In modern times and business we witness various cases involving debtors’ intent to defraud creditors, i.e. different attempts of debtors to avoid fulfilment of obligations towards creditors. Experience showed that insolvent debtors often try to avoid debts towards creditors. Our legislation does not provide the safest protection of creditors in these situations however one of the actions used to prevent the debtor’s fraudulent action (used even since ancient Rome) is challenging debtor’s fraudulent action.
Challenging debtor’s fraudulent action is an action which to our legal practice was developed on the basis of the German legislation and actually was introduced through the Austrian codification, and thus from the German legal terminology. Even the Roman law was familiar with challenging the debtor’s fraudulent action or Actio Pauliana.
Challenging debtor’s fraudulent action is governed by the Contract Law where every defrauded creditor of outstanding claim may file a legal claim before the court against the debtor’s fraudulent action if the same have been made with intent to defraud the creditor i.e. the creditor shall require the court to determine that the debtor’s action is without legal effect to the extent that is required to settle the debt towards the creditor. The creditor is entitled to exercise this right regardless of whether his financial claim arose before or after the debtor’s fraudulent action. Creditor as an initiator of Actio Pauliana address his request against the third party, involved in the fraudulent transfer. In this situation the third party is an opponent to the creditor’s legal claim.
Challenging debtor’s fraudulent action was known even in Roman law under the name Actio Pauliana. In fact, challenging the debtor’s fraudulent action i.e. Actio Pauliana entitle creditors that with an intention to collect its outstanding financial claims may, under certain conditions, rescind fraudulent transfer and other fraudulent actions of their insolvent debtors. The purpose is to protect creditors from unscrupulous and negligent debtors.
Actio Pauliana as a legal action appears in two situations: in the bankruptcy and out of the bankruptcy. The Law on Obligations regulates only those cases when bankruptcy is not initiated. The purpose of Actio Pauliana with regard of out of the bankruptcy cases is to settle one of the defrauded creditors in a way to declare the fraudulent action as null and void but only for the amount necessary for the settlement of the financial claims of that very creditor.
Actio Pauliana may be directed towards: contracts, quasi-contracts, unilateral declarations of intent, factual actions, omissions, simulated legal transactions and illegal activities.
When the debtor’s action includes two separate legal documents, then for challenging of the entire debtor’s fraudulent action it would be sufficient that any of these legal documents can be challenged (modus acquirendi and iustus titulus).
Debtor’s fraudulent action is always individual and related to a particular creditor and for a designated debt. However, if the creditor would like to collect several debts and in order to settle all it would be sufficient to exercise Actio Pauliana for only one debtor’s action, the creditor still has to submit legal claims for each debt regardless of challenging only one debtor’s legal action.
For successful exercise of Actio Pauliana it is necessary to meet the general and special requirements in a way that the general requirements have to be cumulatively fulfilled while for the specific requirements it would be sufficient to fulfil any of the alternative requirements.
General requirements for challenging maturity of creditor’s financial claims are: the debtor’s
insolvency and the debtor’s fraudulent action taken to the detriment of the creditor. Special
requirements are contained in four types of Actio Pauliana: Actio Pauliana dolosa, Actio
Pauliana culposa, Actio Pauliana familliaria and Actio Quasi Pauliana.
- Actio Pauliana dolosa
Filing Action Pauliana dolosa is possible in cases where the debtor deliberately has taken legal action to the detriment of the creditor. In this sense, the Law of Obligations under Article 281, paragraph 1, stipulates that “the debtor was aware” of the damage caused to the creditor. Except for the debtor’s intention to damage the creditor there should be other elements. First of all it should be based on the paid transfer of the debtor’s property (contract for a fee) and existence of awareness of the damage caused to the creditor at the time of taking the action. The creditor must file Action Pauliana dolosa within one year of the legal action taken by the debtor, or from the date when was supposed to take the omitted action.
- Actio Pauliana culposa
To file Action Pauliana culposa it is necessary that it relates to the paid transfer of the debtor’s property (contract for a fee) to the detriment of thecreditor, and that at the time of fraudulent transfer the debtor was not aware that by doing so shall cause damage to the creditor but still could have known if acted prudently. The deadline for submitting Action Pauliana culposa is one year of the legal action taken by the debtor, or from the date when was supposed to take the omitted action.
The Law of Obligations has allowed to the creditor an alternative use of the right dolosa or culposa, or even a combination of these elements in the sense that the creditor can use it in a way that from one legal claim can take one and from the other legal claim can take another element. In this case the Law of Obligations improved the position of creditors.
- Actio Pauliana familliaria
In cases where the debtor has taken a fraudulent transfer in favour of his marital partner or any other member of the immediate family, it is reasonably supposed that such an action was taken to the detriment of the creditor especially if there are no sufficient other assets from which the creditor could be settled. This fraudulent action of the debtor may be challenged with Actio Pauliana familliaria under certain conditions. As with the previous two, the first condition is that the opponent of challenging (the third party) has acquired debtor’s property on the basis of the paid transfer of the debtor’s property (contract for a fee). The second condition is that the debtor’s fraudulent action was made in favour of the debtor’s marital partner or blood relativesin the direct line of descent, collateral relative up to the fourth degree or in-laws to the same degree.
The creditor is not obliged to prove awareness of the debtor and the third party about the damage cause to the creditor. The burden of proof is on the opposite side. Actio Pauliana familliaria must be filed within three years of the legal action taken by the debtor, or from the date when was supposed to take the omitted action.
- Actio Quasi Pauliana
Actio Quasi Pauliana understands challenging a fraudulent transfer of debtor’s assets without payment but to the detriment of the creditor. If the debtor with the fraudulent transfer without any payment is becoming insolvent and therefore unable to meet any obligations to the creditors, then it is assumed that the debtor and the third party were aware that it is an action to the detriment of the creditor. This assumption cannot be challenged (iuris et de iure).
In order to be successful in Actio Quasi Pauliana the creditor must prove the fraudulent transfer was made without payment and the legal claim has to be filed within three years of fraudulent transfer, or from the date when was supposed to take the omitted action.
A fraudulent transfer without any payment includes contract of gift, waiving an inheritance, forgiveness of debt, interest-free loan, assumption of debt and the like. However, creditors cannot challenge three specific types of contract of gift such as the customary appropriate gifts, award gifts and gifts made out of gratitude.
Finally it is important to mention that there are certain dilemmas in exercising Actio Pauliana. The first dilemma is who should be sued. There is no doubt that the third party should have the role of the defendant, but it is questionable whether the debtor also has to be sued. Opinions on this issue are quite divided. Some believe that only the third party should be considered as the defendant, or his legal successors instead, and that the debtor should not be sued because the debtor is already insolvent. However, others are of opinion that in addition to suing the third party should also be sued the debtor, because in the condemnatory part of the legal claim, as a rule, there is a declaration of the debt, and determining the existence of a debt may be addressed only to the debtor.
We believe that the second opinion is more accurate and that in addition to the third party should be sued the debtor, because in the course of the court proceedings it should be necessary that the debtor becomes aware that with the fraudulent action the creditor was damaged, but again it can be established only if the debtor is also considered as the defendant.
It often happens i.e. there are situations that creditors choose wrong method of legal protection, in a way that: 1. They seek nullification of the contract entered by the debtor at the creditor’s expense; 2. They file a legal claim to challenge the debtor’s actions even though their settlement is possible or not even difficult since despite the debtor’s transfer of some property to third party, there is still other property owned by the debtor; 3. They file a legal claim to challenge the debtor’s action, even if there is no any financial claim against the debtor.
Actio Pauliana has extremely great importance, not only for creditors, but also for legal security in general which is already jeopardized in many ways. The purpose of Actio Pauliana is not to declare the debtor’s action as invalid towards all parties, but only towards the creditor that challenge the same but only to the extent necessary for settlement of that particular creditor.
Author: Zeljko Vlacic
E-mail: [email protected]