In 2003, the European Bank for Reconstruction and Development (EBRD) found Kazakhstan to have achieved only "medium" overall compliance with prevailing international standards for effective insolvency and creditor rights systems, even though its insolvency laws were found to be among the strongest in Central Asia. Chief among the areas of deficiency are the reorganization and liquidation processes and the treatment of estate assets. Harmer and Cooper, writing in 2004 for the EBRD, noted that the gap between the quality of Kazakh insolvency law and the effectiveness of its implementation was among the greatest to be found in the countries studied by the EBRD. Reforms took place through 2006, and the EBRD conducted a new assessment of the situation, which it reported in its 2006 "Strategy for Kazakhstan" paper. The new EBRD report found that the recent changes did only a little to address previously noted weaknesses and were primarily concerned with addressing the fraudulent use of bankruptcy proceedings. According to the World Bank's 2007 "Doing Business 2008" snapshot of business closings in Kazakhstan, it takes an average of 3.3 years to complete an insolvency action, compared to a regional average of 3.2 years and an average of 1.3 years among member states of the Organization for Economic Cooperation and Development (OECD). The cost of such proceedings in Kazakhstan averages 18 percent of the debtor estate, compared to 13.7 percent regionally and 7.5 percent within the OECD. Recoveries average 23.4 cents on the dollar in Kazakhstan, compared to 28.9 cents for the region and 74.1 cents on the dollar for OECD member states.

General Overview

In 2004, authors R. Harmer and N. Cooper published the results of a survey that had been carried out by the European Bank for Reconstruction and Development (EBRD) in the previous year. According to that report, Kazakhstan's insolvency legislation had achieved "medium" overall compliance with international standards for insolvency and creditor rights systems. With regard to creditor treatment and involvement, the Kazakh regime earned a rating of "high" compliance, while its compliance with regard to commencement and effect of proceedings and the reorganization process was rated as "medium." With regard to the bankruptcy/liquidation process, Kazakhstan was rated at "low" compliance, and achieved "very low" compliance regarding the issue of assets of the estate. However, Harmer and Cooper dealt solely with the content of the legislation, and did not look specifically at the issues of effectiveness of application or the institutional capacity available to apply the law.

A 2006 summary assessment by the EBRD regarding Kazakhstan's insolvency law regime disclosed that, on the whole, Kazakhstan still attains only medium compliance with international standards. The EBRD's 2006 report, which at present exists only in summary tabular form, is based on the Law on Bankruptcy No. 67 of 2001, as amended through 2006. According to the report, the law is largely unchanged, but does disclose some new, positive features. These include the inclusion of a provision for interim protective relief and new provisions that aim to deter pre-bankruptcy transactions. Also noted is the expansion of the definition of "debts" to include damages for civil wrongs and innovations in the rehabilitation procedure. The new legislation has also modified requirements for information and independent analysis of a reorganization plan. Deficiencies noted in the new law include an inadequate definition of the term "insolvency" and the length of time (three months) required for a debt to remain unpaid before a creditor can seek insolvency relief, as well as vagueness in the definition of "other" evidence of solvency that might be required of creditors. Further, the legislation does not have a clear statement on the rights of secured creditors or of the actual owners of property in the possession or control of the debtor. Finally, the report takes issue with the requirement that secured creditors bear the administrative costs of insolvency proceedings and with the fact that approval of reorganization plans are left to a creditors' committee, rather than being subject to the approval of the general body of creditors.

According to the EBRD's 2006 "Strategy for Kazakhstan," recent legal reforms in Kazakhstan have left significant challenges regarding the firm establishment of the rule of law. While the reform of commercial laws has been "on par with many other CIS [Commonwealth of Independent States] countries," the report adds that "even relatively good laws often suffer from poor implementation (p. 17). This situation leads to a decline in confidence both within the Kazakhstan business community and among foreign investors and traders, with specific reference to Kazakhstan's ability to uphold contractual rights. The Strategy Report notes that Kazakhstan's Law Concerning Bankruptcy is among "the strongest of the insolvency laws in central Asia" (p. 44), even though it achieves only medium level of compliance in the EBRD's 2003 Insolvency Sector Assessment. The report also noted that the Kazakh law still fails to deal with international insolvency.

According to the 2006 EBRD Strategy Report, the recent reforms appear to have been more concerned with tightening the legal framework to reduce the occurrence of fraud than in addressing previously identified flaws. However, legal changes have established an external oversight mechanism that can track debtor behavior throughout the processes of reorganization, restructuring, or liquidation. The external oversight is aimed at discovering cases of deliberate bankruptcy and ensuring that the extent of the debtor's estate is fully disclosed. Other amendments have empowered insolvency regulator with "authority to approve rules for training bankruptcy commissioners, administrators of external supervision, and rehabilitation managers" (pp. 44-45). The regulator is also able to intervene when necessary during insolvency proceedings, approve the fees charged by insolvency professionals, and design the approval process for a debtor's application to enter rehabilitation proceedings.

Other changes in the law that are noted by the 2006 EBRD Strategy Report include the extension of the restructuration period for debtor companies (nine months in general, three years for strategically important businesses) and the expansion of the time in which debtor transactions are to be reviewed, previously set at two years but now extended to three. The 2006 Strategy Report contains a review of the specific effectiveness issues that had been identified in the EBRD's "2004 Legal Indicator Survey for Insolvency," to wit: "the Insolvency Law appears to be an... insufficiently credible threat for creditors to induce recalcitrant debtors to pay their debts. Access to the insolvency system is overly formal and complex and the process is generally regarded as being expensive and inefficient" (p. 45). At the time of the 2004 report, the difference between the quality of Kazakhstan's insolvency law and its successful implementation was deemed to be one of the largest among all of countries surveyed by the EBRD. The 2006 report implies that more time is needed to determine if the recent legislative changes will make a positive difference.

The World Bank's "Doing Business 2008" report, published on the World Bank website in 2007, provides a snapshot of the time, cost, and recovery rates for closing a business in Kazakhstan, and compares these results with (a) the regional average and (b) the results achieved by member states of the Organization for Economic Cooperation and Development (OECD). The World Bank found that it took, on average, 3.3 years to complete an insolvency action in Kazakhstan, compared to a regional average of 3.2 years and an OECD average of 1.3 years. The cost of such proceedings in Kazakhstan averages 18 percent of the debtor estate, compared to 13.7 percent regionally and 7.5 percent for OECD member states. Recoveries average 23.4 cents on the dollar in Kazakhstan, compared to 28.9 cents for the region and 74.1 cents on the dollar for OECD member states.