The Law on Personal Bankruptcy

Last year a law on the bankruptcy of individuals was adopted. It prompted a great deal of debate, since it touches many interests. The country's financial sector will have the most to worry about, because any worsening of the conditions for recovering problem debt leads to less lending and higher risks for the industry. The law is very important and requires careful analysis by lawyers, and launching such an institution is the work of more than one year. I have skimmed the law and, as it seems to me, like any new law it is rather raw. There will be many more clarifications, revisions and by-laws, on which the outcome will depend even more than on the law itself. The devil, after all, is in the details.

I will set out what stands out already and what will create risks for the industry down the line. It would be desirable to try to minimize those risks at the root, through clarifications and well-drafted by-laws.

The glossary of the law implies that only a citizen of the Republic of Kazakhstan can be declared bankrupt. What foreigners who owe debts in the country are supposed to do is not yet clear.

All transactions made in the last three years can be declared invalid. That is normal practice in corporate bankruptcy, but for individuals it will produce a fairly large number of disputed cases, because individuals typically sell cars and apartments, and they sell them to other citizens. Any such transaction can be declared invalid, since when entering into a deal a person cannot guarantee that he will not go bankrupt in the future. This provision may also become a loophole for challenging auctions held by private bailiffs when problem debts are collected from individuals. For example, a bank, in the course of recovering a problem debt, collects it in the form of property, but the borrower, who owes money to someone else, can file for bankruptcy and have the transaction declared invalid. There will be many disputes on this point, and the provision needs to be spelled out more clearly.

A person becomes a financial manager on the basis of a notification, and the role can be filled by a professional manager, an auditor, a professional accountant or a legal consultant. It seems to me that a great deal depends on the financial manager, and risks may well arise here, especially with legal consultants: auditors and professional accountants are accredited in some way, but the requirements for a legal consultant have not been defined anywhere yet.

The out-of-court bankruptcy procedure takes 6 months, while the court procedure can drag on for 1.5 years, because any action can be appealed in court. For example, one can contest the valuation and get bogged down in a lengthy dispute over it, then file an appeal, and so on. Moreover, until the out-of-court procedure, for instance, is completed, the debtor can voluntarily withdraw the bankruptcy filing. Meanwhile, for the duration of the procedure it is prohibited to collect any amounts or to accrue interest, fines and penalties. The result is a legal way to obtain, at a minimum, an interest-free deferral of debts.

An important point concerns out-of-court bankruptcy: you can travel abroad, whereas during court bankruptcy proceedings travel abroad is prohibited. In principle, banks already have the right to impose travel bans on debtors, but now debtors owing up to 1,600 MCI will have a loophole: they can leave the country by starting an out-of-court bankruptcy procedure.

The financial manager will be appointed by the authorized body (I cannot yet understand which body will be designated). The financial manager's remuneration is 1 minimum monthly wage (KZT 70 thousand) per month. It seems to me that the risks here are very large. A great many proper internal procedures will have to be written at the level of the authorized body, otherwise this is a very good field for corruption, allowing legal consultants to make money. There is also a risk that few people will agree to take on complex cases for such pay.

The appraiser is chosen by the financial manager! From my experience working in a bank, I can say that appraisal companies are one big risk. The valuation of one and the same apartment can vary by plus or minus 50%. Opening an appraisal company is not difficult at all. I am sure that alongside the crafty financial consultants, dozens of new appraisal companies will spring up. Regulation is needed here, along with a requirement that the authorized body choose only among accredited appraisal companies. And given that the financial manager is also in charge of the sale, the risks double.

The financial manager has many powers: he sells property, takes inventory, prepares a solvency recovery plan, and so on, yet this activity is not classed as entrepreneurial. It is therefore not quite clear what status financial managers have, who will pay taxes on their earnings, and how many cases one financial manager may handle at the same time.

Following both the out-of-court and the court bankruptcy procedures, bankrupts will be barred from obtaining bank loans and microloans, and in the court procedure they will also be barred from acquiring property for three years. These are very, very, very lenient consequences for bankrupts. Property can always be acquired in the name of close relatives, and banks will not lend to bad borrowers anyway, ban or no ban. This is the riskiest provision, since it opens the way for most problem borrowers to evade their obligations. But, as they say, time will tell what to adjust and how.

I do not envy the new agency: there will be a great deal of work, and the law is important but, it seems to me, very raw, while public demand will be considerable.