The Law of the Republic of Kazakhstan No. 564-IV ЗРК of 17 February 2012 "On amendments to some legislative acts of Kazakhstan regarding the recovery of competitive enterprises" (the "Law")1, came into effect on 12 March 2012 (apart from certain provisions). The main purpose of the Law is to implement the Post-Crisis Recovery Program approved by the Government of Kazakhstan Resolution dated March 4, 2011 and improve bankruptcy legislation in Kazakhstan. It is envisaged that it would be used mainly for the recovery of Kazakh competitive enterprises affected by financial crises, whose debts exceed KZT 4.5 bln.2

Please note the following provisions of the Law:

Introduction of "Accelerated Rehabilitation"

  • The main innovation of the Law is the introduction of the so-called 'accelerated rehabilitation' as a new pre-insolvency procedure3, which in essence is a simplified procedure for enterprise rehabilitation.
  • Bankruptcy Law, as amended, now allows a commercial entity (if no bankruptcy or rehabilitation proceedings have started yet and if it is either (i) insolvent or (ii) unable to meet its monetary obligations upon due date in the next twelve months) to file an application to the relevant Kazakh state court and ask for the initiation of the "accelerated rehabilitation" procedure. A mandatory prerequisite for the accelerated rehabilitation process is that the debtor be able to improve its financial position.
  • The following are among the major legal implications resulting from an initiation of the accelerated procedure: (i) stay of enforcement of court decisions and/or arbitration awards issued earlier upon claims of creditors, that are so-called "homogeneous creditors"4, whose claims are stipulated in the rehabilitation plan and (ii) these homogeneous creditors whose claims are stipulated in the rehabilitation plan cannot file for bankruptcy of the debtor.
  • The Law also introduced the concept of so-called "measures of state support" to be determined on a case-by-case basis by the Government of Kazakhstan. The accelerated rehabilitation procedure can be initiated against a debtor who is a recipient of these measures of state support.
  • The main difference between the "accelerated rehabilitation" procedure and the standard "rehabilitation" procedure is that the former is a fast-track procedure (it will generally not last more than 2 years) and, generally, requires prior approval by a simple majority of the affected creditors.

Improvement of the Rehabilitation Procedure

The Law also introduced, inter alia, the following changes to the regulation of the existing (i.e. standard) "rehabilitation" procedure under the Bankruptcy Law:

  • The introduction of rehabilitation is now possible only upon application to the court by the debtor himself, if he is either (i) insolvent or (ii) unable to meet his monetary obligations upon due date in next twelve months. A mandatory prerequisite for the rehabilitation is that the debtor must be able to improve his financial position. The consent of the creditors committee or authorised state body for granting rehabilitation is no longer required.
  • The Law requires that the rehabilitation plan be developed by the debtor and the creditors within three months of the date that the court decision on the initiation of the rehabilitation procedure takes legal effect. Once the rehabilitation plan is approved by the state court, any transactions with the assets of the debtor which are conducted outside the ordinary course of business and which are not stipulated in the rehabilitation plan require the prior approval of the creditors meeting.
  • Importantly, the rehabilitation procedure can now last up to 5 years (before it could last up to 3 years).
  • An insolvent debtor is now entitled to apply to the court for the suspension of the bankruptcy proceedings and the introduction of the rehabilitation procedure, within 10 days of the date it received a copy of the court ruling on the initiation of bankruptcy proceedings.
  • Interestingly, the Law allows a so-called "pledge lender" (i.e. secured creditor) at any time during the rehabilitation procedure to apply to the relevant state court for in-court foreclosure, if (i) there is a breach of any provision of the Bankruptcy Law which poses a risk to its legal interests; (ii) there is a breach of its debt repayment schedule; (iii) there is a decrease in the value of its pledge property which infringes upon its interests; or (d) the pledged property is not required any more for the borrower to continue its business activities or for the realisation of the rehabilitation plan.

Extending Creditors' Competence

  • The Law introduced the concept of a "creditors meeting" which henceforth can be convened under the accelerated rehabilitation procedure and the rehabilitation procedure.
  • The exclusive competence of the creditors meetings under the accelerated rehabilitation framework includes, among other things, the right to approve members of the creditors committee and approve any amendments to the rehabilitation plan. The exclusive competence of the creditors meeting under the rehabilitation procedure is even broader.
  • The Law abolished the limitation on the maximum number of creditors in the creditors committee and significantly extended the authority of the creditors committee.
  • The Law requires that the representative of a creditor (creditors) with claims exceeding 50% of the total claims of the particular group of creditors with homogeneous claims be included in the creditors committee (before only creditors with the largest claims had a right to be a member of the committee).

Footnotes

1 The Law introduced changes to the Law of the Republic of Kazakhstan dated 21 January 1997 no. 67-I "On Bankruptcy", as well as other laws,

2 According to the Kazakh Prime Minister's press service, 30-50 backbone Kazakh enterprises will undergo a recovery process by 2016.

3 Current Bankruptcy Law provides for the following non-financial insolvency procedures: (i) rehabilitation, (ii) external supervision and (iii) bankruptcy.

4 The group of creditors with homogeneous claims means, basically, the group of creditors with identical claims to the debtor, and such creditors shall not have priority over each other within one group. Examples of the groups of creditors with homogeneous claims are: the group of secured creditors, the group of tax creditors, the group of creditors – financial organizations with claims under unsecured loans etc.

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.