Invalid Transactions and Consequences of Invalidity Thereof.

Invalid Transactions and Consequences of Invalidity Thereof.

All of us - lawyers included, sooner or later dealt with a situation when a transaction was declared as invalid, seized the court in order to protect own interests. Meanwhile, the RK Civil Code (“the Code”) is reported to be the only legal source one’s position can be based on.

Attention should be paid to the fact that the purpose of this article is not to repeat the norms and clauses of the Code, but to provide opinion of a practicing lawyer.

First of all, it is important to define what the following definitions mean: transaction, invalid transaction and effects of such invalidity.

The Code provides the definition of “transaction” as actions of individuals or legal entities focused on establishment, change and termination of civil rights and obligations.

Transactions may be unilateral, which requires expression of will of one of the parties, and bilateral or multilateral (contracts). In other words, conclusion of contracts requires expression of agreed will of two parties (bilateral transactions) or three or more parties (multilateral transactions).

Transactions can be concluded orally or in writing (simple form or qualifying form (notarial or registrable).

The Legislator specified that contracts concluded orally do not require a written form and a person’s behavior expresses his will to conclude a contract; such a contract may be confirmed by counter or ticket delivery or otherwise.

Silent system is a sign to express a will to conclude a contract in the cases specified by the legislation or agreement of the parties.

Attention should be given to transactions executed in writing as open questions frequently arise that should be dealt by cooperation of lawyer and client.

The following transactions have to be concluded in writing:

    1) Transaction in the entrepreneurship sphere, except for contracts that are fulfilled at the moment of their conclusion, unless otherwise specified by the legislation and business turn customs;

    2) Transaction in the amount of more than hundred of the monthly calculating index, except for the contracts that are executed at the moment of conclusion thereof;

    3) In other cases specified by the legislation or agreement of the parties.
Transactions concluded in writing should be signed by parties or representatives thereof, unless otherwise appeared from the business turn customs.

Conclusion of a transaction allows using facsimile signature copying, digital signature, unless it contradicts the legislation or requirement of one of the parties. 

Bilateral transactions may be concluded through documents interchange, each is to be signed by the parties.

Transactions conclusion in writing executed includes exchange of letters, telegrams, telephone messages, teletypograms, fax messages, electronic documents or other sorts of documents defining subjects and content of their will, unless otherwise established by the legislation of agreement of the parties.

The legislation and agreement of the parties  may set up additional requirements to a transaction form, in particular, certain type of a form, sealing as well as specify consequences of violations of such requirements.

A party, which executed a transaction concludedin writing, has the right to request a document confirming the transaction execution from the other party.

The same right is granted to a party, which executed a verbal entrepreneurial transaction, except for the transactions to be executed at the moment of conclusion thereof.

Considering the abovementioned norms of the Code it is logical that the compliance with a transaction conclusion in writing enables a party to require the execution of the transaction.

But what steps should be made and what exactly should be done if the legislation requires written form of transaction, but practically the transaction was not concluded and signed by parties? What if such actions of parties cover a huge amount of money?

According to the Code “non-observance of a simple written form of a transaction does not entail invalidity thereof, however, in case of a dispute it divests a party of its right to confirm the conclusion, content and execution of the transaction by  testimonial evidence. Nonetheless, parties have the right to confirm the conclusion and execution of a transaction executed by referring to written or other documents, except for testimonial evidence.

Non-observance of a simple written form of a foreign economic transaction entails the invalidity thereof.

Let me give you a clear example of a situation taken place in practice. A large legal entity supplied a consumer with an expensive equipment without concluding a contract in writing. The situation became much complicated as the consumer did not make the payment and did not recognize the debt.

In my view, the most reasonable step in this case shall be, firstly, to confirm the conclusion, content and execution of a transaction by providing evidence; only then you can raise a question of the debt recovery.

As practice shows there are clear grounds for claimanta claim for recognition consistency (or validity) of a transaction in spite of the fact this aspect is not completely regulated by the legislation.

Meanwhile, there are some cases when they file a court action as the grounds for recognition of a transaction as completed were improperly executed sale-and-purchase agreements (for apartment, vehicle, etc.), one of which should be reviewed as an example.

Mr. Blyashev brought a suit against Mr. Nusrepov with a claim for Mr.Nusrepov’s  family eviction from Mr. Blyashev’s apartment, which was leased to the defendant.
Mr. Nusrepov, in his turn, submitted a counter-claim for recognition of the apartment sale-and-purchase agreement as completed.

The court session has established that in spring 2003 there were a verbal agreement for sale-and-purchase of this apartment between decedent father of the defendant - Mr. Nusretov and the claimant. This fact is certified by the receipt provided and testimonial evidence.

According to paragraph 3 of the Decree of the RK Supreme Court on Some Issues of apartment ownership protection No. 5 dated 15 July 2007 in cases of non-observance of a transaction form when the actual conclusion of the transaction is certified by proofs other than testimonial evidence (for instance, receipt of an apartment sale and money receipt or power of attorney for alienation right), when the seller’s location is unknown, then  an interested party has the right to apply to court for recognition of the transaction validity.
According to the court decision dated 10.01.2008 the claim of Mr. Blyashev against Mr. Nusretov for the dispossession was dismissed; the counter-claim was sustained in full. The court decision came into force.

Lawyers often recommend to notarize transaction in order to secure oneself in the future.
In the meantime, the list of transactions, which are to be notarized and are considered as concluded only after that, is provided by the legislation.

In particular, the Decree of the Ministry of Justice of the RK on Approval of the Instruction for performance of notary activity in the RK No. 539 dated 28 July 1998 says that the following transactions must be notarized:

    1) Annuity agreement;

    2) Testaments;

    3) Power of attorney for administration of property and conclusion of transactions, which require notarization, unless otherwise established by the legislation;

    4) Additional power of attorney, except for the cases provided by the Civil legislation;

    5) Constitutive documents of business partnership;

    6) Marriage contracts;

    7) Agreement of heirs-at-law for their inheritance priority and shares in the inheritance;

    8) Agreement for alimony payments.

In practice notarization is required even for those transactions, which are not referred to ones requiring notarization.

Let us pay attention to the grounds for transaction invalidity.

In case of the failure to comply with of the requirement to the form, content and parties of a transaction as well as the freedom of the will thereof, such a transaction may be recognized as invalid at the suit of interested parties, the relevant state body or Prosecutor.

In accordance with the requirements of the Civil Procedural Code of the RK a claimant applied to court for protection of his violated or contested constitutional rights, freedoms or legally protected interests must prove the fact of such a violation. Otherwise, his suit will be dismissed.

In general a transaction, the content of which does not meet the legislation requirements and which is concluded for criminal purposes, is considered as invalid.

Let me give you two examples which led to long debates of lawyers taking part in the conference on practical issues of the Financial Legislation, which was held by the Financial Court of Almaty city, GRATA Law Firm and participants of the Almaty Regional Financial Centre. The issue of transaction invalidity was no doubt discussed at the conference.
Example 1 (all names and details of examples are fictitious). One of the city courts reviewed a claim of Ms. Mazhkenova against Mr. Mazhkenov, Munaiburgas LLP, and Mr. Yaliev for invalidation of the transaction on the sale of shares of Munaionimderi JSC and vindication thereof.

The claimantclaims are based on the fact that Ms. Mazhkenova is married to Mr. Mazhkenov, who sold 10% of Munaionimderi JSC shares without her permission. Ms. Mazhkenova claimed to invalidate the sale of shares and registration of shares of Mr. Yaliev at the amount of 9541 shares and 8600 shares of Munaiburgas LLP.

The claim was sustained in accordance with the court decision dated 02 April 2007 upheld by the Appellate Resolution dated 16 May 2007. It was resolved to invalidate the transaction on the sale of Munaionimderi JSC shares between Mr. Mazhkenov, Munaiburgas LLP and Mr. Yaliev and vindicate the shares with return to Mr. Mazhkenov.

The court decision was based on the fact that the shares were purchased by Mr. Mazhkenov during marriage and are the common property of spouses, so the alienation of such shares without the consent of one of the spouses is illegal.

In the meantime, attention should be given to Article 25 of the Law of the RK “On Registration of Securities transaction in the RK”, which specifies securities transactions shall be executed only if there are cross orders of contracting parties.

Withdrawal of the shares from Mr. Mazhkenov’s account and enter the shares to the accounts of defendants was certified by cross orders in writing signed by the authorized persons, registered professional participants of the securities market.

The court did not pay attention to Article 33.2 of the Law of the RK “On Marriage and family” specifying that a transaction concluded by one of spouses with regard to disposal of the common property without the consent of the other spouse may be recognized as invalid, only if proven that the other party of the transaction knew or should have known that the transaction was concluded without the consent of the spouse.

Reversing the court decision and the Appellate Resolution and making the new decision to dismiss the claim the supervisory board noted that the claimant had not provided evidence that the other party of the transaction knew that there was no consent to sell the shares. Moreover, either founder of Munaiburgas LLP Mr. Ibraev, or Mr. Yaliev did not know and could not know of non-consent of Mr. Mazhkenov’s wife for sale of the shares when purchasing them.

In the meantime, Mr. Ms. Mazhkenov are still living together. Prior to the claim submission Ms. Mazhkenova did not care of the shares. She knew that there were no dividends entered but did not bring an action.

The mentioned facts have been taken into account by the Supervisory board in order to confirm that Ms. Mazhkenova had been informed that the shares were sold, in other words, she supposed to be agree with the sale of the shares and this complies with Article 220.2 of the Civil Code of the RK and Article 33.2 of the Law of the Rk “On Marriage and Family”.

As another example let us take the civil case where Ms. Lokteva applied to court with a claim against Zhihaz JSC, Bolashak LLP, the Department of Justice and the Land Committee for invalidation of the minutes of a meeting, power of attorney and transaction on property alienation concluded between the JSC and LLP. The claimantclaim is based on the fact that Mr. Loktev (Ms. Lokteva’s husband) owned 86% of shares of the JSC, which were transferred to her ownership together with the property of the JSC under the marriage contract. Moreover, the interest of her husband in the LLP was 50%, thus he is an affiliated person and did not have the right to vote at the shareholders’ meeting for selling property of the JSC.

The claim of Ms. Lokteva was sustained in the court decision dated 28 September 2007. It was resolved in the court act to invalidate the minutes of meeting, the power of attorney, the sale contract of property of the JSC, the registration of the sale contract at the Department of Justice and the official act. The LLP was compensated in the amount of 7,300,000 tenge on account of the JSC.

The Appellate Resolution dated 01 November 2007 cancelled the court decision and the new decision to dismiss the claim was made.

In accordance with Article 3 of the Law of the RK “On Joint Stock Companies”, the JSC property shall be separate from the property of share holders. The same provision is included into the Charter of the JSC. In other words, Mr. Loktev did not have the ownership rights to the JSC property and, therefore, could not dispose of the property and transfer it to other persons including his wife. Moreover, a person who did not register his rights to shares can not take part in the activity of the JSC.

There were no rights to shares  registered for Ms. Lokteva. She did not have the registered rights to the JSC property as well. Thus the marriage contract was not implemented and property rights were not emerged.

Accordingly, the disputed minutes of the meeting, the power of attorney, the registration of property for the LLP, and the official act cannot violate Ms. Lokteva’s rights, therefore, she is an undue claimant.

The Resolution of the Supervisory board dated 20 March 2008 cancelled the court acts forwarding the case for a new consideration; as according to the marriage contract concluded between Mr. Loktev and Ms. Lokteva the shares and the property of the JSC were transferred to Ms. Lokteva’s ownership. The marriage contract was not cancelled or amended. According to Articles 32 and 33 of the Marriage and Family Code of the RK  property purchased by spouses during the marriage period shall be their common property. Disposal of such a property may be performed only upon the mutual consent of the spouses. In case of the property alienation without the consent of one of spouses. the latter has the right to claim for invaliation of such a transaction within one year since he or she knew about the transaction.

However, neither court of first instance nor a court of appeal defined when Ms. Lokteva had known about the transaction, what actions she had been taken in order to register her rights of ownership to the disputable property and whether her actions comply with the legislation at that time.

Moreover, the appellate instance did not disprove that the transaction between the JSC and LLP had been concluded in violation of the Law requirements to the form, content and parties of transaction.

And now, let me give you some grounds of transaction invalidation.

1. Transaction concluded without obtaining the relevant license or after the expiry of a license shall be invalid;

2. Transaction concluded for the purposes of unfair competition or violating business ethics rules shall be invalid;

3. Transaction concluded by a person under age of 14 shall be invalid, except for the transactions specified by Article 23 of the Civil Code of the RK;

4. Transaction concluded by a person at the age of 14 without the consent of his parents (adoptive parents) or trustees, except for the transactions, which he has the right to conclude individually, may be recognized as invalid by the court at the suit of his parents (adoptive parents) or trustees.

5. Transaction concluded by a person recognized as disabled due to mental alienation of feeblemindedness shall be invalid. A transaction concluded by a person, which is subsequently recognized as disabled (Article 26 of the Civil Code of the RK) can be recognized as invalid by court at the suit of his tutor, if proven that the person was in mental affection at the  moment of the transaction conclusion;

6. Transaction concluded by a person limited in ability by court at the suit of his trustees may be recognized as invalid by court;

7. Transaction concluded by a capable person but being at the moment of the transaction conclusion in the condition that he could not understand the meaning of his actions or control them can be recognized as invalid at the suit of the person or other interested parties after death of that person if he did not have a possibility to bring a suit;

8. Transaction concluded due to an operative mistake may be recognized as invalid at the suit of a party, which acted under such a mistake. An operative mistake is a mistake regarding the nature of a transaction, identy thereof and such features of the subject thereof, which significantly reduce the opportunity to use it as intended. Mistake in intentions may be the ground for invalidation of a transaction only if it is included in the content of the transaction as cancellation condition or condition precedent (Article 150 of the Civil Code of the RK).

If a mistake was caused by gross carelessness of a transaction party or an entrepreneurial risk, then the court considering all details and interests of the other party of the transaction shall have the right to dismiss the claim for invalidation of the transaction.

9. Transaction caused by the lie,  act of force, threat as well as a transaction had to be concluded by a person due to a set of the hard circumstances under extremely unprofitable terms, which was used by the other party (one-sided transaction) may be recognized as invalid by a court at the suit of a victim.

10. Transaction concluded by a representative of one party under a dolose agreement with the other party may be recognized as invalid by a court at the suit of a victim party. Compensation for damages incurred by a victim party (Article 9.4 of the Civil Code of the RK) may be imposed to the unfair representative as a subsidiary liability;

11. Transaction concluded by a legal entity in contradiction with the purposes of activity certainly limited by this Code, other legislative acts or constitutive documents, or in violation of the charter power of a abode thereof may be recognized as invalid at the suit of the owner of property of the legal entity or a founder thereof, if proven that the other party knew or should have known of such violations;

12. Transactions specified by Articles 159.3 and 159.5 of the Civil Code of the RK may be recognized as valid upon the request of parents, adoptive parents or trustees of minors or disabled persons, if such transactions were concluded in favor of such persons.
Now, let us try to figure out what circumstances the court decision on invalidation of a transaction causes.

Reference should be given to the norms of the Civil Code of the RK, according to which an invalid transaction does not entail any legal circumstances, except for the circumstances associated with its invalidity.

In case of invalidation of a transaction each of the parties thereof shall be obliged to return all property acquired under the transaction; and if such a return in kind is impossible, they should return the costs in money equivalent It is so-called “mutual restitution (recognition of circumstances of transaction invalidity).
In such a case, attention should be given to the fact that the judicial practice is ambiguous.

In general, the Supreme Court of the RK does not support the restitution of parties when making decision on a matter.

As practice shows, the court decision tends to recognize the invalidity of a transaction but believes it is necessary  not to include the parties restitution to the operative part of the court decision. Existence of a juridical act recognizing invalidation of a transaction specifies that the parties must return each other all property and money respectively.
On the other hand, the Civil Code of the RK provides the procedure of mutual restitution, which is usually included in the decision of city or regional courts when considering civil cases of the certain category.

We may assume that such a ambiguous practice entails some questions in the course of execution of the count decision. As law enforcement officers still do not operate properly, such questions often result in the problems of judgment creditors, new petitions, complaints and suits.

In my turn, I believe that the ambiguous juridical practice will push the relevant judicial bodies not only to regular generalization but also to the Regulatory Resolution in order to lead everything to the unified legal term.

Best regards,

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