ID 10296

Saltanat Asanova

Legal expertise of the agreement on substituted performance in the Bank’s interest

The following conditions of the agreement on substituted performance create risks for the Bank:

I. Risk:
Absence of clarity regarding the terms of transfer of substitution which is one of the
significant conditions specified in article 372 of the CC of the KR. According to the agreement:
 1.7 Upon registration of this Agreement, the shares specified in clause 1.4 shall become the
property of the Bank (Pledgee).
According to article 207 of the CC of the KR, the term is determined by y a calendar date or
the expiration of a period of time or event that must inevitably occur. There is no specific date
or period upon which the substitution shall be transferred to the creditor. “Upon registration” is
an event and there is no clause stating that the registration will inevitably occur. The agreement
does not prescribe that the registration of the Agreement is an imminent event.

Consequences:
In cases of lack of specification of a concrete date, period, or imminent event upon which the
substitution shall be transferred according to the agreement, there is a risk that the debtor will
prolong or postpone the period of registration since the law does not mandate the requirement for
the registration of the agreement on substituted performance. It is condition which was agreed on
by parties themselves. Thus, unless the parties specify the imminency of registration within
certain period, it can be postponed for indefinite period of time which also leads to the
postponement of the transfer of the substitution for indefinite period of time.

Recommendation:
Applying article 372, the CC of the KR, it is recommended to specify the concrete date of the
transfer of the substitution. Examples:
 The shares specified in clause 1.4 shall become the property of the Bank (Pledgee) at the
moment of registration of the Agreement which shall be conducted no later than the 19 th of
December 2023.
Or
 The shares specified in clause 1.4 shall become the property of the Bank (Pledgee) at the
moment of signing the Agreement by the Parties.

II. Risk:
The point 2.2 of the Agreement constitutes a risk for the Bank. According to 2.2. of the
Agreement, the Bank (Pledgee) has an obligation to accept the performance under this
Agreement. However, the law does not have imperative norm regarding an obligation of a
creditor to accept substitution. In cases of improper or late performance of obligations by the
debtor under the Agreement on substituted performance, the Bank should have right to refuse to
accept the substitution, however that right is not specified.

Consequence:
Such condition is unfavorable for the Bank since the Bank will be obliged to accept any
substitution transferred by the debtor at any time.

Recommendation:
Amend point 2.2: “the Bank (Pledgee) has an obligation to accept timely and proper performance
under this Agreement.”

III. Risk:
A risk concerns the subject of the Agreement. First, accepting the shares and bonds which are
subjects of the pledge agreement is a risk. According to p. 1.3, the Debtor (Pledgor) shall
provide the Bank (Pledgee) with (1) shares and bonds owned by it on the right of ownership.
According to article 372 of the CC of the KR, by agreement of the parties, the obligation may be
terminated by the provision of an assignment in lieu of transferred substitution. However, the
current legislation does not provide for the possibility of transferring the property that is the
subject of the pledge into the ownership of the pledgee.

Consequence:
As explained in paragraph 46 of the Joint Resolution of the Plenums of the Supreme Court of
the Russian Federation and the Supreme Arbitration Court of the Russian Federation of
01.07.1996 N 6/8 "On Certain Issues Related to the Application of Part One of the Civil Code of
the Russian Federation"1, the current legislation does not provide for the possibility of
transferring the property that is the subject of the pledge into the ownership of the pledgee. Any
agreements providing for such a transfer are null and void, except for those that may be qualified
as an agreement on transfer of substitution or novation of a pledged obligation.
To qualify the transfer of shares and bonds under the agreement on transfer of substitution,
the term of performance under the loan obligation secured by the pledge must be due at the time
of conclusion of the agreement on substituted performance. If the term of fulfillment of the loan
obligation has not come, the the transaction on the transfer of property to the pledgee can be
qualified as made in violation of Art. 324, 334 of the Civil Code of the KR.

Recommendation:
Applying the Decision of the Supreme Arbitration Court of the Russian Federation dated
03.03.2014 N VAS-1395/142 which lists the criteria, the presence of which makes it impossible
to qualify an agreement on the transfer of pledged property from the pledgor to the pledgee as an
substituted performance:
1
Joint Resolution of the Plenums of the Supreme Court of the Russian Federation and the Supreme Arbitration
Court of the Russian Federation of 01.07.1996 N 6/8 "On Certain Issues Related to the Application of Part One of
the Civil Code of the Russian Federation",
2
Decision of the Supreme Arbitration Court of the Russian Federation dated 03.03.2014 N VAS-1395/14
- the transfer of property under the guise of an assignment is made by a person who is not a
debtor under the loan obligation;
- the term of performance under the borrowed obligation secured by the pledge has not come due
at the time of the conclusion of the agreement on compensation.
Since in the present case the pledgor is a party to the pledge legal relationship, the transfer of
pledged property to the bank as a substituted performance is possible.
However, the second criterion must also be met, i.e. the term of performance under the
loan obligation secured by the pledge must be due at the time of conclusion of the assignment
agreement, therefore following amendments are proposed:

 Amend point 1.3: “1.3 In connection with its inability to fulfil its obligations under the said
Credit Agreement in the amount of KGS 3,000,000, including in terms of interest payment
and repayment of the loan amount, the Debtor (Pledgor) shall provide the Bank (Pledgee)
with (1) shares and bonds owned by it on the right of ownership if the term of performance
under the loan obligation secured by the pledge must be due at the time of conclusion of the
agreement on the substituted performance (2) as well as rights of claim against Burevestnik
JSC for reimbursement of amounts for unused leave in lieu of fulfilment under the said
Credit Agreement.”
 Then “If the term of fulfillment of the loan obligation has not come, them the only subject of
the agreement on the substituted performance shall be as rights of claim against Burevestnik
JSC for reimbursement of amounts for unused leave in lieu of fulfilment under the said
Credit Agreement.”

IV. Risk:
In the p. 1.2 the Parties agree to terminate all mutual obligations arising from the Share
Pledge Agreement concluded between the Parties on 2 of February 2023. There is a lack of
concrete specification of the moment of termination of obligations under the Share Pledge.
According to Karapetov, if the agreement on substituted performance is executed before the
assignment, the mere fact that the agreement is executed does not terminate the debtor's
obligation.3

Consequence:
The term of termination of obligations under the Share Pledge is not specified which can lead to
the disputes between parties regarding the moment of termination.

Recommendation:
The following amendments to p. 1.2 shall be introduced:
“The Parties agree to terminate all mutual obligations arising from Share Pledge Agreement
№2/23 concluded between the Bank and the Debtor on 2 of February by virtue of the Debtor's
provision of an accord and satisfaction in lieu of fulfilment of these obligations in accordance
with the terms and conditions of this Agreement.”

3
Comments on civil legislation #Glossa. Execution and Termination of Obligations, Commentary on Articles 307-
328 and 407-419 of the Civil Code of the Russian Federation; Edited by A.G. Karapetov
 NEW VERSION WITH PROPOSED AMENDEMENTS AND IMPROVEMENTS
AGREEMENT ON SUBSTITUTED PERFOMANCE

Bishkek, 18 December, 2023

Parties:
- Bank (Pledgor) - Commercial Bank of Kyrgyzstan JSC
- Debtor (Pledgee) - citizen of the Kyrgyz Republic Sardarov S.M.

1. SUBJECT OF THE AGREEMENT

1.1 The Parties agree to terminate all mutual obligations arising from Credit Agreement №2/23
concluded between the Bank and the Debtor on 2 of February 2023 (hereinafter referred to as the
Credit Agreement) by virtue of the Debtor's provision of an accord and satisfaction in lieu of
fulfilment of these obligations in accordance with the terms and conditions of this Agreement.
1.2 The Parties agree to terminate all mutual obligations arising from the Share Pledge
Agreement concluded between the Parties on 2 of February 2023 by virtue of the Debtor's
provision of an accord and satisfaction in lieu of fulfilment of these obligations in accordance
with the terms and conditions of this Agreement.
1.3 In connection with its inability to fulfil its obligations under the said Credit Agreement in the
amount of KGS 3,000,000, including in terms of interest payment and repayment of the loan
amount, the Debtor (Pledgor) shall provide the Bank (Pledgee) with (1) shares and bonds owned
by it on the right of ownership, (2) as well as rights of claim against Burevestnik JSC for
reimbursement of amounts for unused leave in lieu of fulfilment under the said Credit
Agreement.

1.4 Characteristics of securities provided by the Debtor:

- Type of securities – ordinary or privileged shares;
- Issuer - Burevestnik JSC;
- Nominal value: KGS 1300 per one share;
- Quantity: 3000 pieces.
- Value of reimbursement of amounts for unused leave
1.5 The amount of an accord and satisfaction is determined based on the market value of the
transferred shares in the amount of KGS 3,600,000.
1.6 The assignment shall fully cover all claims of the Bank (Pledgee) against the Debtor
(Pledgor) in terms of repayment of the loan amount. In case of transfer of the said block of shares
as an offset, the Bank shall waive any possible claims against the Debtor (Pledgor) for recovery
of the loan amount that it might have under the normal procedure of execution of the said Share
Pledge Agreement and the Loan Agreement.
1.7 Upon registration of this Agreement no later than the 18th of December 2023, the shares
specified in clause 1.4 shall become the property of the Bank (Pledgee).
1.8 The Bank (Pledgee) shall be entitled to demand from the Debtor (Pledgor) to make
appropriate amendments to the Shareholders Register on the transfer of the shares subject to this
Agreement into its ownership after its signing by the parties.
1.9 The Debtor (Pledgor) confirmed its ownership rights to the said shares by entering into Share
Pledge Agreement dated 2 February 2023.
2. RIGHTS AND OBLIGATIONS OF THE PARTIES
2.1. A party that fails to fulfill or improperly fulfills its obligations under this Agreement shall be
obliged to compensate the other party for the losses caused by such non-fulfillment
2.2. The Debtor (Pledgor) shall:
- within 3 days from the date of signing of this Agreement notify the Issuer on transfer of the said
shares into the ownership of the Bank with attachment of one copy of the Agreement;
- pay all expenses on registration of the Bank's title to the shares and fulfil other necessary
procedures in accordance with the legislation of the Kyrgyz Republic.
- If the Debtor violates the term for transfer of the property provided for in cl. 2.3 of this
Agreement, the Debtor shall pay to the Lender a penalty in the amount of 0.2 percent of the
outstanding amount for each day of delay.

2.2 The Bank (Pledgee) shall:

- to accept the performance under this Agreement.
2.3 The Bank shall be entitled:
- to demand from the Debtor (Pledgor) forced fulfilment of obligations under this Agreement in
accordance with the laws of the Kyrgyz Republic, including in court.
- prior to the transfer of the accord and satisfaction, to demand instead the fulfilment of the
obligation parties arising from the Loan Agreement and Share Pledge Agreement at his option.

2.4 In case the Debtor (Pledgor) refuses to fulfil its obligations under this Agreement or defaults
on fulfilment for more than 5 days, the Agreement shall become null and void and all obligations
of the parties arising from the said Loan Agreement and Share Pledge Agreement shall be
restored in full.
3. APPLICABLE LAW
3.1 In all matters not regulated by this Agreement, the Parties shall be guided by the legislation of
the Russian Federation and relevant international agreements.
3.2 Disputes and disagreements that may arise between the parties in the process of fulfilment of
obligations under this Agreement shall be resolved in the International Court of Arbitration at the
Chamber of Commerce and Industry of the Kyrgyz Republic.
4. SPECIAL CONDITIONS
4.1 All amendments and additions to this Agreement shall be valid only if made in writing and
signed by duly authorized persons.
4.2 The Agreement shall enter into force from the date of its signing by the Parties.
4.3. This Agreement has been drawn up in three copies - one copy for each party, one copy to be
delivered to the Issuer. All copies shall have the same legal force.
5. LEGAL ADDRESSES AND BANK DETAILS OF THE PARTIES

6. SIGNATURES OF THE PARTIES