According to Alikhan Smailov, Kazakhstan’s Minister of Finance, the country has an estimated 4,000 bankruptcies and 400 business rehabilitations in process.
Updating the March 7, 2014, No. 176-V Law (Old Law) and related legal acts, Kazakhstan’s new No. 290-VI Law on Rehabilitation Procedure and Bankruptcy (Amended Law) strives to simplify proceedings and balance all parties’ interests.
The most significant changes it introduces are detailed below.
“These numbers are tremendous, and might not even show the whole picture,” “The actual numbers might be even higher.”
According to Alikhan Smailov, Kazakhstan’s Minister of Finance, the country has an estimated 4,000 bankruptcies and 400 business rehabilitations in process.
Updating the March 7, 2014, No. 176-V Law (Old Law) and related legal acts, Kazakhstan’s new No. 290-VI Law on Rehabilitation Procedure and Bankruptcy (Amended Law) strives to simplify proceedings and balance all parties’ interests.
“These numbers are tremendous, and might not even show the whole picture,” “The actual numbers might be even higher.”
The most significant changes it introduces are detailed below.
Report Regarding Financial Stability of a Debtor
The Amended Law now requires insolvency administrators to prepare a financial stability report (FS Report), which the courts must follow, unless there is strong contradictory evidence.
An insolvency administrator can be a temporary manager, temporary administrator, rehabilitation manager or bankruptcy manager (depending on the stage of the proceedings).
The FS Report determines whether a debtor’s financial stability sits under:
- Class I: Financially stable debtors who do not need to undergo rehabilitation or bankruptcy proceedings
- Class II: Debtors associated with financial risk, but have the potential to restore financial stability, who undergo rehabilitation proceedings
- Class III: Financially unstable debtors who may need to undergo rehabilitation proceedings if consent of the creditors’ meeting is obtained, otherwise bankruptcy proceedings apply
Insolvency Tests
The Amended Law introduces two categories of insolvency tests:
Test for rehabilitation and debt restructuring, when the debtor’s inability to pay is considered ‘temporary’
Test for bankruptcy proceedings, when the debtor’s inability to pay is considered ‘persistent’
It replaces previous thresholds for issuing proceedings, with a ‘negative capital test’, expected to simplify things and identify potential bankruptcies more effectively.
Test for rehabilitation and debt restructuring, when the debtor’s inability to pay is considered ‘temporary’
Test for bankruptcy proceedings, when the debtor’s inability to pay is considered ‘persistent’
It replaces previous thresholds for issuing proceedings, with a ‘negative capital test’, expected to simplify things and identify potential bankruptcies more effectively.
Removal of Accelerated Rehabilitation Procedure
The Amended Law now excludes “Accelerated rehabilitation procedure” as an available insolvency option, as it lacked procedural clarity, disempowered minority creditors, and gave debtors too much freedom.
New Collateral Takeover Rules
The Amended Law makes it easier for secured creditors to keep collateral in-kind, but certain conditions must be met for a secured creditor to keep it.
If the price for the collateral minus paid salaries is more than the amount of secured obligations, the difference should be paid by the secured creditor to the bankruptcy estate, or if the price is less, the difference should be paid to the secured creditor in the 4th priority line of claims.
New Collateral Takeover Rules
The Amended Law makes it easier for secured creditors to keep collateral in-kind, but certain conditions must be met for a secured creditor to keep it.
If the price for the collateral minus paid salaries is more than the amount of secured obligations, the difference should be paid by the secured creditor to the bankruptcy estate, or if the price is less, the difference should be paid to the secured creditor in the 4th priority line of claims.
Changes in Claim Priorities
The Amended Law introduced a new (sixth) category of claims: those submitted late, but before remaining assets have been distributed among debtor shareholders. The new creditor waterfall runs:
1st line – payments to individuals for harm caused to their life and health, deducted alimony, labor remuneration and compensation and accrued pension payments, among other claims
2nd line – payments due to secured creditors in respect of obligations secured by assets pledged within the value of the collateral
3rd line – indebtedness under tax liabilities and other mandatory payments to the budget
4th line – payments due to other creditors, including payments to a secured creditor if the value of the collateral was insufficient
5th line – payments of losses, including indemnities, penalties and fines
6th line – late submitted claims
As an exception, first priority line claims, filed late but before final settlement, are still settled first.
Other Notable Developments
Debtors must only now file for bankruptcy if any party with the authority decides to liquidate and there are insufficient assets to pay all creditors.
General claw-back provisions now expressly exclude:
- project finance and securitization (presumably, entered under Kazakhstan law)
- open trades entered through a stock exchange
- customary commercial operations
In rehabilitation plans, creditors in the same priority line rank equally; once courts approve plans, all limitations and attachments can be removed from debtors’ assets
New creditor committees’ rights include approving asset sale plans putting assets up for electronic auction and writing off lost assets
The Amended Law benefits everyone, including foreign investors. Kazakhstan’s Government is monitoring its practical application and may further streamline insolvency proceedings in the future.
Joel Benjamin
Managing Partner, Kinstellar
Joel Benjamin is the Managing Partner Central Asia practice of Kinstellar and manages its offices in Almaty, Nur-Sultan and Tashkent. Joel advises international and local clients in various industries, including oil and gas, mining, banking, telecommunications and media.
Joel has broad experience in corporate and commercial transactions with a particular specialism in banking and finance, where he has developed top rankings within Kazakhstan and Central Asia. He has played a leading role in numerous transactions including bilateral and syndicated loans, trade finance, project finance, and equity / debt capital markets matters. Joel has built a strong corporate practice including work on numerous M&A transactions across sectors including oil and gas, mining, telecommunications and banking.
He comes highly recommended by Legal 500, Chambers Global, IFLR 1000, Who’s Who Legal and Best Lawyers in Kazakhstan. Joel has been named as "Lawyer of the Year" for Banking and Finance and Capital Markets Law in the 2017-2018 edition of the annual directory Best Lawyers in Kazakhstan. Joel is recognised by Chambers and Partners, Global Guide, 2020 and 2021 as the only Eminent Practitioner in Corporate and Finance.
Maksim Grekov
Of Counsel, Kinstellar
sMaksim Grekov is Of Counsel in the Almaty office. Maksim has over 25 years of experience advising major international and local companies in Kazakhstan and other Central Asian countries spanning a wide range of practice areas, including M&A and general corporate, banking and finance, including debt & equity capital markets, derivatives and other financial products. He is often engaged in high-value financial transactions for major banks, funds and corporations. Maksim is ranked among the top practitioners in Kazakhstan by global legal guides such as Chambers Global and IFLR1000.
For a number of years Maksim has been consistently recognised by Chambers & Partners as a leading lawyer in the Corporate & Finance. Maksim Grekov is singled out for his attention to detail and his legislative knowledge, as one source explains: “He brings his attentive and meticulous approach to project financing mandates, often in the natural resources sector, where he advises international financial institutions,” Chambers & Partners, Asia Pacific 2020 and 2021. Maksim holds a Diploma with honours in Commercial Law from Adilet Higher Law School.
Alfiya Sharipova
Legal Assistant, Kinstellar
Alfiya Sharipova is a Legal Assistant in Kinstellar’s Almaty office. Before joining Kinstellar, Alfiya acted as a legal intern in Astana International Exchange advising clients on on laws and regulations of the AIFC.
In addition, Alfiya was a part of winning team at the first Republican Moot Court Competition organised by the AIFC Court and the International Arbitration Centre. She also participated and led pro-bono “Ask a Lawyer” project held by KIMEP Legal Clinic and IS Paragraph that aimed to give online legal consultations on various matters.