In cases where a counterparty fails to fulfill a monetary obligation by transferring funds, companies should consider the possibility of debt recovery within the framework of debtor rehabilitation and bankruptcy procedures. In this regard, we believe it is necessary to clarify the legal grounds and related consequences of applying the above-mentioned procedures.
1. Key Terms Related to Bankruptcy and Rehabilitation Procedures
Often, the very terms “rehabilitation” and “bankruptcy” frighten creditors, who assume that the application of these procedures deprives them of the possibility of satisfying their property claims.
However, such judgments have nothing to do with objective reality.
Thus, the Law establishes, among others, the following key terms:
Bankrupt — a debtor whose insolvency has been established by a court decision that has entered into legal force;
Bankruptcy — insolvency of a debtor recognized by a court decision and serving as grounds for the debtor’s liquidation;
Rehabilitation procedure — a procedure applied in court under which reorganization, organizational and economic, managerial, investment, technical, financial and economic, legal, and other measures not contrary to the legislation of the Republic of Kazakhstan are applied to the debtor, aimed at restoring solvency;
Bankruptcy procedure — a procedure carried out to satisfy creditors’ claims using the bankrupt’s estate in accordance with the procedure established by the laws of the Republic of Kazakhstan.
Thus, these provisions of the Law are key, as the legislator prioritizes restoring the debtor so that the debtor may repay creditors within a rehabilitation procedure, or, alternatively, enabling recovery of the debtor’s assets in favor of creditors within a bankruptcy procedure.
2. Signs of the Debtor’s Insolvency
The introduction of a bankruptcy procedure by the court requires the presence of necessary signs of the debtor’s insolvency. According to Article 5 of the Law, the grounds for a creditor’s application to the court to declare a debtor bankrupt or to apply a rehabilitation procedure is the debtor’s insolvency.
The grounds for a creditor’s application to the court for declaring a debtor bankrupt and liquidating it is the debtor’s unfulfilled monetary obligation to the creditor based on a court act that has entered into legal force (an enforcement document) ordering the recovery of funds from the debtor (or acknowledgment of debt by the debtor).
After the creditor’s application is submitted to the court, the debtor’s insolvency is established by the court taking into account a conclusion on financial stability. Consequently, the court considers a financial report containing conclusions regarding the debtor’s solvency.
As a rule, the number of creditors is not constant and depends in each individual case primarily on the volume of contractual relations with counterparties. At the same time, the state may also act as a creditor through state revenue authorities in relation to unpaid tax obligations.
Entities should understand that the longer the introduction of one of these procedures is delayed, the higher the likelihood that debt, penalties, and other liabilities will continue to grow, resulting in even more negative consequences for the debtor due to the worsening of insolvency indicators.
These consequences will ultimately return like a boomerang to the same creditors, whose opportunities to satisfy their claims from the debtor’s assets will diminish over time.
3. What Is the Benefit for Creditors of Rehabilitation / Bankruptcy Procedures if the Debtor Does Not Pay?
Let us consider whether rehabilitation or bankruptcy procedures are beneficial for creditors in relation to a non-paying debtor.
One of the key goals and objectives of the legislator in developing the special Law was, among others, the protection of creditors’ rights within these procedures.
Article 50 of the Law establishes the consequences of initiating rehabilitation and bankruptcy proceedings, and the scope of such consequences is quite significant (prohibition on the use and disposal of assets outside ordinary commercial transactions without approval of the temporary administrator, etc.), which allows “freezing” the movement of the debtor’s assets and prevents their alienation before the merits of the case are considered.
The Law also provides additional means of securing creditors’ claims through asset seizures and other measures (Article 51 of the Law), which collectively enables preservation of all liquid assets of an insolvent entity.
It is critically important, after initiation of a civil case, to submit a claim within the statutory period for inclusion in the register of creditors’ claims, which represents a list of creditors’ claims against the debtor, indicating their amount, grounds, and date of origin, formed during rehabilitation or bankruptcy procedures in accordance with the Law.
4. Purposes of Rehabilitation / Bankruptcy Procedures
Quite simply, the purpose is to identify all creditor indebtedness that must be repaid from the debtor’s assets.
Subsequently, based on the volume of property claims, a so-called *creditors’ committee* is formed, which is a representative body of creditors elected at a creditors’ meeting during rehabilitation and bankruptcy procedures and vested with powers provided for by the Law.
The powers of the creditors’ committee are quite extensive, depending on the type of procedure applied.
Even a person far removed from legal technicalities can understand, upon analyzing these powers, that they are all aimed at protecting creditors’ interests.
Indeed, the conduct of such procedures is complex for the average citizen. However, by understanding the spirit and purpose of this special Law—developed jointly with World Bank experts using best international practices—it becomes clear that creditors should not fear the application of such procedures. On the contrary, the legislator has provided all the necessary levers and checks and balances to ensure satisfaction of a greater volume of creditors’ claims.
5. Illustration of the Benefits of Bankruptcy Procedures for Creditors
Let us imagine a situation where, three years prior to the introduction of a procedure, a debtor alienated substantial assets in the form of movable and immovable property, money, claims rights, and other assets corresponding to property and rights described in Article 115 of the Civil Code of the Republic of Kazakhstan.
Let us also imagine that all such alienations were intentionally carried out to evade fulfillment of existing obligations, including tax obligations.
Even if creditors hypothetically know about such actions, they cannot independently challenge them, since the court may refuse to invalidate transactions on the grounds that creditors were not parties to the transactions, and proving that the transactions violated creditors’ rights and were aimed at evading obligations is extremely difficult, as such transactions may formally comply with legal requirements.
However, within rehabilitation or bankruptcy procedures, the authorized person — the rehabilitation or bankruptcy administrator — has the full right to file such claims in the interests of all creditors.
A significant feature of such claims is that, in addition to civil law norms, courts apply provisions of the special Law (Article 7), which governs disputed legal relations.
In my opinion, this circumstance is highly beneficial for creditors, as it eliminates the need for them to independently initiate court proceedings, saving time, financial, and human resources.
6. Subsidiary Liability in Bankruptcy Procedures
Under Article 96(3) of the Law, where the legislation of the Republic of Kazakhstan provides for subsidiary liability of other persons for bringing a debtor to bankruptcy, the extent of such liability is determined as the difference between the total amounts of creditors’ claims and the bankrupt’s estate.
The bankruptcy administrator is obliged to bring claims against such persons in the interests of all creditors.
Individual creditors are not allowed to bring such claims independently in their own interests.
This clearly indicates the existence of persons who may be subject to subsidiary liability.
What does this mean?
The Law states that before presenting claims to a person who bears additional (subsidiary) liability under law or contractual terms, the creditor must first present a claim to the principal debtor (Article 357 of the Civil Code of the Republic of Kazakhstan).
For creditors, this means that founders (participants) and/or officials of the debtor bear subsidiary liability to creditors of the insolvent debtor with their own property for deliberate bankruptcy.
If an application for bankruptcy is filed by the debtor for the purpose of fictitious bankruptcy, creditors are entitled to claim compensation for damages and to apply to the court to bring the persons who made such a decision to subsidiary liability.
If facts of deliberate bankruptcy are identified during bankruptcy proceedings, the bankruptcy administrator is obliged within one month — and creditors are entitled — to apply to court with a claim to recover amounts of creditors’ claims left unsatisfied due to insufficiency of the bankrupt’s assets (Article 6 of the Law).
In this case, subsidiary liability arises based on a special law, providing creditors with an additional opportunity to recover debts in full from the subsidiary debtor.
It should also be noted that all entities subject to these procedures automatically become objects of monitoring by the authorized state revenue authority, which includes the Economic Investigation Service, aimed at identifying potential signs of criminal or other offenses.
In summary, a court-imposed rehabilitation or bankruptcy procedure does not relieve the debtor of liability; on the contrary, it allows creditors to take control of the debt recovery process at all stages and identify the causes of insolvency.
7. Information from Judicial Practice and Key Conclusions for Creditors
According to an analysis conducted by the Ministry, debtors whose bankruptcy applications were denied by courts in 2016–2017 did not subsequently improve their solvency. Later, many of these debtors were nonetheless declared bankrupt.
During this period, their financial condition deteriorated significantly, making it impossible to satisfy creditors’ claims, including salary arrears and budgetary payments. Early application of bankruptcy procedures would have significantly increased the level of creditor claim satisfaction.
By refusing bankruptcy, courts effectively compel entrepreneurs to continue operating unprofitable businesses, increasing creditor indebtedness, while also preventing state revenue authorities, including economic investigation services, from reviewing the activities of dishonest persons for unlawful asset withdrawal, deliberate bankruptcy, and subsequent criminal, administrative, or civil liability.
The procedural instruments provided by the legislator ensure full protection of creditors’ rights, including those of the state, leading to the following conclusions:
Taken together, this demonstrates that rehabilitation and bankruptcy procedures are highly beneficial for creditors. However, such understanding is still limited today, and society may need to undergo a certain evolution in legal awareness and attitudes toward these procedures, to which we must all contribute.
If you have any questions regarding the above matters, please feel free to contact us. We will be glad to assist you.
1. Key Terms Related to Bankruptcy and Rehabilitation Procedures
Often, the very terms “rehabilitation” and “bankruptcy” frighten creditors, who assume that the application of these procedures deprives them of the possibility of satisfying their property claims.
However, such judgments have nothing to do with objective reality.
Thus, the Law establishes, among others, the following key terms:
Bankrupt — a debtor whose insolvency has been established by a court decision that has entered into legal force;
Bankruptcy — insolvency of a debtor recognized by a court decision and serving as grounds for the debtor’s liquidation;
Rehabilitation procedure — a procedure applied in court under which reorganization, organizational and economic, managerial, investment, technical, financial and economic, legal, and other measures not contrary to the legislation of the Republic of Kazakhstan are applied to the debtor, aimed at restoring solvency;
Bankruptcy procedure — a procedure carried out to satisfy creditors’ claims using the bankrupt’s estate in accordance with the procedure established by the laws of the Republic of Kazakhstan.
Thus, these provisions of the Law are key, as the legislator prioritizes restoring the debtor so that the debtor may repay creditors within a rehabilitation procedure, or, alternatively, enabling recovery of the debtor’s assets in favor of creditors within a bankruptcy procedure.
2. Signs of the Debtor’s Insolvency
The introduction of a bankruptcy procedure by the court requires the presence of necessary signs of the debtor’s insolvency. According to Article 5 of the Law, the grounds for a creditor’s application to the court to declare a debtor bankrupt or to apply a rehabilitation procedure is the debtor’s insolvency.
The grounds for a creditor’s application to the court for declaring a debtor bankrupt and liquidating it is the debtor’s unfulfilled monetary obligation to the creditor based on a court act that has entered into legal force (an enforcement document) ordering the recovery of funds from the debtor (or acknowledgment of debt by the debtor).
After the creditor’s application is submitted to the court, the debtor’s insolvency is established by the court taking into account a conclusion on financial stability. Consequently, the court considers a financial report containing conclusions regarding the debtor’s solvency.
As a rule, the number of creditors is not constant and depends in each individual case primarily on the volume of contractual relations with counterparties. At the same time, the state may also act as a creditor through state revenue authorities in relation to unpaid tax obligations.
Entities should understand that the longer the introduction of one of these procedures is delayed, the higher the likelihood that debt, penalties, and other liabilities will continue to grow, resulting in even more negative consequences for the debtor due to the worsening of insolvency indicators.
These consequences will ultimately return like a boomerang to the same creditors, whose opportunities to satisfy their claims from the debtor’s assets will diminish over time.
3. What Is the Benefit for Creditors of Rehabilitation / Bankruptcy Procedures if the Debtor Does Not Pay?
Let us consider whether rehabilitation or bankruptcy procedures are beneficial for creditors in relation to a non-paying debtor.
One of the key goals and objectives of the legislator in developing the special Law was, among others, the protection of creditors’ rights within these procedures.
Article 50 of the Law establishes the consequences of initiating rehabilitation and bankruptcy proceedings, and the scope of such consequences is quite significant (prohibition on the use and disposal of assets outside ordinary commercial transactions without approval of the temporary administrator, etc.), which allows “freezing” the movement of the debtor’s assets and prevents their alienation before the merits of the case are considered.
The Law also provides additional means of securing creditors’ claims through asset seizures and other measures (Article 51 of the Law), which collectively enables preservation of all liquid assets of an insolvent entity.
It is critically important, after initiation of a civil case, to submit a claim within the statutory period for inclusion in the register of creditors’ claims, which represents a list of creditors’ claims against the debtor, indicating their amount, grounds, and date of origin, formed during rehabilitation or bankruptcy procedures in accordance with the Law.
4. Purposes of Rehabilitation / Bankruptcy Procedures
Quite simply, the purpose is to identify all creditor indebtedness that must be repaid from the debtor’s assets.
Subsequently, based on the volume of property claims, a so-called *creditors’ committee* is formed, which is a representative body of creditors elected at a creditors’ meeting during rehabilitation and bankruptcy procedures and vested with powers provided for by the Law.
The powers of the creditors’ committee are quite extensive, depending on the type of procedure applied.
Even a person far removed from legal technicalities can understand, upon analyzing these powers, that they are all aimed at protecting creditors’ interests.
Indeed, the conduct of such procedures is complex for the average citizen. However, by understanding the spirit and purpose of this special Law—developed jointly with World Bank experts using best international practices—it becomes clear that creditors should not fear the application of such procedures. On the contrary, the legislator has provided all the necessary levers and checks and balances to ensure satisfaction of a greater volume of creditors’ claims.
5. Illustration of the Benefits of Bankruptcy Procedures for Creditors
Let us imagine a situation where, three years prior to the introduction of a procedure, a debtor alienated substantial assets in the form of movable and immovable property, money, claims rights, and other assets corresponding to property and rights described in Article 115 of the Civil Code of the Republic of Kazakhstan.
Let us also imagine that all such alienations were intentionally carried out to evade fulfillment of existing obligations, including tax obligations.
Even if creditors hypothetically know about such actions, they cannot independently challenge them, since the court may refuse to invalidate transactions on the grounds that creditors were not parties to the transactions, and proving that the transactions violated creditors’ rights and were aimed at evading obligations is extremely difficult, as such transactions may formally comply with legal requirements.
However, within rehabilitation or bankruptcy procedures, the authorized person — the rehabilitation or bankruptcy administrator — has the full right to file such claims in the interests of all creditors.
A significant feature of such claims is that, in addition to civil law norms, courts apply provisions of the special Law (Article 7), which governs disputed legal relations.
In my opinion, this circumstance is highly beneficial for creditors, as it eliminates the need for them to independently initiate court proceedings, saving time, financial, and human resources.
6. Subsidiary Liability in Bankruptcy Procedures
Under Article 96(3) of the Law, where the legislation of the Republic of Kazakhstan provides for subsidiary liability of other persons for bringing a debtor to bankruptcy, the extent of such liability is determined as the difference between the total amounts of creditors’ claims and the bankrupt’s estate.
The bankruptcy administrator is obliged to bring claims against such persons in the interests of all creditors.
Individual creditors are not allowed to bring such claims independently in their own interests.
This clearly indicates the existence of persons who may be subject to subsidiary liability.
What does this mean?
The Law states that before presenting claims to a person who bears additional (subsidiary) liability under law or contractual terms, the creditor must first present a claim to the principal debtor (Article 357 of the Civil Code of the Republic of Kazakhstan).
For creditors, this means that founders (participants) and/or officials of the debtor bear subsidiary liability to creditors of the insolvent debtor with their own property for deliberate bankruptcy.
If an application for bankruptcy is filed by the debtor for the purpose of fictitious bankruptcy, creditors are entitled to claim compensation for damages and to apply to the court to bring the persons who made such a decision to subsidiary liability.
If facts of deliberate bankruptcy are identified during bankruptcy proceedings, the bankruptcy administrator is obliged within one month — and creditors are entitled — to apply to court with a claim to recover amounts of creditors’ claims left unsatisfied due to insufficiency of the bankrupt’s assets (Article 6 of the Law).
In this case, subsidiary liability arises based on a special law, providing creditors with an additional opportunity to recover debts in full from the subsidiary debtor.
It should also be noted that all entities subject to these procedures automatically become objects of monitoring by the authorized state revenue authority, which includes the Economic Investigation Service, aimed at identifying potential signs of criminal or other offenses.
In summary, a court-imposed rehabilitation or bankruptcy procedure does not relieve the debtor of liability; on the contrary, it allows creditors to take control of the debt recovery process at all stages and identify the causes of insolvency.
7. Information from Judicial Practice and Key Conclusions for Creditors
According to an analysis conducted by the Ministry, debtors whose bankruptcy applications were denied by courts in 2016–2017 did not subsequently improve their solvency. Later, many of these debtors were nonetheless declared bankrupt.
During this period, their financial condition deteriorated significantly, making it impossible to satisfy creditors’ claims, including salary arrears and budgetary payments. Early application of bankruptcy procedures would have significantly increased the level of creditor claim satisfaction.
By refusing bankruptcy, courts effectively compel entrepreneurs to continue operating unprofitable businesses, increasing creditor indebtedness, while also preventing state revenue authorities, including economic investigation services, from reviewing the activities of dishonest persons for unlawful asset withdrawal, deliberate bankruptcy, and subsequent criminal, administrative, or civil liability.
The procedural instruments provided by the legislator ensure full protection of creditors’ rights, including those of the state, leading to the following conclusions:
- creditors have no grounds to fear the introduction of these procedures;
- creditors are relieved from independent involvement in lengthy litigation and associated costs;
- the probability of full repayment of obligations increases significantly;
- the risk of losing limitation periods for claims and enforcement is eliminated;
- prevention and detection of administrative and criminal offenses is ensured;
- the possibility of preserving and rehabilitating debtor enterprises and restoring solvency over time is provided;
- growth of creditor indebtedness is prevented;
- as a final outcome — improvement of the national investment climate.
Taken together, this demonstrates that rehabilitation and bankruptcy procedures are highly beneficial for creditors. However, such understanding is still limited today, and society may need to undergo a certain evolution in legal awareness and attitudes toward these procedures, to which we must all contribute.
If you have any questions regarding the above matters, please feel free to contact us. We will be glad to assist you.