Managing Director - member of the Board of DBK Askar Amirtaev told our publication on the example of the guarantee instrument, what is so attractive for investors in English law, and why it is worth looking at the opportunities offered by the international financial center "Astana" (AIFC).
- Guarantee is a fairly common tool to ensure the performance of obligations. What do You think, how legally protected is the creditor who received the guarantee of a third party?
- This year, as part of the work on improving approaches to legal risk management, DBK paid considerable attention to the topic of invalidation of guarantees, we studied the Kazakh and Russian judicial practice, conducted unscheduled monitoring of all guarantees available in our portfolio.
The reason was a high-profile court case regarding the invalidation of the guarantee, which was covered in the media at the end of last year, on the recovery of 24.9 billion tenge from an individual in favor of the National Bank of Kazakhstan. In this civil case, the court of first instance issued a decision to refuse to satisfy the requirements of the national Bank to an individual on the performance of obligations under the guarantee, and satisfied the claims of the guarantor, in connection with the invalidity of the guarantee for a number of reasons.
The claims of the guarantor were based on the arguments of misleading him when providing a guarantee, non-compliance of the guarantee with the requirements of the law, by virtue of which the loan must be secured by highly liquid and risk-free securities and other low-risk assets; as well as an increase in the loan repayment terms without the consent of the guarantor, which worsened the position of the guarantor. And although already this year the appeals board satisfied the requirements of the financial regulator, recognizing the guarantee as valid, the study of the issues of the legal vulnerability of the guarantees continued to be of professional interest to us.
Guarantee as a way to ensure the fulfillment of obligations is used in different areas of contractual relations and primarily in the field of Bank financing. By the way, in the loan portfolio of DBK guarantees of performance of obligations, occupy about 35% of the entire security base. The meaning of the guarantee is simple and is that the guarantor assumes responsibility to the creditor for the breach of the obligation by the debtor.
Despite the fact that the development Bank or any other financial institutions adhere to the practice of adopting full solidarity guarantees that protect their interests as much as possible, judicial practice shows that the guarantee is a rather vulnerable instrument for ensuring the performance of the obligation.
The legislation provides for various grounds for recognizing invalidity of transactions, which are applicable to guarantees, as well as separate rules on the termination of guarantees. Among other things, the recognition of the invalidity of the guarantee due to non-compliance with legal requirements, the lack of proper corporate approval, necessary authorization, etc.
For all these legal risks, there are ways of mitigation applied by legal services, such as checking the form and content of a guarantee, obtaining all necessary consents, analyzing the structure of the guarantor's governing bodies, etc.
In studying judicial practice, we see many interesting cases regarding disputes about the invalidity of a guarantee on the basis of the increase in the responsibility of the guarantor and the deterioration of his position. In one case or another, the position of the guarantor may deteriorate if even the conditions of the obligation change, which, at first glance, do not require agreement with the guarantor.
A good example is a civil case, considered by domestic courts in 2015, in a counterclaim of a legal entity (guarantor) to one of the STB and another legal entity (borrower) to declare the guarantee void, in which the guarantor declared the claim invalidating the guarantee in view of lack of consent of the guarantor to the product by the borrower and the bank of changes in the conditions of the obligation secured by the guarantee:
- the collateral value of collateral was reduced, and as a result, the risks of the guarantor increased in comparison with the initial conditions;
- a deferment was granted on the repayment of principal and interest, which resulted in an increase in the amount of the monthly payment and an increase in the total amount of interest;
- the frequency of payments changed.
Despite the arguments of the STB that these changes do not increase the liability of the guarantor, the court sided with the guarantor and declared the warranty invalid.
In turn, in other similar disputes, some courts support the position of the creditor.
Looking through such cases, we have compiled a list of all possible changes in the conditions of a bank loan and for each of them simulated situations in which the guarantor could theoretically refer to an increase in his risks or the occurrence of adverse consequences. Ultimately, such an analysis forced us to significantly expand the list of loan cases that require coordination with the guarantor.
- Based on your comment, can we conclude that in our legislation this issue is not regulated in detail?
- Exactly so, with the obvious similarity of the provisions of the legislation of the Republic of Kazakhstan and the Russian Federation regulating the legal relations of the guarantor and the creditor, the law enforcement practice of the Russian Federation has enviably more precise regulation. In particular, the resolution of the Plenum of the Supreme Arbitration Court of the Russian Federation “On some issues of resolving disputes related to a guarantee” defines the legal position of the court on almost all possible controversial situations related to the recognition of guarantees (sureties) invalid.
Borrowing the experience of our neighbors will put an end to disputes between lenders and guarantors, increase the level of legal confidence in guarantees, create comfort in relations between the lender and the guarantor, and at least close the issue with the constant requirements of the guarantor of agreements for almost all cases changes in loan terms.
In this regard, the Development Bank plans to initiate the issue of the need to improve the legislative framework in order to increase the confidence of all market participants and investors in such a tool for securing obligations as a guarantee.
- What is the practice of banks in Kazakhstan on guarantees of non-residents?
- The guarantee as a way to ensure the fulfillment of obligations is well known to all and is successfully used in various areas of contractual relations and, above all, in the field of bank financing. Currently, in Kazakhstan, when banks financed investment projects, there is a practice of accepting the guarantee of a participant / shareholder or ultimate beneficiary (investor) of the Borrower, including non-residents. The guarantors of non-residents do not always understand all the subtleties and consequences of submitting a transaction to the jurisdiction of Kazakhstan law. In addition, the execution of the decision of a Kazakhstan court in a foreign jurisdiction can also cause a number of difficulties. Therefore, in practice, the choice of Kazakhstan law for a guarantee contract does not meet the needs of both the guarantor and the lender.
When any controversial issues arise between the investor and the borrower or the bank and the investor, the latter prefers to apply to a structure that works on the principles of international practice, international standards. It is not by chance that most investors prefer to resolve disputes in the London International Arbitration Court (LCIA), the arbitration courts of Stockholm, Singapore and other countries.
- What difficulties do banks have in accepting such guarantees by non-residents?
- For banks, one of the problems of accepting a guarantee of a non-resident is the recognition and enforcement of decisions of the courts of the Republic of Kazakhstan on the territory of a foreign state, since it is not always possible to execute a decision of a Kazakhstan court on the territory of other states. The exceptions are the countries with which today our country has concluded international treaties on the provision of legal assistance, including such multilateral ones as the Minsk and Kishinev Conventions on Legal Assistance and Legal Relations in Civil, Family and Criminal Matters, as well as a number of other international treaties.
- What, in your opinion, are the advantages for investors of a guarantee regulated by English law?
- First, the understanding on the part of foreign banks and foreign contractors (guarantors) that when working with guarantees under English law, the court carefully and impartially examines each document submitted to it, which is the subject of the dispute, revealing its legal nature. At the same time, it is important not only every word in the document, but also the testimony of the parties, the previous correspondence, the practice of relations in this sphere of business. In cases, judges are not guided by any statutory methods of interpretation and apply the so-called "equity law" (equity law). As a result, the court determines the actual will of the parties, taking into account all factors, and only after that makes a decision.
Secondly, English law provides broad rights and tools to protect the interests of the Bank as a lender. For example, the standard limitation period for claims arising out of a breach of contract under English law is six years from the date of the breach. In respect of contracts made in a special written form "under seal" (as deeds), a 12-year limitation period is established.
- Most recently, with the participation of the President of the Republic of Kazakhstan, the building of the Court and the International Arbitration Center of the AIFC was opened in a solemn ceremony. Will the Development Bank apply the guarantees regulated by English law and is it planned to use the AIFC site when executing the guarantee?
- The opening of the Court and the AIFC International Arbitration Center is a clear signal to foreign investors that our country aims to build an independent and effective judicial system. This is evidenced by the high qualification of foreign judges of the AIFC, as well as the stipulated procedural mechanisms, such as: extended statute of limitations, various procedural advantages of the AIFC court in comparison with Kazakhstani court practice, a proportional reduction in the amount of court fees as the amount of the claim increases, and others.
Arbitration decisions of the AIFC are subject to execution in the Republic of Kazakhstan, as well as internationally in accordance with the New York Convention of 1958 on the territory of 157 foreign states.
In essence, the AIFC is an effective tool to protect the rights and interests of international investors and increase the investment attractiveness of our country, i.e. the so-called "element of trust" between investors and the state.
In order to effectively use the advantages of the AIFC, the Development Bank worked on the development of a standard form of the guarantee agreement regulated by English law. It should be noted that the guarantee was developed according to the standards of LMA (Loan Market Association), as well as taking into account compliance with the requirements of the laws of Kazakhstan, which are provided for in relation to the form and mandatory conditions of the guarantee contract. The developed guarantee form contains an arbitration clause for resolving disputes at an international arbitration center at the AIFC.
- In your opinion, taking into account the existing advantages, is it possible to implement certain provisions of English law in the domestic legislation?
- I think this is not only possible, but also necessary because our society has undergone significant changes since independence. The legal consciousness of people has changed, economic ties and mechanisms of corporate relations have become more complicated. Our country is actively increasing its export potential and is actively involved both in integration processes and in attracting new foreign investors to the country. All this creates conditions and prerequisites for the improvement of legislation.
At the same time, I believe it is impossible to simply copy the "legal mechanisms" of other legal systems. Each new mechanism should be evaluated and finalized taking into account Kazakhstan's law enforcement practice, the needs of the population and the business community.
