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Kazakhstan

Bankruptcy law in Kazakhstan

Bankruptcy legislation is one of the barometers of development of market mechanisms in transition economy countries. Kazakhstan has been improving its bankruptcy legislation since 1992. Kazakhstan's Law on Bankruptcy dated January 21 1997 (the bankruptcy law) borrows the practice, used in most Western countries, which provides for one of two results of bankruptcy: rehabilitation (reorganization) or liquidation. This article addresses a number of issues arising from Kazakhstan's legislation which are important to creditors of a bankrupt Kazakhstani company and potential purchasers interested in acquiring the company's assets through a bankruptcy liquidation.

Creditors' rights

The most important provisions of the bankruptcy law in terms of assuring creditors rights are as follows:

  • creditors have the right to initiate the liquidation of the debtor, either through bankruptcy proceedings, or through an out-of-court procedure (in which case the creditors will perform the functions that the court performs normally in bankruptcy proceedings);

  • when the creditors file claims, they must remember that the aggregate sum of their claims must be at least 150 times the monthly calculation index (which is presently Kt725, about $5), totalling about $755. The state fee payable by a creditor in case of bankruptcy is five times the monthly calculation index, totaling about $25.

  • creditors have the right to demand that transactions concluded within the year preceding the commencement of bankruptcy proceedings be declared void, and that the property transferred be returned to the debtor. This may be done only when such property was transferred to the detriment of creditors' interests, free of charge, or at a price significantly lower than market prices, or without sufficient grounds;

  • creditors may form a creditors committee with the rights to initiate the rehabilitation of the debtor, to monitor and control the receiver's activities, to challenge his actions and to demand his replacement by the court, to determine his remuneration, and to approve the plan for the sale of the bankrupt estate.


The following issues are of particular concern to purchasers of assets through bankruptcy proceedings.

The state, although it is just one of the creditors of the bankrupt company, is granted additional power and leverage in bankruptcy proceedings. One possible interpretation of the bankruptcy law is that the government may establish special terms and procedures and additional requirements, not only if the insovent is a strategically important enterprise, but also in respect of any other company if the bankruptcy was initiated by the state (irrespective of whether the state is a significant shareholder). The law fails to specify the "special conditions, procedures, and additional requirements," which basically allows the courts to follow the discretional instructions of government officials. This ultimately defeats the purpose of bankruptcy as an efficient and legitimate instrument for acquiring property free of encumbrances and obligations. In some cases, the government has imposed certain investment obligations or employment obligations on purchasers.

Under the bankruptcy law, the bankruptcy estate comprises the debtor's property, including accounts receivable. At the same time, a general approach under the Civil Code is that the property includes both property (assets) and property rights (ie not only accounts receivable, but any other rights, including land use and subsoil use rights). Thus, a purchaser who is buying a mining company or other company having subsoil use rights at an open tender during bankruptcy proceedings needs to verify whether the subsoil use rights in which it is interested are included in the bankruptcy estate in order to avoid the necessity to participate in a separate tender for those rights.

The general rule under Kazakhstani legislation is that licences are not transferable, unless the legislation specifically provides for such a transfer. At the moment there is no law that expressly allows the transfer of a licence in bankruptcy proceedings. Moreover, licences owned by a bankrupt company must be terminated upon its liquidation. This leaves a purchaser with the risk of being fined for operating facilities without the required licence (especially when the purchaser is not able to halt operation due to the nature of the business, eg electricity production) given that the collection of documents, the application procedure and issue of a licence from the licensing agency may take up to two or three months.

One of the central figures in the bankruptcy procedure, the receiver, granted a wide rage of duties. Failure to perform his duties properly may result in pecuniary, administrative, and criminal liability for the receiver. Although the bankruptcy law does not state that a sale of assets in a bankruptcy proceeding may be rescinded for those reasons, the civil law implicitly allows a bankruptcy sale to be challenged for up to three years. This, of course, creates uncertainty for the purchaser.

Conclusion

As in many other fields of law, Kazakhstani bankruptcy law is in a state of flux. Although definite steps are being taken in the development of the bankruptcy legislation, many matters remain unresolved.

Laila Nazarbekova

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