Key changes proposed in the new Rehabilitation and Bankruptcy Law affect involuntary petitions for bankruptcy, invalidations, trustees' avoidance powers, debtors' dissolution, and priority of claims.
On 29 December 2012, the Kazakhstan Ministry of Finance proposed key changes to the current bankruptcy law through the new Rehabilitation and Bankruptcy Law (Draft Law). The Draft Law and the current law apply to legal entities and registered entrepreneurs (individuals). The Draft Law is currently in review with the Mazhilis, the lower chamber of the Parliament of Kazakhstan, and is expected to become effective in 2013. The Draft Law emphasizes the need for an effective bankruptcy system that encourages the rational use and distribution of assets upon the liquidation of insolvent debtors and promotes the recovery of debtors in economic difficulties so as to permit the continuation of their economic activities.
Involuntary Petitions for Bankruptcy
The current bankruptcy law permits the following categories of creditors to force an insolvent debtor into bankruptcy proceedings:
Under the Draft Law, creditors with claims related to personal injury, alimony, payroll, and compensation may also force an insolvent debtor into bankruptcy proceedings. A debtor is insolvent if it is unable to pay its debt within three months from the time it is due.
Invalidations and Trustees' Avoidance Powers
The normal statute of limitations for the invalidation of a transaction is three years prior to the initiation of bankruptcy or rehabilitation proceedings. Under the Draft Law, the statute of limitations period will be frozen from the date the bankruptcy or rehabilitation case is initiated until the bankruptcy or rehabilitation trustee discovers the avoidable transaction. The period for initiating an action to invalidate an avoidable transaction discovered by the bankruptcy or rehabilitation trustee is set by the creditor committee.
Creditors or bankruptcy trustees may seek to invalidate a transaction on any of the following additional grounds proposed by the Draft Law:
When it is impossible to clawback assets following the invalidation of a transaction, the transferee must compensate the estate for the value of the assets.
Under the current bankruptcy law, the rehabilitation trustee may refuse to perform a debtor's obligations, in whole or in part, if the trustee believes 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 Draft Law also empowers the rehabilitation trustee to refuse to perform a debtor's obligations, in whole or in part, with affiliated parties.
Debtors' Dissolution Outside of Bankruptcy Procedure
Creditors may petition the courts to declare that a debtor is bankrupt and dissolve the debtor without going through bankruptcy proceeding if the debtor and its assets cannot be found for bankruptcy proceedings.
Priority of Claims
The Draft Law provides for a new order of priority for creditor claims. As a result, the first and second priorities were combined into the first priority. All other claims have moved up one priority. The proposed priority of claims is as follows:
1. First priority claims must be paid in the following order: personal injury damages, unpaid alimony, employee payroll and compensation, social contributions to the National Social Insurance Fund and mandatory pension contributions, and compensation due under copyright agreements.
2. Second priority claims must be paid to secured creditor claims.
3. Third priority claims must be paid to tax claims.
4. Fourth priority claims must be paid to unsecured creditor claims, payroll and compensation for persons whose wages increased during the year prior to initiation of bankruptcy proceedings, and claims of secured creditors for the difference between the amount received from a pledged property and the amount actually owed.
5. Fifth priority claims must be paid to contract damage claims as well as fines and penalties on such claims.
It should be noted that administrative expenses and taxes incurred during the period of bankruptcy proceedings are outside of the order of priority for creditor claims and must be paid ahead of all creditor claims.
Notable New Terminology
The Draft Law introduces a number of terms, including the following.
Changes to Other Legal Acts
The following changes to other legal acts in connection with the Draft Law have been proposed:
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