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
Similar Articles
Relevancy Powered by MondaqAI
 
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”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
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 (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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