The latest amendments to the Kazakhstan Rehabilitation and Bankruptcy Law were signed on April 2, 2019, and became effective from April 14. The amendments enhance the priority right of secured creditors through the acceptance of pledged assets in kind or the implementation of self-facilitated foreclosure over pledged assets. Notably, the law provides that pledged assets are carved out from bankruptcy estates.
To exercise a priority right, a secured creditor must comply with the following procedure:
In general, the order of priority for other creditor claims remains the same. The law provides for the following order of priority:
Note that administrative expenses, court expenses, and taxes incurred during the period of bankruptcy proceedings are outside the order of priority for creditor claims and must be paid ahead of all creditor claims.
Involuntary Petitions for Bankruptcy
The law permits the following categories of creditors to force an insolvent debtor into bankruptcy or rehabilitation proceedings:
The law provides for circumstances when the debtor is obliged to initiate insolvency proceedings. Specifically, this obligation triggers when the following occur:
Management and Founders’ Liability
The law provides for subsidiary liability of the company’s officers for the bankrupt company’s debts if they fail to initiate bankruptcy proceedings in a timely fashion, disclose accounting records and other information to a bankruptcy or rehabilitation trustee, and provide access to such data (as discussed below). Notably, managers may bear joint liability in respect of any amount that cannot be collected from the debtor.
Such provisions have significant practical implications. For instance, under the law, a director may be held liable for an insolvent company’s debts if he or she fails to file for bankruptcy within six months of the date the company’s tax obligation exceeded approximately $986 and was four months overdue.
Further, management and founders (who were held criminally liable under bankruptcy proceedings) are not allowed to register new companies until such liability is lifted. Under the law, information about bankrupt companies is posted on the website of the Ministry of Finance of the Republic of Kazakhstan.
Invalidations and Trustees’ Avoidance Powers
The law includes grounds for challenging and invalidating transactions concluded within three years prior to the initiation of bankruptcy or rehabilitation proceedings (except for project finance, securitization, and stock exchange open-trade transactions). Specifically, a bankruptcy or rehabilitation trustee must seek to invalidate transactions in the following cases:
Further, a bankruptcy or rehabilitation trustee may also challenge certain types of reorganizations on the debtor’s part that involve asset transfer.
The creditors’ committee sets the period for initiating an action to invalidate a transaction discovered by the bankruptcy or rehabilitation trustee. When it is impossible to claw back assets following an invalid transaction, the transferee or person who made a decision to transfer assets as well as the temporary administrator and trustee who approved the transfer should compensate damages up to the value of the transferred assets.
The law preserves the rehabilitation trustee’s right to refuse to perform the debtor’s obligations, in whole or in part, if the trustee believes that performance will be to the detriment of other creditors or if the agreement contains burdensome provisions for the debtor in comparison with analogous agreements. The law also empowers the rehabilitation trustee to refuse to perform the debtor’s obligations, in whole or in part, in interested parties’ transactions (with affiliated parties).
Further, under the law, the bankruptcy trustee is obliged (per the creditors’ committee decision) to amend, terminate, or challenge (depending on circumstances) the validity of contracts concluded before the bankruptcy proceeding.
Termination on Bankruptcy Clause
The law challenges the enforceability of “termination on bankruptcy” clauses (which are common in commercial and financing agreements), under which the bankruptcy or insolvency of one contracting party triggers the contract’s termination by the other party. Under the law, any agreement on contract termination because of bankruptcy proceedings against the debtor (concluded before filing a bankruptcy case) is void. While “termination on bankruptcy” clauses are still not uncommon, practical implementation of this clause remains unclear.
Notably, no statute of limitations for the invalidation of a termination on bankruptcy clause has been imposed. The bankruptcy or rehabilitation trustee may challenge the clause.
Debtor’s Duty of Disclosure
The law includes detailed procedures related to a debtor’s disclosure duties in the course of insolvency proceedings. Specifically, a debtor is obliged to disclose information on its business activity, financial standing, assets (pledged and leased assets, money on bank accounts, etc.), and foundation documents. This information is disclosed to the bankruptcy or rehabilitation trustee, temporary administrator or trustee, court, and/or creditors.
Further, the debtor must provide a report on the implementation of a rehabilitation plan and its commercial activity during rehabilitation to its creditor(s) or creditors’ committee.
Meeting of Creditors in Bankruptcy Proceedings
The law provides for the meeting of creditors in bankruptcy proceedings (in addition to the previously provided creditors’ committee). The creditors’ meeting includes all creditors in the creditors’ register and has broader powers than the creditors’ committee, including the authority to select the bankruptcy trustee and control over the sale of a debtor’s property. In the event that the creditors are not satisfied with the trustee, they may terminate his or her contract and appoint a new trustee. Notably, decisions of the creditors’ meeting are taken under the principle whereby a claim for one Kazakhstan tenge equals one vote.
To avoid lobbying of debtor’s interests by influencing the decisions made in the creditors’ meeting, the law excludes any debtor’s affiliated parties from voting in the meeting until claims of other creditors are fully satisfied. Furthermore, courts will refuse to find the debtor bankrupt in cases where there are no other creditors but the claimant (unless such claimant is a tax authority).
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