The hedge funds that hold 51 per cent of the bonds issued by Bulgarian steel maker Kremikovtzi have secured a ruling from Britain's High Court that ordered that the steel mill paid back the principal and interest payable under the notes, which combine to a total of 347 million euro, a source familiar with the process told Dnevnik.

The 325 million euro bond was placed by Kremikovtzi subsidiary Bulgaria Steel Finance (BSF), and was guaranteed with the steel maker's production assets and 71 per cent of Kremikovtzi's shares.

Law Debenture Trust, the trustee to the Kremikovtzi bond, had originally said the bonds were in default as far back as November 16 2007 after the company failed to provide an auditor's certification and maintain accounting controls in compliance with the notes' conditions. Default became inevitable when Kremikovtzi failed to pay the 19.5 million euro coupon due on May 5 2008.

The High Court ordered that Kremikovtzi reclassifies the principal of the bonds and the interest due as a short-term liability.

Neither BSF in its capacity as issuer, nor Kremikovtzi in its capacity as guarantor, were represented at the hearing. The certificate of enforceability issued by the UK court makes its judgment immediately recognisable in all European jurisdictions, including Bulgaria.

The committee of bondholders will next try to join the insolvency proceedings against Kremikovtzi as an interested party at the July 29 hearing scheduled by the Sofia City Court. The  judgment of the British court is unlikely to be contested because an indisputable event of default occurred following the non-payment of bond interest in May.

Legal experts said the next step in the process should be a decision of the Sofia city court conferring authority to an enforcement agent to execute the judgment of the UK court. But before the assets put up as collateral can change owners, the enforcement agent will have to check with the State Receivables Agency as to whether the steel maker has any outstanding debts to the state.

The fact that the bondholders enjoy a status of first-rate secured creditor under UK law complicates matters because Bulgaria's commercial code provides for the claims of the state to be satisfied first. As has been reported, Kremikovtzi may be facing a 400 million leva claim from the Government over its failure to meet commitments to cut down pollution.

The amount was written off by the cabinet prior to the privatisation of the plant in exchange for the commitment on the part of the new owner to invest in environmental improvements. As these pledges were not honoured, the European Commission may declare the write-off to be illegal state aid and order that it is reclaimed.

The legal situation could be further compounded by likely controversy over which national law governs the notes and over whether the bondholders will be able to secure settlement of their claims before everyone else's, legal experts said.

Concerned about the transparency of the insolvency procedure, the bondholders have asked the European Commission to keep an eye on the process.