Statutory Interest
The Obligations and Contracts Act was adopted at the end of 1950 and has been in force since the beginning of 1951. It is not only one of the oldest active legislative acts in Bulgaria but also one of the most important as being the fundamental civil act such as Code civil and Buergerliche Gesetzbuch.
As far as statutory interest is concerned, the law provides that in the event of non-fulfillment of a monetary obligation, every debtor regardless of their status – natural or legal person or capacity – merchant or non-merchant, owes to the creditor compensation from the day of the delay. Statutory interest is not subject to negotiation between the contracting parties that is due ex lege. It is also called late payment interest or default interest. The amount of the statutory interest shall be determined by the Council of Ministers.
At present, the amount of such universally regulated statutory interest (for all debtors of monetary obligations and for all cases of delay) is equal to the basic interest rate of the BNB for the relevant period plus 10 (ten) percentage points. This amount was determined by a decree of the Council of Ministers in 1994, and although subsequent decrees of the Council of Ministers have been adopted since then (the latest in 2014), it has remained unchanged.
Need for Change
The petitioners consider the current statutory interest amount to be excessively high in view of the time elapsed and the economic changes in the country. More than 30 years have passed since the first determination of statutory interest until today, during which significant changes have occurred in the socio-economic relations in Bulgaria. Thus, the effective law in this part does not reflect such changes.
Maintaining the current excessively high rate of statutory interest on overdue monetary obligations in the conditions of low bank interest rates is unjustified and makes it excessively high. This changes the very legal nature of statutory interest, transforming its function from compensatory to highly punitive.
The latter is especially valid given the fact there is no differentiated rate of statutory interest according to the type of the debtor. This puts merchants and other persons on the same footing without considering the different capacity. Such legal “equality” threatens the most vulnerable groups, such as citizens with low incomes and social status, who often ignore proceedings brought against them for unpaid electricity, water or heating bills, as well as small and medium – sized enterprises (SME), a good number among them – family businesses. Due to the high amount of statutory interest such groups may be faced with the inability to repay the interest obligations, which may many times exceed their principal debt.
Moreover, compared to the current levels of statutory interest in the individual Member States of the EU and in comparison, with the amount adopted in EU law of the basic interest rate plus 8 (eight) percentage points for merchants, the current amount of the Bulgarian statutory interest is indeed unjustifiably and excessively high as applied equally to traders and other persons.
The proposed amendments to the Law on Obligations and Contracts could also be seen as a measure to address the consequences of the combination of crises witnessed currently, related to the COVID-19 pandemic, the war in Ukraine, the sharp increase in fuel and essential goods prices, etc.
EU Law , “Think Small First” and the Small Business Act for Europe
Finally, the proposed amendment would also contribute to bringing the Bulgarian national legislation in line with the main policies and trends in EU law, i.e. Directive 2011/7/EU of the European Parliament and of the Council of 16 February 2011 on combating late payment in commercial transactions, according to which undertakings should be able to trade their products throughout the internal market under conditions that ensure that cross-border transactions do not pose a greater risk than sales within a Member State.
In addition, in its Communiqué of 25 June 2008 entitled “Think Small First!” – A “Small Business Act” for Europe (SBA), the European Commission stressed that access to finance for SME should be facilitated and that a legal and economic environment should be developed which is conducive to timely payments in commercial transactions. Public authorities have a particular responsibility in this respect. The SBA comprises ten guiding principles intended for adoption at the highest political level across the EU. Notably, it is not a legislative act in the traditional sense. The primary objective of this communiqué was to establish a comprehensive policy framework that would enhance competitiveness and foster entrepreneurship within the SME sector. The SBA proposes that the Commission and EU Member States adopt among others legislative proposals aligned with the “Think Small First” principle, including a regulation on state aids; a regulation establishing a statute on the European Private Company; amendments to existing rules regarding late payment, a proposed directive aimed at reducing VAT rates for locally supplied services. Another communiqué dated 26 November 2008 entitled “A European Economic Recovery Plan” aims at reducing the administrative burden and promote entrepreneurship, inter alia by ensuring that, in principle, obligations for supplies and services, including those of SMEs, are paid on time, which should alleviate liquidity constraints.
Conclusion
A quick review of the practices and approaches applied in the EU Member States in determining the statutory interest for late payment shows that its regulation in Bulgaria is one of the highest in intensity. It is regulated as a general, universal, accessory obligation, payable by law, i.e. without the need for any negotiation of it, for any delayed monetary obligation, by any debtor, regardless of whether he is a natural or legal person, a trader or a non-trader. The purpose of the bill for amendments to the Obligations and Contracts Act is to alleviate the situation of vulnerable Bulgarian citizens with low incomes and micro-enterprises that are family businesses, by differentiating the statutory interest according to the type of debtor.
Thus, the adoption of the proposed amendments will bring the Obligations and Contracts Act, in its part on the amount of statutory interest, in line with the current socio-economic environment in Bulgaria, in the European Union and on a global scale.
