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LEGAL ASPECTS OF THE PRIVATE SECTOR IN BULGARIA
by Valnetin Georgiev
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II. LEGAL STATUS OF
COMMERCIAL ENTITIES AND THEIR INTERRELATIONS IN THE PROCESS OF
CARRYING OUT ECONOMIC ACTIVITY
After the Liberation, trade legislation
included a Law on Commerce, Law on Market-Places, Law on
Cooperative Partnerships, Law on Stock-Exchanges, Law on Limited
Liability Companies, Commercial Shipping Law, Sea Trade Law,
Pre-Bankruptcy Work-Out Agreement Law, and others. A subsidiary
source of economic activity regulation were the general civil laws,
most notably the Law on Obligations and Contracts. Commercial law
provided the necessary legal framework of economic relations in
Bulgaria, which were based on private property, equal treatment of
commercial entities, and the competition under a market
economy.
Following 1944, commercial law lost its
significance in the context of centrally planned command economy.
The nationalization of private industrial and mining enterprises in
1947 and the subsequent adoption of the new Law on Obligations and
Contracts in 1951 in fact put an end to commercial law in the time
of socialism.
With the repeal of the old commercial
legislation, the regulation of the economic activity and relations
among commodity producers was covered by civil law and above all,
contractual law. A number of instruments designed to regulate
commerce, such as the commission contract, shipping and forwarding
contracts, the publishing contract, the insurance contract, etc.,
were covered by contractual law and more specifically, by the Law
on Obligations and Contracts, passed in 1951. However, those
instruments primarily served a single type of entities, namely the
socialist economic organizations, as citizens were generally not
allowed to engage in economic activities. A number of special
regulations and legislative acts were also passed - Law on
Contracts between Socialist Organizations, Foreign Trade Law,
Ordinance on Commercial Contracts, Ordinance on Interrelations in
the Investment Process, Rules and Regulations on Economic Activity,
and others, which regulated the legal status of the socialist
commercial entities and the relations among them.
The first attempt to break down the state
monopoly on economic activity took place with the adoption of Rules
and Regulations on the Collective and Personal Labor of Citizens
for Additional Production of Goods and Services (Decree N 35 of
1987 of the Council of Ministers). It granted citizens the
opportunity to exercise economic activity and to own means of
production of a type and size required for the purposes of that
activity. Citizens could own studios and workshops, shops, farming
facilities, trucks, and others.
While the Rules allowed the carrying out
of a wide range of activities, most of them were subject to special
subsequently passed regulations. They introduced a licensing system
for the exercise of those activities, as well as a number of formal
administrative procedures for the granting of licenses.
Foreign-trade activities, for instance, still remained an exclusive
monopoly of the state. On the other hand, the forms in which
citizens were allowed to carry out economic activities were limited
- citizens could engage in the production of goods and services by
running small workshops and retail outlets granted for use through
auctions and on the basis of contracts concluded for a term of up
to 5 years; by organizing small production collectives for carrying
out additional activity within socialist economic organizations or
the exercise of a craft, manufacture, or retail business, and by
supplying services upon registration.
One specific characteristic was the fact
that the production of goods and services could only be carried out
through personal or collective labor of citizens. Hiring labor
force, i.e. the exploitation of another's labor, was
prohibited.
In fulfillment of the basic normative act
- the Rules and Regulations on the Collective and Personal Labor of
Citizens for Additional Production of Goods and Services, it was
followed by the adoption of a number of other acts:
Decree N 17 of the Council of Ministers of
June 3, 1988, on the Reorganization of Domestic Trade and Services
(State Gazette, 46/06.17.1988);
Ordinance N 6 on the Supply of Transport
Services by Citizens, issued by the Ministry of Transport (State
Gazette, 75/09.29.1987);
Ordinance N 3 on Holding Auctions for the
Purpose of Granting Management of Small Objects, issued by he
Ministry of Trade and the Ministry of Finance (State Gazette
76/10.02.1987);
Ordinance N 6 on Granting Licenses for the
Exercise of a Craft, Organizing Manufactures, Trade, and Supply of
Services and on Registration of Licensees, issued by the Ministry
of Finance and the Ministry of Trade (State Gazette,
76/10.02.1988);
Ordinance N 7 on Architectural Designers'
Services, issued by the Committee on Territorial and Built-Up Area
Zoning (State Gazette, 78/10.09.1987);
Ordinance 1 on Software Design and the
Supply of Programming Services through Collective and Personal
Labor of Citizens, issued by the Information Technology Committee
(State Gazette, 80/10.16.1987);
Ordinance N 7 on the Supply of Pedagogical
Services, issued by the Ministry of Culture, Science and Education,
(State Gazette, 40/05.27.1988);
Ordinance N 7 on Administrative and Legal
Services, issued by the Ministry of Justice (State Gazette,
59/08.02.1988);
Ordinance N 1 on Family Run Hotel
Businesses, issued by the Ministry of the Economy and Planning
(State Gazette, 66/08.26.1988);
Decree N 53 of the Council of Ministers of
September 15, 1987 on Establishing a Table on the Size of Fees of
Persons Supplying Services
Ordinance N 7 on Determining the Fees and
the Income Tax on Incomes Acquired under the Conditions of the
Rules and Regulations on the Collective and Personal Labor of
Citizens for Additional Production of Goods and Services, issued by
the Ministry of Finance (State Gazette,
76/10.02.1987).
The next step in abolishing state monopoly
on economic activity was made with the adoption of Decree N 56 on
Economic Activity, which introduced the so-called company
organization. The company organization of economic activity was an
attempt to restore, or reestablish rather, market economy
principles in the context of centralized, planned
economy.
Decree N 56 on Economic Activity
prescribed the entities that individuals could form or participate
in, in the exercise of their right to take part in economic life.
The first text of Decree 56 allowed citizens to form only one-man
or collective companies, and partnerships, with only the latter
having the status of legal persons. It was not until 1990 that
individuals were allowed to form or participate in limited or
unlimited liability companies and joint-stock companies. At the
same time, the restriction limiting participation to 2 companies at
the most was still valid.
The use of "hired labor" was allowed for
the first time, though the number of workers that could be employed
was limited to 10.
Citizens were purportedly free to choose,
register and exercise any objects of activity. However, this
liberal system was immediately constrained by the condition that
should there be a law, or a decree or other act of the Council of
Ministers prohibiting the exercise of a particular economic
activity by citizens' companies, courts would deny statement of
that activity in the objects of the company upon its registration.
Thus very soon, a number of government acts and regulations
reestablished a restrictive system with respect to the possible
objects of private companies. For instance, speculative activity
was prohibited, meaning any activity involving buying of goods for
the purpose of reselling them. In such cases companies could be
terminated upon request by the competent state authority or the
public prosecutor.
On the other hand, according to the
initial text of the Rules for the Implementation of Decree N 56 on
Economic Activity, citizens' companies were restricted with respect
to the foreign trade activities they could engage in. The one-man
and collective companies could engage in import and export through
companies that were legal persons. At the same time, citizens'
partnerships, which had legal person status, were prohibited from
carrying out trade representation in the country and abroad, as
well as from exporting goods manufactured by other companies, or
importing goods other than those required for the purposes of their
own activity.
Subsequently those restrictions were
lifted and private companies were allowed to engage freely and
independently in foreign trade activities with no permissions from
state authorities required, except in the cases when the Council of
Ministers set import and export quotas and conditions with respect
to certain goods, or prohibited the import and export of certain
goods, or established licensing with respect to certain
foreign-trade transactions. The freedom of private companies to
engage in foreign-trade activities was expressed in their right to
negotiate and conclude contracts with foreign contracting parties,
to make and receive payments, to contract for the accessory
activities involved in foreign-trade transactions - freight,
insurance, commissions, and others.
The rigid interpretation of speculative
activity was also dropped. With respect to foreign trade, it was
possible to export both the private company's own products, and
goods produced by other companies. The restrictions on imports were
also lifted - private companies could import goods required for
their own activity, as well as goods meant for sale in the
country's retail network, for renting out, etc.
At the same time, however, private
companies were still facing the problem of the established foreign
exchange system. According to the provisions of Decree N 32 of the
Council of Ministers of April 10, 1990, convertible currency
transactions at market exchange rates were organized by the
Bulgarian Foreign Trade Bank through auctions. Private one-man and
collective companies and partnerships were required to sell to the
Bulgarian Foreign Trade Bank 50 per cent of their foreign currency
results from the export of goods and services, reexport, etc., at
the current market exchange rate. The currency results were
calculated after deducting the value of imported materials and
packaging paid in foreign currency for the production of the
exported goods, expenses for transport, insurances, commissions.
The remaining sum after the sale of 50% of the foreign currency
revenues was left at the disposal of the respective private
company. The companies receiving income in convertible currency
from international tourism sold 80% of their currency earnings to
the Bulgarian Foreign Trade Bank at the market exchange rate, with
the remaining 20% left at their disposal. The conditions were even
more unfavorable for the companies licensed to sell imported goods
and services in convertible currency or which received income in
foreign currency by acting as representatives, intermediaries, or
agents. They were required to sell 90% of their currency earnings
to the Bulgarian Foreign Trade Bank at the market exchange rate,
with barely 10% remaining at their disposal.
There existed a number of regulations and
legal possibilities meant to place private companies on an equal
footing with other companies. However, they were insufficient in
themselves in the absence of guarantees about their application.
The negative attitude and common practice of underestimating and
neglecting private economic initiative in fact thwarted the
emergence of truly equal business conditions.
Nevertheless, following the adoption of
Decree N 56, there occurred a number of positive changes regarding
the independence of commercial entities.
In accordance with the Law on Obligations
and Contracts, the economic activity of companies and their
interrelations were realized on a contractual basis. That was a
considerable step forward compared to the former system of state
commissions and obligatory planned deliveries.
The Law on Obligations and Contracts was
created in 1951 and though its purpose was to regulate contracting
between persons in the context of socialist planned economy, its
provisions, particularly after the amendments and additions made in
1993, generally meet market economy requirements as well. The chief
instruments of civil law which have been adopted and regulated by
the Law constitute the basis for the development of private law
relations. According to the stipulations of the Law, in their
capacity of contracting parties, the commercial entities are free
to determine the content of the contract at will, on the sole
condition that it is not against the law. The contract has effect
between the parties and with respect to third parties can only have
effect in cases specified by law.
One of the most consequential legislative
reforms for encouraging private sector development consisted in the
adoption of the Law on Commerce.
The first two parts of the Law are devoted
to the legal and organizational forms of carrying out economic
activity. A definition is provided of the trader as a commercial
and legal entity. The term "firm", which is quite meaningless from
a legal point of view and which used to denote the commercial
entity in the text of Decree N 56, has been dropped. It is now used
to signify the name of the commercial entity. The various types of
commercial entities have been defined - the sole trader,
state-owned and municipal enterprises, as well as the commercial
companies, including the general partnership, the commandite
partnership, the limited liability company, the joint stock
company, the company limited by shares. However, it is the
Cooperatives Act that provides for the cooperatives as independent
entities. The Law on Commerce also provides for trade
representation.
Part three of the Law on Commerce, which
is to regulate trade transactions, has still not been adopted, but
as pointed out above, the relations between the commercial entities
are subject to the provisions of the Law on Obligations and
Contracts.
Part four of the Law on Commerce -
Bankruptcy - was adopted in 1994 and regulated the legal procedure
of adjudication of bankruptcy and/or insolvency.
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