Liability of corporate officers: ensuring compliance

Introduction
Civil liability
Administrative liability
Criminal liability

Introduction

A number of corporate structures can be used to carry on business in Kazakhstan. The most common forms of commercial organisation are the limited liability partnership and the joint stock company. The officers of these entities under the applicable law are:

• the chief executive officer and members of the executive body in the case of a limited liability partnership; and
• the chief executive officer, members of the executive body and members of the board of directors in the case of a joint stock company.

The liability of officers of a limited liability partnership or joint stock company is basically regulated by:

• the Civil Code (December 27 1994);
• the Administrative Code (January 30 2001);
• the Criminal Code (July 16 1997);
• the Law on Limited and Additional Liability Partnerships (April 22 1998); and
• the Law on Joint Stock Companies (May 13 2003).

Civil liability

The board of directors of a joint stock company generally manages the company's activities, except for decisions which fall within the exclusive competence of the general shareholders' meeting (which is the company's supreme management body). The main function of the executive body in both a limited liability partnership and a joint stock company is to carry out the day-to-day management of the entity's activities. While performing his or her duties, an officer must act in the interests of the partnership or company, in good faith and on reasonable grounds.

Restrictions
Certain actions are deemed to conflict with the interests of the partnership or company and, as such, may not be performed by the members of the executive body or their relatives. Such persons are prohibited from:

• concluding a transaction with the limited liability partnership that is aimed at obtaining personal benefits from the partnership (eg, gift agreements, loan agreements, purchase and sale agreements and gratuitous use agreements), without first obtaining the consent of the general meeting;
• receiving commission from the partnership or a third party for a transaction concluded between the partnership and such third party;
• acting on behalf or in the interests of a third party in its relations with the partnership;
• carrying out business activities in competition with those of the partnership;
• assuming the role of chief executive officer or acting in such capacity in any other legal entity; and
• using the joint stock company's property or permitting such usage in violation of the company charter or decisions of the general shareholders' meeting or board of directors, or using such property or allowing its use for personal advantage, and otherwise abusing their rights while entering into transactions with an affiliate.

This list is not exhaustive - the charter of a limited liability partnership or joint stock company may include additional prohibitions. As a matter of law, a company (including a joint stock company or limited liability partnership) may challenge transactions carried out by its executive body (eg, its chief executive officer) with third parties in breach of limitations set forth by the company's charter, provided that the third parties were aware of such limitations.

Liability and grounds
Limited liability partnership
Members of an executive body bear the following civil liability under the law:

Joint stock company
Officers of a joint stock company are liable to the company and its shareholders for damages and losses caused by their actions or failure to act. Liability includes, but is not limited to, damages incurred as a result of:

• the provision of misleading or false information;
• the violation of procedures for providing information as established by the Joint Stock Company Law; and
• suggestions to enter into, or approval of decisions to enter into, significant transactions or related-party transactions causing damages to the joint stock company as a result of unfair actions or failure to act, including suggestions and approvals of decisions aimed at obtaining personal benefits for such officers or their affiliates.

In addition, if the financial statements of the joint stock company falsify its financial position, the officers who signed the statements are liable to third parties for financial losses as a result of such falsification.

On the basis of a decision by the general shareholders' meeting or a shareholder holding 5% or more of the company's voting shares, a joint stock company can apply to the court with a claim against an officer to seek:

• reimbursement of losses caused by his or her unfair actions or failure to act; and

• the return of profits accruing to such officer or his or her affiliates as a result of the approval of resolutions on major transactions or related-party transactions that resulted in losses to the company, provided that the officer can be shown to have acted unfairly or to have failed to act.

On the same basis, a claim can be brought against a third party to seek reimbursement of losses to the company as a result of a transaction with such third party, provided that when entering into the transaction, such officer acted in agreement with the third party and in violation of the applicable laws of Kazakhstan, the company charter or internal regulations or that officer's employment agreement. In such cases, the officer and third party are jointly and severally liable to reimburse the company for its losses.

Exemption from liability
A corporate officer may be released from civil liability to a limited liability partnership or joint stock company if he or she proves in court that:

• the actions that harmed the partnership or company were prompted by decisions of the entity's supreme body, which he or she followed in good faith;
• he or she voted against the decision which was adopted by the partnership or company's management body and caused the damage to the company or partnership or any participants; or
• he or she did not participate in the relevant vote.

The relevant minutes, decisions and resolutions will be accepted as proof in such cases.

Court practice
The law requires that officers of a limited liability partnership or joint stock company act in good faith and on reasonable grounds. However, in practice, it is difficult to determine whether they acted in such a way (unless his or her actions are deemed to be a crime). There are no generally known cases in which an officer of a limited liability partnership or joint stock company has been found to bear civil liability in this way.

Corporate officers may also be subject to administrative and criminal liability.

Administrative liability

Administrative liability arises if an officer fails to perform his or her functions (or performs them improperly) and thereby has a negative impact on the limited liability partnership or the joint stock company (eg, by causing its bankruptcy).

The maximum administrative penalty for such officers may not exceed 1,000 times the monthly specified index (approximately $10,350).

Criminal liability

Officers of a limited liability partnership or joint stock company may be subject to criminal liability if:

• in performance of their management functions, they use their powers and authority:
  • in their own interests or those of other persons;
  • to generate profit for themselves or other persons; or
  • to cause damage to other persons; and
• such use results in significant damage to the rights and legal interests of certain persons or to the interests of the state which are protected by law.

The maximum penalty is four years' imprisonment.

Examples of crimes whereby an officer of a limited liability partnership or joint stock company incurs criminal liability are:

• carrying out business activities without the necessary licence;
• improper accounting;
• bribery;
• fraudulent activities;
• smuggling; and
• environmental contamination.

Such crimes may result in a penalty, the obligation to undertake corrective measures, arrest and imprisonment - the appropriate penalty will be determined on a case-by-case basis.

For further information on this topic please contact Yerzhan Kumarov at Macleod Dixon ELP by telephone (+7 727 311 24 80 88), fax (+7 727 311 24 89) or email ([email protected]).