On Rehabilitation And Bankruptcy In Kazakhstan
Kazakhstan entered 2017 as a full-fledged member of the World Trade Organization. However, in reality, low competitive ability coupled with the global crisis and changes in the oil market pricing entailed a prognosis of an impending economic crisis in Kazakhstan. Such a situation mainly affects enterprises, which endure the crisis and are not able to compete with foreign suppliers of goods, works, and services.
In 2016, Kazakhstan modernized in part its laws on bankruptcy and rehabilitation procedures. The current law of the Republic of Kazakhstan ('the RK') No. 176-V 'On Rehabilitation and Bankruptcy' dated 7 March 2014 (as amended on 13 November 20151) ('the Law') supersedes the former statutory bankruptcy regime in Kazakhstan. The Law replaces the previous law of the RK No. 67-I 'On Bankruptcy' dated 21 January 1997, which generally appeared to be too uncertain and unlikely to bring results. Hence, many rely on the current Law of the RK 'On Bankruptcy and Rehabilitation' as a lifeline for maintaining businesses and expectations of it are high.
We note clients' demand for bankruptcy and rehabilitation matters, as well as enterprises' active practical use of rehabilitation regulations. In this note, we provide an overview of the main features of the rehabilitation and bankruptcy regime in Kazakhstan.
1 The Law of the RK 'On Amending Certain Legislative Acts of the Republic of Kazakhstan on Bankruptcy and Rehabilitation' dated 17 November 2015.
What procedures are available?
(the debtor's decision to settle his insolvency prior to creditors' initiation of legal procedures)
The court decides on approval or rejection of procedure.
Within 2 months from the date when the court decision on application of procedure enters into legal force, the debtor enters into agreement with all creditors on settling insolvency.
Ø Cessation of accrual of forfeit (penalties, fines) and consideration (interest) under all types of the debtor's indebtedness;
Ø Lifting of all restrictions on the debtor's accounts without respective decision of public bodies, which imposed said restrictions;
Ø Cessation of enforcement of previous court decisions and arbitral awards1;
Ø Imposition of new seizures on the debtor and other restriction in disposal of his property are permitted solely based on claims on invalidation of transaction and recovery of property held in adverse possession, filed against the debtor.
(insolvency or risk of insolvency, where the debtor would fail to fulfil financial obligations upon maturity thereof in the next 12 months, provided that solvency may be restored)
Fast-track rehabilitation procedure
Ø Only the debtor can act as an applicant;
Ø Procedure is used towards the debtor for obligations before a group (groups) of homogenous creditors;
Ø Procedure is used with the simultaneous presence of the following conditions: no rehabilitation or bankruptcy proceedings have been initiated against the debtor; the debtor is a commercial organization; the debtor is insolvent or would not be able to fulfil financial obligations upon maturity thereof in the next 12 months.
Fast-track rehabilitation procedure implies minimal court involvement. The debtor and creditors independently opt for the most reasonable debt repayment solution.
(voluntarily or compulsorily recognized insolvency of the debtor when it is impossible to restore solvency)
The debtor himself may voluntarily initiate the procedure. The debtor may be compulsorily recognized bankrupt by:
Ø Prosecutor (when signs of deliberate bankruptcy are detected and in the case when the creditor is the RK or a public body);
Ø State revenue body.
1 Except payments to citizens to whom the debtor is liable for causing harm to life or health, excluding claims for compensation for non-pecuniary damage, the payment period of which came after the conclusion of the insolvency regulation agreement.
The creditor may file a lawsuit for recognition of the debtor's bankruptcy or application for rehabilitation, provided that the debtor is insolvent when one or more of the following conditions apply:
1) Failure to fulfil obligations before creditors within 3 months from maturity thereof, with minimum amount of 100 MCI1;
2) Failure to fulfil obligations before creditors on taxes and other mandatory payments to budget for tax indebtedness, including indebtedness of the debtor's branch and representative offices, within 4 months from maturity thereof, with minimum amount of 150 MCI;
3) Failure to fulfil obligations before other creditors within 3 months from maturity thereof, with minimum aggregate amount of 300 MCI for individual entrepreneurs, and 1000 MCI – for legal entities.
Who administers procedures?
In accordance with the current laws, courts play one of the most important roles in administering rehabilitation and bankruptcy procedures. Courts consider claims and decide on the application for insolvency procedures; approve insolvency settlement agreements; recognize or refuse to recognize that the debtor is bankrupt; approve settlement agreements; apply and terminate fast-track rehabilitation procedure, approve a rehabilitation plan, and so on.
This category includes temporary and rehabilitation administrators, temporary and bankruptcy managers appointed in due course during the examination by the court of cases, and in the conduct of rehabilitation/bankruptcy procedures.
A temporary administrator is appointed by the court to compile a register of creditors' claims and agree on transactions outside of normal commercial transactions during the rehabilitation plan development. The court also appoints a temporary manager. He collects information about the financial status of the debtor and conducts the bankruptcy procedure before the appointment of a bankruptcy manager. A bankruptcy manager is appointed by the authorized body in the field of rehabilitation and bankruptcy2 to conduct the bankruptcy procedure. A rehabilitation manager is the delegated authority to manage the property and affairs of the insolvent debtor during the rehabilitation procedure.
A regulatory authority in bankruptcy and rehabilitation procedures is the authorized body in the field of rehabilitation and bankruptcy, which exercises state regulation in the field of rehabilitation and bankruptcy (except for banks, insurance (reinsurance) organizations, and accumulated pension funds).
Old and new impressions
It is common knowledge that many foreign investors are wary of unfamiliar legal proceedings in Kazakhstan and opt for arbitration, including international arbitration, in order to solve disputes. Despite the express distribution of functions among all administrators, Kazakhstan courts have a special and primary role in resolving issues related to bankruptcy and rehabilitation procedures. This creates a major setback in the form of uncertainty, at least until rehabilitation and bankruptcy procedures demonstrate predictable and effective results. Thus, for instance, courts at their own discretion decide on recognizing the debtor insolvent, and tend to interpret the debtor's capacity in their own way. On the other hand, it could happen that the court refuses to grant rehabilitation and instead recognizes the debtor to be solvent, when in reality, the rehabilitation procedure could have been the debtor's last chance for survival.
Availability of professionals
The effectiveness of certain procedures prescribed in the Law largely relies on the expertise of the administrators and managers engaged in the process.
For instance, the law stipulates that the court should elect a temporary manager, taking into account the manager's experience in the debtor's main business activity. However, the Law does not establish the criteria for specific expertise in the field of financial literacy, restructuring issues, and so on. It happens that in practice administrators perform only a supervisory role.
As in many other countries, qualified accountants and financial advisors act as administrators in Kazakhstan. However, only a few professional specialists act as administrator or manager, since such experts prefer advising the parties as external consultants. The engagement of inexperienced administrators and managers generally affects the effectiveness of the legal institute of bankruptcy and rehabilitation. Accordingly, the fees for the services of such specialists should be at a level capable of attracting experienced experts. In addition, a law is needed to set more specific qualification requirements for administrators of bankruptcy and rehabilitation procedures.
Recent changes in Kazakhstan bankruptcy laws provide a new mechanism for preserving an existing business, which has already been declared bankrupt by the court:
- Bankrupt debtor drafts the rehabilitation plan and coordinates it with all creditors. The bankruptcy procedure is terminated once the rehabilitation procedure has commenced;
- Conclusion of settlement agreement at any stage of the bankruptcy procedure. The previous court decision declaring the debtor bankrupt is not enforceable once the settlement agreement has been approved by the court;
- Sale of bankrupt company and change of ownership. In order to preserve the business entity in the process of bankruptcy, one can propose to sell the enterprise as a whole, including its debts. In this case, the court decision on bankruptcy is subject to cancellation.
An effective and reliable bankruptcy regime has the ability to 'reanimate' businesses and keep jobs. All the latest changes in bankruptcy and rehabilitation regulation are, of course, a step in the right direction. The level of predictability and pragmatism of the bankruptcy and rehabilitation laws has a direct impact on promoting entrepreneurship, developing small and medium-sized businesses in the country, and attracting foreign investment. However, it should be noted that while the World Bank's Doing Business 2016 ratings ranked Kazakhstan 21st out of 189 world economies for convenience in setting up businesses3, this ranking falls dramatically with regard to resolving bankruptcy issues – our country is ranked only 47th so far.
1 Monthly calculation index (MCI) in 2017 is KZT 2,269.
2 Ministry of Finance of the RK.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.