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27.08.2020

Business Ombudsman: «Business owners should not pay with their property for the mistakes of officials»

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«Business owners will simply not be protected, if they have to pay with their property for mistakes made by LLP officials. All this will lead to an increase in bankruptcies and a drop in business activity», Business Ombudsman, Rustam Zhursunov, wrote on his Facebook page.

«During the bankruptcy procedure of a company, a legal instrument is provided to ensure the rights of creditors - subsidiary liability of its founders and management. This is an additional responsibility of the owners of the company, who are responsible with their property for the obligations of this company (in case the property of the company is not enough to pay off its debts).

As you know, in limited liability partnerships the authorized capital is divided into shares, and the participants (owners) of the LLP are not responsible for its obligations and bear the risk of losses associated with the LLP’s activities, within the limits of their contributions. However, there may be exceptions to the bankruptcy procedure.

For example, if the partnership does not have or does not have enough property to pay off debts, then the amount of the remaining debt of the partnership can be recovered from the personal funds of the participants (Clause 1 of Article 6 of the law on Rehabilitation and Bankruptcy). The law provides for such a possibility only if it is proved in the order of administrative or criminal proceedings that it was the actions of its participants that led to the bankruptcy of the partnership.

Over 3.5 thousand bankruptcy cases are initiated in Kazakhstan annually. In 2017-2019, under Article 238 of the Criminal Code “Intentional bankruptcy,” 59 cases were registered and only 4 were sentenced (only in 2019). For the first half of 2020, 11 cases were registered, not a single one was submitted to the court.

According to Artitcle 182 “Intentional bankruptcy” of the Code of Administrative Offenses in 2017-2019, 63 cases were registered, 23 administrative penalties were imposed. For the first half of 2020, there is not a single administrative penalty.

This means that cases of bringing to subsidiary liability in the event of deliberate bankruptcy are not widespread in practice. Nevertheless, I receive applications from business owners that they were brought to subsidiary liability, despite the absence of administrative or criminal proceedings.

The law on rehabilitation and bankruptcy (Clauses 2, 4 of Article 11) provides for a number of obligations, for failure to fulfill which an official of the LLP (manager, his deputy, chief accountant, etc.) may be brought to subsidiary liability.

It turns out that if for deliberate bankruptcy (in the presence of a court ruling or verdict that entered into force), both officials and founders (participants) of the LLP can be brought to subsidiary liability, then for violation of the requirements of paragraph 2 of Artitcle 11 of the law on rehabilitation and bankruptcy - only the officials of the LLP, whose duties include the fulfillment of a number of requirements.

 

The founder (participant) of the legal entity or the owner of its property is not responsible for its obligations, and the legal entity is not responsible for the obligations of the founder (participant) of the legal entity or the owner of its property, except for the cases provided for by the code, other legislative acts or the constituent documents of the legal entity (Clause 2 of Article 44 of the Civil Code).

Hence, the question of the validity of bringing business owners (founders, LLP participants) to subsidiary liability under Article 11 of the Law on Rehabilitation and Bankruptcy. The operational activities of the LLP are carried out by its officials. They can act in bad faith: withdraw assets from the company, destroy its reputation, in general, and lead the company to bankruptcy. The owner should not be held responsible for such actions of the director.

December 27, 2019 in Article 11 of the Law on Rehabilitation and Bankruptcy were significantly amended. For example, the rule (previously Clause 4 of Article 11 of the Law) was excluded, according to which in the event of a violation of the law by the founder (participant) of the debtor, the owner of the property or officials of the debtor, these persons would be brought to appropriate responsibility with compensation for losses caused as a result their actions.

I believe that this very rule could serve as the basis for an ambiguous understanding and incorrect application of paragraph 4 of Article 11 (previously Clause 5 Article 11) of the Law.

At my disposal there are facts, for example, in the Mangystau region, when it was the participants of the LLP that were brought to the subsidiary liability. There is a situation in which the owners of companies are forced to answer the debts of companies with personal property without the grounds provided for by law, which can occur in exceptional cases that are clearly regulated by law, and cannot be a widespread practice, in particular, in relation to limited liability partnerships.

 Any business carries risks; any entrepreneur is responsible for the consequences of decisions made. But the risk factor increases especially during periods of an unstable state of the economy and the presence of such discrepancies in legislation.

The very essence of the legal nature of limited liability partnerships is that the property liability of its founders (participants) should be limited to the contributions made by them. Otherwise, the very meaning of LLP functioning is nullified. Business owners simply will not be protected if they have to pay with their property for mistakes made by LLP officials. All this will lead to an increase in bankruptcies and a drop in business activity.

I have already addressed this issue to the Chairman of the Supreme Court, Zhakip Asanov. In my opinion, it is now important to take measures to improve judicial practice to bring the participants (founders) of the LLP to subsidiary liability. Otherwise, the business climate in Kazakhstan will soon deteriorate so much that many entrepreneurs will give up doing business altogether.

P.S. Dear Entrepreneurs! If you are faced with such a problem, please contact me, my office is ready to take these materials into work and bring each one to its logical conclusion. Together with the Supreme Court, we have implemented more than one project, and the leadership of the Supreme Court really adheres to the concept of a hearing state and these proposals will at least be considered, scrupulously and impartially», wrote Rustam Zhursunov.

«...Domestic business, the so-called national bourgeoisie, should be supported in every possible way, and those who prevent its development by unreasonable inspections, extortions, raids should be strictly punished...»

Statement from the President of Kazakhstan Kassym-Jomart Tokayev at an enlarged meeting of the Government on 15 July 2019

Zhursunov R.M.

Ombudsman for the Protection of the rights of Entrepreneurs of RK

The blog of the Ombudsman for the Protection of the Rights of Entrepreneurs of Kazakhstan was created for you to have an opportunity to appeal directly to me and I hope that it will contribute to a constructive dialogue between us – send me feedback, share opinions, make suggestions. All your comments without exception will be read by me.

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