Symbat Tursyngali, Anar Kubeyeva

Lawyers, Synergy Partners Law Firm

A company, for example LLC[1], has decided to close its business. In this case there are several options:

(1)        The shareholders liquidate the LLC themselves.[2] This option is possible if the LLC has enough property and money to cover all creditors’ claims. For example, the LLC has property worth 1 million tenge, and creditors' claims are 900 thousand tenge.

(2)        The LLC suspends its activity. [3] This option is temporary, because it does not fully solve the issue of closing the business. The LLC exists, but all operations are frozen. The advantage is that the LLC does not need to submit tax reports and pay taxes, if the activity was suspended correctly. In the future, the LLC can be closed.

(3)      Closing the LLC by the bankruptcy procedure. This option is applicable if the LLC has less money and property than the creditors' claims. Detailed information about this option is described below.

Kazakhstan bankruptcy legislation clearly states that bankruptcy is ordered by a court decision and only the court establishes the debtor’s insolvency, and the court guarantees the legitimacy of all procedures on bankruptcy. [1]

Kazakhstan legislation states two types of bankruptcy. [2]

• Voluntary bankruptcy, when the company or LLC itself files a claim to the court and asks to be declared as a
• Forced bankruptcy, when the company's creditors file a claim to the court and ask to recognize the company / LLC as a

In this article, we will consider voluntary bankruptcy.

To apply for voluntary bankruptcy of the LLC, the Bankruptcy Law requires several following conditions:

First condition: the LLC has less money and property than the creditors' claims[3]. For example, the LLC has 1 million tenge, and the LLC must pay 3 million tenge to all creditors.

Second condition: the Law requires that the LLC has a stable insolvency. The Bankruptcy Law states that the stable insolvency refers to the inability of a company to meet its obligations over the following time: [4]

• The LLC could not meet its obligations, and it had less money and property than the creditors' claims on the date of filing the court application;
• The LLC could not meet its obligations, and the value of the property is less than the creditors' claims at the beginning of the year in which the LLC filed the court application;
• The LLC could not meet its obligations and the value of the property is less than the creditors' claims at the beginning of the previous year, if the LLC filed the court application in the first quarter of the current year (for example, if the LLC filed the court application in February 2020, then on January 1, 2019).

All of the above dates will be checked in order to apply bankruptcy.

For convenience, we have highlighted the following stages and procedures of voluntary bankruptcy based on practice:

1. Corporate resolution

Depending on the corporate details, the Articles of association, and other internal documents of the company, the LLC/LLC’s shareholders make a corporate resolution on declaring of the LLC as a bankrupt.

1. The LLC finds a temporary manager

The LLC/LLC’s shareholders find a temporary manager and enter into an agreement with him/her to exercise the powers of the temporary manager. The temporary manager may be the person, whose notification is included in the register of notifications of persons entitled to perform the activities of the administrator. [5]

The company must provide the temporary manager with access to the accounting documents for a review. [6]

1. The LLC submits a set of documents to the court

The LLC collects a set of documents, and submits the documents to the court.[7] Documents must contain all the information required by law. [8]

1. The court initiates a bankruptcy case

The court conducts the necessary procedural actions and issues a judicial act that a bankruptcy case has been initiated. [9]

1. Temporary manager analyzes the LLC’s financial stability

The temporary manager analyzes the LLC’s financial and business operations, documents and gives his/her report on the LLC’s financial stability, which may have one of the following conclusions: [10]

1. Statement for recognition the LLC as a bankrupt is not justified – I class of financial stability;
2. There are no grounds for the LLC’s bankruptcy, but the rehabilitation procedure may be applied – II class of financial stability;
3. There are grounds for the LLC’s bankruptcy – III class of financial stability.

Additionally: There are cases when companies do not give temporary managers access to the accounting documents. This usually happens in forced bankruptcy. In this case, the temporary manager cannot determine the company’s financial stability, and instead of issuing the report, temporary manager issues a corresponding act. [11]

1. The court considers the case

The court considers the bankruptcy case at the preparation stage[12] and then on the merits. On average, the consideration of the case on its merits takes 2 months[13] or more, depending on the separate companies.

As a result, the court issues a corresponding court decision: either satisfies or refuses to declare the LLC as bankrupt[14].

1. The LLC transfers documents and values to the temporary manager

After the court declares the LLC bankrupt, the LLC transfers the following documents and company values to the temporary manager:[15]

• All constituent documents, seals and stamps – within three working days from the date of the court decision;
• Accounting documents, title documents to the LLC’s property – within ten business days from the date of the court decision;
• Material and other values belonging to the LLC – within twenty business days from the date of the court decision.

1. The temporary manager notifies the authorized body

The temporary manager notifies the authorized body that the LLC has been declared bankrupt. And the authorized body places an announcement on its Internet resource on declaring the LLC bankrupt. [16]

Today, the authorized body in the bankruptcy field is the tax authority.[17]

1. The court decision comes into force, the consequences of being declared bankrupt

Next, the court decision on declaring the LLC bankrupt comes into force.[18]

It should be noted that declaration of the LLC as bankrupt entails the following consequences for the LLC:[19]

1. the property owner, shareholders and all bodies of the LLC are prohibited from using and selling property, as well as repaying the obligations;
2. the terms of the LLC debt obligations are considered expired;
3. the accrual of penalty and remuneration (interest) for all types of the LLC debts are terminated;
4. if court decisions on property disputes involving the LLC have not entered into legal force, they shall be terminated;
5. claims may be filed against an LLP only in the framework of bankruptcy proceedings, except in cases established by law;
6. all restrictions and encumbrances on the property of the LLC are removed without decisions of the bodies that imposed such encumbrances – on the basis of an application from the administrator and a decision to declare the LLC bankrupt;
7. the imposition of new arrests on the LLC’s property and other restrictions on the disposal of LLC’s property shall be allowed only in cases of claims against the LLC for invalidating the transaction and for recovering property from someone else's illegal possession.
8. The bankruptcy procedure

After the company was declared bankrupt, the bankruptcy procedure begins.

The bankruptcy procedure includes various actions, including but not limited to: satisfying creditors' claims, assessment and sale of the company’s property, and other actions. The company, the temporary and bankruptcy manager, creditors, the court, the authorized body, and other interested parties participate in the bankruptcy procedure, in accordance with the legislation of Kazakhstan.[20]

According to the Law, the bankruptcy procedure can last from 9 months to 5 years.[21] However, in practice, the period may be longer, depending on the separate company.

1. The bankruptcy completion and liquidation

After going through all bankruptcy procedures and satisfying the creditors’ claims, the bankruptcy manager submits final reports and balance sheets to the court.[22] If all the information is correct and all procedures are followed, the court approves such reports and issues a decision on the completion of the bankruptcy procedure, in accordance with the Kazakhstan legislation.[23]

The last stage is the submission of documents to the registration authority for the termination of the company’s activity (liquidation).[24]

After the registration authority registers the termination of the LLC, the business will be officially closed.

CONCLUSION

This article provides a general description of the procedure for declaring the company bankrupt in Kazakhstan. Depending on the size, volume of operations and other factors of a separate company, additional obligations and stages of the bankruptcy procedure may arise. We recommend coordinating every step with experienced professionals in the field of corporate law to avoid any negative consequences.

This article is current as of the date of writing. This article is for informational purposes only and is not an official interpretation of the legislation of Kazakhstan.

[1] Article 1.6 of the Kazakhstan Law on Rehabilitation and Bankruptcy, Article 52 of the Kazakhstan Civil Code

[2] Article 4.1 and 4.2 of the Kazakhstan Law on Rehabilitation and Bankruptcy, Article 53 of the Kazakhstan Civil Code

[3] Article 11.2.1 of the Kazakhstan Law on Rehabilitation and Bankruptcy

[4] Article 5.1 of the Kazakhstan Law on Rehabilitation and Bankruptcy

[5] Article 11.2.4 of the Kazakhstan Law on Rehabilitation and Bankruptcy

[6] Article 11.2.8 of the Kazakhstan Law on Rehabilitation and Bankruptcy

[7] Article 42.2.1 of the Kazakhstan Law on Rehabilitation and Bankruptcy

[8] Article 41 of the Kazakhstan Law on Rehabilitation and Bankruptcy

[9] Article 38.1 of the Kazakhstan Law on Rehabilitation and Bankruptcy

[10] Article 49.1 of the Kazakhstan Law on Rehabilitation and Bankruptcy

[11] Article 49.2.2 of the Kazakhstan Law on Rehabilitation and Bankruptcy

[12] Article 52 of the Kazakhstan Law on Rehabilitation and Bankruptcy

[13] Article 54.1.1 of the Kazakhstan Law on Rehabilitation and Bankruptcy

[14] Article 55.1 of the Kazakhstan Law on Rehabilitation and Bankruptcy

[15] Article 56.2.4 of the Kazakhstan Law on Rehabilitation and Bankruptcy

[16] Article 56.3 of the Kazakhstan Law on Rehabilitation and Bankruptcy

[17] On the date of April 13, 2020, the authorized body in the field of rehabilitation and bankruptcy is the State Revenue Committee of the Ministry of Finance of the Republic of Kazakhstan

[18] Article 61.1, 62 of the Kazakhstan Law on Rehabilitation and Bankruptcy

[19] Article 87 of the Kazakhstan Law on Rehabilitation and Bankruptcy

[20] Article 85 of the Kazakhstan Law on Rehabilitation and Bankruptcy

[21] Article 84 of the Kazakhstan Law on Rehabilitation and Bankruptcy

[22] Article 110.1 of the Kazakhstan Law on Rehabilitation and Bankruptcy

[23] Article 110.3 of the Kazakhstan Law on Rehabilitation and Bankruptcy

[24] Article 112.1 of the Kazakhstan Law on Rehabilitation and Bankruptcy