1. How the pledge contract is created, and is there any
restrictions on who can be a pledger?
A pledge is created by contract, either by a separate pledge
agreement or through a clause in the agreement. The pledge
agreement must be in writing. Along with that, both the debtor
himself and a third party can be the pledger.
2. What property can act as a pledge?
Any property can act as a pledge, with the exception of things
withdrawn from circulation. It is possible to secure debts not yet
existing (future or conditional), debts expressed in foreign
currency, and even fluctuating debt. The once registered, will give
the lenders a priority security interest in the collateral.
3. Can a common property be pledged?
Common property can be pledged only with the consent of all
owners. The right to a share in common property can be an
independent subject of pledge.
4. Are there any regulations regarding insurance of the
The law or a contract may provide for the obligation of the
pledgee to insure the pledged property transferred into his
possession. The pledgee has the right to receive, on the same
basis, satisfaction from the insurance indemnity for the loss or
damage of the pledged property, regardless of in whose favor it is
insured, unless the loss or damage has occurred for reasons for
which the pledgee is responsible.
5. In the event of non-fulfillment of an obligation, is
creditor allowed to take over the pledged item?
A secured creditor cannot simply take possession of the
collateral. The creditor must sell the collateral through a public
auction and recover the debt from the sale proceeds. The sale
proceeds are used to cover expenses incurred in connection with the
enforcement and sale. After that the proceeds will be used to repay
the debts. The remainder, if any, will be returned to the
6. Is the registration of pledge contract
Registration of a pledge over most types of movable assets is
not required for the pledge to be effective. In contrast, security
over immovable assets and certain registered movable assets (e.g.,
vehicles, aircraft and registered securities) must be registered in
order to be effective. While it is not obligatory to register
pledges in relation to most movable assets, such registration
grants the creditor priority right in the collateral. If two or
more creditors obtain security interests in the same collateral
(whether movable or immovable), the law gives priority to security
interests in the order in which they are registered. Thus, in the
typical case, the creditor who filed earlier will prevail.
7. What are the most popular things being pledged as
collateral, and how are they regulated by law?
Below we have indicated some of key things being pledged, and
how they are regulated by the law.
|Pledge of Shares in the
The holders of the shares in the company have the right to
pledge all or part of the shares in favor of the lenders (including
foreign lenders). The major shortcoming of such a pledge is that
the lenders would not be entitled to take possession of the shares
but instead must sell the shares through a public auction.
A pledge over shares in the company might be registered either
with the Ministry of Justice or with the relevant independent share
registrar, which will make an entry regarding the pledge in the
company’s shareholder’s register.
There are no restrictions on the lenders’ right to enforce
the pledge over the shares, subject to their compliance with local
procedural rules for such enforcement.
It is important to note that a purchaser of 25% or more of the
shares in the company may be required to obtain approval of such
purchase from the Competition Agency. If the purchase will be
subject to the antimonopoly approval (depends on the combined asset
value, or annual turnover of the purchaser and the company), then
the purchaser will be required to apply for approval within 30 days
after the public auction at which it acquired the shares.
|Pledge over Land, Plant and
The company can pledge its land, plant and machinery in favor of
the lenders, including foreign lenders.
If the relevant plant and machinery is deemed to be immovable
property (i.e., inseparable from the land or building at which it
is installed), the pledge must be registered with the Ministry of
Justice to be valid. If the plant and machinery is not deemed to be
immovable property, the security interest (pledge) will be created
by means of the pledge agreement. However, to ensure the priority
of the lenders’ security interest, the pledge should be
registered with the registration authorities of the Ministry of
Justice as discussed above.
|Pledge of Property Complex
|It is possible to register the plant with the
registration authorities of the Ministry of Justice as a
“property complex” (i.e. as a going concern, consisting
of all assets and liabilities which comprises it, i.e. land,
buildings, plant and machinery, intellectual property, goods in
stock and other relevant property and assets). Once registered as a
property complex, it may be pledged as such in favor of the
lenders. However, this possibility is only available after the
plant is constructed and commissioned.
|Pledge of Receivables
|It is possible for a company to pledge its
monetary claims under a contract. Thus, the company should be able
to pledge its rights to receivables (for instance from electricity
sales under power purchase agreements). Where rights to receivables
are pledged, the enforcement will be carried out by way of
assignment of the relevant rights to the pledgee (i.e. without the
public auction as it is with most other types of collateral).
|Pledge of Rolling Stock
The pledge of railway rolling stock is subject to registration
with the authorized body – the Ministry of Industry and
Importantly, the registration shall be carried out by the
pledgor in place of its registration. As such if the pledgor is a
non-resident of Kazakhstan such pledge, apparently, could not be
registered in Kazakhstan.
|Pledge of Non-monetary Rights under
It is possible for a company to pledge its non-monetary rights
under a contract. However, this form of security has a major
drawback: as with most other types of collateral, the secured
creditor cannot simply take possession of the collateral (i.e. to
have the relevant rights assigned to it). The creditor must seek to
sell the collateral (i.e. the pledged rights) through a public
auction and recover the debt from the sale proceeds. This makes
pledging non-monetary rights under a contract impracticable.
Accordingly, while the company can pledge its non-monetary
rights and benefits under the project agreements in favor of the
lenders, such form of security is not practicable. The lenders (or
a company appointed by them) would not be able to enforce the
pledge by stepping in but will be required to seek to sell the
pledged rights through a public auction.
|Pledge of Local Bank
As a matter of Kazakhstan law, the company has the right to
pledge in favor of the lenders the money standing at the
company’s bank account (whether such account is with a
Kazakhstan bank or with a foreign bank). From the legal
prospective, it is not possible to pledge the bank account itself,
but only the rights of the company to the money standing at such
Upon default of the company the lenders will be entitled to
directly debit such account and take the money standing at such
account and the money deposited to such account thereafter as set
forth in the pledge agreement. However, the relevant Kazakhstan
bank should also be a part of the security arrangement over the
company’s bank account to allow the lender to directly debit
Generally, where money is pledged, the enforcement is carried
out by transferring the relevant money to the pledgee.
|Pledge Foreign Bank Accounts
|According to the law of the Republic of
Kazakhstan, the company is obliged to notify the National Bank of
the Republic of Kazakhstan when opening bank account(s) in a
foreign Banks. Subsequently, the company can grant a security
interest to the lenders over such foreign bank account, which will
be created and enforced under the relevant foreign law.
|Mortgage over Land and Construction in
Land plots owned or leased for a long-term period by the company
may be mortgaged in favor of the lenders.
As a matter of Kazakhstan law, construction in progress
constitutes movable property (not real estate) until the
construction is finished, commissioned by the State and registered
by the Ministry of Justice as a unit of real estate. In this
regard, the construction in progress can be pledged as movable
property, but not as real estate.
It is important to mention that the pledge over construction in
progress does not automatically convert into pledge over real
property after completion and registration of construction.
Instead, after the plant is commissioned, it will be necessary for
the company to execute a new pledge agreement in respect of the
plant, replacing the earlier agreement in respect of construction
As mentioned above, the title to a land plot is inseparable from
the title to real property it underlies. Therefore, a mortgage of a
building means that the underlying land plot will also become the
subject of the same mortgage.
|Pledge of a Grain
The laws of the Republic of Kazakhstan contain the concept of
the grain receipt, which is a certificate in the form of a debt
non-documentary non-issue security, certifying the rights of its
holder to receive grain from a grain-receiving enterprise in the
volume and quality determined during its issue.
The holder of the grain receipt registers the order for the
transfer / pledge of the grain receipt with indicating information
about the pledgee and the information on the pledgee agreement.
Upon payment of the debt by the holder of the grain receipt in the
amount of the obligation to the creditor, the pledgee is obliged to
register in the register an order to remove the encumbrance
It is also important to know that the claims of holders of grain
receipts containing information about the pledge are satisfied in
the third priority, after satisfaction of claims for compensation
for harm for causing harm to life or health, and payment of wages
|Pledge of the Aircrafts
In accordance with the legislation of the Republic of
Kazakhstan, the pledge of an aircraft is governed by the norms of
Kazakh law in case if such an aircraft belongs to a Kazakh legal
entity and / or is registered in the Aircraft Register. The pledge
of the aircraft is subject to registration with the Authorized Body
– the Ministry of Industry and Infrastructure Development of the
Republic of Kazakhstan.
Along with that, it should be noted that the legislation in the
field of aircrafts, in addition to the legislation of the Republic
of Kazakhstan, is also regulated by international agreements (e.g.
the Convention on International Guarantees for Mobile Equipment and
the Protocol on Aviation Equipment to the Cape Town
Thus, the procedure for foreclosure on an aircraft that is the
subject of a pledge should be governed by the provisions of the
Cape Town Convention and its Protocol, according to which the
lessor / lender is granted a real right to the aircraft itself. The
sale of an aircraft when foreclosure on the subject of a pledge
should be carried out in accordance with the provisions of the Cape
Town Convention and its Protocol, and not in accordance with the
legislation of Kazakhstan.
8. What are the enforcement capabilities of pledgee to
secure his rights under the contract?
According to the laws of the Republic of Kazakhstan, the pledgee
may collect pledge either through an out-of-court proceedings or a
court-proceedings, which is prescribed either by the law, or may be
indicated in a pledge contract.
In the out-of-court enforcement procedure, the pledgee (its
representative) may organize and carry out the enforcement
procedure, including the sale of the collateral. For this, it is
necessary for the pledgee representative to carry out a number of
procedural steps, including preparing and registering a default
notice, publishing an auction notice in mass media, and conducting
If the pledge agreement provides for out-of-court pledge
enforcement procedure, the lenders will be able to enforce the
pledge by selling the collateral without the need to pay the court
fee or any other State fee. However, if the local borrower refuses
to co-operate with the lenders in selling the collateral or
otherwise obstructs the enforcement of the pledge, the lenders will
have no other recourse but to apply to a Kazakhstan court seeking
judicial enforcement of the pledge. In such case, it will be
necessary for the lenders to pay a court fee in the amount of 3% of
the value of the claim (if the lenders are successful in their
litigation, the court would require the customer to reimburse the
lenders for the paid court fee).
Enforcement may take up to 6 months from the moment of default
to the sale of the pledged property. It may take longer if the
pledgor contests the underlying default. The enforcement expenses
may vary in a range of several thousand U.S. dollars (without
taking into account the court fees). The law, however, provides
that expenses incurred by the pledgee are recoverable from the sale
proceeds, and the court fees are to be reimbursed by the
If the lender enforces the pledge through a court-supervised
procedure, it will be necessary for the lender to pay a court fee
in the amount of 3% of the value of the claim. If the lender is
successful in its court action seeking pledge enforcement, the
court will order the customer to reimburse the lenders for the
court fees paid by the lender in commencing the court action.
In case of enforcement through judicial action, the
court-marshal is obliged under the law to conduct the auction and
sell the collateral within four months after he received the
relevant court order. This term may be extended in certain
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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