Debt Recovery Kazakhstan

• Due to local currency devaluation from 2014, the payment system of Kazakh firms has deteriorated, with a high risk of further devaluation. No DSO statistics are available and it is heavily industrially based.

• The courts are competent and timely in making judicial rulings. The criteria for the assertion to provide supporting documentation are however very high. Enforcement processes show modest outcomes and room for improvement is available.

• Insolvency proceedings tend to produce low results for unsecured creditors while the creditor's claim must be accompanied by the documentation required.

1. Summary

1.1. General financial information

1.1.1. Corporate financial information is only selectively available to the public–it depends on the type of corporate (e.g. private owner or limited liability company) and is not compulsory for all businesses. There is a Financial Statements electronic depository (regulated by the Ministry of Finance), which comprises those of Joint Stock Companies, Financial Companies and State Commercial Companies.

1.1.2. The data available to the public is usually reliable, but the volume appears to be inadequate to arrive at a conclusion about a particular business. This can be accessed either in real time (rarely) or, if necessary, after a written request has been sent to the approved agency (more likely), depending on the type of information required.

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1.2. Key legal structures

1.2.1. There are many different corporate structures in Kazakhstan but the most common are the following:

• Individual Entrepreneur (IP), who has several benefits–quick incorporation process, minimal paperwork and the individual entrepreneur is not necessary to have a business logo, no need to apply financial data and sometimes no obligation to pay VAT.

• However, it also has several drawbacks–the shareholder is personally responsible for the company's debts, the shareholder can not be changed, the company can not have branches, the number of employees is limited and some business activities may be prohibited.
• Limited Liability Companies (TOO) allow the shareholder's responsibility to be limited to the amount of its share in the Company. A Limited Liability Company that open subsidiaries, have infinite amounts of workers and all business activities are allowed.

• The organization must however have its license and current financial information to the authorities. Company registration is more difficult compared to an IP: a wide number of paperwork is needed, and it takes longer to register.

• The more complicated organizational structure is the Joint Stock Company (AO). There is no limit to the number of employees and the turnover, but there is a list of certain requirements that must be met, including a minimum share capital. AO businesses are regulated during their whole working period by local authorities.

• Limited Liability Company (TOO), with more than 50 per cent of all businesses recorded as such, is the most prevalent type of company among the forms mentioned above.

1.3. Regulatory framework

1.3.1. The Economic Court's proceedings are governed by the Civil Code, the Code of Civil Procedure and the Law in the court system.

1.3.2. The Specialized Economic Court has authority to resolve trade disputes according to local legislation. The law defines commercial disputes as being where the legal person is at least one party to the dispute, or where the claim relates to a corporate dispute. A Specialized Economic Court is based in each region of the country and on average, the judge has between 400 and 500 cases per year.

1.3.3. Global Commercial Arbitrage courts still operate in Kazakhstan and the parties can decide that the case can be taken before this judge. International Commercial Arbitrage Courts are controlled by the Laws' on International Commercial Arbitration 'and' On Arbitration Courts.' The Laws are drawn up on the basis of the UNCITRAL Framework Law on International Commercial Arbitration.

1.3.4. The Mutual Arbitrage provision may, therefore, be included in the deal (if not, the parties must accept an alternative document). Agreement between the parties on taking the issue before the Commercial Arbitrage Court can be achieved even during the Economic Court trial.

1.3.5. It must be noted that industrial arbitrage is a private trial and may be more complex than the legal actions taken in a court with general jurisdiction. Normally, though, a Commercial Arbitrage ruling can not be challenged, and it limits the period for legal action.

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2. Receiving payments

2.1. DSO - Days Sales Outstanding

2.1.1. In general, the payment community in Kazakhstan is at a satisfactory level, but payment quality decreased in 2014 due to the devaluation of local currency and the economic recession in Kazakhstan (i.e. declining oil prices). No official reports or company documents are accessible in support of the DSO of the region.

2.2. Late interests

2.2.1. The law provides that if there is a pause in payment for the obtained goods or services, the borrower may order the debtor to pay interest. The interest may be determined on the basis of the contract terms between the parties (the seller will use the rate stated in the contract) or on the basis of Civil Law (then the National Bank of Kazakhstan refinancing rate may apply).

2.2.2. Despite being able to assert interest, though, it is never charged, and often only when the loan is collected through the court. When prelegal talks are pending, the debtor can agree that there is no reimbursement for the interest. If the debtor is not willing to pay the interest but the creditor asks for it, the only solution is to initiate a legal procedure that can be time consuming and costly.

2.3. Costs of debt collection

2.3.1. The country's law does not place a duty on the claimant to offset the costs of debt recovery or other related expenditures. In reality, most debtors are not willing to discuss future repayment of any side costs and these sums are almost always recovered.

2.4. Protecting ownership

2.4.1. The Retention of Title (RoT) provision may be included in the settlement between the parties and can be used as a tool to motivate the debtor to settle the invoice more efficiently. In certain cases, though, RoT can not bring positive outcomes (e.g. if the debtor business faces financial difficulties or if it has been set up to make dishonest transactions etc.).

2.4.2. If the debtor refuses payment, if there is a RoT clause in the contract, the creditor may request the return of the goods, but if the debtor rejects this order, the creditor will have to continue with a demand for the contract's unfulfilled terms and appeal the return of the goods to the trial. This complicates and effects claiming RoT.

2.4.3. If the debtor is declared bankrupt and there are products remaining unpaid, the receiver must refund those goods in RoT terms which will not include the creditor's argument in the creditors register even though the value of the goods has declined and the outstanding amount has not been fully recovered.

2.5. Payments

2.5.1. The key ways of payment through bank transfer or currency. Certain approaches such as audits or lending assurances are used quite occasionally and therefore local businessmen don't believe them. There are conditions for currency management that must be met in order to comply with a transfer abroad and this can contribute to complications in transfers or to banks demanding additional documents.

2.5.2. Once the required documentation are given, however, all problems can be overcome. Sometimes customers make payments through a (offshore) third party. While this activity is not a breach of local legislation, it has its risks and it is prudent, before approving, to carefully review payment deals from a third company rather than the initial client.

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3. Collecting payments

3.1. Amicable action

3.1.1. Negotiating. Kazakhstan's legislation does not set the conditions for mandatory pre-legal negotiations before it can start legal debt recovery. However, if it is a condition between the parties in the contract, then it must be followed, otherwise the court will refuse the claim.

3.1.2. Although there is a long history of dispute resolution through the judiciary, with local firms not used to accommodating debt collection procedures and intervention with third parties, there is a trend to continue seeking private services to help solve problems by out - of-court processes, even if this is done with reservations. Starting any potential legal case with an amicable stage is always advisable, as it helps to understand the background of the case and possible drawbacks.

3.1.3. This can also help to reduce the cost of legal action should litigation become necessary. The Debt Collection Activities Legislation was enacted on 6 May 2017, though it only governs the collection of debt from the banking delinquency.

3.2. Legal proceedings

3.2.1. Ordinary proceedings. Simplified court proceedings are not possible when it comes to settling contractual conflicts so litigation would usually have to be launched.

3.2.2. The appeal must be referred to the Economic Court in the area where the claimant is based (if no other jurisdiction is provided for in the contract). The court's decision on the validity of the application shall be made within seven days from the date the lawsuit is charged. The court tests whether the allegation was processed and addressed in accordance with the law. If all conditions have been met, the court must accept the claim and continue revising it. The judge scrutinizes all aspects of the case, determines on court session witnesses, gives a copy of the allegation to the defendant and establishes the defendant's date to provide an answer to the accusation.

3.2.3. The court session is scheduled once the case has been prepared for litigation and after the time has passed for the defendant to provide an answer. The court reviews all of the claimant's and defendant's supporting documents and facts, and makes a decision on the lawsuit. An appeal against the court's decision can be filed.

3.2.5. When pending the judge's decision, the parties will enter a settlement agreement. However, if the provisions of the settlement agreement are violated, the defendant can receive a writ of execution to begin the prosecution process.

3.2.6. If the judgment is not appealed, it becomes legally enforceable and the execution letter may be issued, after which the enforcement proceedings may begin. If the parties continue with legal action by Commercial Arbitrage, the court's decision must be submitted to the Court of General Jurisdiction in order to obtain the implementation letter to begin the compliance process.

3.2.7. Required documents.  Agreement between the parties and/or the debtor's instructions, shipping documentation (delivery notes) or other documents verifying the purchase of merchandise, documents relating to the outstanding sum (invoices, account statements, debtor's reimbursement agreements (if any) etc.), quotes from the creditor's list and an attorney's authority if the creditor is appointed. Both documentation must be given in the state language, hence, the translation must be completed before the argument is put before the judge.

3.2.8. Time limitations. The claim may be brought before the court for up to three years from the date of the debtor's payment obligation. If the time limit expires, the court will dismiss the claim.

3.2.9. Provisional measures. If the claimant makes such a request, the court can apply provisional measures. The compulsory requirement is that there are reasonable grounds to believe that, if these remedies are not enforced, implementation of the court's decision may become difficult or unlikely.

3.2.10. The foregoing temporary sanctions are the most prevalent in contractual disputes:

(i) retention of properties or bank accounts,

(ii) limitation on certain acts or practices, and

(iii) restraint on the third party to satisfy commitments or transfer assets to the claimant.

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The interim remedies must be proportional to the amount of the allegation, and the form can adjust as decided by the judge.

3.2.11. The court will order the borrower to pay a deposit to offset any possible losses the defendant may suffer as a consequence of the interim steps being implemented. Furthermore, when the debtor has incurred some damages, the debtor can order the creditor to pay the settlement after the temporary steps are cancelled.

3.2.12. Appeal lodging. The appeal may be lodged up to 15 days after the court's decision has been issued. There are no further conditions or documents required to lodge an appeal. If the dispute has been filed with the contractual tribunal, an appeal will generally not be made, except in situations where the court has broken the procedural code.

3.2.13. Enforcing court decisions: If the parties do not lodge an appeal on the first instance court's decision, the decision becomes legally enforceable and the claimant can obtain the execution writ. This paper is then sent to the office of the bailiff situated in the debtor area.

3.2.14. The bailiffs use various enforcement tools but the most common is property seizure and debtor's bank accounts seizure. The bailiff has a right to seize properties in which the debtor has partial ownership but it must be proportionate to the amount of the debtor's share of the property seized. The bailiff also has the right to prohibit the debtor from leaving the country (if the debtor is a legal person, that restriction will be imposed on the company's director).

3.2.15. The timeline provided for compliance hearings is two months, and the judgment must be fully enforced during this duration. If enforcement due to lack of assets is not possible, the enforcement procedure will be concluded with a negative result.

3.2.16. There are two distinct types of bailiffs: state and private bailiffs. Private bailiffs can sometimes recover the debt faster–e.g. at an auction, a private bailiff can sell the debtor's property while a state bailiff has to organize a special tendering sale procedure. A private bailiff, however, can not seize the debtor's property without the court's prior approval for this action, but the state bailiff does not require special empowerment to do so or forbid the debtor to take certain actions.

3.2.17. Duration of a legal action.  The statute stipulates that the court will review the case and arrive at a conclusion within two months from the outset of the trial. Furthermore, as the submission and filing of the petition can take up to one month, with a further month needed for the judgment to become enforceable, it may take up to four months to continue in the first instance case. The timetable for the trial can take at least eight months if the ruling is challenged. It takes two months for enforcement to proceed.

3.2.18. Costs of legal action. The court can make a decision in favor of the creditor and ask the debtor to compensate for part of the cost of the creditor for legal proceedings, but the amount of this compensation is issued by the court and depends on several factors, such as the personality of the debtor, the financial state, etc.

3.2.19. Lawyers usually offer a fixed fee to prepare and file a claim. Certain costs may include travel trial expenditures for an advocate, court tax payments and cost of translation. It must be understood that the price of a court visit by an attorney depends on the location of the court, so if it is in a remote location the costs may be high. Costs of International Commercial Arbitration include registration (USD 222) and arbitration fees (from 1.5 to 3 per cent depending on the amount of the dispute).

3.3. Alternatives to legal action

3.3.1. Alternative Dispute Resolution (ADR) approaches are used in Kazakhstan but primarily in the context of mediation. Mediation is a popular alternative to finding an acceptable solution within a shorter period of time (e.g. several weeks), as a court procedure can take a long time. Mediation is used in both civil and amicable dispute resolution but is most commonly used when the argument has already been taken before the judge.

3.3.2. The number of mediation cases increased by 50 per cent in the first six months of 2015 compared to the same period in 2014. The situations effectively settled through this process would help increase the trust in and use of mediation as a mechanism for dispute resolution.

3.3.3. Foreign forums. Legislation in Kazakhstan allows a foreign company to get a court ruling in another country and then enforce it in Kazakhstan. The foreign jurisdiction clause has to be incorporated into the contract between the parties. The court must reject a foreign court's decision on a conflict between the parties if the settlement does not designate the court as the court eligible to resolve disputes. Kazakhstan's law calls for implementation of rulings of both kinds of foreign courts–general courts of authority and global economic arbitration courts.

3.3.4. Enforcing international awards. The foreign court's decision must be validated by a local court in Kazakhstan in order to submit a letter of execution and begin compliance proceedings. The court does not review the ruling itself, but only makes sure that the legal requirements are met and that the defendant has every opportunity to defend his rights in litigation. The creditor must provide the foreign court's decision and other documents (e.g. the document confirming that the debtor has been properly informed by the foreign court of the place, date and time of the court session, etc.), and all documents must be translated into the state language.

3.3.5. The validation process is only necessary in situations when judgments have become legally enforceable. The validation process is normally a mere formality.  Once a local court has accepted the international court's decision, the execution letter may be released and the compliance process will begin. It should be recalled that implementation of a foreign court ruling can only be rendered no later than three years from the enforceable date of the verdict.

4. Managing insolvent debtors

4.1. Insolvency in Kazakhstan

4.1.1. The bankruptcy case extends only to legal persons and can not be used by private persons. It is comprised of two processes: foreclosure and recovery. The court appoints an agent of restructuring proceedings who seeks to recover the delinquent company's solvency and if this process is effective the company will continue to work. If the court imposes the recovery strategy but the reform program is not met and the solvency of the business can not be recovered, instead bankruptcy proceedings begin.

4.1.2. The trustee does not try to restore the company's solvency in bankruptcy proceedings, instead sells the company's assets and shares them among the creditors. The corporation is subsequently removed from the legal persons list. The petition with a motion to begin insolvency proceedings is presented to the court by either the claimant or the borrower, and the court decides whether to accept it or not.

4.2. Insolvency proceedings

4.2.1. Out-of-Court proceedings. No law stipulates such prosecutions. It can be either regular or accelerated to restructure the loan recovery or redemption process, where the standard procedure requires five years and the rapid procedure takes two years. The court can extend the period in question but for a maximum of six months only.

4.2.2. The determination to begin a settlement process is taken by the court after the claimant or the borrower has lodged a related petition. The court therefore accepts the action schedule, which the designated coordinator of the settlement proceedings will ready. Once the court has accepted the reform and its strategy, the company's administration is performed by the administrator, whose aim is to take all practicable steps to allow the company to implement the agreed program.

4.2.3. Claims from investors are to be filed within a month, but the statute has a provision that allows borrowers to file their claims after the date, although this would result in lack of voting rights. The debtor will assume all obligations during the execution of the agreement, owing to all creditors specified in the contract. The process concludes either with a positive recovery of the debtor and further operation, or with a bankruptcy proceeding if the debtor fails to follow the program.

4.2.4. Winding up proceedings. The insolvency proceedings span nine months but may be extended for another three months. The administrator is in charge of all operations and it is their responsibility to compile the register of creditors and to review the claims submitted and to verify their legitimacy. The lender then must attempt to sell the debtor's assets to cover the demands of the creditors.

4.2.5. Claims of the creditors shall be made within one month from the day the notice of the proceedings is issued. If this date is met, though, the petition can still be made, although with the claimant lacking voting rights.

4.2.6. Priority rules. The priority principles are as follows: (i) delinquent business staff, (ii) insured shareholders, (iii) tax office and similar organisations, (iv) all investors, and (v) creditors' demands on compensation and damage recovery.

4.2.7. Cancelation of suspicious transactions. The supervisor checks all the debtor's agreements over the last three years and, if a contract becomes suspect, the administrator is allowed to make a motion to the court for cancelation of the agreement. If a contract is broken, the purchaser will be required to return the money or property to the promoter. If the property is lost or destroyed, then the debtor is required to compensate for the property's value.

4.2.8. If the insolvent corporation has been reorganized over the previous three years preceding insolvency, the trustee shall have the right to file a motion to the court asking that such reorganization be declared void if the properties were transferred from the insolvent business during this reorganization.

4.2.9. Duration of insolvency process. The recovery program can last from two to five years while it requires one year to conclude the bankruptcy process. If bankruptcy is started due to the debtor's inability to follow the rehabilitation procedure plan, the total insolvency proceeding time would be two to five years of the rehabilitation process plus one additional year for the bankruptcy process.

4.2.10. Lawyers generally charge a fixed fee for drafting and filing the petition, although trial appearances (if necessary) are typically charged separately, and the court tax bill will also have to be compensated.

4.2.11. Required documents. Documents showing that both the court tax fee and all documents proving the claim were paid.