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2.3 ACTION LINE 2.3: DRAFTING ADDITIONAL LAWS
AFFECTING SMALL AND MEDIUM SIZE ENTERPRISES
- 2.3.1
BACKGROUND
- 2.3.2
OBJECTIVES
- 2.3.3
ACTIONS
- FORECLOSURE
LAW
- LEASING LAW
- CONSUMER PROTECTION
LAW
- ELECTRONIC COMMERCE
LEGISLATION
- CURRENCY EXCHANGE
LEGISLATION
- TRADE MARK
LEGISLATION
- GOVERNMENT
PROCUREMENT LEGISLATION
- SME
LEGISLATION
- 2.3.4 EXPECTED
RESULTS
2.3.1 BACKGROUND
Many steps have been taken towards creating an
enabling environment for SMEs, many of which have been completed
and some of which still need to be finalized. However, there are
still a number of laws that need to be drafted in the near future.
In drafting such laws, special attention should be paid to two
factors. First, stability of the legal system should be preserved
as much as possible in this process which implies change and
motion. An unstable system of laws means a lack of a legal system.
Second, special attention should be paid to prevent the passage of
retroactive legislation which represents the worst form of legal
instability. Failure to observe these two principles will
compromise the entire reform effort: harming SMEs instead of
promoting them.
New legislation should take into consideration that
Bulgaria has entered into an Association Agreement with the
European Union and filed a request for full membership in the
European Union in December, 1995. As a consequence, Bulgaria has
adopted a policy towards approximation of its internal legislation
with EU law. Therefore, all steps must be taken to ensure that new
legislation follows an appropriate direction, in terms of
approximation with EU law.
.3.2 OBJECTIVES
This paper is not intended to propose an exhaustive
list of laws that need to be drafted in order for the legal
framework for SMEs to be completed. However, it suggests certain
important pieces of legislation which are necessary for the
development of the SME sector.
2.3.3 ACTIONS
The actions foresee:
- drafting modern foreclosure legislation
(FORECLOSURE LAW);
- drafting amendments to leasing law (LEASING
LAW);
- drafting consumer protection laws (CONSUMER
PROTECTION LAW);
- drafting electronic commerce legislation
(ELECTRONIC COMMERCE LEGISLATION);
- drafting modern currency exchange legislation
(CURRENCY EXCHANGE LEGISLATION);
- drafting modern trade mark legislation (TRADE MARK
LEGISLATION);
- drafting government procurement legislation
(GOVERNMENT PROCUREMENT LEGISLATION);
- passing specialized legislation on SMEs (SME
LEGISLATION)
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FORECLOSURE LAW
Background
Foreclosure is a difficult process in Bulgaria.
Confidence in the legal mechanism for enforcing rights is low and
private "enforcement" and racketeering groups flourish. The result
of the difficult foreclosure process is that commercial turnover
remains slow. Businesses attempt to avoid situations where money
would be owed to them for fear that commitments will not be honored
and enforced.
The existing foreclosure law does not recognize or
allow for non-judicial methods of foreclosure (with the exception
of the newly passed Law on Registered Pledges which, when it takes
effect, will only allow out-of-court foreclosure on pledged movable
property). Every creditor who has procured a writ of execution,
regardless of whether it is a secured creditor, must go through a
lengthy judicial process. Sale of a debtor’s assets must be
effected at a court appointed auction. The initial auction price
must be determined by a court appointed expert. If a creditor must
foreclose on a combination of real estate and chattel, this must
happen in two different procedures which do not necessarily run
parallel in time. Debtors are not allowed to bid and creditor’s
rights to bid are limited. Foreclosure on bank accounts is
practically unworkable. Steps need to be taken so that the law will
enable creditors to easily obtain information about the existence
and location of bank accounts.
Current foreclosure legislation favors the debtor.
Debtors have numerous opportunities to prolong the procedure. Fines
for violation of procedural rules are outdated and low and do not
deter procedural violations. Even when, after a lengthy process,
the court has scheduled an auction, a debtor whose assets may
exceed the value of the creditor’s claim, may delay the process by
another two years. If prior to the auction, the debtor pays 20
percent of the claim and commits to pay ten percent every quarter,
foreclosure is stopped. The result can be that the creditor is
forced to accept payments over a two-year period from the
debtor.
While this law was written to service a 1952 command
economy, it is currently unsuitable. Although SMEs comprise a
significant number of the debtors in the economy and an efficient
foreclosure procedure may not work to their immediate advantage,
SMEs will ultimately benefit from a more stringent legal framework
applicable to them since it will enhance lending.
Recommendation
Organize a working group to draft and lobby for
passage of a modern foreclosure law. The government will perform
much better in providing a workable foreclosure legislation if it
works closely with banks and other private businesses. By far,
private businesses and banks are the ones who suffer most from the
current foreclosure framework and could propose suitable solutions
to most of the existing problems. In this way, it will be
guaranteed that no problems will be left unresolved.
LEASING LAW
Background
Leasing is used in western economies as an effective
means of "pay as you go" financing. It is particularly attractive
for SMEs. Bulgaria has a long tradition, over ten years, of leasing
relative to its Central European neighbors.
Leasing transactions were recently provided for in a
newly passed division of the Law on Commerce. Still, certain
problems remain which inhibit the development of leasing as a
financial method.
Under VAT, finance transactions are tax exempt.
Finance leasing transactions (where, simply put, money is borrowed
to finance the purchase of equipment), however, are not classified
as finance transactions under Bulgaria’s VAT law. The result is
that a finance lease cannot compete with a finance loan.
Demand for financial leasing should be high in
Bulgaria primarily because (1) the country faces a lack of
financial resources for starting businesses, (2) suitable financing
is difficult to obtain from Bulgarian banks and (3) the process for
obtaining bank loans is usually long and arduous.
Recommendation
Consideration should be given to amending the VAT
law to allow financial leasing to compete with other forms of
financing. Also, work needs to be done in respect of protecting the
lessor’s interests where the lessee defaults on the lease payment.
So far, Bulgarian law does not recognize lessor’s right to
repossession of leased goods. In this respect, the government would
do better if new legislation is developed in dialogue with leasing
companies and SMEs which are the most likely beneficiaries of
financial leasing.
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CONSUMER PROTECTION LAW
Background
Bulgaria has not passed consumer protection
legislation which seriously affects SME businesses since most of
their clientele consists of consumers. Therefore, consumer
protection laws will largely affect the volume of business of
SMEs.
Consumer protection legislation will also have a
disciplining effect on SMEs by allowing them to build better
credibility with customers. Consumer credit in the form of vendor
financing will be enhanced. In turn, this will increase the
turnover of SMEs producing and trading in consumer goods.
Recommendation
Consumer protection legislation needs to be drafted.
It needs to cover both sale of consumer goods and consumer credit.
Consumer organizations, NGOs and SMEs have critical role to play in
the public dialogue which needs to precede drawing up of draft
laws.
ELECTRONIC COMMERCE
LEGISLATION
Background
Electronic commerce is about to start making its way
into Bulgaria. Analog telephone lines are being progressively
replaced with digital high quality lines. Electronic mail is
quickly becoming more and more popular and the Internet network is
growing. In addition, computerized registries are starting to
emerge.
Despite significant improvements in Bulgaria’s
electronic business infrastructure, existing legislation still only
addresses the concerns of business based on paper commerce. A
contract made orally, over the telephone, or via fax or telex is
often not enforceable, or if enforceable, it may be difficult or
impossible to prove it in court. Paper filings into computerized
registries increase the social cost of maintaining the
registry.
Recommendation
Legislation inserting reliability in electronic
commerce needs to be drafted and passed. While there are no
obstacles under current law for transacting business via electronic
means, it is almost impossible to utilize telecommunication
technologies because there are no legal protections for such
contracts. Therefore, new legislation must provide for security and
encoding of electronic business information. A digital signature
law is critical for enabling authentication of the signer’s
signature and guaranteeing the authenticity of information. A
digital signature law will enable electronic filing in computer
based registries. The law of evidence needs to be changed in order
for it to accommodate electronic documents which have not been
provided for under current law.
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CURRENCY EXCHANGE
LEGISLATION
Background
Currency exchange legislation now in effect was
created in 1966 to provide the currency framework of a socialist
economy existing in isolation from the international markets under
a state currency monopoly. The most defining characteristic of this
framework is the amount of restrictions in place and the amount of
discretion maintained by monetary authorities to grant currency
permits. Since current currency law is unsuitable for a market
economy, currency exchange matters are now largely being regulated
through secondary legislation. This causes instability of the
framework and has a general inhibiting effect on the business of
SMEs. Since the Bulgarian economy is largely dependent on imports,
exports and foreign investment, the stifling effect of
old-fashioned legislation is becoming even stronger.
Recommendation
New legislation on currency exchange needs to be
drafted. In doing so, the government needs to study the experience
of foreign investors and foreign and local trading partners.
Studying the experience of banks both in Bulgaria and abroad is
important, as well. The new laws should define clearly what is
prohibited and what is freely allowed. Inserting clarity and
stability in the legal framework will dramatically improve the
climate for SMEs.
TRADE MARK LEGISLATION
Background
Current trademark legislation is clearly outdated
and unworkable in the current market environment. The legislation
providing for trademarks was created in 1967 and is suited to
regulating the behavior of the agents of a centrally planned
economy. Accession of Bulgaria to GATT places new requirements to
trademark law, consistent with the modern international
concepts.
Recommendation
New trade mark legislation should be drafted
reflecting the modern internationally accepted standards for trade
mark protection. The efforts of the Patent Agency of Bulgaria to
create a new law should be supported by NGOs, lawyers and SMEs,
both at the drafting and at the passage stages. After the new law
is passed, work should be done to train lawyers and trade mark
specialists in implementing the modern law. Enactment of this law
will complete the process of reforming Bulgaria’s IPRs
legislation.
GOVERNMENT PROCUREMENT
LEGISLATION
Background
Government procurement laws do not exist in
Bulgaria. This leaves the fields of dispositions with government
property and funds, as well as awarding government contracts,
totally unregulated. SMEs are among the potential government
contractors and need strict and clear procedures for awarding
government contracts. Without such laws, SMEs will undoubtedly lose
many government contracts to powerful and influential economic
agents.
Recommendation
Draft and pass government procurement laws. SMEs and
NGOs should be part of the drafting and advocacy process. Only in
this way government procurement rules will account for the
legitimate interests of SMEs and will provide for a favorable legal
framework for SMEs.
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SME LEGISLATION
Background
SMEs are a part of the economic reality which, like
all other parts, are governed by the laws and agencies which
regulate the activity of all economic agents. A legal framework
favorable to business in general would be sufficient for a healthy
SME sector. However, in recent years, SMEs have attracted
increasing attention from regulatory agencies on a national and
international level. The European Union issued a Commission
Recommendation of 3 April, 1996, Concerning the Definition of Small
and Medium Sized Enterprises. This and other pieces of legislation
reveal that, on an international scale, SMEs are attracting the
special attention of legislators and institutions. Therefore, the
emerging SME sector in Bulgaria deserves even stronger support and
attention on behalf of authorities.
Recommendation
Specialized legislation regarding SMEs needs to be
passed. Whether in the form of a special law, or in the form of
amendments to various laws, such legislation must provide for the
following:
- preferential tax treatment of SMEs in terms of
direct taxation;
- presenting SMEs with options to choose their
accountancy and tax treatment (from among accountancy and tax
treatment of individuals and general business entities);
- preferential tax treatment of transfers of title to
SMEs among close relatives, including by inheritance;
- preferential customs treatment of imports and
exports of SMEs (although the effects should be weighed since such
treatment may run contrary to Bulgaria’s international obligations
as a member of the WTO as well as other bilateral international
obligations);
- preferential treatment of SMEs as employers and
providers of social security;
- simplified registration procedures;
- creation of a SME Agency which shall be charged
with monitoring the economic and legal climate for SMEs,
maintaining relationships among SMEs and the Government, and
formulating the Government policy towards SMEs.
2.3.4 EXPECTED RESULTS
If the described new legislation is drafted, the
legal framework for SMEs will be almost complete. Participation of
SMEs in the law drafting procedures will educate them into the
process of maintaining a public dialogue on policy issues. SMEs
will also get a chance to have a say in the process of creation of
the legal framework governing their activities.
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