COVID-19 Related Payment Moratorium on Financings
(“May you live in interesting times” – Chinese proverb)
The COVID-19 pandemic has multiple effects on the economy. Many businesses struggle to survive and are or may become unable to service their bank debt in the same way as they did before the outbreak of the pandemic. Governments and central banks around the world are imposing various emergency measures and taking actions to support the economy, the business and households in this emergency situation.
One of the measures some governments adopt is a payment moratorium on bank loans and other forms of financings. Other governments have refrained from imposing mandatory payment moratoria, but banks and/or bank associations in such jurisdictions have decided commercially to allow parties affected by the pandemic to suspend payments of financings until the emergency situation exists.
In Bulgaria a Law on the Measures and Actions During the Emergency Status Announced with a Resolution of the National Assembly of 13 March 2020 (the “Emergency Act”) was adopted on 24 March 2020 with a retroactive effect as of 13 March 2020. Art. 6 of that Emergency Act states that “Until the revocation of the emergency status no consequences of a delay in the payment of liabilities of private persons, including interest or penalties for late payment, as well as non-monetary consequences such as acceleration, cancellation of the contract or repossession of property, are allowed”. This provision is extremely broad and essentially introduced a general payment moratorium on any and all payments under any and all deals as of 13 March 2020.
To be more precise, it does not prohibit the debtors to make payments, but forbears late payments, i.e. deprives temporarily (until the emergency status is in place) creditors under any and all types of deals from any and all legal remedies related to delayed payment, without however affecting the payment of the debt after the revocation of the emergency status.
Art. 6 of the Emergency Act has received a lot of criticism as such a broad payment moratorium is dangerous to the economy and might result in an even greater risk of insolvencies and market disruption.
It seems that no other country in Europe has adopted such a general payment moratorium.
At the time this article was written (6 April 2020), a bill on an amendment to the Emergency Act was pending in Parliament (voted at first hearing), which provides for limiting the payment moratorium only to bank loans and other forms of financing (leasing, factoring, etc.).
The bill, however, is also subject to criticism as it for example (probably unintentionally) excludes only contractual consequences of late payment, which arguably does not exclude the consequences of a late payment arising from the law (such as for example statutory interest for delay, which in Bulgaria is quite high – at the moment some 10% p.a.), as well as the ability of the creditor to commence enforcement in respect of the delayed payment.
At the same time on 3 April 2020, the banking regulator in Bulgaria (the Bulgarian National Bank, the “BNB”) has announced that it will follow the European Banking Authority (EBA)’s guidelines on the treatment of public and private moratoria in light of COVID-19 measures and has invited commercial banks in Bulgaria to present, within five business days (i.e. until 10 April 2020), their views on a private (i.e. non-legislative) moratorium on payments under bank loans related to the COVID-19 pandemic.
BOYANOV & Co.’s Banking and finance team suggests that in order to ensure consistency between the legislative payment moratorium and the non-legislative payment moratorium, the Parliament should await the views of commercial banks and their approval by the BNB before it adopts any amendments to Art. 6 of the Emergency Act. The team is of the opinion that a more sophisticated approach distinguishing between debtors which are indeed materially adversely affected by the COVID-19 related situation and those which are not so much affected would be justified. In addition, the payment moratorium should not be limited only to the duration of the emergency situation but should last for at least a few months thereafter, so as to allow affected debtors reasonable time to recover.
Further, the legislator in Bulgaria might consider some related emergency measures in the insolvency regulations, for example, removing temporarily (for the duration of the payment moratorium) the duty of the directors of insolvent companies to file for voluntary insolvency and also restricting the ability of creditors to file for insolvency of debtors eligible to benefit from the payment moratorium only if the de facto insolvency has occurred prior to the introduction of the emergency situation (i.e. prior to 13 March 2020). Also, some claw-back claims in insolvency should not apply to new financings provided during the emergency situation (e.g. claw-back of security or repayment) in order to facilitate new financings for the business during the emergency situation.
Another interesting aspect of payment moratoria is whether national legislative payment moratoria would affect cross-border financings, i.e. financings provided by foreign lenders and governed by foreign laws. One could argue that a national payment moratorium would apply also to cross-border loans governed by foreign law as the emergency COVID-19 related measures might be deemed overriding mandatory local law provisions that would override the governing law of the loan agreements. This is unchartered territory for lawyers, but the answer to this question would depend on the courts that would hear a dispute under the loan agreement and the applicability of national payment moratoria on a foreign law governed cross-border loan.
Local courts would probably feel more comfortable to apply national legislative payment moratoria on the basis of national public policy compared to foreign courts. Also, a local Bulgarian court might feel more uncomfortable overturning a court decision of a court of another EU Member State rather than a court decision of a third country. That might create more uncertainty given that many cross-border loan agreements are governed by English law and disputes under it referred to the English courts and the uncertainty of what Brexit will mean for English court judgments enforceability in the EU.
As the Chinese curse goes: “May you live in interesting times“!
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