Project finance transactions involving foreign lenders require creation of a comprehensive security package covering all material assets and rights of claim of the project company. One instrument widely used in international practice is the Reinsurance Assignment Deed (the “RAD”) – an agreement pursuant to which rights under reinsurance contracts are assigned by way of security.
Project finance transactions involving foreign lenders require creation of a comprehensive security package covering all material assets and rights of claim of the project company. One instrument widely used in international practice is the Reinsurance Assignment Deed (the “RAD”) – an agreement pursuant to which rights under reinsurance contracts are assigned by way of security.
The RAD is of particular interest in transactions involving Kazakhstan insurance organisations, given that Kazakhstan law does not recognise a number of the legal mechanisms upon which the RAD is premised under English law. No publicly disclosed precedents for the use of a RAD involving a Kazakhstan insurer have been identified to date, which underscores the novelty of this instrument in the Kazakhstan market. This article examines the structure of the RAD, the delineation of applicable legal systems and the Kazakhstan law considerations arising in connection with its use.
As a matter of English law, the RAD constitutes an agreement for the assignment of rights of claim by way of security (an “assignment by way of security”). The principal parties to a RAD are the Kazakhstan insurance organisation (the “Assignor”) and the Security Agent, acting in the interests of the lending syndicate.
The composition of the parties to a RAD may vary depending on the structure of the particular transaction. In some cases, the borrower (project company) is also included as a party to the RAD. However, the borrower’s participation in the RAD is not legally necessary – its interests in this structure are minimal, and the principal obligations are assumed by the insurer. The provision of the borrower’s consent to the assignment is sufficient for the purposes of structuring this security without the need for the borrower to become a full party to the RAD.
The subject matter of the assignment (the “Assigned Property”) comprises the Kazakhstan insurer’s rights of claim against foreign reinsurers under reinsurance contracts. Having assumed risks under an insurance contract with the project company, the insurer transfers a portion of those risks to foreign reinsurance organisations. The insurer thereby acquires a right to claim payment from the reinsurers upon the occurrence of an insured event – it is precisely this right that constitutes the subject matter of the RAD.
Questions of validity, interpretation and performance of the RAD, including the characterisation of the assignment as an assignment by way of security, are determined by English law. Disputes arising out of the RAD are subject to the jurisdiction of the English courts or international arbitration.
Notwithstanding that the RAD is governed by English law, a number of issues inevitably engage Kazakhstan legislation, in particular as regards the legal status of the Assignor as a Kazakhstan legal entity and the subject matter of the assignment as rights of claim of a Kazakhstan insurer.
A Kazakhstan insurance organisation is entitled to enter into a RAD provided that the transaction does not conflict with Kazakhstan insurance legislation. Pursuant to Article 11 of the Law of the Republic of Kazakhstan dated 18 December 2000 No. 126-II “On Insurance Activity” (the “Insurance Activity Law”), insurance organisations are entitled to carry on only those types of activity expressly provided for by the Insurance Activity Law. However, the execution of a RAD constitutes an assignment of rights under pre-existing reinsurance contracts rather than the conduct of a new independent type of activity.
Since the reinsurers are foreign organisations and their obligations to the Kazakhstan insurer arose under foreign law, the assignment of rights of claim against them is governed by the applicable foreign law. Kazakhstan law does not prohibit such an assignment.
It should, however, be noted that Kazakhstan insurance legislation contains a number of mandatory requirements applicable to insurance organisations which operate as overriding mandatory provisions irrespective of the governing law chosen by the parties, by virtue of Article 1091 of the Civil Code of the Republic of Kazakhstan (the “Civil Code”). The most significant of these provisions are considered below.
The execution of a RAD by a Kazakhstan insurance organisation requires appropriate corporate authorisations in accordance with its constitutional documents and applicable Kazakhstan law. Depending on the value of the rights being assigned relative to the total asset value of the insurer, the transaction may require approval by the board of directors or the general meeting of shareholders on grounds provided for under the Law of the Republic of Kazakhstan “On Joint Stock Companies”, such as a major transaction (for example, where the value of the assigned rights amounts to 25% or more of the book value of the insurer’s total assets) or an interested party transaction. Additional approval requirements may be imposed by the insurer’s constitutional documents, as well as by prudential regulation applicable to insurance activities.
Principal Limitations of Kazakhstan Law in relation to the Mechanisms of the RAD
A RAD typically provides for the Assignor to grant to the Security Agent an irrevocable power of attorney. This structure is not achievable under Kazakhstan law for two reasons.
First, pursuant to Article 170 of the Civil Code, a principal is entitled to revoke a power of attorney at any time, and any waiver of this right is void. Accordingly, any attempt to render a power of attorney irrevocable has no legal effect under Kazakhstan law, irrespective of what the parties have agreed in the RAD.
Second, pursuant to Article 167 of the Civil Code, a power of attorney is a unilateral written authorisation granted by the principal to the attorney. Pursuant to Article 168(2) of the Civil Code, a power of attorney that does not specify its date of issue is void – meaning that the law presumes a power of attorney to have its own, separately fixed date of execution, distinct from the date of the agreement. Market practice likewise treats a power of attorney as a standalone document with its own particulars (number and date of issue), which an agreement subsequently references. Incorporating power of attorney provisions directly into the text of the RAD creates uncertainty as to whether a valid “issuance” of the power of attorney within the meaning of Articles 167–168 of the Civil Code has occurred, and is inconsistent with Kazakhstan market practice for documenting an agent’s authority.
A further practical limitation is the maximum period of validity of a power of attorney of three years, which necessitates its periodic renewal throughout the life of the financing. Failure to comply with this requirement may result in the power of attorney being invalid at a critical moment of enforcement.
That said, since the actual enforcement mechanism relies on direct recourse to the reinsurers rather than on the power of attorney, the practical significance of this limitation in relation to the specific structure of the RAD is limited.
A RAD traditionally contains a provision to the effect that any proceeds received by the Assignor in breach of the terms of the agreement are held by it on trust for the Security Agent. Kazakhstan law does not recognise the institution of a trust in the English law sense.
Articles 883 to 895 of the Civil Code provide for the institution of fiduciary management of property (doveritelnoye upravleniye), which is a fundamentally different construct – a contractual obligation to manage property rather than a proprietary right of the beneficiary over the trust assets. If this provision of the RAD were to be considered by a Kazakhstan court, it would be characterised as a contractual obligation to transfer the proceeds received, rather than as a proprietary right of the Security Agent over those proceeds. In the event of the Assignor’s insolvency, the Security Agent would be unable to assert a proprietary claim against the insolvency estate on the basis of this provision and would be entitled only to submit an unsecured creditor’s claim in the ordinary course.
The Practical Enforcement Mechanism and its Effectiveness
Notwithstanding the limitations of Kazakhstan law identified above, the RAD structure retains considerable practical value in transactions involving Kazakhstan insurers. The rights of claim against foreign reinsurers fall outside Kazakhstan jurisdiction.
Upon the occurrence of an Enforcement Event, the Security Agent gives notice directly to the foreign reinsurers. From the moment of receipt of such notice, the reinsurers are obliged to make payments directly to the Security Agent, bypassing the Assignor. The entire enforcement mechanism is implemented under foreign law in a foreign jurisdiction, without the need to apply to Kazakhstan courts or to obtain any authorisations from Kazakhstan regulatory authorities.
It is for this reason that proper notification of the reinsurers of the assignment is a critically important condition for the effectiveness of the RAD.
Conclusions
The RAD is not a typical instrument in the Kazakhstan market – no publicly disclosed precedents involving Kazakhstan insurers have been found. Its use is not contrary to Kazakhstan law, but the following points should be understood.
First, the RAD is governed by English law, which determines its validity and enforcement. Kazakhstan law is relevant only to the Assignor’s legal status as a Kazakhstan entity and to certain overriding mandatory provisions of Kazakhstan insurance legislation.
Second, the RAD’s provisions on a receiver, an irrevocable power of attorney and a turnover trust have no legal effect under Kazakhstan law. These are standard English law security concepts that have not been adapted to the Kazakhstan legal system. Note in particular that a contractual receiver under English law is fundamentally different from temporary administration under Kazakhstan insurance legislation – they serve different purposes and arise on different grounds.
Third, the RAD’s real value lies in the Security Agent’s direct recourse to the foreign reinsurers on an Enforcement Event – a mechanism carried out entirely abroad, without engaging the Kazakhstan legal system at all.
Fourth, the lack of public precedents does not mean the instrument is impermissible. It simply reflects the confidentiality of project finance documentation and the relative immaturity of Kazakhstan’s market for large foreign-lender-backed projects. As that market develops, the RAD is well placed to become a standard security instrument for transactions involving Kazakhstan insurers.
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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