ARTICLE
20 March 2020

Legal Framework For Insolvencies In Uzbekistan

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Despite being relatively new, the current bankruptcy law in Uzbekistan (initially adopted in early 1990s) has improved drastically over the last decades.
Uzbekistan Insolvency/Bankruptcy/Re-Structuring

Despite being relatively new, the current bankruptcy law in Uzbekistan (initially adopted in early 1990s) has improved drastically over the last decades. Uzbekistani insolvency regime, that was upgraded significantly throughout the several redrafts of the law, is still undergoing some changes that are being introduced as a part of its ambitious market-oriented economic reforms.

The main document regulating insolvency regime in Uzbekistan is the Law "On Bankruptcy" adopted in May 5, 1994 (the "Bankruptcy Law"). Adoption of the Bankruptcy Law was aimed at setting up a system of insolvency proceedings for legal entities as well as for individual entrepreneurs. Being a former-Soviet country Uzbekistan at that time had close to none historical background of bankruptcy regulations whatsoever. Unsurprisingly this first version of the Bankruptcy Law had failed to work successfully in practice as it did not cover many vital issues that kept arising thought attempts of implementing the bankruptcy proceedings. There were actually only two cases brought to court during the four-year period of existence of this version.

The evident underdevelopment of the first version of the Bankruptcy Law led to adoption of the second one on August 28, 1998. Compared to the previous one, the updated version expanded the scope of creditors' rights and also attempted to fill in the procedural gaps of the previous insolvency regime. This resulted in apparent progress of Uzbek bankruptcy law: 439 bankruptcy cases were adjudicated in 1998 alone. Nevertheless, there was a lot left to be desired in terms of organization of state staff responsible for procedural matters, application of the bankruptcy test and intricacies regarding certain categories of debtors.

The third and the latest version of the Bankruptcy Law (i.e. the Law "On Bankruptcy" No. 474) was adopted on April 24, 2003. It provides for the definition of insolvency and the updated criteria for insolvency, as well as for the order of initiating and conducting of bankruptcy procedures. Furthermore, it sets out the scope of authority for those involved in organizing and holding of bankruptcy proceedings as well as relevant obligations of state bodies. The state bodies authorised to carry on governmental control over insolvency matters in Uzbekistan are the Cabinet of Ministers and the Agency for managing state assets ("Agency").

Bankruptcy criteria

Pursuant to Article 3 of the Bankruptcy Law, the terms "bankruptcy" and "insolvency" are used interchangeably and are defined as debtor's incapacity to satisfy its monetary obligations or mandatory payment obligations. In order to be recognized insolvent by the court, a debtor shall meet twofold bankruptcy criteria:

  1. Inability to satisfy monetary obligations or mandatory payment obligations owed to creditors or state authorities for a period over 3 calendar months.
  2. The aggregate amount of debt owed by the debtor shall exceed 300 basic estimated values (BEV)1, i.e. approximately US$ 7,000.

It is important to note that the law does not require bankruptcy criteria to be associated with financial insolvency of a debtor, i.e. absence of any funds and assets to settle all accounts payable. The Bankruptcy Law supported by the latest judicial practice sets forth that any inability of a debtor to pay due to any "practical" reasons may lead to bankruptcy procedure. For instance, one of the precedents evidences that a debtor that owes debt denominated in foreign currency and has the required funds available in local currency to pay such debt, but fails to convert its funds into the necessary foreign currency, may still be found insolvent in Uzbekistani court. Although conversion related issues are no longer treated as a risk in Uzbekistan, judicial practice

shows that any practical inability of a debtor to pay may lead to initiation of bankruptcy proceeding that are likely to be supported in courts.

Initiation of bankruptcy proceeding

The bankruptcy proceeding in Uzbekistan can be initiated in the economic courts by the authorized persons as long as the above insolvency criteria are satisfied. The right to file a petition in court for initiation of such proceedings is vested in a debtor, a creditor, a prosecutor and, in case of mandatory payment, tax agency and other state authorities.

Moreover, it should be noted that the Bankruptcy Law, besides the right to initiate proceedings, also imposes an obligation to file a petition on initiation of proceedings to court upon the director of the debtor as soon as the bankruptcy criteria are met. For instance, Article 8 of the Bankruptcy Law obliges a company's director to file for bankruptcy if payment of one creditor's debts in full leads to inability of a company to pay another creditor's debts. In this case, a director of a company must file the bankruptcy lawsuit with an economic court no later than within 1 calendar month from the day this inability became apparent under the debtor's financial reports. A debtor's director who failed to fulfill this obligation may be brought to criminal liability since Uzbek law treats such failure as a concealment of bankruptcy. Depending on the circumstances of the case, this violation may lead to a criminal sanction in the form of a fine starting from 150 BEV (i.e. roughly US$ 3,500) or in the worst case scenario to an imprisonment for up to 3 years.

For a director to be able to bring such petition to court and initiate the proceedings a corporate decision on liquidation of the company shall be made. Such decision is usually adopted via general shareholders meeting (GSM) or by a sole participant. Depending on the type of a legal entity certain quorum shall be met when adopting such decision (for instance, in case of joint-stock company ("JSC") more than 75% of vote is required while for the limited liability company ("LLC") decision on liquidation shall be made unanimously).

All insolvency cases are resolved by the economic court - the state body that has an exclusive competence to hear bankruptcy cases in Uzbekistan. The term for initiation of bankruptcy proceedings usually takes 1 month, but it may be prolonged for an additional month.

Types of bankruptcy procedures

Once the petition by a debtor, a creditor, a prosecutor, a tax agency or other state authority is successfully filed with the economic court, the bankruptcy procedure is deemed initiated.

All procedures are carried out by court receivers (судебный управляющий). Depending on the type of procedure, a court receiver would have a different title (e.g. interim receiver, sanation manager, external manager and liquidation manager). The Bankruptcy Law and Decree of the Cabinet of Ministers "On measures to organize the activities of court receivers" No. 765 dated September 12, 2019, set out qualification requirements for a court receiver: a court receiver must have a higher education, at least 2 years of work experience and certification of the Agency etc. Moreover, court receivers must not be biased, i.e. somehow interested in the faith of either a debtor or a creditor. These are the primary factors considered by the economic courts before approving the decision on appointing of court receiver in each bankruptcy procedure. Furthermore, once appointed court receivers are automatically enrolled into professional associations of court receivers.

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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.

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