February 11, 2021
Reorganization of legal entities in the Republic of Kazakhstan: protection of creditors’ rights
- Challenging the reorganization of legal entities
- Guarantees of the rights of creditors of the reorganized legal entity
1. Challenging the reorganization of legal entities
The reorganization of a legal entity is a complex process regulated by law that entails a change in the legal and (or) property status of a legal entity participating in the reorganization process, with the obligatory occurrence of specific legal consequences. By default, as a matter of course, it is generally accepted that a legal entity lawfully carries out the reorganization procedure without violating the rules prescribed by law, and only due to compliance with these rules, this legal entity is considered lawfully reorganized. It follows from this that violation of at least one of the conditions of reorganization entails its recognition as invalid or, in other words, illegal.
The current legislation does not contain any generalizing or clarifying definition of the concept of invalid reorganization. The literal interpretation of the legislation (note – the Law on LLP and TCO) regulating the reorganization procedure allows us to determine and state the following fact: challenging the reorganization is possible both at the stage of reorganization and after the completion of the reorganization procedure. However, the legal problem is that the legislator grants such a “preferential” right only to the participants of a legal entity. It follows from this that the creditors of the reorganized legal entities are in a discriminatory position. After all, there are often cases when the reorganization is carried out by unscrupulous participants or the intentions of such entities do not meet the real goals of a legitimate reorganization. In this case, the legislation does not provide a guarantee for creditors, and the latter are not entitled to file a statement of claim to invalidate the decision on reorganization or to recognize the reorganization as generally illegal.
Challenging the reorganization of a legal entity is possible in case of violation of the legally established procedure for reorganization and (or) violation of the rights of the persons participating in it. According to article 50 of the Law on LLP and TDO, the decision on the reorganization of a legal entity can be declared invalid by the court in whole or in part at the request of a participant in the partnership. The interpretation of this article makes it possible to determine the following important aspects:
– subject (an entity) that has the right to apply to a judicial authority with a statement of claim declaring the decision of the general meeting on reorganization invalid: 1) a participant in the partnership who did not participate in the voting; or 2) a participant in the partnership who voted against the reorganization;
– the objective side: 1) violation of the procedure for holding a general meeting and making decisions; 2) contradiction with the law or the charter of the partnership; 3) violation of the rights of a participant in the partnership;
– the period during which a participant in the partnership has the right to apply to the court with a statement: six months from the day when the participant in the partnership learned or should have learned about the decision, and with direct participation in the general meeting – within six months from the date of this decision by the general meeting.
Consequently, the literal interpretation of Article 50 of the Law on LLP and TCO makes it possible to determine discrimination in the rights of creditors of the reorganized legal entity, since there is an imbalance in the rights of the reorganized legal entities and their creditors. It is interesting that, despite the pursuit of unfair goals by the reorganized legal entity, creditors are not entitled to file a claim with the court to invalidate the decision on reorganization.
1.1. General meeting of LLP participants: practice of invalidating a decision on reorganization
The body or person (persons) convening the general meeting of the participants of the legal entity must comply with all regulations governing the procedure for convening and holding the general meeting. As can be seen from the analysis of the legislation, the basis for recognizing the reorganization as invalid is the decision on the reorganization, adopted within the framework of the general meeting of participants.
It is interesting to consider the judicial practice regarding the invalidation of the decision on reorganization. The analysis of the bank of judicial acts made it possible to determine that, in quantitative terms, statements of claim related to the issue in question do not prevail over other claims. Either this fact is ascertained by the real absence of illegal reorganizations, in which the procedure was carried out without violating the rights of the participants of the legal entity, or the reason for this is legal illiteracy or ignorance of the participants. So, it is necessary to consider in more detail the most striking example from judicial practice, reflecting the application of the rules on challenging the decision on reorganization.
The specialized interdistrict economic court of the city of Ust-Kamenogorsk has considered the case of N.V. Khlebnikova three times over the course of two years. (hereinafter – the Claimant) against LLP “Efimov” (hereinafter – the Defendant 1) and LLP “Mileiko” (hereinafter – the Respondent 2) on the recognition of the decision of the extraordinary general meeting of October 27, 2017 as illegal, the recognition of the transfer of property as illegal, on the cancellation of order No. 20 of January 30, 2018, State Institution “Department of Justice of the Glubokovsky District of the East Kazakhstan Region” created in the process of reorganization. It is known from the circumstances of the case that the Claimant is a member of Efimov LLP. As indicated earlier, according to article 50 of the Law on LLP and TDO, only the participants of a legal entity have the right to apply to the judicial authority with an application for recognizing the decision on reorganization as invalid. The authorized capital of Respondent 1 was formed by introducing the rights of individuals for temporary long-term land use (lease) to a conditional land share – the participants of the partnership, including the Claimant, have legal rights to the subject of the authorized capital, which is confirmed by the relevant certificate. Considering the circumstances of the case, the court concluded that there was no offense in the procedure for calling the meeting, since the Claimant was lawfully notified thirty days before the opening day of the meeting by the body convening the general meeting of the holding of the general meeting of participants on October 27, 2017 with a clear indication of the agenda: On the reorganization of Efimova LLP by merging with Mileiko LLP, on the approval of the transfer act, on the approval of the merger agreement. Moreover, the announcement of the convocation of the general meeting was published on September 26, 2017 in the Yuridicheskaya Gazeta newspaper, as regulated in paragraph 1 of Article 46 of the Law on LLP and TDO, that the partnership has the right to additionally inform the participants through the media. So, the convocation of a general meeting has no signs of an offense, since all participants in the partnership are duly aware of the upcoming general meeting and are familiar with the agenda of the meeting. Despite the absence of violations of the procedure for holding a general meeting, the court satisfies the Claimant’s claim, since there was a violation of the rights of participants. The reason for this was the failure by the Defendant of 1 interim measure imposed by the court on October 10, 2017 in the form of a ban to the head of LLP “Efimov” Mikhailova L.A. and the participant of LLP “Efimov” Kremmel T.A. take actions to hold a general meeting of participants scheduled for October 27, 2017 (note – on October 18, 2017 L.A. Mikhailova and T.A. Kremmel duly received the definition of the SMES of Ust-Kamenogorsk). However, Defendant 1 violated the provision of part 2 of Article 21 of the Civil Procedure Code of the Republic of Kazakhstan (hereinafter referred to as the Civil Procedure Code of the Republic of Kazakhstan), according to which, a court ruling that has entered into legal force is mandatory for a legal entity (note – LLP “Efimov”) and is subject to strict execution throughout the territory Republic of Kazakhstan. This violation in the form of failure to comply with the court ruling led to a violation of the rights of the participants, in connection with which the court satisfied the Claimant’s claim. Moreover, the recognition by the court of the decision on the reorganization of a legal entity as illegal entails the invalidation of the deed of transfer of property from LLP Efimov to LLP Mileiko.
Earlier, in 2016, the SMES of Ust-Kamenogorsk considered a similar statement of claim with a request to invalidate the decision to reorganize Efimov LLP in the form of a merger with Mileiko LLP. The court satisfied the Claimant’s claim, but the grounds for making such a decision were different. The body that convened the general meeting in the appropriate manner notified the participants of Efimov LLP about the forthcoming holding of the general meeting of participants, indicating four issues discussed on the agenda. However, thirty days before the opening of the meeting, he published information in the press about the upcoming general meeting of participants, indicating five issues from the agenda of the meeting, including the consideration of the issue of reorganizing a legal entity. The plaintiff based his position on the fact of ignorance about the consideration of this issue – about the reorganization of the legal entity in the form of a merger with Mileiko LLP. However, Respondent 1 referred to the publication of the information in the newspaper. Although the law stipulates that participants must be notified in advance (approx. – thirty days before the opening of the meeting) and in writing about the upcoming general meeting of participants and about all issues discussed on the agenda. The publication of such information is only an additional means, but in no way a primary means or a substitute for written notification. On the basis of the fact of violation of the procedure for convening and holding the general meeting, the court satisfied the requirement to declare the decision on reorganization invalid and, accordingly, to declare the transfer act illegal.
Thus, the participants in a legal entity have the right to challenge the decision on reorganization by filing a claim with the court. In case of violation of the procedure for holding a general meeting and making decisions; contradiction of the decision with the law or the charter of the partnership; violation of the rights of the participants in the partnership, the court resolves the issue of the legality of the decision to reorganize the legal entity. The legal problem is that the entity that has the right to challenge the decision of the general meeting is a participant in the reorganized legal entity. The starting point in the development of legislation in this direction should be the need to ensure equal protection of the rights of both the legal entity itself and its participants, and creditors.
2. Guarantees of the rights of creditors of the reorganized legal entity
The reorganization of a legal entity, through the prism of the legislator’s vision, should not only pursue good faith goals, but the achievement of these goals should not in any way infringe on the rights of the creditors of the reorganized entity.
Analysis of the norms of the current legislation makes it possible to determine the following 3 (three) types of legal guarantees of the rights of creditors whose debtors are the reorganized legal entities:
- the right to information or the right to be informed;
- the right to demand early termination of the obligation and compensation for losses;
- the right to demand joint and several performance of obligations.
- It is important to make it clear that the last two “guarantee” rights have particularities in their application, since they are not projected onto all forms of reorganization and have their own nuances.
2.1. The right to information or the right to be informed
The right to information, or, in other words, the right to be informed is regulated both in the civil code and in the Law on LLP and ALP. According to paragraph 1 of Article 48 of the Civil Code of the Republic of Kazakhstan, the owner of the property of a legal entity or the body that made a decision on the reorganization of a legal entity is obliged to notify the creditors of the reorganized legal entity about this in writing. Special laws governing legal relations arising in the process of reorganization of a limited liability partnership or joint stock company supplement the above requirement for written notification of creditors about the reorganization in terms of the timing of notification, attached documentation and the fulfillment of an additional condition. In order to identify similar and different features, one should separately consider the guarantees of the rights of creditors, both in legal relations with a limited liability partnership and with a joint stock company.
The Law on LLP and ALP stipulates not only the obligation of the reorganized legal entity to notify the creditor in writing, but also the mandatory publication in the official press of information about the decision to reorganize. It is important to note that the guarantee of the rights of creditors, in particular, the right to be informed about the upcoming reorganization, is not provided for in the implementation of the reorganization in the form of transformation. At the legislative level, the period within which the partnership is obliged to notify the creditors of the reorganization is clearly established – within two months from the date of the adoption by the general meeting of the participants of the decision on the merger, acquisition, division or separation. Consequently, the partnership, after making a decision at the general meeting of participants on the reorganization, is obliged to notify the creditors in writing within two months, and also to publish such a statement in the official press. Establishing a time frame, as well as referring such a condition to an “obligation” (note – not under the category of “law”), without which it is impossible to carry out state registration of newly formed legal entities, certainly speaks of the provision of protection of the rights of creditors. Of particular interest is the requirement of the legislator in relation to the documentation sent to the creditor together with a written notice. So, when reorganization is carried out in the form of division or separation, the reorganized partnership is obliged to attach a separation balance sheet, information about the company name, location and address of each of the newly emerging partnerships. In the case of reorganization in the form of a merger or acquisition, on the contrary, the reorganized legal entity is exempted from the provision of a deed of transfer, but undertakes to submit a draft merger or acquisition agreement. It should be assumed that the draft agreement contains comprehensive information necessary to provide a guarantee of the rights of creditors, since awareness of the quantitative component of the balance of the reorganized participants will allow the latter to predict the real possibility of fulfilling obligations by the reorganized debtor.
2.2. The right to demand early termination of the obligation and compensation for losses
One of the most significant types of guarantees for the rights of creditors of a reorganized legal entity is the right to demand early termination of an obligation and compensation for losses.
However, in the course of the legal analysis of this “guarantee” right, a difference in the interpretation of the norms reflected in the Civil Code of the Republic of Kazakhstan and the Law on LLP and ALP was revealed. An interesting approach of the legislator consists in providing a guarantee of rights to creditors of a legal entity reorganized only in the form of division or separation.
Should it be assumed that creditors of legal entities reorganized through mergers or acquisitions are deprived of this guarantee of rights? Possibly, the legislator proceeded from the position that during a merger or acquisition, the assets of a newly formed legal entity are enriched to such limits that guarantee the fulfillment of obligations to creditors, both reorganized legal entities and newly formed ones. This position does not always justify such an expectation, since, often, reorganized legal entities and their successors have in their “arsenal” a considerable number of creditors and, in the aggregate, do not have sufficient property to fulfill their obligations to the latter. The literal interpretation of Article 48 of the Civil Code of the Republic of Kazakhstan makes it possible to determine that the creditors of reorganized legal entities in the form of a merger or acquisition are in a rather discriminatory position, since, according to the norms of the code, only creditors whose debtors carry out reorganization in the form of division or separation are entitled to protect their rights through claims for early termination of the obligation and compensation for losses.
The Law on LLP and ALP clearly regulates the right of creditors to demand from the partnership not only early termination and compensation for losses, as reflected in paragraph 2 of Article 48 of the Civil Code of the Republic of Kazakhstan, but also the provision of additional guarantees for the performance of obligations (note – in the case of reorganization in the form of a merger or acquisition ) or early fulfillment of obligations together with compensation for losses. It is important to note that such an extended right or guarantee of rights is provided for creditors whose debtors are limited liability partnerships that are reorganized, both in the form of division or spin-off, and in the form of merger or acquisition. The only caveat lies in the choice of only one of the rights presented by the creditors.
2.3. The right to demand joint and several performance of obligations
The right to claim joint and several performance of obligations is the third type of legal guarantees provided to the creditors of the reorganized legal entity.
In accordance with paragraph 3 of Article 48 of the Civil Code of the Republic of Kazakhstan, if the separation balance sheet does not make it possible to determine the legal successor of the reorganized legal entity, or if the legal successor does not have enough property to fulfill obligations that arose before the reorganization, the newly formed legal entities, as well as the legal entity from which another legal entity is separated, bear joint responsibility for the obligations of the reorganized legal entity to its creditors.
The right to demand joint and several fulfillment of obligations is granted only to creditors whose debtors are legal entities reorganized in the form of division or separation. Cases are not excluded when the separation balance sheet does not allow to accurately determine the legal successor of the reorganized entity, in view of which the legislator, in order to provide a guarantee of the rights of creditors, determined both the reorganized legal entity and its legal successor to be joint debtors for obligations that arose to the creditors of the reorganized entity. The presence of this provision casts doubt on the mechanism of state registration of a legal entity created through reorganization. After all, the occurrence of such a case when there is no provision on legal succession for the obligations of the reorganized legal entity or similar succession is not clear and accurate in the separation balance sheet, a priori is not allowed and is illegal, which excludes both state registration and reorganization in general. This peremptory norm makes it possible to state another type of guarantees of the rights of creditors of a reorganized legal entity: failure to submit a deed of transfer or separation balance sheet together with constituent documents, as well as the absence of provisions on legal succession in them, entails refusal of state registration of newly emerged legal entities.
3. Guarantees of the rights of creditors of a reorganized legal entity: foreign practice
The guarantees of the creditors’ rights of the reorganized legal entity do not fully meet the initially set goals, as a result of which creditors remain “in the shadows”, not having sufficient rights. The presence of only three points in the Civil Code of the Republic of Kazakhstan is not sufficient to achieve efficiency in providing guarantees for the protection of the rights of creditors of a legal entity during reorganization. Moreover, the process of reorganization of legal entities is a rather complex mechanism, since it is necessary to take into account the interests of not only the participants in the reorganization, but also the creditors, maintaining a balance of rights and interests. Domestic legislation is not perfect enough and requires improvement in terms of guaranteeing creditors’ rights. In order to improve the legislation on this issue, it is interesting to analyze foreign legislation, taking into account innovations that may be useful for our legislation.
The French Commercial Code does not include the concept of “reorganization” in relation to legal entities. However, there are concepts and phenomena that, according to their description, coincide with our understanding of the legal procedure for “reorganization”. Thus, Chapter VI of Title III of the Commercial Code regulates the process of merger and division. In particular, according to article L.236-1, “one or several partnerships may, by merger, transfer their property to an existing partnership or a new partnership that they establish. A partnership can also transfer its property by division to several existing partnerships or to several new partnerships”. Moreover, in accordance with Article L.236-3, the merger and division of legal entities entails the automatic liquidation of the partnership, but, at the same time, the property of this partnership is not liquidated, but transferred in full to the recipient partnership in the same state in which it is was at the time of the final operation. Consequently, for the creditors of legal entities reorganized in the form of a merger, the debtors are the newly formed, or, in other words, the acquired partnership. As you know, a merger or takeover is not an absolute guarantee that the asset of a newly formed legal entity will grow so well that it contributes to the “painless” fulfillment of obligations and debt coverage to creditors of both the merging legal entity and the affiliated one. Compared to Kazakh law, French law gives creditors the right to file an objection in court within 30 days after the merger is published. This right is provided in order to avoid a situation where the lack of property of one legal entity will financially weaken another partnership or company, as a result of which adverse consequences for creditors will occur. Only the court has the right to decide on the immediate fulfillment of obligations to creditors or the provision of sufficient guarantees.
German legislation contains legal norms according to which reorganized legal entities are obliged to inform creditors about the reorganization that has already taken place by registering in the trade registers each entity participating in the reorganization procedure. Whereas, according to domestic legislation, prior to the completion of the reorganization procedure and state registration of newly formed legal entities, advance written notification of creditors and publication in the official print media is required. It is important to note that such registers are maintained by courts located at the location of each of the reorganized legal entities. Further, after registration in the commercial register of the court, an announcement must be published in the daily newspaper and in the Bulletin of Official Announcements – Bundesanzeiger. Printing information about the reorganization in two sources and registering in the commercial register gives the creditor the right to be informed and have an idea of the debtor to whom the obligations were transferred. The difference with our legislation is that creditors are not entitled to demand early performance or repayment of obligations, since the guarantee of creditors’ rights lies in joint and several liability provided by German law. However, in the event of reorganization in the form of a merger, creditors, in the presence of real and well-grounded evidence of the existence of risks of default by the debtor, have the right to demand the provision of guarantees for the performance of obligations within six months after the registration of the legal entity.
Experience of Spanish legislation, which is notable for providing extensive guarantees of rights to creditors of reorganized legal entities. In Spain, creditors have the right to object to a merger or division, even if the decision to reorganize was taken and approved at a general meeting and published in the press. So, the guarantee of rights is provided by the connecting or receiving legal entity. Moreover, if the reorganized or newly formed legal entity does not have sufficient property to fulfill its obligations and ceases to exist, the guarantee is provided to the credit institution. Until the entities participating in the reorganization provide the required guarantees of rights to creditors, the merger agreement will not enter into force. Otherwise, creditors have the right to demand immediate fulfillment of obligations. Consequently, the creditors of the reorganized legal entity have a fairly wide range of guarantees for the protection of rights.
Thus, the most urgent, and requiring special attention, is the problem of providing protection of the guarantee of the rights of creditors of the reorganized legal entity. The current legislation provides creditors with the following legal guarantees: the right to information or the right to be informed; the right to demand early termination of the obligation and compensation for losses; the right to demand joint and several performance of obligations. Also, this list can include the fact that, in the absence of information on succession in the transfer act or dividing balance sheet, the state registration of the newly formed legal entity is not carried out. A study of the legislative practice of countries such as France, Germany and Spain in relation to the protection of creditors’ rights during reorganization allowed us to determine that the experience of German legislation is a positive experience. In particular, granting the creditors of an already reorganized legal entity the right to file a claim and demand security with a guarantee for the performance of obligations within six months after the reorganization. Also, the Spanish experience is also useful, according to which, upon termination of activities of both a reorganized and a newly created legal entity, a credit institution provides an additional guarantee, acting in the person of the debtor as the creditor of the reorganized entity.
 The decision of the Specialized Interdistrict Economic Court of the city of Ust-Kamenogorsk dated May 25, 2018 in the case of N.V. Khlebnikova to LLP “Efimova”, LLP “Mileiko” on the recognition of the decision of the extraordinary general meeting of October 27, 2017 as illegal, on the recognition of the transfer of property deed illegal, on the cancellation of the order (Decision No. 2-1167 / 2018).
 Commercial Code of France / Preface, trans. with fr., add., reference dictionary and comments. V.N. Zakhvataeva. – P .: Walters Kluver, 2008 .– P. 308.
 Nye Hans-Werner. European law of commercial companies // Fundamentals of German commercial and economic law: Collection. – P., 1995.
 European law: Textbook for universities / Under total. ed. prof. L.M. Entina. – P., 2000.