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Unicase Law Firm

Q&A: Securing Obligations in Kazakhstan

1. How the pledge contract is created, and is there any restrictions on who can be a pledger?
A pledge is created by contract, either by a separate pledge agreement or through a clause in the agreement. The pledge agreement must be in writing. Along with that, both the debtor himself and a third party can be the pledger.
2. What property can act as a pledge?
Any property can act as a pledge, with the exception of things withdrawn from circulation. It is possible to secure debts not yet existing (future or conditional), debts expressed in foreign currency, and even fluctuating debt. The once registered, will give the lenders a priority security interest in the collateral.
3. Can a common property be pledged?
Common property can be pledged only with the consent of all owners. The right to a share in common property can be an independent subject of pledge.
4. Are there any regulations regarding insurance of the pledged item?
The law or a contract may provide for the obligation of the pledgee to insure the pledged property transferred into his possession. The pledgee has the right to receive, on the same basis, satisfaction from the insurance indemnity for the loss or damage of the pledged property, regardless of in whose favor it is insured, unless the loss or damage has occurred for reasons for which the pledgee is responsible.
5. In the event of non-fulfillment of an obligation, is creditor allowed to take over the pledged item?
A secured creditor cannot simply take possession of the collateral. The creditor must sell the collateral through a public auction and recover the debt from the sale proceeds. The sale proceeds are used to cover expenses incurred in connection with the enforcement and sale. After that the proceeds will be used to repay the debts. The remainder, if any, will be returned to the debtor.
6. Is the registration of pledge contract obligatory?
Registration of a pledge over most types of movable assets is not required for the pledge to be effective. In contrast, security over immovable assets and certain registered movable assets (e.g., vehicles, aircraft and registered securities) must be registered in order to be effective. While it is not obligatory to register pledges in relation to most movable assets, such registration grants the creditor priority right in the collateral. If two or more creditors obtain security interests in the same collateral (whether movable or immovable), the law gives priority to security interests in the order in which they are registered. Thus, in the typical case, the creditor who filed earlier will prevail.
7. What are the most popular things being pledged as collateral, and how are they regulated by law?
Below we have indicated some of key things being pledged, and how they are regulated by the law.
Pledge of Shares in the Company

The holders of the shares in the company have the right to pledge all or part of the shares in favor of the lenders (including foreign lenders). The major shortcoming of such a pledge is that the lenders would not be entitled to take possession of the shares but instead must sell the shares through a public auction.

A pledge over shares in the company might be registered either with the Ministry of Justice or with the relevant independent share registrar, which will make an entry regarding the pledge in the company’s shareholder’s register.

There are no restrictions on the lenders’ right to enforce the pledge over the shares, subject to their compliance with local procedural rules for such enforcement.

It is important to note that a purchaser of 25% or more of the shares in the company may be required to obtain approval of such purchase from the Competition Agency. If the purchase will be subject to the antimonopoly approval (depends on the combined asset value, or annual turnover of the purchaser and the company), then the purchaser will be required to apply for approval within 30 days after the public auction at which it acquired the shares.

Pledge over Land, Plant and Machinery

The company can pledge its land, plant and machinery in favor of the lenders, including foreign lenders.

If the relevant plant and machinery is deemed to be immovable property (i.e., inseparable from the land or building at which it is installed), the pledge must be registered with the Ministry of Justice to be valid. If the plant and machinery is not deemed to be immovable property, the security interest (pledge) will be created by means of the pledge agreement. However, to ensure the priority of the lenders’ security interest, the pledge should be registered with the registration authorities of the Ministry of Justice as discussed above.

Pledge of Property Complex

It is possible to register the plant with the registration authorities of the Ministry of Justice as a “property complex” (i.e. as a going concern, consisting of all assets and liabilities which comprises it, i.e. land, buildings, plant and machinery, intellectual property, goods in stock and other relevant property and assets). Once registered as a property complex, it may be pledged as such in favor of the lenders. However, this possibility is only available after the plant is constructed and commissioned.

Pledge of Receivables

It is possible for a company to pledge its monetary claims under a contract. Thus, the company should be able to pledge its rights to receivables (for instance from electricity sales under power purchase agreements). Where rights to receivables are pledged, the enforcement will be carried out by way of assignment of the relevant rights to the pledgee (i.e. without the public auction as it is with most other types of collateral).

Pledge of Rolling Stock

The pledge of railway rolling stock is subject to registration with the authorized body - the Ministry of Industry and Infrastructure Development.

Importantly, the registration shall be carried out by the pledgor in place of its registration. As such if the pledgor is a non-resident of Kazakhstan such pledge, apparently, could not be registered in Kazakhstan.

Pledge of Non-monetary Rights under Contracts

It is possible for a company to pledge its nonmonetary rights under a contract. However, this form of security has a major drawback: as with most other types of collateral, the secured creditor cannot simply take possession of the collateral (i.e. to have the relevant rights assigned to it). The creditor must seek to sell the collateral (i.e. the pledged rights) through a public auction and recover the debt from the sale proceeds. This makes pledging non-monetary rights under a contract impracticable.

Accordingly, while the company can pledge its nonmonetary rights and benefits under the project agreements in favor of the lenders, such form of security is not practicable. The lenders (or a company appointed by them) would not be able to enforce the pledge by stepping in but will be required to seek to sell the pledged rights through a public auction.

Pledge of Local Bank Accounts

As a matter of Kazakhstan law, the company has the right to pledge in favor of the lenders the money standing at the company’s bank account (whether such account is with a Kazakhstan bank or with a foreign bank). From the legal prospective, it is not possible to pledge the bank account itself, but only the rights of the company to the money standing at such account.

Upon default of the company the lenders will be entitled to directly debit such account and take the money standing at such account and the money deposited to such account thereafter as set forth in the pledge agreement. However, the relevant Kazakhstan bank should also be a part of the security arrangement over the company’s bank account to allow the lender to directly debit such account.

Generally, where money is pledged, the enforcement is carried out by transferring the relevant money to the pledgee

Pledge Foreign Bank Accounts

According to the law of the Republic of Kazakhstan, the company is obliged to notify the National Bank of the Republic of Kazakhstan when opening bank account(s) in a foreign Banks. Subsequently, the company can grant a security interest to the lenders over such foreign bank account, which will be created and enforced under the relevant foreign law.

Mortgage over Land and Construction in Progress

Land plots owned or leased for a long-term period by the company may be mortgaged in favor of the lenders.

As a matter of Kazakhstan law, construction in progress constitutes movable property (not real estate) until the construction is finished, commissioned by the State and registered by the Ministry of Justice as a unit of real estate. In this regard, the construction in progress can be pledged as movable property, but not as real estate.

It is important to mention that the pledge over construction in progress does not automatically convert into pledge over real property after completion and registration of construction. Instead, after the plant is commissioned, it will be necessary for the company to execute a new pledge agreement in respect of the plant, replacing the earlier agreement in respect of construction in progress.

As mentioned above, the title to a land plot is inseparable from the title to real property it underlies. Therefore, a mortgage of a building means that the underlying land plot will also become the subject of the same mortgage.

Pledge of a Grain

The laws of the Republic of Kazakhstan contain the concept of the grain receipt, which is a certificate in the form of a debt non-documentary non-issue security, certifying the rights of its holder to receive grain from a grain-receiving enterprise in the volume and quality determined during its issue.

The holder of the grain receipt registers the order for the transfer / pledge of the grain receipt with indicating information about the pledgee and the information on the pledgee agreement. Upon payment of the debt by the holder of the grain receipt in the amount of the obligation to the creditor, the pledgee is obliged to register in the register an order to remove the encumbrance (pledge).

It is also important to know that the claims of holders of grain receipts containing information about the pledge are satisfied in the third priority, after satisfaction of claims for compensation for harm for causing harm to life or health, and payment of wages to employees.

Pledge of the Aircrafts

In accordance with the legislation of the Republic of Kazakhstan, the pledge of an aircraft is governed by the norms of Kazakh law in case if such an aircraft belongs to a Kazakh legal entity and / or is registered in the Aircraft Register. The pledge of the aircraft is subject to registration with the Authorized Body - the Ministry of Industry and Infrastructure Development of the Republic of Kazakhstan.

Along with that, it should be noted that the legislation in the field of aircrafts, in addition to the legislation of the Republic of Kazakhstan, is also regulated by international agreements (e.g. the Convention on International Guarantees for Mobile Equipment and the Protocol on Aviation Equipment to the Cape Town Convention.)

Thus, the procedure for foreclosure on an aircraft that is the subject of a pledge should be governed by the provisions of the Cape Town Convention and its Protocol, according to which the lessor / lender is granted a real right to the aircraft itself. The sale of an aircraft when foreclosure on the subject of a pledge should be carried out in accordance with the provisions of the Cape Town Convention and its Protocol, and not in accordance with the legislation of Kazakhstan.

8. What are the enforcement capabilities of pledgee to secure his rights under the contract?
According to the laws of the Republic of Kazakhstan, the pledgee may collect pledge either through an out-of-court proceedings or a court-proceedings, which is prescribed either by the law, or may be indicated in a pledge contract.
Out-of-court Enforcement

In the out-of-court enforcement procedure, the pledgee (its representative) may organize and carry out the enforcement procedure, including the sale of the collateral. For this, it is necessary for the pledgee representative to carry out a number of procedural steps, including preparing and registering a default notice, publishing an auction notice in mass media, and conducting the auction.

If the pledge agreement provides for out-ofcourt pledge enforcement procedure, the lenders will be able to enforce the pledge by selling the collateral without the need to pay the court fee or any other State fee. However, if the local borrower refuses to co-operate with the lenders in selling the collateral or otherwise obstructs the enforcement of the pledge, the lenders will have no other recourse but to apply to a Kazakhstan court seeking judicial enforcement of the pledge. In such case, it will be necessary for the lenders to pay a court fee in the amount of 3% of the value of the claim (if the lenders are successful in their litigation, the court would require the customer to reimburse the lenders for the paid court fee).

Enforcement may take up to 6 months from the moment of default to the sale of the pledged property. It may take longer if the pledgor contests the underlying default. The enforcement expenses may vary in a range of several thousand U.S. dollars (without taking into account the court fees). The law, however, provides that expenses incurred by the pledgee are recoverable from the sale proceeds, and the court fees are to be reimbursed by the pledgor

Judicial Enforcement

If the lender enforces the pledge through a courtsupervised procedure, it will be necessary for the lender to pay a court fee in the amount of 3% of the value of the claim. If the lender is successful in its court action seeking pledge enforcement, the court will order the customer to reimburse the lenders for the court fees paid by the lender in commencing the court action.

In case of enforcement through judicial action, the court-marshal is obliged under the law to conduct the auction and sell the collateral within four months after he received the relevant court order. This term may be extended in certain circumstances.

We hope that the information provided will be useful to you. If you have any questions or want to provide more information, please do not hesitate reaching us. We will be glad to provide any assistance.
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