The economy of Kazakhstan: policy features in the field of bankruptcy
Table of contents: The Kazakh-American Free University Academic Journal №3 - 2011
Author: Kunanbaeva Duisekul, Kazakh National University in honor of Al-Farabi, Kazakhstan
A market economy operates according
to certain rules and provides opportunities for companies to
become prosperous. A market economy does not have a place for companies that lag behind. Formal adherence to market criterion of resolving crisis situations in an organization which is usually the elimination of
all insolvent institutions will
inevitably lead to mass unemployment, lowering living standards and increasing income differentiation. All this leads to an increase of social tension and presents insurmountable obstacles to economic growth.
An alternate solution to crises is the institute of bankruptcy. It restores
the viability of the organization by helping the company overcoming financial difficulties. Furthermore, the
institute of bankruptcy eliminates non-viable elements of the market.
A comparative analysis of national models of organizations
insolvency in the world economy indicates that the bankruptcy institute in France and in
the United States focuses on protecting the interests of the debtor. The priority is given to an organization that operates and
functions as a company; therefore, its cessation through elimination is the last measure to undertake. However, a strict rule used by the French is to support the organization's activities in any case. While reducing the share of assets that creditors expect from the liquidation process of the insolvent debtor
weaken the entire economic system as a whole. In addition, using the model allows the debtors to abuse their rights. Corporate governance issues of "Enron" in the U.S. can serve as an example.
In the legal systems of Great Britain
and Germany, bankruptcy is a way of debts repayment at the
expense of the liquidation and sale of bankruptcy estate. For instance, in Germany the process is aimed at maximizing the debtor's assets for their
distribution among its creditors. Along
with unfavorable market conditions, lack of
opportunities for funding due to banking crisis,
the bankruptcy law of 1999 caused significant number insolvent companies in Germany. According to the law, explicit encouragement was given to terminate the organization because creditors
were interested primarily in the sale of assets
of the company that was
experiencing a difficult situation rather than in its recovery. Thus, as international
experience shows the national models of organizations insolvency regulation and rights distribution in favor of debtors or creditors is largely a political choice by the states and governments.
Kazakhstan's independent economy, which is only 20 years old, is characterized by
the use of neutral models of insolvency regulation, which combines both
debtor’s and creditor’s interests protection. For example, bankruptcy system in Kazakhstan cannot accept only the interests of the creditors, as it can be done in some economically developed
foreign countries. The bankruptcy should facilitate the implementation of the macroeconomic strategy of the state, helping to preserve the productive capacity of the country and not to be destructive but a creative force.
It should be noted that effective functioning of the institution of
bankruptcy in the national economy is possible only if there is a qualitative legislation on insolvency and mechanisms for its implementation are established. The law of the Republic of Kazakhstan "On Bankruptcy" of 1997 is the third part of legislative documentation (the first law was passed in 1992, the second - in
1995) that regulates bankruptcy
procedures. Until now, the law underwent multiple amendments (more than 30 times) in order to improve the
country’s insolvency regulation
mechanisms. Despite that, the legal basis of the insolvency of organizations requires further improvement.
Initially, since the introduction of the
institution of insolvency, the most dysfunctional organizations went through
the bankruptcy process in Kazakhstan. These organizations did not have to
restore the solvency of the debtor and the continuation of their operations: a
large percentage of bankruptcies accounted for the organizations with no assets
through the sale of which the creditors claims could have been met, as well as
absent debtors. Absent debtor – is a debtor, whose physical location, as well
as the location of the founders, members, managers and officials, without whom
the entity cannot operate, is not identified during six months. The national
budget for the program 003 "Implementation of procedures for liquidation
and bankruptcy" each year provides funds to carry out liquidation
procedures of the insolvent debtors. As a result, objectives of the procedures
to eliminate insolvent institutions are not achieved. As a result,
entrepreneurs had the stereotypical attitude to the Law of the Republic of Kazakhstan "On bankruptcy", which can be used as a way to close the
organization through the sale and concealment of property.
The practice of the institution of bankruptcy demonstrates that business entities do not consider bankruptcy as a mechanism for recovery. For instance, in Kazakhstan in 2008, the rehabilitation processes were introduced at only 15 organizations (0.7% of the liquidated),
in 2009 - 14 organizations (0.6% of the liquidated),
in 2010 - for 43 organizations (2.0% of the liquidated).
institute of bankruptcy must reduce the number of negative effects in the event of
insolvency, and ensure financial recovery, restructuring
liquidation of insolvent organizations.
It must protect the rights of creditors as well as the
interests of owners. In addition, it requires further
development in the policy of the state in
regulating the processes of bankruptcy. The
urgency of improving the mechanisms of bankruptcy also depends on ongoing
changes in Kazakhstan's economy in a
Now due to the crisis in the global economy, a number of competitive enterprises have difficulties with loan repayment and loan servicing. This creates a risk of bankruptcy, default by lenders, investors
and counterparties, default of tax obligations and a negative impact on banks' loan
portfolio. In turn, deterioration
of banks’ financial position reduces the possibility of crediting the real sector and may ultimately hinder economic growth.
This suggests that it is the time that entrepreneurs caught in difficult circumstances,
are provided with effective tools of financial restructuring
and rehabilitation stipulated in the bankruptcy law. Thus, over the last one and a half years more than 70 debtors have gone through the procedure of rehabilitation and 30 out of which restored their
paying capacities. 84 organizations are now in a rehabilitation procedure and more than 13 000 workers are
fully employed and in addition to that 8 organizations that successfully completed the rehabilitation in 2011 saved more than 1,000 jobs. It should be mentioned that majority of
organizations that went through the rehabilitation procedures were municipal and public, but recently this procedure has become popular among the other forms of business organizations.
The use of rehabilitation procedures by the
institute of bankruptcy provides the debtor with the following advantages:
1) growth of debt stops once the rehabilitation
procedure is introduced. Forfeits (fines and penalties) for all types of debt
of the debtor, including bank loans, are not charged.
2) repayment of deferred payables is carried
out according to the repayment schedule according to the 3-year rehabilitation
plan. In addition, the repayment of deferred payables is carried out on the
first day after the administration of the rehabilitation process, and after 4
months, i.e. after the approval of the register of creditors. This gives the
company time to create a working capital.
3) during the rehabilitation procedure the
company continues carrying out its economic and financial activities, including
participation in tenders.
4) rehabilitation procedure applies to
business: legal entities and individual entrepreneurs.
5) claims of creditors are satisfied within the
period of rehabilitation procedure.
It should be noted that the introduction of rehabilitation
procedure has several advantages to the banks: a guaranteed return of borrowed funds within 3 years, participation in the committee
of creditors and monitoring the conduct of the rehabilitation process. It follows that the introduction
of the rehabilitation process will help stabilize the economic
development and reduce social
tension in the country.
Practical experience shows that the model of insolvency in Kazakhstan plays an important role in the national economy. It involves many of the
structures of different levels of government: the Ministry of Finance of the Republic of Kazakhstan, the Committee on the Insolvent Debtors within the Finance Ministry
and its territorial agencies - the departments, the Ministry of
Justice of the Republic of Kazakhstan, organizations of
professional managers in bankruptcy
procedures, specialized economic courts, and other state and commercial
In connection with the existing problems of the real and
financial sectors due to the global
financial crisis, the Government of the Republic of Kazakhstan in March 2011 approved a program of post-crisis recovery, which
aims to improve competitive
enterprises, the debt of which exceeds 4.5 billion tenge. Competitive enterprises, whose debt is less than that amount, will benefit from state support in the framework of the "Road map business 2020", approved by the Government of the Republic of Kazakhstan on 13 April 2010. It should be noted that government support of enterprise rehabilitation is a temporary
measure and is directed to help businesses move to the growth strategy. Therefore, the
possibility to enter the post-crisis recovery program is limited.
economy requires a common concept of public
policy in the field of bankruptcy. This
concept should include a set of laws
regulations that is refined on an ongoing
basis in accordance with the radical changes in the
national economy. In addition to the existing law of the Republic of Kazakhstan "On
bankruptcy" as amended and supplemented, the
"Rules of interaction of state bodies for the
prevention, detection and suppression of facts and deliberate false
bankruptcy," etc., a legislation on financial
restructuring of institutions of self-regulatory
organizations should be developed. Changes in the law "On
Joint Stock Companies", which make provision
for protection of property rights with
introduction of bankruptcy procedures in
organizations, should be well-thought-out.
concept of public policy to prevent bankruptcies should
include provisions that establish new and strengthen existing
structures of bankruptcy institution. In order to
develop an appropriate mechanism for implementing
the state policy in the area
of bankruptcy it is necessary to establish a permanent Coordinating
Council to improve organizations’ well-being. The
composition of this council should
include representatives of industry ministries, the judiciary, tax
authorities, enforcement authorities and
The main tasks of the Coordinating
Council should include:
state and public organizations during
crisis management and financial improvement of
and implementation of the National program
of financial rehabilitation of enterprises;
financial condition of the economically and socially
important enterprises of the republic, and
development of appropriate measures for their improvement;
the implementation of bankruptcy procedures in large
socially important insolvent enterprises;
of positive attitudes towards bankruptcy procedures as a
natural economic process, which facilitates the recovery
of the economy;
a system of training, retraining of crisis
The main priority in the state regulation of
insolvent organizations is creating a regulatory framework for governing bodies
of insolvent institutions in bankruptcy proceedings.
Studies show that bankruptcy laws in foreign
countries usually put forward requirements for professional quality control of
the organization’s governing body. For example, in U.S., UK, Germany, Belgium, Italy a governing body (the manager) is a person who either has a license or
authorization from the competent authority, or a member of a certain professional
organization or person entered in the special list. In almost all countries the
responsibility of governing bodies (the managers) are regulated in the civil
and criminal codes. Many countries seek to ensure their obligations. The
governing bodies have the insurance coverage both for their activities in the
framework of their profession and for procedures while filing for bankruptcy.
In Canada, associations of "Insolvency practitioners" develop
standards of their managerial activity.
For ensuring the effectiveness of the mechanisms associated with the failure of organizations in the management of the bankruptcy
proceedings it is necessary to create a common regulatory control system in the Republic of Kazakhstan which may consist of the following:
- Professional and other requirements to the person who is the bankruptcy governing body (the manager);
- Liability insurance
for those performing duties of the bankruptcy governing bodies (managers);
- Professional activity standards for those who are the bankruptcy governing bodies (managers).
Kazakhstan, obtaining a
license allowing managing
property and affairs of insolvent
debtors during bankruptcy proceedings is
realized by an applicant – a
physical entity that must meet the following eligibility
a higher law or economic education and be
trained in educational
continuing work as the administrator of
external observation, bankruptcy
trustee in accordance
with the laws of bankruptcy;
at least three years of experience
in one of the following areas: economics,
finance, accounting and analysis, control
and audit, legal, or being the
head of the legal entity at
least for three years.
In addition, these requirements should include
the provision of training in acting as an assistant manager, as well as
membership in a self-regulatory organization. The last requirement entails
conforming changes in the regulatory system of control in the Kazakhstan economy.
It should be noted
that the purpose of state regulation in the bankruptcy process should be to
maximize market self-regulation. The state should reduce the regulatory role in
crisis management, transferring its functions to the operational management of
an insolvent organization of leading professional crisis management
organizations, leaving behind only the control and enabling functions.
indicates that a system of self-regulation at the micro level in countries with
the developed market economies was established a long time ago and covers
practically all spheres of economic life. All kinds of professional associations
of lawyers, notaries, auditors, insolvency administrators develop ethical
standards and special activities that create mechanisms for monitoring
compliance with these rules. Thereby their activities contribute to improving
the quality of their professional activities and reduce the number of
violations in the field of entrepreneurship. As a result, self-regulatory
organizations are considered as mechanisms of stability and balance on the microeconomic
the effectiveness of regulatory and economic failure of organizations in Kazakhstan's economy it is imperative to create self-regulatory
organizations of governing bodies (managers) (SROM). It is the
responsibility of SROM to appoint managers to carry out
the bankruptcy procedures. The lender/creditor submitting the application
to the court to declare the debtor bankrupt, mentions only the self-regulatory
organization, which, in turn,
nominates managers who file for and deal with bankruptcy procedures.
Noteworthy in this regard, the experience of Russia, where the trustee is a member of a self-regulatory
organization and approved by the arbitration
tribunal. Self-regulatory organization offers the court three candidates of arbitration managers. Therefore,
according to Russian practitioners to initiate bankruptcy proceedings for any lender is a complicated
issue since "it is useless to buy only one
arbitrary manager, one
needs to buy the entire self-regulatory
organization or its staff."
A key element of the regulatory system of
control procedures for bankruptcy is a mandatory liability insurance of managers
for accidental damage to third parties involved in the bankruptcy case. Third
parties who are entitled to compensation for damage shall be deemed a debtor
and creditors of the debtor. This insurance is complemented by the creation of
compulsory SROM compensation funds, which are formed exclusively in the form of
money from contributions of members to recover damages caused by the activity
of SROM managers. The Government of the Republic of Kazakhstan establishes conditions
and procedures for allocation and disbursement of compensation fund. The means
of compensation funds will be applied only in case of impossibility of full
compensation for losses at the expense of insurance liabilities as well as in
the case, if such losses were not included in the insurance, that is, if there
is an intentional infliction of damage control in course of business by
managers. We emphasize that this self-regulatory organization must pay for the
guilty trustee, using funds from the compensation fund.
Thus, the proposed
the regulatory control of the bankruptcy proceedings will allow securing
independence of the managers of various participants in bankruptcy cases and will make them responsible for property liability and for retaining control of the parties filing
their bankruptcy procedures.
The rules for self-regulation do not conflict with the formal rules established by the state and are legitimate. Therefore, it is assumed that SROM will monitor compliance with laws and regulations governing the activities set by the Government of the Republic of Kazakhstan; SROM will protect the rights and legitimate interests of its members. It will provide information openness of bankruptcy procedures among the members and will encourage professional growth and level of training of its members. The
authorized body of the state will monitor the implementation of legislation by the self-regulatory organizations.
Thus, under the new
system of control based on the study of foreign experience, the concept of Republican SROM as a vertically integrated organization that brings together all regions of the country and operates on principles that encourage its members to execute the bankruptcy
procedures in strict accordance to the
law is proposed for implementation. The result will be an increase in the degree of managers’ responsibility for the results of the bankruptcy proceedings. In the event of damage to the debtor or debtor’s creditors by the rehabilitation or administration managers, the losses
should be compensated at the expense of their insurance liability. In case of the fund shortages the losses are covered by the SROM compensation fund.
It should be noted that the creation of SROMs will enhance the effectiveness of the economic insolvency regulation system of organizations by bringing a competitive professional management in
carrying out bankruptcy
procedures. SROMs will also increase the proportion of rehabilitation
procedures, enable the percentage growth of the
repayment of debts and will prevent negative tendencies in Kazakhstan economy in the sphere of bankruptcy.
1. The Republic of Kazakhstan. The law on
bankruptcy. - Almaty: Lawyer, 2011.
2. The Russian Federation. Federal law. On insolvency (bankruptcy). - M.: Os-89, 2008. (Current law).
3. Proceedings of the Committee on the Insolvent
Debtors Ministry of Finance of the Republic of Kazakhstan. - http://www.minfin.kz
4. Stepanov, VV Insolvency
(Bankruptcy) of Russia, France, England and Germany. - M.: "The Statute", 2003.
Table of contents: The Kazakh-American Free University Academic Journal №3 - 2011