Commentary to the articles of Paragraph 6 Sale of the enterprise of Chapter 25 of the Civil Code of the Republic of Kazakhstan

Under the contract for the sale of an enterprise, the seller undertakes to transfer ownership of the enterprise as a whole to the buyer as a property complex (Article 119 of the Civil Code), with the exception of rights and obligations that the seller is not entitled to transfer to other persons (Article 493 of the Civil Code)  

The specifics of the subject of this agreement determine the specifics of its regulation. Firstly, the contract of sale of an enterprise is one of the types of sale of real estate. Secondly, the concept of "enterprise" is used by the Civil Code in two meanings: as a subject of law (for example, state-owned and state-owned enterprises) and as an object of law. In the latter sense, an enterprise is understood as a special type of property with specific properties, and is subject to regulation in the commented paragraph.  

Considering an enterprise as a special property that is the subject of purchase and sale, it is necessary to highlight the following. Firstly, an enterprise is a property intended for conducting business activities. Secondly, an enterprise is a property that is separate from other types of property, including those belonging to a particular entity. Thirdly, an enterprise is a single property complex, which is not just a collection of disparate items, but one non-consumable, complex (cumulative) thing.1. Finally, an enterprise is an immovable thing (paragraph 1 of Article 119 of the Civil Code).  

In this case, the purchase of the enterprise itself is made as a thing, in which the buyer acquires ownership of the purchased thing, as in a regular purchase and sale transaction. Whereas, for example, when a person acquires 100% of the shares of a joint-stock company, its shareholders do not have ownership of the joint-stock company's property, but only of shares, which, in turn, gives them the right to control the company. Ownership of the JSC's property, as well as all binding and exclusive rights (i.e., the company), belong to the joint-stock company itself as a legal entity. In addition, when selling shares, there is no change in the owner of the enterprise, the holder of property rights: the joint-stock company remains, only the person changes, the holder of binding rights (corporate and dividend rights) is the shareholder.  

The contract for the sale of an enterprise is consensual, reimbursable, and mutual.  

The parties to the contract for the sale of an enterprise are usually entrepreneurs: citizens or commercial organizations. When selling state-owned enterprises during privatization, the sellers are the relevant departments for the management of state property - republican or territorial, and buyers can only be non-governmental organizations and citizens.  

As a general rule, clause 4 of Article 493 of the Civil Code, the rights obtained on the basis of a special permit (license) to engage in relevant activities are not subject to transfer to the buyer of the enterprise, unless otherwise established by legislative acts. The inclusion of obligations in the structure of the enterprise transferred under the contract, the fulfillment of which is impossible by the buyer in the absence of a special permit (license), does not release the seller from the corresponding obligations to creditors. The seller and the buyer are jointly and severally liable to creditors for non-fulfillment of obligations. Therefore, to purchase certain types of enterprises, a license is required, i.e. to work with the enterprise being sold, the buyer must be allowed to engage in one activity or another. For example, according to the Decree "On Licensing", oil refining is licensed. This means that if the relevant enterprise is being sold, then upon its acquisition, the buyer must also submit a license.  

493 of the Civil Code establishes increased requirements for determining the subject of an enterprise purchase agreement: it must specify the composition of the enterprise being sold, which is determined on the basis of its complete inventory. The company has tangible and intangible elements. The first include: premises, buildings, structures (and land plots) with appropriate equipment, raw materials, semi-finished products, finished products, fuels and lubricants, etc., as well as cash. Intangible elements of an enterprise are understood as property rights and obligations of a binding nature (including accounts payable and receivables), exclusive rights to the results of creative activity (patent, copyright, etc.), exclusive rights in relation to the means of individualization of the seller and his goods (brand name, trademarks, etc.).  

The subject of the contract may be not only a full-fledged enterprise owned by the buyer. One of the most important features of the subject of this agreement is the presence of obligations (debts) of the seller to third parties. The sale of an enterprise is the only type of purchase and sale that allows for the retaliatory alienation of subjective duties. The sale of an obligation means at the same time the transfer of debt (to a third party creditor) from the seller to the buyer, which is possible only with the consent of the creditor (paragraph 1 of art. 348 of the Civil Code). Therefore , art. 496 of the Civil Code regulates in detail the obligations of the parties to the contract to notify creditors and the corresponding rights of the latter.  

An essential condition of the contract for the sale of an enterprise is its price, i.e. the value of the enterprise, which is determined by agreement of the parties, unless otherwise established by legislative acts. But at the same time, Clause 2 of Article 495 of the Civil Code says that before signing the contract, it is necessary to prepare a number of documents that directly affect the determination of the price: an inventory report, a balance sheet, an independent auditor's opinion on the composition and value of the enterprise, as well as a list of all debts (obligations) included in the company, indicating creditors, nature, size and the timing of their claims (para. 2 art. 495 of the Civil Code). It should be borne in mind that these documents are the basis for concluding a contract of sale of an enterprise as a special object, but they are not important for determining the price of an enterprise item. The property, rights and obligations specified in these documents are subject to transfer by the seller to the buyer upon conclusion of the contract (clause 1 of Article 494 of the Civil Code), unless otherwise follows from Article 493 of the Civil Code and is not established by the contract. It is here that failure to comply with these formal requirements (on the availability of the above-mentioned documents) entails the invalidity of the contract.  

The form of the contract for the sale of an enterprise is determined similarly to the rules for the sale of real estate. The contract must be concluded in writing by drawing up a single document (clause 1 of Article 494 of the Civil Code). When selling state-owned enterprises, the initial auction (tender) price is determined by special regulations in accordance with the procedure established by the Decree "On Privatization" and the "Rules for Pre-sale preparation and sale of property (assets) of liquidated organizations declared bankrupt on the initiative of the state", approved by Resolution of the Government of the Republic of Kazakhstan dated August 11, 1998 No. 759. Thus, according to Article 22 of these Rules, the sale of property (assets) is carried out according to the auction plan (auction using the English or Dutch method) in compliance with the principles of transparency, publicity and accessibility. Moreover, the sale of property being auctioned for the first time is carried out according to the English bidding scheme. If the auction is declared invalid, the property is put up for auction according to the Dutch method (clause 23 of the Rules).  

A special feature of the company's sale agreement is that it is subject to state registration and comes into force from the moment it is completed (Clause 2, Article 294 of the Civil Code).  

The content of the company's sales agreement.

According to the general rules on the purchase and sale of an item, the obligations of the seller of the enterprise are to transfer the goods to him in a certain quantity, set, established quality and free from the rights of third parties. In accordance with Article 497, the transfer of an enterprise by the seller to the buyer is carried out according to a transfer act, which specifies data on the composition of the enterprise and on the notification of creditors of its sale, information on the identified deficiencies of the transferred property and a list of property that cannot be transferred due to its loss (paragraph 1 of Article 497 of the Civil Code). The significance of the transfer act for the execution of the contract of sale of the enterprise is that from the moment of its signing, the enterprise is considered to have been transferred to the buyer (Clause 2, Article 497 of the Civil Code). From that moment on, the risk of accidental loss or damage to the property constituting the company (but not the ownership right) passes to the buyer. The preparation of the enterprise for transfer, including the preparation and submission for signature of the transfer act, is the responsibility of the seller and is carried out at his expense, unless otherwise provided by the contract (Clause 2, Article 497 of the Civil Code). The significance of the transfer act is also manifested in the fact that the enterprise is considered to have been transferred to the buyer from the moment the transfer act is signed, provided that by that time the seller has provided the buyer with the actual opportunity to freely accept the enterprise, since the obligation to actually transfer the thing to the buyer is the seller's main obligation in all purchase and sale agreements. But it is impossible to carry out the actual transfer of the enterprise (for example, by delivery) to the buyer, especially at the same time, since the enterprise is a complex property complex consisting of many elements.  

The obligation to transfer ownership to the buyer directly follows from the legal definition of the contract of sale of the enterprise. In accordance with clauses 1 and 2 of Article 498 of the Civil Code, immediately after the transfer of the enterprise to the buyer, ownership of the enterprise (transfer of ownership) must be registered with the buyer, unless otherwise provided by the contract. As a result, a coherent sequence of actions is being built to transfer ownership rights to the buyer: signing and state registration of the contract, signing the transfer act (i.e. transfer of the company), registration of ownership rights. From the moment the ownership rights are transferred to the buyer, the seller is considered to have fulfilled his obligation under the contract. The moments of transfer of ownership and the risks of accidental death of an enterprise are determined by law imperatively and do not coincide in time. With regard to property rights, this is explained by the general rule of paragraph 2 of Article 238 of the Civil Code. Whereas the definition of the moment of transfer of risks, timed to coincide with the transfer of the enterprise, has a slightly different rationale. Thus, the buyer who received the enterprise under the transfer act is by no means deprived of all rights in relation to the enterprise until the acquisition of ownership. In cases where the contract stipulates that the seller retains ownership of the enterprise transferred to the buyer until the enterprise is paid for or other circumstances occur, the buyer has the right to dispose of the property and rights belonging to the transferred enterprise to the extent necessary to ensure the operation of the enterprise as a property complex. (paragraph 3 of art . 498 CC).  

By virtue of the direct indication of clause 1 of Article 499, the consequences of a violation by the seller of the conditions on quantity (set) and quality are determined similarly to the general provisions on purchase and sale.  

The rights of the buyer are sufficiently protected when selling "low-quality" or incomplete items of the enterprise. In cases where the enterprise has been transferred and accepted under a transfer act, which contains information about the identified deficiencies of the enterprise and lost property (paragraph 1 of Article 497 of the Civil Code), the buyer has the right to demand a corresponding reduction in the purchase price of the enterprise, unless the right to present other claims in such cases is provided for by the contract.  

The buyer also has the right to demand a corresponding reduction in the purchase price of the enterprise upon receipt of property of inadequate quality or in a smaller quantity (incomplete) (Clause 2 of art. 499 of the Civil Code). However, the right to demand a reduction in the purchase price is a way to protect the buyer only when the defects or absence of certain items were specified in the transfer deed (i.e., they were known to the buyer at the time of the transfer of the enterprise). If the specified violations were not known to the buyer and were discovered after the transfer of the enterprise, he has all the above-mentioned means of protection according to the general rules on purchase and sale. The buyer has the right to demand a reduction in the purchase price even if the seller's debts (obligations) are transferred to him as part of the enterprise, which were not specified in the contract or transfer deed, unless the seller proves that the buyer knew about the debts (obligations) at the time of the conclusion of the contract and the transfer of the enterprise.  

A judicial procedure is provided for the termination or amendment of the contract of sale of the enterprise: the buyer has the right to demand in court the termination or amendment of the contract and the return of what was performed by the parties to the contract, if it is established that the enterprise, due to the shortcomings for which the seller is responsible, is not suitable for the purposes specified in the contract of sale, and these shortcomings have not been eliminated by the seller under the conditions, in the manner and within the time limits established in accordance with the Civil Code, legislative acts or the contract, or the elimination of deficiencies is impossible.  

When determining the consequences of violating the terms of the contract of sale of an enterprise, the requirements of art. 500 of the Civil Code must be taken into account. Thus, the claims of one or both parties for the return or recovery in kind of what was received under the contract are subject to satisfaction only if this does not significantly violate the rights and interests of the creditors of the parties (other persons) and does not contradict the public interests. The seller is obliged to transfer the property to the buyer free from the rights of third parties. The specifics of this obligation when selling an enterprise are due to the fact that the subject of the contract, as a rule, includes obligations to third parties. In this case, the seller must warn the buyer about all available rights of third parties to the company and transfer their debts to the latter in an appropriate manner. By signing the transfer act, which contains a list of all debts, the seller simultaneously notifies the buyer about them and transfers the debts to him. The proper execution of the debt transfer under the contract of sale of the enterprise requires mandatory notification and consent of creditors (art. 496 CC). Creditors must be notified in writing of the proposed transfer of debts before the transfer of the enterprise to the buyer, i.e. before the parties sign the transfer act. The obligation of such notification lies with the seller, since it is he who must transfer the company (including debts) to the buyer. Creditors who have not agreed to transfer the debt have the right to demand either termination or early fulfillment of the obligation (and compensation for losses), or invalidation of the contract in full or in the relevant part (paragraph 2 of Article 496 of the Civil Code) The duration and nature of the periods during which these requirements can be fulfilled vary. For creditors notified of the transfer of debt, this period is three months (from the date of receipt of the notification) (paragraph 2 of Article 496 of the Civil Code). Its expiration repays the creditor's right to make appropriate claims to the seller. To protect the rights of creditors who have not been notified of the transfer, a one-year limitation period has been established (paragraph 3 of Article 496 of the Civil Code). It begins to flow from the moment when the creditor learned or should have learned about the transfer of the enterprise (and, accordingly, about the violation of its rights). In the case of transfer of debts to the buyer without the consent of the creditor, the parties to the contract are jointly and severally liable for the obligations included in the transferred enterprise (Clause 4, Article 496 of the Civil Code).  

The main obligation of the buyer under the contract is to pay for the received enterprise. The procedure and terms of payment are determined similarly to the general provisions on purchase and sale. The obligation to accept goods in relation to the sale of GC enterprises is not specifically regulated. However, such a duty exists. It is expressed in the performance by the buyer of the actions necessary for the seller to be considered to have fulfilled his obligation to transfer the enterprise. Accordingly, the buyer cannot unreasonably refuse to sign the transfer act (if it complies with the terms of the contract) and evade the state registration of ownership of the enterprise.

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The commentary was prepared within the framework of the scientific and practical research program of the Scientific Research Center of Private Law of the Kazakh State Law University.  

Head of the working group on the preparation of the draft Civil Code of the Republic of Kazakhstan, Corresponding Member of the Academy of Sciences of the Republic of Kazakhstan, Professor Suleimenov M.K.

Deputy head Professor Basin Yu.G.