Certain Aspects Of Law Enforcement In The Courts Concerning Financial Lease (SIGNUM)

 

 

In this article, we would like to address some of the issues that lessors face in the protection of their interests concerning financial property lease in Kazakhstan courts.

In 2016, we participated in around 20 lawsuits—which can now be viewed as case studies—on the lessee’s default in performing the obligations in financial lease agreements. In view of these cases, we would like to point to certain issues that may arise in the courts. That being said, we do not aim to cover all the issues on financial lease litigation.

The Kazakhstan courts tend to neglect the statutory provisions on lease and have stated that lease activities fall under the legal and economic regime of investment activity[1]. Hence, lessors are granted full and unconditional protection[2] of their rights and interests, as secured by all Kazakhstan regulatory legal acts.

This is reflected in the fact that the courts tend to unfoundedly align themselves with the lessees in the consideration of the lessors’ claims.

Unreasonable Size Reduction of the Penalty Accrued Due to Untimely Performance of the Obligations by the Lessee

One of the main problems in financial lease relations is the lessees’ violation of the lease payments terms, even including the complete cessation of payments.

In order to ensure the lessee’s timely performance of his financial obligations, the parties provide for contractual and financial lease penalties and the procedure for the accrual thereof. Accordingly, the lessee, upon signing the financial lease agreement: first, assumes the obligations of timely lease payments; and second, as a security in the event of non-compliance with these obligations, undertakes to pay the penalty in the amount set by the agreement.

However, despite the fact that issues of charging and levying penalties are directly regulated in the financial lease agreements, the courts, guided by Article 297 of the Kazakhstan Civil Code, would generally reduce the amount of the leviable accrued penalty, substantiating it by the fact that the penalty is extremely high compared to the losses of the creditor. At the same time, the reduction can be considerable (up to 10% of the claimed penalty).

Thus, one can draw the following conclusions:

First, there is no assessment of the lessor’s losses arising from the lessee’s failure to perform its obligations (including untimely performance) to make the lease payments, and the subsequent termination of the lease agreement through the lessee’s fault. The courts maintain the basic attitude that, if at the time of the decision the lessee has already repaid the principal debt on the lease payments, then the lessor’s losses are not severe. At the same time, the lost profit of the lessor, which also relates to the overall loss, the direct losses of the lessor due to the early termination of the agreement, the servicing of loans related to the acquisition of the leased asset, and so on, are not taken into account.

Second, a number of circumstances are not taken into account, which circumstances deserve attention and can testify in favour of the lessor.

As a rule, in the course of court hearings, the lessee pays the present principal debt, the payment of which is already an indisputable requirement. Not only does the court disregard the untimely performance as ‘under duress’ and as such is an unconscientious performance of the obligations by the lessee, but, on the contrary, views such performance as voluntary and credits the lessee with such.

Third, the lessor is often incriminated with the failure to apply for the recovery of the penalty within a reasonable time. At the same time, this course of action completely overlooks the fact that no deadlines for recovery of penalties are provided in the lease agreement or in Kazakhstan laws. In addition, the general term of limitation provided for in the Kazakhstan Civil Code is 3 years.

In some cases, judges generally came to the odd conclusion that the penalty increased not because the lessee failed to timely perform the obligations, but because the lessor delayed the initiation of legal action.

The Lack of Common Approach to the Issue of the Currency of the Award

In cases where the lessor is a non-resident company, all obligations under the lease agreement are recorded in foreign currency. Accordingly, when taking legal action, the lessor declares his claims in foreign currency, as these are recorded in the lease agreement.

The courts, however, in absence of a common stance, award the claimed amounts either in foreign currency, or in tenge, pursuant to the Regulatory Resolution of the Supreme Court of Kazakhstan ‘On Judicial Award’ dated 11 July 2003.

In cases where requirements are awarded in tenge, the courts overlook the following provisions of the laws aimed at protecting the lessors’ interests:

·        Kazakhstan laws single out ‘international lease’ as one of the lease forms, when one of the parties is not a Kazakhstan resident;

·        Kazakhstan law provisions on the protection of the investor’s interests, according to which the lessor, as an investor, is granted full and unconditional protection of rights and interests secured by all normative legal acts of Kazakhstan;

·        The currency laws provisions, according to which non-residents have the right to receive and transfer dividends, remuneration, and other income received from deposits, securities, borrowing, and other currency transactions with residents without restrictions.

However, the latest practice of the Supreme Court of Kazakhstan on the issue of currency of the court award supported foreign lessors, recognizing that the award of financial lease agreements with non-resident lessors should be made in the currency of the financial lease agreement. Thus, the Supreme Court recognizes that residents are entitled to conduct transactions with non-residents in national and/or foreign currency based on the parties’ consent in accordance with the currency laws of Kazakhstan. Consequently, the debt and penalty under unpaid lease payments are to be recovered in the currency of the agreement, and the courts of the first and appellate instance are not entitled to independently change the subject matter of the claim and accordingly recalculate the foreign currency award in tenge in tenge at the date of the decision.

Withdrawal of the Leased Asset

One of the problematic issues is the withdrawal of the leased asset. Lessors face numerous problems in the process of withdrawing the leased asset. For example, the lessees prevent the withdrawal of the leased asset; that is, they do not allow the lessor to enter their own territory, they conceal property, disassemble the asset to a non-working/non-transportable state, transfer it to third parties, and sometimes even manage to sell the leased asset. Moreover, the law enforcement practice also raises many issues. The indisputable withdrawal of the leased asset is recorded in Article 24 of the Law of the Republic of Kazakhstan ‘On Financial Leasing’.

However, despite the direct indication in the laws, the law enforcement practice for the withdrawal of the leased asset shows that the courts are ambiguous about resolving this issue.

As a case in point, the court of appeal changed the decision of the court of first instance regarding the return of the leased asset because during the proceedings in the first and the appellate instance court, the lessee repaid the debt on the lease payments, notwithstanding that the lessor unilaterally terminated the lease agreement.

Thus:

·        Notwithstanding that at the time of the dispute consideration, the financial lease agreement ceased to be valid due to unilateral termination, the court in the meantime takes into account the ‘untimely’ performance of the lessee (performed after the agreement termination), and on this basis comes to the conclusion that the lessee must not return the leased asset;

·        The court ignores the debt as of the date of the decision of the court of first instance.

Distribution of the Representative Expenses Between the Parties

Another thematic issue is the formal approach of certain judges in the distribution of the representative expenses between the parties.

In accordance with Article 109 of the Kazakhstan Civil Procedural Code, if the claim is partially satisfied, the expenses are awarded to the claimant in proportion to the amount of claims satisfied by the court, and to the defendant, in proportion to the part of the claim that was refused to the claimant.

Following this regulation, certain judges award the compensation of the expenses by the claimant in favour of the defendants in proportion to the part of the claim that was refused to the claimant.

Considering the common court practice in terms of considerable reduction in the penalty claims (up to 10% of the claimed penalty), as a result, the lessor claimants are faced with a situation where the lessor claimant who has fulfilled his obligations under the financial lease agreement in good faith is forced to repay the representative expenses to the unconscientious defendant.

That is, the court not only infringes the right of the lessor for the full protection of his interests by reducing the penalty, but also imposes obligations on the lessor to pay the expenses of the unconscientious counterpart, thereby indulging the unfair business practices of certain lessees.

As a general conclusion, we would like to summarize that, despite the existence of Kazakhstan laws that expressly regulate financial lease issues, law enforcement practice poses ambiguous questions, which lessors must necessarily take into account when carrying out lease activities in Kazakhstan.

[1] Article 25 paragraph 1 of the Law of the Republic of Kazakhstan ‘On Financial Lease’

[2] Article 276 of the Entrepreneurial Code of the RK

Information contained in this Client Update is of general nature and cannot be used as legal advice or recommendation. Please note that Kazakhstan is an emerging economy, and its legislation and legal system are in constant development. Should you have any questions or want to discuss matters addressed in this Client Update, please contact us.