Kazakhstan: Certain Aspects Of Law Enforcement In The Courts Concerning Financial Lease

Last Updated: 20 June 2017
Article by Abylkhair Nakipov and Saltanat Kemalova

In this article, we would like to address some of the issues that lessors face in the protection of their interests concerning financial property lease in Kazakhstan courts.

In 2016, we participated in around 20 lawsuits—which can now be viewed as case studies—on the lessee's default in performing the obligations in financial lease agreements. In view of these cases, we would like to point to certain issues that may arise in the courts.That being said, we do not aim to cover all the issues on financial lease litigation.

The Kazakhstan courts tend to neglect the statutory provisions on lease and have stated that lease activities fall under the legal and economic regime of investment activity1. Hence, lessors are granted full and unconditional protection2 of their rights and interests, as secured by all Kazakhstan regulatory legal acts.

This is reflected in the fact that the courts tend to unfoundedly align themselves with the lessees in the consideration of the lessors' claims.

Unreasonable Size Reduction of the Penalty Accrued Due to Untimely Performance of the Obligations by the Lessee

One of the main problems in financial lease relations is the lessees' violation of the lease payments terms, even including the complete cessation of payments.

In order to ensure the lessee's timely performance of his financial obligations, the parties provide for contractual and financial lease penalties and the procedure for the accrual thereof. Accordingly, the lessee, upon signing the financial lease agreement: first, assumes the obligations of timely lease payments; and second, as a security in the event of non-compliance with these obligations, undertakes to pay the penalty in the amount set by the agreement.

However, despite the fact that issues of charging and levying penalties are directly regulated in the financial lease agreements, the courts, guided by Article 297 of the Kazakhstan Civil Code, would generally reduce the amount of the leviable accrued penalty, substantiating it by the fact that the penalty is extremely high compared to the losses of the creditor. At the same time, the reduction can be considerable (up to 10% of the claimed penalty).

Thus, one can draw the following conclusions:

First, there is no assessment of the lessor's losses arising from the lessee's failure to perform its obligations (including untimely performance) to make the lease payments, and the subsequent termination of the lease agreement through the lessee's fault. The courts maintain the basic attitude that, if at the time of the decision the lessee has already repaid the principal debt on the lease payments, then the lessor's losses are not severe. At the same time, the lost profit of the lessor, which also relates to the overall loss, the direct losses of the lessor due to the early termination of the agreement, the servicing of loans related to the acquisition of the leased asset, and so on, are not taken into account.

Second, a number of circumstances are not taken into account, which circumstances deserve attention and can testify in favour of the lessor.

As a rule, in the course of court hearings, the lessee pays the present principal debt, the payment of which is already an indisputable requirement. Not only does the court disregard the untimely performance as 'under duress' and as such is an unconscientious performance of the obligations by the lessee, but, on the contrary, views such performance as voluntary and credits the lessee with such.

Third, the lessor is often incriminated with the failure to apply for the recovery of the penalty within a reasonable time.  At the same time, this course of action completely overlooks the fact that no deadlines for recovery of penalties are provided in the lease agreement or in Kazakhstan laws. In addition, the general term of limitation provided for in the Kazakhstan Civil Code is 3 years.

In some cases, judges generally came to the odd conclusion that the penalty increased not because the lessee failed to timely perform the obligations, but because the lessor delayed the initiation of legal action.

The Lack of Common Approach to the Issue of the Currency of the Award

In cases where the lessor is a non-resident company, all obligations under the lease agreement are recorded in foreign currency. Accordingly, when taking legal action, the lessor declares his claims in foreign currency, as these are recorded in the lease agreement.

The courts, however, in absence of a common stance, award the claimed amounts either in foreign currency, or in tenge, pursuant to the Regulatory Resolution of the Supreme Court of Kazakhstan 'On Judicial Award' dated 11 July 2003.

In cases where requirements are awarded in tenge, the courts overlook the following provisions of the laws aimed at protecting the lessors' interests:

  • Kazakhstan laws single out 'international lease' as one of the lease forms, when one of the parties is not a Kazakhstan resident;
  • Kazakhstan law provisions on the protection of the investor's interests, according to which the lessor, as an investor, is granted full and unconditional protection of rights and interests secured by all normative legal acts of Kazakhstan;
  • The currency laws provisions, according to which non-residents have the right to receive and transfer dividends, remuneration, and other income received from deposits, securities, borrowing, and other currency transactions with residents without restrictions.

However, the latest practice of the Supreme Court of Kazakhstan on the issue of currency of the court award supported foreign lessors, recognizing that the award of financial lease agreements with non-resident lessors should be made in the currency of the financial lease agreement. Thus, the Supreme Court recognizes that residents are entitled to conduct transactions with non-residents in national and/or foreign currency based on the parties' consent in accordance with the currency laws of Kazakhstan. Consequently, the debt and penalty under unpaid lease payments are to be recovered in the currency of the agreement, and the courts of the first and appellate instance are not entitled to independently change the subject matter of the claim and accordingly recalculate the foreign currency award in tenge  in tenge at the date of the decision.

Withdrawal of the Leased Asset

One of the problematic issues is the withdrawal of the leased asset. Lessors face numerous problems in the process of withdrawing the leased asset. For example, the lessees prevent the withdrawal of the leased asset; that is, they do not allow the lessor to enter their own territory, they conceal property, disassemble the asset to a non-working/non-transportable state, transfer it to third parties, and sometimes even manage to sell the leased asset. Moreover, the law enforcement practice also raises many issues. The indisputable withdrawal of the leased asset is recorded in Article 24 of the Law of the Republic of Kazakhstan 'On Financial Leasing'.

However, despite the direct indication in the laws, the law enforcement practice for the withdrawal of the leased asset shows that the courts are ambiguous about resolving this issue.

As a case in point, the court of appeal changed the decision of the court of first instance regarding the return of the leased asset because during the proceedings in the first and the appellate instance court, the lessee repaid the debt on the lease payments, notwithstanding that the lessor unilaterally terminated the lease agreement.

Thus:

  • Notwithstanding that at the time of the dispute consideration, the financial lease agreement ceased to be valid due to unilateral termination, the court in the meantime takes into account the 'untimely' performance of the lessee (performed after the agreement termination), and on this basis comes to the conclusion that the lessee must not return the leased asset;
  • The court ignores the debt as of the date of the decision of the court of first instance.

Distribution of the Representative Expenses Between the Parties

Another thematic issue is the formal approach of certain judges in the distribution of the representative expenses between the parties.

In accordance with Article 109 of the Kazakhstan Civil Procedural Code, if the claim is partially satisfied, the expenses are awarded to the claimant in proportion to the amount of claims satisfied by the court, and to the defendant, in proportion to the part of the claim that was refused to the claimant.

Following this regulation, certain judges award the compensation of the expenses by the claimant in favour of the defendants in proportion to the part of the claim that was refused to the claimant.

Considering the common court practice in terms of considerable reduction in the penalty claims (up to 10% of the claimed penalty), as a result, the lessor claimants are faced with a situation where the lessor claimant who has fulfilled his obligations under the financial lease agreement in good faith is forced to repay the representative expenses to the unconscientious defendant.

That is, the court not only infringes the right of the lessor for the full protection of his interests by reducing the penalty, but also imposes obligations on the lessor to pay the expenses of the unconscientious counterpart, thereby indulging the unfair business practices of certain lessees.

As a general conclusion, we would like to summarize that, despite the existence of Kazakhstan laws that expressly regulate financial lease issues, law enforcement practice poses ambiguous questions, which lessors must necessarily take into account when carrying out lease activities in Kazakhstan.

Footnotes

1 Article 25 paragraph 1 of the Law of the Republic of Kazakhstan 'On Financial Lease'

2 Article 276 of the Entrepreneurial Code of the RK

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions