Will the Suggested Amendments to the Commercial Act Deteriorate the Business Climate?

Amendments to the Commercial Act were voted on first read in the end of November after being introduced by the left. The objective is better protection of workers and employees in the case of non-payment of the due remuneration for more than two months.

The amendments give workers and employees the opportunity to initiate bankruptcy proceedings against their employer and a privileged order by which they will be redressed before everyone else when the cashed property of the bankrupt employer is divided. According to the left the amendments will cease the dreadful practice of non-payment of remuneration and will discipline the employers. Let us take a closer look of the risks in the commercial turnover and economy.

To make your employer go bankrupt

The first suggested amendment broadens the circle of people who can initiate bankruptcy proceedings against a company. Up until now among them were the debtor itself, its liquidator, its creditors or the National Revenue Agency. With the amendments at least one third of the debtor’s employees who have not received their remuneration for more than two months can practice this right.    

Every employer has the obligation to pay his workers and employees in due time and size. But if the employees’ main obligation is wholly to provide work force, the employer has tens of responsibilities and risks. The merchant has to search for markets for the production, to comply with agreed deadlines with contracting parties, they have to find crediting and to acquit payments in order to avoid demurrages, to modernize the production and to cover the ever changing requirements, to cope with periods of stagnation. The enumeration can be long. 

Every business means taking on commercial risks. Difficulties are part of the development. If you manufacture shoes, you can make a big order for an Italian contracting authority, but they could be pending the payment. Thus, you are unable to remunerate your employees in due time. The risk could cost you a few months while you are trying to cope. If at this moment your employees submit an application for bankruptcy, the risk of your business sinking increases multiple times. 

The suggested amendments turn the employer into a prisoner of his own employees. In the current economic situation and keeping in mind the enormous inter-company indebtedness, periods of difficulties are no exception for merchants. However, this does not deem them to be unreliable. The legislator wrongly is trying to put in the hands of the employees a right which is exceeding multiple times their obligations and responsibilities. They have limited financial liability for caused damages – up to a few remunerations. The law has guaranteed a certain number of monthly remunerations through the Employee Claims Guarantee Fund. That is why they are not at risk of not receiving the due amounts.  

At the same time, if they are provided with the envisaged opportunity against delay of their remuneration exceeding two months, they could cause their employer damages in millions. With their actions they could lead the company to bankruptcy and could lose their jobs. The regional economy could worsen. If that happens, finding a new job occupation will become harder and harder. The wrong assessment of the personnel and the inconsistent conveying of power of great rights in its hand could cause a negative domino effect with a backlash in the regional economy. 

Before anyone else in distributing the cashed property

Up until now the secured creditors were the first to be redressed after distributing cashed property of the insolvent company. The amendments envisage that the workers’ remunerations deriving from labor relations will be privileged regarding those who are secured with a pledge or mortgage. What we obtain is an unprecedented rearrangement of the creditors’ redress order which has a serious impact on the civilian and commercial turnover. 

Bulgaria has market economy. The business creates goods – it pays taxes, provides employment, improves the living standard of the region. Many people are engaged in the private sector. In order for them to receive salaries and to increase their income, the business has to constantly develop, modernize and expand. If the changes are adopted, no bank will embark on crediting merchants and their initiatives because the certainty of full redress from the established collaterals is gone. 

Let us go back to the shoe producer example. They want to modernize their activity with new technologies, to carry out renewal with which the production will increase its performance and quality. This way the 100 employed workers will work in better and healthier conditions. The increased productivity will lead to bigger profits and a possibility to raise of remuneration. The producer needs credit from a bank in order to modernize. The bank refuses, not because the business plan is bad, but because there is no certainty that the sums left after the redress of the personnel in the bankruptcy proceedings will be enough to satisfy the bank’s takings. The merchant’s plan fails and soon they lose the requests from their Italian counterparty which has raised their requirements. The lack of crediting would lead to other difficulties in other sectors of the region. This would trigger the domino effect – without business there is no employment. 

The rearrangement of the redress order is illogical – an employee with a taking of a couple of remunerations, covered by the Employee Claims Guarantee Fund, surpasses a creditor with a secured taking of much greater value. The suggestion de jure means that the unsecured creditor has an advantage over the secured one. This is extremely incorrect and threatens the civilian and commercial turnover. 

The change brings about a serious deterioration in the business climate and the economic environment. The banks will suffer because they will have to narrow down their lending and will have to make them more expensive due to the increased risks. The effect will be negative for the employees as well – if the business does not work properly, better work conditions cannot be expected. A situation in which we all lose. 

The erroneous protection

The changes will not only fail to reach their goal, but the consequences for the community and business as well as for the employees themselves will also be quite serious. An unnecessary opposition between employers and employees is created instead of them working together to achieve success. If your business is going well, you will be encouraging your employees and not stopping their remuneration. If you are experiencing temporary difficulties, it is expected that you will manage with the help of your personnel. It is not expected that an unpaid remuneration will leave you knocked out from your own team. 

Workers and employees are not deprived of possibilities for active behavior even now. If the employer is not paying you, quit the job and file a claim for your remuneration, do not lead them to bankruptcy. Unlike them, you have a guaranteed payment for several remunerations in the Employee Claims Guarantee Fund.

The suggested amendments standardize the employers as enemies of the employees which should be punished on a general ground. Such a legislative tendency is populism. The needed changes are other – penalizing employers who deliberately exploit the work of their employees and deliberately divert the profits from their activities. The incrimination of this behavior was left in the public discussions. 

This article is published in Investor.bg

Author: Teodor Todorov, Attorney-at-law