Earlier disposal of assets by a debtor does not eliminate the chances of a future creditor
A creditor has a chance to obtain satisfaction through a fraudulent transfer claim even if the debtor disposed of its assets before the claim arose. The intention to injure future creditors is demonstrated by the foreseeability of insolvency, and thus the debtor’s expectation of becoming insolvent with respect to potential creditors.
It is common knowledge that a creditor can obtain judicial protection against acts by a debtor who disposes of its assets or encumbers them in favour of third parties and thus at least hinders the enforcement of its (existing) monetary obligations. This protection is afforded to the creditor by a fraudulent transfer claim, based on Art. 527 of the Polish Civil Code.
But it should be borne in mind that under Civil Code Art. 530, a fraudulent transfer claim may also be asserted by a future creditor, i.e. a party who at the time of the actions by the defendant resulting in disposal of its assets did not yet hold any monetary claim against the defendant, but obtained such a claim only after the defendant’s transaction. This is a very useful provision, as it sometimes happens that participants in commercial dealings attempt in bad faith to “secure” themselves against risks arising out of business operations in general, or a specific transaction, by disposing of all their principal assets before they incur obligations. In this way, future debtors seek to shift all the economic risk to their future creditors, because when they do incur an obligation, they no longer possess any significant assets. This is accompanied by the unjustified belief that if only the future creditor fails to check carefully whether the future debtor possesses assets out of which the monetary claim could be satisfied, then the risk of unsuccessful execution rests on the creditor. But this would be destructive to commerce, as the legal system would offer no protection to a future creditor and would thus force future creditors to examine before every transaction whether the future debtor has any assets which could be executed against if the debtor failed to comply with its monetary obligation.
However, the form of fraudulent transfer claim governed by Art. 530 does involve heightened subjective grounds, as the effectiveness of such a claim is conditioned on the existence on the debtor’s part of an intention to injure the creditor. In other words, the party asserting a fraudulent transfer claim under Art. 530 must demonstrate through convincing evidence that when carrying out a transaction in its assets, the debtor was at least aware, and accepted, that the transaction would result in injury to the future creditor. By comparison, a fraudulent transfer claim under Art. 527 requires only an awareness of the possibility of injury to the creditor (i.e. that the debtor knew or should have known that its action could injure its creditor—even if that was not the debtor’s conscious intent). But this fact alone should not discourage a creditor injured by the debtor’s disposal of assets before the debt arose from pursuing a fraudulent transfer action under Art. 530.
The good news is that an analysis of judicial rulings shows that the notion of an “intention to injure a creditor” is interpreted in practice to afford the broadest possible protection to future creditors.
Under these cases, the intention to injure future creditors is evident from the mere foreseeability of the possibility of insolvency, and thus the future debtor’s awareness that it could become unable to pay future creditors (e.g. Supreme Court of Poland judgment of 7 February 2007, case no. V CSK 434/07, and judgments of the Szczecin Court of Appeal of 12 April 2019, case no. I ACa 698/18, the Wrocław Court of Appeal of 6 April 2016, case no. I ACa 235/16, and the Katowice Court of Appeal of 17 December 2015, case no. I ACa 832/15).
Recently the Szczecin Court Appeal issued a judgment (of 18 October 2019, case no. I ACa 114/19), guided by the legal view discussed above, confirming the correctness of a fraudulent transfer claim under Civil Code Art. 530 under a set of facts precisely conveying the notion of the debtor’s misplaced “foresight” in avoiding the risk arising out of failure to perform future obligations. The debtor received high advances from its customers toward the purchase of goods, and passed on the advances to the parties that would supply the goods to the debtor. The debtor’s operations were thus dependent on the suppliers of the goods for which its customers had paid advances to the debtor. However, after the suppliers had received the amounts paid by the debtor, the suppliers failed to deliver the goods to the debtor. The debtor was then unable to refund the advances to its customers, or cover by purchasing the goods from other suppliers. The debtor’s business and financial condition were entirely dependent on the soundness and integrity of the suppliers, typically also closely tied with the situation of their own customers and suppliers. Thus the debtor’s operations carried a high risk, as the debtor’s business could be disrupted by even a single dishonest supplier which itself fell into financial difficulties. Aware of this risk, shortly after collecting additional advances from future customers (to whom the debtor ultimately never delivered the goods, due to the fault of its own supplier), the debtor disposed of all of its fixed assets.
A fraudulent transfer claim under Civil Code Art. 530 (like a claim under Art. 527) should be directed against the third party to whom the future debtor transferred its assets. If the third party obtained a material benefit from the debtor for consideration, the creditor may demand a finding that the transaction conveying this benefit is ineffective only if the third party knew that the debtor intended to injure a future creditor. Thus if the debtor has disposed of its assets for consideration, to the detriment of a future creditor, the creditor will undoubtedly face a difficult task, as it will have to prove that the third party was aware of the debtor’s bad intentions. The task may be difficult, but that does not mean it is impossible. Based on observations of cases of this type, it may be stated that debtors seeking to protect their property against creditors most often transfer their assets to third parties closely affiliated with themselves. In such instances, there is a serious chance of proving that the third party was aware of the debtor’s bad intention.
It is also always worth verifying whether the debtor’s transfer of property to a third party was truly made for consideration. It is not at all rare in such situations for the consideration to be purely nominal, declared only to discourage creditors from pursuing claims. It is not enough for the third party to show that the transaction was made for consideration, if there was a gross disproportion between the objective value of the transferred property and the price actually paid for the property. Actual payment by the third party to the debtor of an amount significantly lower than the equivalent value of the consideration received by the third party must impact the assessment of the grounds for the third party’s liability under Civil Code Art. 530 (Supreme Court judgment of 28 November 2014, case no. I CSK 33/14).
In conclusion, creditors are not left without hope to obtain legal protection through a fraudulent transfer action, even if the debtor disposed of its assets before the creditor’s claim arose. Even if a material benefit was obtained from the debtor for consideration, this does not exclude the possibility that a third party will be held liable to the creditor under Civil Code Art. 530.
Adam Studziński, adwokat, Dispute Resolution & Arbitration practice, Wardyński & Partners
