We would like to give you brief information concerning some practical questions of pledging the subsurface use right.

First of all, we would like to stop on positions of the Decree of Kazakhstan President having the force of law «On subsurface and subsurface use» dated 27/01/96 (further — the Decree on Subsurface).

Article 15 of the Decree on Subsurface provides obligatory requirements to a pledge of subsurface use right, namely:

1. The contract of a pledge of subsurface use right should be concluded. The pledge contract should include the information about the subject of the pledge, its estimation, существо, volume and terms of performance of obligation covered by pledge, information on the party holding the pledged assets and on the possibility of the use of the assets;
2. The pledge of the subsurface use right is possible only with the purpose of attraction of financial resources (the credit, the loan) for carrying out of operations on subsurface use and such credit (loan) should be used only for carrying out of mentioned operations. Thus, if the contract of a pledge of the subsurface use right consists is concluded with other purpose, according to Clause 5 Article 14 of the Decree on Subsurface such contract of a pledge is considered void from the moment of its conclusion.

Thus, the pledge of the subsurface use right necessarily should be expressed in the corresponding contract. The Subsurface user (the pledger) and the creditor providing with the loan (the pledgee) for carrying out of the subsurface use operations are the parties of the contract of a subsurface right pledge. Banks and any other companies having sufficient financial opportunities for financing of subsurface use operations can be pledgees.

It is not necessary to obtain the permission of the Competent Body for the pledge of the subsurface use right according to Clause 1 Article 14 and Clause 2-1 Article 15 of the Decree on Subsurface. However Clause 2-2 Article 15 of the Decree on Subsurface provides obligatory registration of the contract of a pledge of the subsurface use right with the Competent body. Thus, the contract of a pledge becomes effect either from the moment of registration of the contract of a pledge with the Competent body or other later date, which can be stipulated by the contract of a pledge.

For registration of the contract of a pledge of the subsurface use right the subsurface user (pledger) should submit to the Competent body the following documents:

1. The application;
2. The feasibility report on attraction, use and return of the loan;
3. The information about organization which is giving a loan;
4. The information on conditions of granting of the loan;
5. The signed contract of a pledge of the subsurface use right.

After submission of the listed documents the Competent body within 30 days makes the following decisions:

1. Registers the contract of a pledge of the subsurface use right недропользования and issues the certificate of registration (thus registration does not mean and does not attract re-execution of the Contract on subsurface use on the name of the Pledgee); or
2. Refuses in registration of the contract of a pledge of the subsurface use right.

Refusal in registration of the contract of a pledge of the subsurface use right is possible only on any of the following three bases:

1. the subsurface user (pledger) falls under the legislation on bankruptcy; or
2. There are no adequate conditions of a pledge of the subsurface use right for subsurface user in comparison with the conditions used on domestic or the international market under corresponding conditions of a pledge of such subsurface use right; or
3. The pledged subsurface use right is a subject of other pledge contract (i.e. it is already pledged).

If the penalty is imposed on the pledged subsurface use right, all subsurface users rights and duties under the Subsurface use Contract passes to the pledgee (except for banks). According to the Clause 2-7 Article 15 of the Decree «On Subsurface» the procedure of the penalty imposition on the subsurface use right as to the subject of a pledge should be determined by the Government of Republic Kazakhstan. However we have not any information on acceptance of the mentioned Government Degree.

In this case according to Clause 3 Article 4 of the Decree «On Subsurface» some civil-law relations, which are not governed by the Decree «On Subsurface» and connected with the subsurface use right, should be governed by provisions of the Kazakhstan Civil Code and the Decree of the President of the Republic of Kazakhstan, having the force of the law dated 23/12/95 «On the mortgage of the Real Estate» (further — the Decree on Mortgage) as according to Clause 2 Article 319 of the Civil Code the rules and the procedures established by the Decree on Mortgage for realization of the mortgage are applied to realization of other kinds of pledged assets if otherwise is not established by the Civil Code.

According to Clause 2 Article 318 of the Civil Code, Clause З Article 35 of the Law «On Banks and Bank Activity» dated 31/08/95 (further — the Law on Banks) in the cases stipulated by the Contract of a pledge and the Civil Code as well as by other acts, the Pledgee (in particular the bank) has the right to sell independently pledged assets in involuntary extrajudicial order by holding a tender. Otherwise the satisfaction of the requirement of the Pledgee from cost of the pledged assets is made by court.

Selling of the pledged subsurface use right in the involuntary extrajudicial order is carried out according to the following procedure:

1. According to Article 320 of the Civil Code at selling of the pledged assets in the involuntary extrajudicial order the authorized representative who is the legal person or individual having the power of attorney from the Pledgee for selling of the pledged assets, in case of breach of the obligation under the credit contract secured with a pledge holds the tender.

Thus the authorized representative carries out the following procedures:

1. Makes the notice to the Pledger (subsurface user) about default and registers the given notice with the Competent body, where the Contract of a pledge was registered. Thus it is necessary to mean, that on reception of the notice on default under the credit contract the pledger (subsurface user) have the right to apply to the court:
• with the claim for absence of the reasons for the penalty imposition on the pledged subsurface use right; or
• with the application for granting a delay in penalty imposition on pledged subsurface use right.

The application with the claim (application) to the court suspends the above-stated 2 month term.

2. Makes the notice on selling of the pledged subsurface use right in case of dissatisfaction of the requirements following from the notice, but not earlier, than in two months from the moment of its sending to the Pledger (Subsurface user). Such notice also should be registered with the Competent body where the Contract of a pledge has been registered. After registration the given notice is presenting to the Depositor (subsurface user). Besides the announcement on selling should be published officially.

From the moment of the first publication of the announcement about selling all transactions with regard to the pledged subsurface use right are forbidden, and if such transactions have been made, they declares invalid.

2. The authorized representative organizes and holds tender only after the expiration not less than one month from the moment of the first publication of the announcement about the tender and till the moment of its holding. The authorized representative declares the tender frustrated if: 

• less than two buyers participated in the tender; and/or
• the person who has gained the tender, has not paid a purchase price within established terms.

3. According to Article 34 of the Decree «On Mortgage» after the end of the tender and contribution by the winner of the tender of the final price and all others required from him payments the authorized representative gives him the document on buying of the subsurface use right at the tender. The document about Purchase the subsurface use right at the tender should be confirmed with the signature of the authorized representative and the seal (if the authorized person is a legal entity).

According to Clause ЗЗ of the Decree «On Mortgage» the Pledger (subsurface user) has the right to contest tender results within 3 months in court in case of infringement of procedure of tender holding. Filing of the statement of claim does not suspend fulfillment of the actions resulting from the tender, i.e. re-execution of the subsurface use right on the winner of the tender.

4. According to Item 4) Clause 1 Article 322 of the Civil Code the sale of the pledged assets from the public tender implies the cancellation of the pledge. According to Clause 1 Article 37 of the Decree «On Mortgage» the Pledgee registers the document, evidencing the cancellation of the pledge, (for example, the contract of sale and purchase of the pledged subsurface use right) with the Competent body, which registered the Contract of the pledge. From this moment the subsurface use right passes to the Pledgee. According to Article 35 of the Decree «On Mortgage» in a case the Pledger refuses to transfer the subsurface use right to the Pledgee, who baught it at the tender, the Pledgee has the right to apply to the court.

Further, after purchase of the pledged subsurface use right, it is necessary to observe provisions of the Decree «On Subsurface», namely to solve the problem on re-execution of the subsurface use right on the new subsurface user. Thus we would like it to note the following practical problems: Article 12 of the Decree «On Subsurface» contains the list of the bases under which the subsurface use right arises, namely:

1. Giving the subsurface use right directly by the state (Granting the subsurface use right).
2. Giving the subsurface use right by the another subsurface user (Transfer of the subsurface use right).
3. Occurrence of the subsurface use right at the assignee under reorganization (liquidations) of the legal entity-subsurface user (Passing of the subsurface use right on the basis of universal assignment).

Basing on the above-stated information, taking into account, that at purchase of the pledged subsurface use right as a result of the penalty imposition, the new subsurface user is not granted with the subsurface use right directly by the state as well as has not received such right in connection with liquidation of the pledger (the former subsurface user), one may to draw a conclusion that occurrence of the subsurface use right at the new subsurface user should to be made out according to the rules governing the Transfer of the subsurface use right (in view of provisions of Article 14 of the Decree «On Subsurface»).

Transfer of the subsurface use right should be made on the basis of civil law transactions and also on other bases stipulated by the legislation according to the Decree «On Subsurface».

However according to Clause 1 Article 14 and Clause 5 Article 14 of the Decree «On Subsurface» before conclusion of the transaction it is necessary to receive the permission of the Competent body for transfer of the subsurface use right to the new subsurface user. Otherwise such transaction would be considered invalid from the moment of its conclusion according to Clause 5 Article 14 of the Decree «On Subsurface». According to Clause 9-2 Article 14 of the Decree «On Subsurface» the transfer (the purchase) of the pledged subsurface use right is completed from the moment of re-execution of the subsurface use contract (including by alterations and additions of the contract and registration of such changes and additions).

In this connection as appears from the provisions of the Decree «On Subsurface», it is necessary to obtain permission of the Competent body for transfer of the pledged subsurface use right by the.