The rule is that the obligatory relations between the debtor and third parties for the creditor are res inter alios acta. An exception to this rule is the possibility for a creditor to, under certain conditions, refute legal actions taken by his debtor with a third party.
The creditor refutes such actions by filing a lawsuit (actio Pauliana) against a third party i.e. by pointing out an objection against the third party’s claim against the creditor’s debtor or his legal successors, to whom the debtor has transferred certain rights.
Terms of Refuting debtor’s legal acts
The basic general premise for refutation is
- that there is a creditor’s claim against the debtor due for collection (regardless of when it arose) and
- that the debtor is insolvent (which the creditor is obliged to prove).
The creditor refutes the legal action of his debtor (contract, regardless of whether it is simulated or dissimulated, unilateral declaration of will, illegal activities, Etc.).
Every creditor whose claim is due for payment, regardless of the date of its taking place, shall be entitled to refute a legal act of his debtor taken to the detriment of creditors.
A legal act shall be considered to have been taken to the detriment of creditors if due to it the debtor is left without sufficient means to satisfy the creditor’s claim.
The term “legal act” shall also include an omission due to which the debtor has forfeited a substantive right of his, or incurred a property obligation for himself.
The creditor can refute the legal act of the debtor if it reduces the property of the debtor and not, as a rule, legal acts concerning the personality of the debtor. If the legal activities related to the person produced a reduction of the debtor’s property, the legal acts related to the person in that part (and not the concluded marriage, performed adoption, Etc.).
A creditor can refute the legal act of his debtor only if it is taken to his harm.
It is considered that a legal act has been taken to the creditor’s harm if, due to its execution, the debtor does not have sufficient funds to fulfil the creditor’s claim following Article 280, paragraph 2 of the Law of Contract and Torts.
The legal acts of the over-indebted debtor shall be refuted by a lawsuit or objection outside the bankruptcy and not in the bankruptcy procedure. By refuting the debtor’s legal acts, they lose effect only against the plaintiff (the creditor) and to the extent necessary to fulfil his claim, while refuting in bankruptcy proceedings prevents all bankruptcy creditors from being settled and legal acts taken lose their effect against everyone, so that the alienated value returns to the bankruptcy estate.
In addition to the general assumptions for a successful refuting, particular assumptions must be made that depend on whether the disposition is for value or gratuitous disposal and whether the debtor is a relative of a third party or not.
A disposal for value on the debt side may be refuted:
- if at the time of effecting the disposal, the debtor was aware or could have been aware that such action would do harm to his creditors
- if a third person benefitting from the legal act undertaken was aware of the fact, or could have been aware of it
- if an action to refute is lodged within one year from the day of undertaking the legal action being refuted, or from the day on which the omitted action should have been taken.
If the third person is the debtor’s spouse or in close blood relation or a remoter relative up to the fourth degree, or an in-law relative of the same degree, there shall be a presumption that such third person was aware of the fact that the debtor’s disposal was to the detriment of creditors.
An action to refute a disposal for value on the debt side done to a third party, who are the debtor’s spouse or relative may be lodged within three years from the day of undertaking the legal action being refuted, or from the day on which the omitted action should have been taken.
In case of a gratuitous disposal and a legal act equal to it, the debtor shall be considered to have been aware that the disposal undertaken would do harm to creditors, so that in refuting such acts there shall be no requirement that the third person was aware, or was supposed to be aware of the fact.
Renouncing an inheritance shall be considered as a gratuitous disposal. Other actions in which no counter-value was entered into the debtor’s property which came out of the property (the debtor destroyed the bill of exchange or check, forgave the debt, left the right, Etc.) shall also be considered as a gratuitous disposal.
A lawsuit for refuting – a quasi-Paulian lawsuit may be lodged by creditor within three years from the day of undertaking the legal action being refuted, or from the day on which the omitted action should have been taken.
It shall not be possible to refute, on the ground of being detrimental to creditors, usual gifts for an occasion, prize gifts, or gifts given out of gratitude and being commensurate to the financial possibilities of the debtor.
Active and Passive Legitimation for Refuting
Refuting shall be effected either by action in the court or by objection.
By legal action, the insolvent debtor can damage his creditor. Therefore, the creditor, i.e. his legal successors, is actively legitimized for filing a lawsuit. The creditor may also refute legal actions with an objection in the case when the debtor’s action by which he undertook an obligation to a third party (the opponent of the refutation) is refuted, and the third party demands fulfilment of that obligation, while the creditor refutes it with an objection. – to a third party) or the debtor’s property contains a object on which the opponent of the rebuttal previously acquired a stronger right and demanded that it be exempted from execution, and the creditor objects that the debtor acquired the object by a legal action subject to rebuttal.
An action to refute shall be lodged against a third person being a party to the legal act, or to whose benefit the act to be refuted was undertaken, or against his universal legal successors.
Should a third person transfer, by a transaction on the debit side, the benefit acquired through the disposal to be refuted, the action may be lodged against the acquirer only if the latter was aware that the acquisition of his predecessor was prone to be refuted, but if such benefit was transferred by a gratuituous transaction, the action may be lodged against the acquirer even if he was not aware of the fact.
A defendant may avoid the refuting by performing debtor’s obligation.
Effect of Refuting debtor’s legal acts
Should the court uphold the claim, the legal act shall become ineffective only as to the plaintiff and only to the degree necessary for meeting his claim.
In addition to the items obtained from the debtor, the third party owes the creditor, as an unscrupulous holder, the fruits and default interest in terms of the provisions of Article 214 of the Law of Contract and Torts, considering that the basis for retaining the receipt was later dropped by passing a judgment.
If the claim is accepted and the third party has handed over the received item to the creditor, he has the right to demand from the debtor compensation for damage due to non-fulfilment of obligations. When the third party keeps the received thing and pays the creditor its equivalent, personal subrogation will occur so that the third person takes the creditor’s place and acquires the right towards the debtor that the creditor had towards the debtor before refuting the legal action.
Read more:
General rules of fulfilment of obligations »
Unenforceability of the claims for damages »
Collection of receivables from debtors in the blockade »
