Differences (pluses and minuses) in consolidation of legal entities by creating of a consortium and separate legal entity (LLP)

 The choice between one and another form of consolidation of legal entities (liability limited partnership in Kazakhstan) depends on the will of partner(s) of the merging entities/ LLPs and is mediated by a number of specific factors of objective reality.

In this connection, it is impossible to talk about pluses and minuses of a particular type of association of (liability limited partnerships in Kazakhstan as in each specific situation, a set of such pluses and minuses will vary for certain entities of legal validity in different ways. Therefore only specific features inherent in the consortium and LLP will be discussed below.

1). Order of incorporation, registration.

·         Limited Liability Partnership is incorporated in accordance with the Laws of the Republic of Kazakhstan “About business partnerships”, “About partnerships with limited and additional liability”, “About state registration of legal entities and registration of branches and agencies”. Liability limited partnership is an entity of private entrepreneurship and according to its belonging to small/average/big entrepreneurship it shall possess a definite size of Charter Capital. The Limited Liability Partnership operates on the basis of Charter. LLP in Kazakhstan is registered at Justice Bodies.   

·         Consortium is established in accordance with Chapter 12 of the Civil Code of the Republic of Kazakhstan, it operates on the basis of Participation Agreement. The Consortium is not legal entity and is not subject to registration at the State Bodies of the Republic of Kazakhstan.  

2). Responsibility of Founders (Partners).

·        Founder (Partner) of the legal entity or Owner of its property will not be responsible for its liabilities, and legal entity will not be responsible for liabilities of Founder (Partner) of  LLP in Kazakhstan or Owner of its property excluding cases stipulated by Civil Code of Kazakhstan, other legislative acts or constitutional documents of legal entity. Herewith Partners of Partnership who have made contributions into Charter Capital partially will bear a joint liability for its obligations within the value of the unpaid part of the contribution of each partner. In case if stated Charter Capital of the Limited Liability Partnership exceeds actual Charter Capital, the Partners of the Partnership will be vicariously liable before creditors for debts of partnership in the amount exceeding charter capital over equity capital. If a bankruptcy of LLP in Kazakhstan is generated by actions of its Founder (Partner) or Owner of its property then in case of lack of funds of legal entity the Founder (Partner) or Owner of its property will be bear a subsidiary liability before creditors.

·         Consortium Participants in Kazakhstan are jointly and severally liable for the obligations relating to the activities of the consortium, unless otherwise is stipulated in Participation Agreement.

3). Management team, control over activities.

·         A supreme management body of LLP is General Meeting of Partners (Sole Partner). Executive body is a General Meeting of Partners (Sole Partner).

·         Management of consortium is performed according to Consortium Agreement.

4). Provisions on taxation.

·         Taxation of LLP in Kazakhstan is performed on the basis of a certain tax regime (standard, due to tax declarations in the simplified form and etc.).

·         Due to the fact that the consortium is not a separate legal entity it will not be considered by the Tax Code of the Republic of Kazakhstan as an independent subject of taxation; a consortium taxation occurs at the level of its participants i.e. each participant of the consortium pays taxes independently and for own part.

5). Liquidation.

·         Limited Liability Partnership in Kazakhstan may be liquidated according to the decision of General Meeting of its Partners or by the decision of the Court. LLP Liquidation Procedure is a quite long and complicated process. Liquidation of LLP in Kazakhstan is deemed completed after the issue of an order on exclusion of LLP from Register of Legal Entities performed by Justice Bodies.  

·         Consortium will terminate at the time of termination of Consortium Agreement. No state bodies will be aware about termination of consortium.

  6) Participation of Consortium in state purchases.

Concerning the issue of participation of the Consortium in state purchases conducted in accordance with the Law of the Republic of Kazakhstan “About state purchases”: The Consortium has the right to participate in the procedure for state purchases.

Transfer of funds to bank accounts of the Consortium participants in Kazakhstan.

            Taking into account that the Consortium in Kazakhstan is not legal entity and independent taxpayer, it has no own Business Identification Number, an opening of a separate bank account directly in favor of the Consortium in Kazakhstan is not possible (nowadays second tire banks do not render such services).

According to p.2 Art.230 CC RK: monetary or other asset contributions of parties to the Agreement, as well as property created or purchased as a result of their joint activity, are their common property. As well as according to p.4 Art.223 CC RK: participants of the Consortium in Kazakhstan shall be jointly and severally liable for the obligations relating to the activities of the Consortium unless otherwise is stipulated in the Consortium Agreement.

Consequently if otherwise is not stipulated in the Consortium Agreement in Kazakhstan all income of the Consortium Participants is distributed among them proportionally to their shares in the property of the Consortium.

For this purpose settlements with Consortium in Kazakhstan  may be performed in one of the following methods:

1.      All earnings from the activities of Consortium in Kazakhstan will be transferred by counteragents to the bank account of one (often to the account of Leader) of the participants of the Consortium, and whereas, the latter will distribute funds among other participants of the Consortium in accordance with the Consortium Agreement.

2.     Earnings from the activities of the Consortium will be transferred by counteragents separately to the bank accounts of the Participants of the Consortium. But in present case such settlement order should be stipulated by Agreements with Counteragents of the Consortium. (Such version is more common in practice).

3.      Other forms and settlement procedures are possible.

In this section there also should be mentioned the fact that relationships associated with activities of the Consortium in Kazakhstan have not been regulated enough by the current Laws of the Republic of Kazakhstan; therefore, a common rule “Everything is allowed that has not been prohibited by the Law” operates.

Independent activities of Participants not associated with the Consortium activities in Kazakhstan.

            Paragraph 2 Art.233 Civil Code RK states the following: Consortium Participants in Kazakhstan retain their economic independence and may participate in the activities of other consortiums and associations.

From the above-mentioned rules it follows that the Consortium Participants in their economic activities not related to the consortium activities are separate, independent economic entities, and therefore, have the right to engage in economic activities on their own.

If a counteragent enters into Agreement directly with the Consortium in Kazakhstan, such Agreement shall be performed by Participants of the Consortium in accordance with the Consortium Agreement and certain Commercial Contract respectively.  If a separate participant won a tender on his own and renders services for such certain project,then obviously the Consortium in Kazakhstan is not associated with liabilities of such agreement.

The Consortium Agreement may foresee, for example, that the Consortium Leader engages only in finding customers/prospecting, and direct performance of a definite  civil law contract will be done by participant or participants of the Consortium (and it should be prescribed respectively that in such case for example income is distributed  20 to 80). Herewith the Consortium Agreement may prescribe subcontracting by Participants of the Consortium of definite obligations due to definite contracts to the third parties (subcontracting, subleasing and etc.), as well as the Consortium Agreement could prohibit such subcontracting.  

Transfer of the rights of the Consortium Participants to third parties.

Article 232 CC RK regulates relationships associated with transfer of rights and withdrawal from joint activities, and according to this article, it follows that: transfer of right to participate in joint activities may be performed only with the consent of participants of Joint Activity Agreement (Simple Partnership Agreement). Participant of the Joint Activity Agreement (Simple Partnership Agreement) has right to refuse to participate in joint activities at his own discretion.

Consequently, transfer of the rights of the Consortium Participant to third parties is possible only with consent (written consent in practice) of other Consortium Participants. It should be noted here that such legislative rule is a peremptory norm by its nature in this connection a procedure other than prescribed in the agreement could not be changed by parties on the basis of their consortium agreement.

Limitations.

Consortium Participants in Kazakhstan in their own economic activities not associated with activities of the Consortium are independent and have the right to enter freely into different relationships at their own discretion, to conclude different agreements with different counteragents. However, the Consortium Agreement may foresee definite limitations of the conclusion by Consortium Participants of certain independent agreements (for example, not to create a competition to the Consortium itself).  

All aspects of the conclusion of agreements by the Consortium with third parties, the options for payment under the contracts have been discussed above, in connection with which, in this part, we note a few points:

·         The Consortium in Kazakhstan has the right to conclude agreements with counteragents, herewith a procedure for such conclusion is regulated by Consortium Agreement and Chapter 23 of CC RK “Conclusion of an agreement”;

·         Settlements with Consortium in Kazakhstan are performed in one of the methods established by Consortium Agreement and definite agreement directly;

·         The Consortium in Kazakhstan has the right to enter into agreements both with private and state third parties as well

Prepared by Maxim Bazhenov

Attorney of ZAN Company

Kazakhstan law firm