Kazakhstan: Facilitating Recovery by Improving Insolvency Systems

The World Bank, under the Joint Economic Research Program (JERP), is providing technical assistance to the government of Kazakhstan to amend the law on bankruptcy, and draft a new law on rehabilitation and insolvency, which if successfully implemented, will help preserve financial stability and jobs, and boost the economic growth of the country.

Insolvency procedures are a way of dealing with the natural exit of firms from the market that occurs due to loss of capital, revenue, and credit. An effective corporate insolvency system seeks to ensure the most efficient use and allocation of economic value, by liquidating enterprises that have no prospect of recovery, whilst restructuring distressed businesses that are viable and could contribute to economic growth in the long run.

Corporate insolvency laws, policies and regulations play an important role in the economy and in society in general, and in the business environment in particular. This is also important at times of financial turmoil.

Before the reform process began, the Kazakhstan Law on Bankruptcy was heavily weighted in favor of strict piece meal liquidation -- assets were sold individually many times undervalued. Rehabilitation procedures were rarely used. The number of rehabilitation cases was very low in 2009 (14 companies representing 0.6 per cent of bankruptcies) and 2010 (43 companies representing 2 per cent of bankruptcies).

Small and medium sized enterprises (SMEs) are especially vulnerable as the legal process is lengthy and costly, so bankruptcy often is a viable option. An effective insolvency framework can make it easier for SMEs to restructure their financial position.

As a first stage in the reform process, in early 2012, the Kazakh Parliament passed preliminary amendments to the Law on Bankruptcy aimed at facilitating business rehabilitation. Most of the newly introduced provisions have already produced positive results.

 “As of January 2013, there are 131 enterprises under rehabilitation, including 56 (43.4 percent)… within the frames of the new legislation. Rehabilitation of 20 enterprises was completed. There are 11,151 jobs saved, and debts in the amount of KZT 1.2 billion have been repaid,” said Nurila Usenova, Chairperson of the Committee for Insolvent Debtors of the Ministry of Finance.   

For the second phase, the Bank helped draft a new Law on Rehabilitation and Insolvency, consistent with international standards.

“The new draft Law will expand these improvements by introducing changes in the procedural structure of the insolvency system to offer more protection to creditors and to the assets of the debtor and accelerate the access to the insolvency proceedings (rehabilitation or liquidation),” said Bakhytbek Tashenev, Director of the Department for Planning and Methodology of Managing Public Assets and Insolvency Procedures, Analysis and Assessment of Corresponding Budget Programs of the Ministry of Finance.

With efficient use of judicial resources in place, the new insolvency legislation will stimulate expansion of access to credit at affordable rates (in particular, for small and medium size enterprises), and boost foreign and local investment.

To complete the reform process, future World Bank technical assistance, following the JERP programmatic nature, will be focused on insolvency of individuals.