When handling client consultation on Kazakhstan law matters, we frequently face situations where, in approaching public bodies for registration purposes (be it the registration of companies/branch or representative offices, or the registration of encumbrances on movable/immovable property), we have to offer the client an ad hoc solution to legal issues. This is largely due to the absence in Kazakhstan of laws with clear and comprehensive requirements for certain legal matters. Consequently, public officials often have room for interpreting law provisions at their own discretion, without reference to a specific legal provision.
In this note, we would like to share two cases from our recent practice on the registration of property pledge termination in Kazakhstan. First, we would like to share our experience with the registration of movable property pledge termination, where our client – a foreign company – acted as a pledge holder. During this seemingly simple legal procedure, we faced a number of unexpected problems, which delayed the process for more than a month. Second, we will share another case in our practice related to the termination of pledge of subsoil use right in Kazakhstan.
Movable Property Pledge Termination
Kazakhstan civil law stipulates that a pledge holder must submit to the competent body the following exhaustive list of documents in order to terminate the registered pledge of a movable property:
- Registration fee payment receipt;
- Pledge registration certificate;
- Document confirming the fulfilment of the primary obligation.
Based on the foregoing, a pledge holder must address the request to the competent body for the termination of the pledge of movable property. The application on the termination of pledge registration is filed by the pledge holder, which, in essence, justifies the pledge holder's intention to terminate the pledge due to the pledger having fulfilled its obligations. Apart from the application, as stated above, the pledge holder must also submit the document confirming the fulfilment of its primary obligation. Kazakhstan laws do not specify the document that actually suffices for this purpose. Therefore, our lawyers presented an official letter on behalf of the pledge holder1, which confirmed the fact of the pledger's fulfilment of its primary obligation.
The competent body2 refused to accept our letter as in its opinion, as the pledge holder's legal representatives, we were not authorized to dispose of its movable property. Public officials ignored our arguments that a legalized and notarized power of attorney, issued by the pledge holder, expressly authorized us to sign and file any documents required for the termination of the pledge of movable property in Kazakhstan. They had thereby cast a doubt on the legal institution of a power of attorney under Kazakhstan civil law.
Following the continuous polemic with public officials, we were instructed to sign an agreement on behalf of the pledge holder, together with the pledger, on the fulfilment of its primary obligation. Otherwise, the public officials threatened to refuse the pledge termination. Thus, one can conclude that from the public body's standpoint, the pledge holder's legal representative is forbidden to independently sign the document that confirms the fulfilment of the obligation, but may sign the said document jointly with the pledger. That said, the exclusive right to terminate a pledge always belongs to the pledge holder, and, according to Kazakhstan law, only the pledge holder must declare the termination of a pledge of movable property.
This case illustrates that even if civil law already indicates the express requirements and the list of necessary documents to be submitted in an application for a pledge termination, the competent body may unpredictably 'create' new statutory requirements ad hoc. Such attitude does not at all pursue the declared principles for creating a favourable climate for small and medium businesses in Kazakhstan.
Technical Issues with IS TSON3
When applying for the termination of a pledge registration, we also faced some technical issues. To fill in a public service order, a TSON operator must enter in the system the BINs4 of both the pledger and the pledge holder. In our case, the information system TSON ('IS TSON') would not process the application for a pledge termination in the absence of the BIN from the pledge holder, who is a foreign company.
To resolve this issue, IS TSON suggested that we used the BIN of any Kazakhstan company affiliated with our client. However, our client does not have affiliates in Kazakhstan, and had not actually contemplated obtaining the BIN in Kazakhstan solely for the termination of the pledge registration. The public officials accepted our arguments and countered with the excuse of the public system's deficiency. We repeatedly contacted maintenance service and were informed that the issue might take up to six months to resolve.
Eventually, the public officials suggested that we file an application for pledge termination on behalf of the pledger. Such suggestion of the public body generally contradicted Kazakhstan civil law provisions due to the express statutory requirement of filing an application for pledge termination on behalf of the pledge holder, and not the pledger. Hence, based on the public body's suggestion, our client may opt for two options: either wait up to six months for the technical issue to be resolved, or secure an application on behalf of the pledger, which does not align with Kazakhstan civil law requirements.
Pledge of Subsoil Use Right
The second case in our practice relates to the registration of subsoil use right pledge agreement with the competent body of the Republic of Kazakhstan (Ministry of Energy of the RK for raw hydrocarbons and Ministry of Investment and Development of the RK for common mineral resources).
Kazakhstan subsoil use laws require obtaining the competent body's permission, and registering the subsoil use right pledge agreement with the same government authority.
A recent transaction that we were involved in envisaged obtainment by the seller of the competent body's permission to pledge subsoil use right as a transaction security. Having applied to the competent body, the applicant was informed that his subsoil use right had already been pledged. It turned out that several years ago, the company had already pledged the subsoil use right under a bank loan agreement. However, the loan had already been repaid long ago, and no information on loan repayment and pledge termination was actually filed with the competent body. Hence, the register of the competent body listed the company's subsoil use right as being already encumbered.
Compared to Kazakhstan civil law governing the procedure for the termination of a pledge of movable and immovable property, and notifying public bodies of the RK thereof, the subsoil use laws do not contain similar requirements regarding the termination of the pledge of subsoil use right in the registering (competent) body. Property pledge is one of the most common ways to secure the fulfilment of obligations, and subsoil users often resort to a pledge of subsoil use right for securing certain obligations. However, we believe that in practice, issues frequently arise as to who should notify, and when should the registering body be notified of the pledge termination, and whether such notification should even be generally filed. Faced with said practice, we recognize the need to fill the gaps in Kazakhstan subsoil use laws.
These cases in our practice once again aim to illustrate the unlikelihood of the government's success in attracting investment, and creating favourable business conditions. The operation of public bodies as well as the current laws should be revised and adapted for business realities.
1. On the basis of the power of attorney from the client, which enabled us to sign on behalf of the client and file with Kazakhstan state authorities all and any documents required for property pledge termination in Kazakhstan.
2. The Land Cadaster and Technical Property Inspection Department of Almaty.
3. Public Service Center.
4. Business Identification Number.
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.