Filing Lawsuits Correctly or How to Avoid Unjustified Expenses when Filing a Loan Agreement Lawsuit

A loan agreement is one of the most common ways to establish civil legal relationships.

Parties to civil legal relationships are increasingly resorting to judicial protection of violated rights, freedoms, and legally protected interests arising from loan relationships.

Disputes arising from loan agreements are resolved in accordance with Chapter 34 “Loan and Credit” of the Civil Code of the Kyrgyz Republic (hereinafter referred to as the Civil Code of the Kyrgyz Republic). Articles 724-728 of the Civil Code of the Kyrgyz Republic regulate the procedure for concluding a loan agreement, the obligations of the borrower, and the consequences of the borrower’s breach of the loan agreement.

Under a loan agreement, one party (the lender) transfers money or other items with specific characteristics to another party (the borrower), and the borrower undertakes to return to the lender the same amount of money (the loan amount) or an equal quantity of other items of the same kind and quality.

A loan must be formalized in writing, in the form of a contract, receipt, or other document confirming the transfer (receipt) of funds or items, if the amount exceeds the calculation index by at least ten times, and in cases where the party is a legal entity, regardless of the amount.

In accordance with paragraph 3 of Article 725 of the Civil Code of the Kyrgyz Republic and Article 80 of the Civil Procedure Code of the Kyrgyz Republic, the term “other document” confirming the existence of a loan agreement should be understood as any written confirmation of the borrower receiving money or items (acts, contracts, certificates, personal and business letters containing information related to the transaction, including those received by facsimile, electronic or other means of communication that establish their authenticity), originating from one of the parties to the loan agreement.

The agreement is considered concluded from the moment the money or items are transferred.

Despite the fact that on July 24, 2013, Law of the Kyrgyz Republic No. 162 “On Amendments and Additions to Certain Legislative Acts of the Kyrgyz Republic” introduced amendments to Article 725 of the Civil Code of the Kyrgyz Republic, according to which a loan agreement must be concluded in a notarial form if its amount exceeds at least five hundred times the calculation index (50 000 KGS), and the failure to comply with the notarial form of the loan agreement renders it null and void, and the lender does not have the right to demand payment of interest on the loan agreement that does not comply with the notarial form (paragraph 2 of Article 178, paragraphs 4 and 5 of Article 725 of the Civil Code of the Kyrgyz Republic), in practice, there are numerous cases where a loan agreement exceeding 50 000 KGS is formalized in a simple written form (often by writing a receipt).

In this case, when the borrower defaults, many lenders, not to mention lawyers, make mistakes when filing a lawsuit in court, which result in significant financial expenses in terms of paying state fees.

This article clarifies an important point when filing a lawsuit based on a loan agreement formalized in a simple written form (without notarization) for an amount exceeding 50,000 soms. This will help both plaintiffs (individuals and legal entities) and our colleagues save time and, most importantly, money when seeking legal protection for violated rights arising from loan relationships.

As noted above, the failure to comply with the notarial form of a loan agreement exceeding 50 000 KGS renders it null and void.

According to paragraph 10 of the Resolution of the Plenum of the Supreme Court of the Kyrgyz Republic No. 12 dated May 31, 2018, “On Some Issues of Judicial Practice in Resolving Disputes under Loan Agreements”, it is clarified to the courts that, based on the requirements of paragraphs 1 and 2 of Article 184 of the Civil Code of the Kyrgyz Republic, an invalid transaction does not have legal consequences, except for those related to its invalidity, and it is null and void from the moment of its conclusion. In the case of an invalid transaction, each party is obliged to return everything received under the transaction to the other party. In this regard, the court is entitled, based on paragraph 2 of Article 183 of the Civil Code of the Kyrgyz Republic, to apply the consequences of a void transaction on its own initiative, indicating in the reasoning part of the decision the non-compliance with the notarial form of the loan agreement.

In this case, many plaintiffs and lawyers acting on their behalf actually make a significant mistake by filing a claim for the recovery of debt under the loan agreement instead of filing a claim for the application of the consequences of the invalidity of the void transaction. Thus, when formulating the subject of the claim incorrectly, the plaintiff has to pay state fees as if it were a property claim, which, according to the approved Resolution of the Government of the Kyrgyz Republic No. 159 dated April 15, 2019, the state fee rates range from 2500 soms and above depending on the amount of the claim.

The aforementioned paragraph of the Resolution of the Plenum of the Supreme Court of the Kyrgyz Republic No. 12 dated May 31, 2018, clarifies to the courts that when resolving disputes of this category (claims for the recovery of debt under a loan agreement), the operative part of the decision should indicate the rejection of the claim, the application of the consequences of the void transaction, and the restoration of the parties to their original position by recovering the amount received without interest.

A similar clarification is given by the Supreme Court of the Kyrgyz Republic in paragraph 3 of the Resolution of the Plenum No. 11 dated May 24, 2019, “On Some Issues of Judicial Practice in Disputes over the Invalidity of Transactions and Good Faith Acquisition of Property”, which states that "in the case of establishing the invalidity of a transaction in a case where the subject of consideration is not a claim for the recognition of the transaction as invalid, the court is entitled to apply the consequences of the invalidity of the void transaction on its own initiative (for example, if the fact of invalidity (voidness) of the loan agreement is established in the consideration of the claim for the recovery of debt under the loan agreement due to non-compliance with the notarial form under paragraphs 4 and 5 of Article 725 of the Civil Code of the Kyrgyz Republic, the court is entitled to apply the consequences of the invalidity of the void transaction by recovering from the defendant in favor of the plaintiff the received amount without payment of interest)”.

In case the court renders a decision to dismiss the claim, the state fee is directed to the state's revenue, even if the parties are restored to their original positions, and the plaintiff is awarded a refund of the principal amount of the loan. As mentioned above, depending on the value of the claim, the lost amount of the state fee (which must be paid for the claim to be accepted) can be significant when the subject of the claim is formulated incorrectly.

Thus, it appears lawful and economically justified, in situations where the recovery of borrowed funds in a judicial proceeding is required, for an amount exceeding 50 000 KGS, which were documented in a simple written form (for example, by writing a receipt), to file a claim for the application of the consequences of the invalidity of a void transaction.

According to paragraph 10 of the Resolution of the Plenum of the Supreme Court of the Kyrgyz Republic dated May 24, 2019, No. 11 “On certain issues of judicial practice regarding the invalidity of transactions and good faith acquisition of property”, “an invalid transaction does not entail any legal consequences, except for those related to its invalidity.

These consequences include the obligation of each party to return to the other party everything received under the transaction (bilateral restitution).

When making a claim for the application of the consequences of the invalidity of a transaction, whether voidable or void, a state fee is paid, which is established for non-property disputes”.

A similar clarification was given by the Supreme Court of the Kyrgyz Republic in paragraph 6 of the Resolution of the Plenum dated May 29, 2020, No. 9 “On certain issues of the application of legislation on state fees in the consideration of civil, economic, and administrative cases by the courts of the Kyrgyz Republic” – “non-property disputes also include disputes regarding the application of the consequences of the invalidity of transactions (Articles 183-184 of the Civil Code of the Kyrgyz Republic)”.

Thus, when formulating the subject of the claim correctly according to the legal relationships described in this article, the plaintiff will only have to pay a state fee in the amount of 7 times the base value (700 KGS) based on subparagraph 4 of paragraph 1 of the approved Resolution of the Government of the Kyrgyz Republic dated April 15, 2019, No. 159, on State Fee Rates.

If you want to ensure that your rights are always properly protected, that claims are correctly formulated in accordance with the latest legislative requirements, and do not result in unjustified economic losses, you can turn to highly qualified lawyers.

The team of the Lex Law Firm has specialists with extensive experience in representing clients in judicial bodies for many years, and we are ready to come to your assistance and protect your rights at a high professional level.