Challenging transactions in bankruptcy: grounds, time limits and consequences in the Republic of Kazakhstan

People come to a situation where a debtor's transaction is called into question in different ways: some learn about a filed application to challenge it only after they have sold or bought property, others are creditors themselves and see that assets went to third parties shortly before bankruptcy. The common feature is the same — the transaction was concluded on the eve of the procedure, and now its fate depends on the provisions of the Law of the Republic of Kazakhstan on Rehabilitation and Bankruptcy. This article examines which operations attract the interest of the bankruptcy trustee, on what grounds they are challenged and what this means for both parties.

The material is intended for a private client or entrepreneur from Almaty who is encountering the topic for the first time and wants to understand the logic of the procedure before consulting a specialist. There is no assessment of a specific dispute here: only the framework — grounds, the circle of claimants, time limits, consequences and the position of a bona fide counterparty. After reading, it will be clear which documents matter, what the court looks at and where the line runs between an ordinary business operation and a transaction that may be reversed.

Challenging transactions in bankruptcy: what it is and why it is needed

Challenging transactions in bankruptcy returns to the estate property or money withdrawn by the debtor before bankruptcy. The relations are governed by the Law of the Republic of Kazakhstan on Rehabilitation and Bankruptcy: without such a mechanism, a debtor would sell off assets to acquaintances and creditors would be left with nothing.

In practice, creditors or the bankruptcy trustee apply to court with an application to declare the transaction invalid. If the court grants the application, the party returns what it received, and the property goes into the estate for settlements. Not only gifts are challenged, but also sales at an undervalue, set-offs and payments to individual creditors to the detriment of the rest.

For creditors this gives a chance to recover more on their claims, for the debtor — the risk of the withdrawn property being returned against debts.

Typical grounds for challenging:

• transactions concluded during the suspicious period established by law
• sale or transfer of property at a price below market value
• gratuitous transfers and gifting of assets
• settlements with individual creditors bypassing the order of priority
• transactions with interested parties: the director, participants, relatives

Which transactions can be challenged in bankruptcy

The Law on Bankruptcy does not tie challenging to a specific contract. What matters is not the name of the transaction but its effect on the estate: a reduction in the debtor's property or a preference to one creditor to the detriment of the others. The list of types of transactions remains open.

The bankruptcy manager analyses the debtor's documents for the preceding period. Challenging is built on two lines: unequal consideration and preference to one creditor. Transactions concluded after the case was initiated or shortly before it are also reviewed separately.

Below are the categories that occur most often in practice. The list does not close the question of which transactions can be challenged in bankruptcy, but it shows the typical schemes for withdrawing assets.

• Sale and purchase: sale of property at an undervalued price, including with a deferred payment that never materialises.
• Gifting and gratuitous transfer of assets: disposal of real estate, vehicles, a share in an LLP, equipment without consideration.
• Set-off and agreements on the termination of obligations: repayment of one creditor's debt by terminating the claims of others.
• Assignment of a claim: transfer of receivables to a third party on terms unavailable to ordinary participants in commerce.
• Marriage contract and agreement on the division of spouses' property: redistribution of assets in favour of one spouse bypassing creditors.
• Security transactions: pledge of property for a specific obligation, if it is removed from the general settlement regime.

The table is indicative: the final assessment of a transaction depends on its terms and the period in which it was concluded.

Grounds for challenging transactions in bankruptcy: inadequate consideration and harm to creditors

The Law of the Republic of Kazakhstan on Rehabilitation and Bankruptcy allows creditors and the bankruptcy manager to challenge the debtor's transactions. The grounds fall into two groups: inadequate counter-performance and conclusion of a transaction with the aim of causing harm to the property rights of creditors. Both apply to transactions concluded within the period established by law before the commencement of bankruptcy proceedings.

Inadequate counter-performance means that the debtor received less from the counterparty than it gave: payment noticeably below the value of the property, work or service transferred, or no counter-performance at all. The court compares the transaction price with market conditions and assesses whether it was aimed at reducing the asset pool. If the counterparty obtains unjustified benefit at the expense of creditors, the transaction may be declared invalid.

• Inadequate counter-performance: the price or terms differ noticeably from market ones to the detriment of the debtor.
• Transactions with interested parties: close partners or affiliated companies obtain an advantage.
• Gratuitous transfer of assets: gift, debt forgiveness, disposal without real payment.
• Creation of unjustified obligations: formal debts that reduce the asset pool.
• Transactions aimed at moving liquid property out during the suspect period.
• Transactions that breach the order of priority for satisfying creditors' claims.

Suspect transactions in bankruptcy: how they are identified

Suspect transactions are identified by a combination of objective indicators, not by the name of the contract. The date of the transaction is compared with the moment proceedings are commenced: the shorter the interval, the higher the likelihood of assets being moved out on the eve of insolvency. The court assesses the circumstances on the case file, including the register of creditors' claims and the manager's report.

The indicators revolve around the economic sense of the operation. Terms unfavourable to the debtor — sale below market price, refusal of counter-performance, debt forgiveness without reason — point to an intention to reduce the asset pool. Disposal of the only liquid property deprives creditors of satisfaction.

• Short period between the conclusion of the transaction and the commencement of bankruptcy proceedings
• Clear unfavourability of terms: understated price, absence of counter-performance, gratuitous transfer
• Disposal of the only liquid asset that could have been used to satisfy creditors' claims
• Transactions with affiliated persons: participants, the director, relatives, related LLPs
• Loss of assets while the debtor retains control over the transferred property
• A combination of several indicators in a single transaction

Who is entitled to apply for challenging transactions in bankruptcy

The Law of the Republic of Kazakhstan on Rehabilitation and Bankruptcy governs the bankruptcy of legal entities and individual entrepreneurs, including the challenging of the debtor's transactions. The range of persons who may initiate such a challenge is defined by law and is not limited to the administrator.

The bankruptcy administrator files applications to challenge transactions that violate creditors' rights or contradict the law. He analyses transactions, identifies suspicious operations and represents the interests of the estate, acting independently but taking into account the opinion of creditors and the authorised body.

Creditors and the authorised body are also entitled to apply for challenging transactions: creditors — through participation in meetings and submission of claims, the authorised body — by representing the interests of the state in respect of mandatory payments.

• The bankruptcy administrator is the main subject filing applications to challenge transactions.
• Creditors — may initiate a challenge through the creditors' meeting or by direct applications.
• The authorised body — protects state interests in respect of taxes and duties.
• The rehabilitation administrator — in the rehabilitation procedure.
• Other persons expressly specified in the Law of the Republic of Kazakhstan on Rehabilitation and Bankruptcy.

The court assesses not the formal side of the contract but the real purpose of the transaction and its effect on the possibility of settling with creditors. The less business explanation a transaction has, the higher the risk of it being challenged.

Challenging transactions in bankruptcy: time limits and court procedure

An application to challenge a transaction is filed with the specialised interdistrict economic court that is hearing the bankruptcy case. The bankruptcy administrator is entitled to file it, and on certain grounds — creditors and the authorised body.

The procedure begins with an analysis of the debtor's documents and the preparation of an application stating the ground and the evidence. The court verifies the validity of the transaction, the good faith of the parties and the consequences of its performance, then issues an act recognising the transaction as invalid and applying the consequences — return of the property or recovery of its value.

• determine the date of the transaction and compare it with the period of suspicion
• establish the ground: harm to creditors, preference or others expressly specified in the law
• prepare an application to challenge and collect supporting documents
• file the application with the court hearing the bankruptcy case
• prove the ground: unequal consideration, preference to a creditor or another violation of law
• secure the application of the consequences of the transaction's invalidity

Consequences of challenging transactions in bankruptcy: return of property and restoration of debts

After a transaction is recognised as invalid, the consequences provided for by the Law of the Republic of Kazakhstan on Rehabilitation and Bankruptcy apply. Each party must return everything received under the transaction, and if return in kind is impossible, the value of the property is compensated. This restores the position that existed before the transaction and allows the estate to be replenished.

The return of property in bankruptcy means that an item, money or other asset that has left the debtor's possession is brought back into the bankruptcy estate. It is managed by the bankruptcy trustee under the supervision of the creditors and the court. The property is then valued and sold in the manner prescribed for satisfying creditors' claims.

• the counterparty's good faith and its awareness of the debtor's insolvency
• the possibility of recovering the property in kind or recovering its value
• the rank in which the restored claim is included
• the size of the bankruptcy estate and the number of creditors in the same rank
• whether the counterparty has secured claims or not
• the bankruptcy trustee's actions to form the estate

Challenging transactions in bankruptcy: the position of a good-faith counterparty

The fate of the counterparty's claim when the debtor's transaction is challenged depends on its conduct and the evidence it puts forward in response: the trustee proves that the transaction was for unequal value or harmed creditors, while the counterparty rebuts this with facts of ordinary business practice. The court assesses the circumstances as a whole, and the position must be supported by primary documents and by conduct predating the commencement of the bankruptcy case.

The key argument is that the transaction was for value: contracts, acts, delivery notes, payment documents and correspondence confirm real, equivalent counter-performance, which reduces the grounds for returning the property to the bankruptcy estate.

• Check that the primary documents for the transaction exist and are complete: the contract, acts, delivery notes, payment confirmations.
• Confirm that the transaction was for value: show equivalent counter-performance by the counterparty.
• Explain the absence of awareness of the debtor's insolvency as at the date of the transaction.
• Disclose the reality of performance: the actual delivery of goods, performance of works or provision of services.
• Show the economic purpose of the transaction and its consistency with the parties' ordinary activities.
• Compare the parties' conduct before the bankruptcy with ordinary business practice in order to rule out signs of asset stripping.

Challenging transactions in bankruptcy and transactions with affiliated persons

Bankruptcy of legal entities and individual entrepreneurs in Kazakhstan is governed by the Law of the Republic of Kazakhstan on Rehabilitation and Bankruptcy. In bankruptcy cases, transactions with interested parties are scrutinised more closely than ordinary ones: the law associates them with an increased risk of property losses for creditors. Where a relative, participant, director or controlled company is a party to the contract, the creditor and the trustee proceed on the basis that the terms may have been set not by market bargaining but by the influence of one party.

In practice, challenging transactions with affiliated persons in bankruptcy is held to a stricter standard. A party connected to the debtor cannot rely on formal documents alone: it is expected to confirm the reality of performance, the sources of payment and the economic purpose of the transaction. The absence of such an evidentiary basis shifts the assessment in favour of the creditors, even if the paperwork shows no apparent irregularities.

• Transactions with interested parties are assessed for the reality of performance, not just for the paperwork
• Where there is affiliation, the market nature of the price and the counter-performance are checked
• The subsequent fate of the property along the chain of transactions is taken into account
• The timing of the transaction relative to the commencement of the case is assessed
• A connected counterparty should disclose the source of funds and the economic purpose of the transaction
• The combination of connections between the parties raises the evidentiary requirements

Challenging transactions in bankruptcy: mistakes of the debtor and the counterparty

A typical mistake of the debtor is withdrawing assets on the eve of the procedure. Gifting property to a close relative, selling at a price below market, or settling by promissory note with a friendly LLP does not save the situation: the bankruptcy trustee analyses transactions for the period before the case was initiated and is entitled to seek their invalidation. The court assesses not the motive of the parties, but the fact of the reduction of the asset mass and the inadequacy of the counter-performance.

The second mistake is the absence of documents confirming settlements. If payment is confirmed only by a receipt without a cash register receipt, payment order or bank statement, it is almost impossible to prove the reality of the transaction.

• transactions for the statutory review period before the initiation of the bankruptcy case: gift, sale, set-off, substitute performance
• the market price of the disposed property and the availability of a valuation report
• primary documents: payment orders, statements, reconciliation acts, invoices
• grounds for family and employment ties between the parties to the transaction
• receipt of all correspondence from the court and the trustee, and attendance at hearings
• a position on each contested episode with evidence of counter-performance

Challenging transactions in bankruptcy: what changes for transactions in Almaty and across Kazakhstan

Challenging transactions in bankruptcy in Kazakhstan under the Law of the Republic of Kazakhstan on Rehabilitation and Bankruptcy takes place in a specialised interdistrict economic court. For Almaty this means that a dispute over a debtor's transaction is heard by the court handling the bankruptcy case, not the court at the location of the property. The court examines the suspicion period, the counter-performance and the counterparty's awareness. The return of real estate is formalised through the Legal Cadastre and the Public Service Centre.

Court practice shows that the outcome depends on the moment the transaction was concluded and on how the counterparty confirms payment. If the payment documents have not been preserved, the court more often declares the transaction invalid. The return of real estate is registered by the State Corporation Government for Citizens on the basis of a court decision that has entered into force.

• The transaction was concluded within the suspicion period established by law.
• The price clearly differs from the market value of the asset.
• The counterparty knew of the signs of the debtor's insolvency.
• There is no evidence of actual payment under the contract.
• The property was transferred without counter-performance.

The return of the asset does not happen automatically: a judicial act and subsequent registration are required.