29 09 2021
Standard form of Article of Association. Consequences of failure to sign upon the establishment of LLP
Article of Association of Limited Liability Partnerships
In order to simplify business registration procedure in Kazakhstan based on the Law No. 2198 of April 17, 1995 "On state registration of legal entities and accounting registration of branches and representative offices" the provision on establishment of notification procedure for business entities registration (instead of the permissive one) came into effect. This procedure does not oblige business entities to submit article of association of a future business to an authorized body, which actually reduces the term of its registration.
Does the notification procedure mean that the approval of the Article of Association becomes optional for the establishment of a limited liability partnership (the "LLP")?
According to clause 1 of Article 4 (1) of the Law of the Republic of Kazakhstan "On Business Partnerships", founding documents of business partnerships include the memorandum and article of association. Thus, the notification principle of LLP registration provided for by the Law of the Republic of Kazakhstan dated 29.10.2002 does not exempt the company participants from complying with the established procedure for approval and signing of the Article of Association, as the latter is included in the founding documents of the partnership and for any procedures shall be submitted to both state and non-state organizations.
The first difficulties in the case of the absence of a article of association usually begin with the opening of a bank account. On the basis of clause 11 of the Regulations of the National Bank Board dated June 2, 2000 № 266 to open a bank account it is necessary to present the Article of Association or its notarized copies or a document confirming the fact of client's activity on the basis of the standard Article of Association.
The absence of the Article of Association does not, in itself, invalidate the registration of LLP or serve as grounds for its forced liquidation.
Moving on to the issue of drafting the Article of Association, it should be noted that there are two types of Article of Association: a standard Article of Association and an individual Article of Association. A standard Article of Association is a form developed by an authorised body that contains the standard rules of LLP, while an individual Article of Association should be understood as a document developed by a specialist that complies with the legislation and reflects the individual characteristics of the company and regulates the rules of doing business by that company.
Many founders consider the preparation of constituent documents as a formal procedure and use the model article of association without taking into account the need to approve additional rules related to the specifics of their business.
Nevertheless, a properly drafted article of association can help founders to avoid possible misunderstandings later on related to the company's activities.
In addition, the preparation of an individual Article of Association gives participants the following options
• Reducing the time frame for calling a general meeting.
According to clause1 of Article 46 (1) of the Law on Partnerships with Limited and Additional Liability (the "Law on LLP") obliges the body convening the general meeting of LLP participants to notify each LLP participant in writing not later than 30 days before the opening of the meeting to the address indicated in the register of participants, which is maintained by the executive body of the partnership.
By virtue of clause 5 of the above article with the LLP membership of less than 7 persons, the individual article of association may stipulate terms other than those stipulated in clause 1 of the same article. Thus, if LLP has up to 7 participants, the time limit for calling a general meeting for a shorter period of time (less than 30 days) can be changed by the article of association, which makes it possible to hold a general meeting of participants more expeditiously.
• Limitations on the powers of the executive body (director).
According to clause 2 of Article 54 of the Law on LLP, the procedure for the activity of the sole executive body of the partnership and its decision-making is determined by the partnership's article of association, as well as rules and other documents adopted by the general meeting of participants.
For example, based on the provisions of the article of association, the partners may restrict the director from carrying out transactions without the prior consent of the supreme body (participant):
- related to granting (raising) loans, sureties, obtaining bank guarantees, assignment of claims and transfer of debt, opening bank accounts;
- transactions related to immovable property (including transfer or receipt of property for lease (sublease), acquisition or alienation of immovable property, its pledge, disposal of immovable property in other ways) as well as transactions directly related to disposal of property rights to immovable property (including assignment of rights and transfer of debt under real estate lease agreements);
- related to intellectual property.
In addition, the participants can limit the amount of transactions or several related transactions, as well as the amount of bonuses to the employees.
It is important to keep in mind that the term of appointment of an executive must not exceed 5 years. Such restrictions will allow the participants to control the activities of the director.
• Restrictions on the sale of shares to third parties.
Given the provisions of Article 32 of the Law on LLP, the individual article of association may provide for a prohibition or restriction on the sale by a partner of his share to third parties.
Thus, Article 17 of the Law on LLP stipulates that the Article of Association must contain the following provisions
1) business name, place of residence and address of the partnership;
2) list of partners or name, place of residence and data of an identity document (if the founder is a natural person);
3) information on the amount of the nominal capital of the partnership;
4) procedure for formation and competence of the bodies of the partnership;
5) conditions of reorganization and termination of activities of the partnership;
6) procedure for distribution of the partnership's net profit in the case where the register of members of the partnership is kept by the central depositary
7) Procedure and terms for providing to participants of the partnership and purchasers of shares of the partnership information on activities of the partnership;
7-1) name of the mass media used for publishing information on the activities of the partnership
8) rights and obligations of members of the partnership.
The provision on the amount of the share capital should be noted and it should be clarified that the minimum amount of funds for opening LLP is not set by the law of the Republic of Kazakhstan. Thanks to this, it is possible to open LLP without much investment, or more precisely even with zero share capital.
Entrepreneurs often wonder about the need to notarize the Article of Association. At the moment, the legislation of the Republic of Kazakhstan does not oblige legal entities that are subjects of small, medium and large businesses to notarize the Article of Association.
At the same time the legislation previously provided for such duty, but excluded by the Law of the Republic of Kazakhstan dated 24.12.2012, No. 60-V "On amendments and additions to some legislative acts of the Republic of Kazakhstan on state registration of legal entities and record registration of branches and representative offices. At the same time, the mandatory notarization of the authenticity of a participant's signature on the Article of Association is retained when notarized copies of such Article of Association must be certified.
Summing up, we believe it is necessary to note that the legislation does not oblige LLP participants to approve the Article of Association at the time of its registration; however, such document will be required for further relations with public authorities and organisations.
When choosing between the standard Article of Association and the individual Article of Association developed to meet the needs and specifics of the company's activities, we recommend that the development of an individual Article of Association be chosen.
Author: Kamila Polatova, a junior lawyer at MG Partners