Taking Security In Kazakhstan

1. INTRODUCTION

Kazakh law provides for several methods of securing obligation. Obligations could be secured by penalty, pledge, surety, guarantee, deposit, withholding the debtor's property, guarantee deposit, and other methods stipulated by legislation or agreement (see article 292 of the Civil Code)1. Invalidity of a security agreement does not invalidate the main obligation. In contrast, invalidity of the main obligation would invalidate the obligation under security agreement, for security is an accessory obligation under Kazakh law. The most commonly used forms of security in Kazakhstan are pledges and guarantees. Though assignment is not strictly speaking a type of security under Kazakh law, it is quite often a part of a standard security package in international finance transactions. Also, in a typical project finance deal creditors require so-called "step-in" rights that enable them to appoint a nominee to undertake the project company rights together with the project company itself (with the project company remaining liable for all the obligations) or appoint a new obligor in the place of the project company to repay the amounts due to the lenders. These "step-in" rights enable the lenders to take over control of the project and implement the project by finding a long-term buyer, thus ensuring that the project continues generating revenues. It should be noted that Kazakh law does not recognise concept of "step-in rights". II. PLEDGE

Pledge is a type of security under which the creditor (the pledgee) has the right, in the event of failure by the debtor to perform obligation secured by the pledge, to receive satisfaction from the value of the pledged property, in a priority procedure before other creditors of the person to whom that property belongs (the pledgor), subject to exceptions stipulated by the Civil Code. As a rule pledge secures performance of obligations by the debtor up to their full performance. If the principal (secured) obligation is extended for the new tenor, correspondent amendments shall be made to the relevant pledge and, if such pledge was initially registered with the authorised state body, such amendments shall be registered as well. Under Kazakh law, pledges can be of two types: (1) mortgages; and (2) possessory charges. A mortgage is a type of pledge when the collateral remains in the possession of the pledgor or a third party. A possessory charge is a type of pledge when the collateral is transferred to the possession of the pledgee. An agreement governing creation of an asset security interest must contain a subject of the collateral, its value, nature, scope and maturity period of the obligation secured by such collateral. Agreement must also clearly identify a party which retains the collateral. The value of the collateral shall be indicated in national currency. Types of collateral and secured debt

In general, there are no restrictions as to the type of debts that can be secured. Also, it is possible to secure debts not yet existing (future or conditional), debts expressed in foreign currency, and even fluctuating debt. With limited exceptions, law does not limit the types of property that can be pledged. After-acquired assets may be pledged, as well as goods in turnover, such as inventories, raw material, semi-finished goods, and finished products. Creation and registration formalities

A pledge may be created by contract, either by a separate pledge agreement or through a clause in the agreement, which creates the secured debt. The pledge agreement must be in writing and must contain certain information prescribed by the law. Failure to observe the legislative requirements results in invalidity of the pledge agreement. Registration of a pledge over most types of movable assets is not required for the pledge to be effective. In contrast, security over immovable assets and certain registered movable assets (e.g., vehicles, aircraft and registered securities) must be registered in order to be effective. A pledge of other movable property is subject to mandatory registration only if the further pledge of such movable property is prohibited by the pledge agreement. While it is not obligatory to register pledges in relation to most movable assets, such registration grants the creditor priority right in the collateral. If two or more creditors obtain security interests in the same collateral (whether movable or immovable), law gives priority to security interests in the order in which they are registered and registered pledges generally have priority over unregistered ones regardless of the time of creation. Unregistered pledges generally have priority in the order in which they are created. Generally, it is possible to check registered pledges - for this purpose, the extract from the relevant register shall be requested. Accordingly, it will be necessary for the lenders to procure that the pledge/mortgage is registered with the relevant registration authorities to ensure that they have first priority security interest in the collateral. No further steps for perfection of security interest will be necessary. Any subsequent registered or unregistered pledge (or any prior unregistered pledge) by any third party pledgee over the same collateral will rank lower than the lenders' perfected security interest in the collateral. Registration of a pledge does not need to be renewed (unless either secured obligation or composition of collateral is amended). Registration authorities at the Ministry of Justice register pledge over most movable and all immovable assets. Depending on the type of pledged property, some authorities also register security (e.g. traffic police register pledges over vehicles, the Ministry of Agriculture registers pledges over tractors and certain other agricultural machinery, and an...