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Kyrgyz Supreme Court Has Established the Possibility of Direct Claims Against the Kazakh BTA Bank - Kyrgyz Supreme Court, ruling on a claim against a local investment company and several entities in BTA (Bank TuranAlem) group, has established the possibility of direct claims against the Kazakh BTA Bank
Kyrgyz Supreme Court Has Established the Possibility of Direct Claims Against the Kazakh BTA Bank

 

NewswireToday - /newswire/ - Bishkek, Kyrgyz Republic, 2009/09/12 - Kyrgyz Supreme Court, ruling on a claim against a local investment company and several entities in BTA (Bank TuranAlem) group, has established the possibility of direct claims against the Kazakh BTA Bank.

   
 
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When ruling on a private claim by an aggrieved investor against a local Kyrgyz investment company (Investment Company of Central Asia, LLC) for the purchase of the now defaulting bonds of Kazakh BTA Bank, the Supreme Court of Kyrgyz Republic held that it is the Kazakh bank and not its special purpose company (the Dutch registered Turanalem Finance BV) (“SPV”) which shall pay the bondholders, and that the whole scheme of routing bond investments through a “hollow” special purpose entity was indeed a sham masking the economic transaction of lending money directly to the Kazakh BTA.

The arguments of the Court which amounted to a combination of the ‘sham transaction’ and ‘piercing of the corporate veil’ legal doctrines were similar to those used in many foreign cases where, for tax or asset recovery purposes companies without economic substance were disregarded by courts.

The Court established that:
(a) the SPV was registered with the sole purpose of servicing eurobond payments;
(b) the SPV had no economically significant activity of its own;
(c) all business decisions of the SPV were in fact taken by BTA Bank;
(d) the SPV did not decide on how to use the funds invested into the bonds, these decisions were pre-determined in the offering documentation;
(e) the size of the SPV’s authorized capital was very small in comparison with the multi-billion volume of bond issues;
(f) the investors undoubtedly understood that the person economically responsible for the repayment of the invested funds is BTA Bank and not the SPV, which is further proved by BTA Bank giving a guarantee on the bonds;
(g) the end recipient of the funds raised by bond issues was BTA Bank and not the SPV.

Based on the above, the Court held that:

(a) the true economic purpose of creating the SPV and the offering documentation was to raise money from investors by BTA bank at the determined annual interest and for the specified term;

(b) the true intention of the investors was to lend money to BTA at the determined interest rate and for the specified term, or to accept the BTA credit risk for certain return, in case of the secondary bond market;

(c) therefore, the creation of the SPV and of the offering documentation was a sham because it did not correspond to the true intentions of the bond investors and BTA – that is, to enter into a lending relationship. The real transaction masked by the above legal scheme was lending and accepting money for certain term at a certain interest rate.

The Kyrgyz Supreme Court excluded the SPV (Turanalem Finance BV) from the list of defendants, held BTA bank directly liable to investors for the face value of the bonds and in return asked the claimant to hand over the bonds back to the bank, as these were held a legal nullity.

The Kyrgyz Supreme Court ruling may mark an interesting development in the restructuring process initiated by BTA, opening possibilities for direct recovery of funds for the BTA bondholders by pursuing the bank’s liquid assets held outside its home country.

 
 
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Kyrgyz Supreme Court Has Established the Possibility of Direct Claims Against the Kazakh BTA Bank

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