Bankruptcy settlements

13 November 2015 saw the adoption of the Republic of Kazakhstan Law to Amend Certain Legislative Acts of the Republic of Kazakhstan on Rehabilitation and Bankruptcy (hereinafter referred to as the Law). Specifically, the Rehabilitation and Bankruptcy Law received a new chapter, 6-1, Settlement, which enables the debtor and creditors to make a settlement agreement at any stage of bankruptcy proceedings in order to discontinue bankruptcy proceedings. The effective date of the amendments is 2 December 2015.

A statutory definition of settlement is given in s. 8-1, art. 1 of the Rehabilitation and Bankruptcy Law: settlement is a procedure used at any stage of bankruptcy proceedings for the purposes of bringing same to an end by an agreement executed between the debtor (bankrupt) and creditors subject to court approval.

Note that a bankruptcy settlement has some unique features that distinguish it from civil and arbitrazh settlements. They include, for example:

1) a special procedure for settlement. The decision to settle is made and the settlement agreement is signed for the bankrupt by the property owner, the incorporator (member) of the bankrupt and the official receiver, and for the creditors by the creditors’ meeting. Thereafter, the settlement needs to be approved by court. No settlement may be approved by court until after senior creditors have been paid. A settlement approval application shall be filed with the court by the official receiver within 5 working days of the settlement resolution by the creditors’ meeting;

2) the option for the settlement agreement to be joined by third parties who accept the rights and duties provided for in the settlement agreement. This can mean, for instance, a surety or a guarantor, who provide a suretyship or guarantee for the due performance by the debtor under the settlement agreement. The settlement agreement shall be signed by said parties in person or through authorized signatories;

3) terms and conditions of settlement. A settlement can be conditioned on: a) a grace period and/or an instalment plan for the bankrupt; b) assignment of the bankrupt’s receivables; c) performance of the bankrupt’s obligations by third parties; d) novation; e) swap of creditor claims for the bankrupt’s equity interests subject to the statutory restrictions of the Republic of Kazakhstan; f) other arrangements not inconsistent with the current legislation.

As we can see, the list of options to satisfy creditors is not exhaustive; the parties have discretion to provide in the settlement agreement for other arrangements to satisfy creditors.

Where a settlement is made with a public authority as one of the creditors, a settlement agreement can provide for a grace period of for up to one year after the approval of the settlement to repay the debt to the public authority.

The settlement agreement must detail the extent, procedure and time limits for the performance of the bankrupt’s obligations and/or discharge of his obligations to the creditors.

4) implications of court approval of settlement. Court approval of a settlement provides authority to discontinue the bankruptcy proceedings. As of the effective date of court approval of settlement: a) the bankruptcy order shall be set aside; b) the official receiver shall be taken off the case; c) no further effect shall be given to the bankruptcy consequences provided for in art. 87 of the Law.

5) procedure for settlement agreement cancellation and its implications. A settlement agreement is not binding on the parties, and the parties can have it cancelled by the court.

A settlement can be cancelled by court order in respect of all creditors if requested by a creditor (creditors) accounting as at the date of filing for a minimum of twenty-five per cent of the total claims on the list of creditors, as well as in the event of a default on the settlement agreement by the debtor and/or third parties in respect of such creditors. It is forbidden to cancel a court-approved settlement between individual creditors and the debtor.

A court having ordered the cancellation of a settlement agreement, a new bankruptcy proceeding will be instituted under the general procedure set out in chapter 6 of the Rehabilitation and Bankruptcy Law.

Note also that a reversal of court approval of settlement or cancellation of settlement agreement does not require senior creditors to refund the bankrupt whatever has been received by them towards debt repayment and extinguishes the debt to the creditors whose claims have been discharged under the settlement.

Thus, settlement in bankruptcy proceedings is primarily designed to rehabilitate the debtor by restructuring his debts.

Saida Shukurova

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