Foremost among the scenarios that make recovery of a claim difficult is the debtor’s transferring the assets in their hands to third parties and thereby frustrating the enforcement proceedings; this picture is frequently encountered in enforcement law practice. The action for annulment of a disposition ensures that certain transactions carried out by the debtor before attachment or bankruptcy — transfers of movable and immovable property above all — which on their face appear lawful, produce no effect as against the creditor. The way is thus opened for the claim to be recovered through compulsory enforcement.
Once the action succeeds, the creditor obtains the power to have the property subject to the disposition attached directly and to request its sale. Where the dispute concerns immovable property, the proceedings may be continued over that property without any need to annul the land registry record created in the third party’s name.
Below we address the legal character of the action, the preconditions required, which transactions fall within the scope of annulment, the regime of proof and the rules on time limits, in a practice-oriented manner and with regard also to the practice of the Court of Cassation.
Definition and Legal Character of the Action
Purpose and Character
The action for annulment of a disposition is an enforcement law action of a special character, which ensures that dispositions made by the debtor with the motive of concealing assets from creditors — in the period preceding the attachment in enforcement by way of attachment, and preceding the opening of the bankruptcy in enforcement by way of bankruptcy — produce no effect as against the creditor. The purpose here is twofold: to prevent the creditor from suffering loss on account of transactions concluded by the debtor with third parties that appear sound in form, and to make recovery of the claim through compulsory enforcement possible once again.
Its Place Within Enforcement and Bankruptcy Law
The statutory basis of the institution is Article 277 et seq. of the Enforcement and Bankruptcy Act No. 2004; the provision is framed as a strong mechanism protecting the creditor. The judgment given does not extinguish the disposition altogether; the successful creditor is granted only the power to have the property subject to the disposition attached and to request its sale. The third party who has acquired the property is likewise obliged to submit to these compulsory enforcement measures. With these features the action has the appearance of an action for performance that rests on the right to the claim and reinforces the possibility of compulsory enforcement.
Preconditions of the Action
At the first stage of the trial the court examines whether the preconditions necessary for the merits to be considered are satisfied. If one of these conditions is missing, the action is dismissed without the grounds of annulment in Articles 278, 279 and 280 of the Enforcement and Bankruptcy Act No. 2004 being discussed at all.
The Existence of a Genuine and Current Claim
The claimant must have, as against the debtor who made the disposition, a claim that genuinely exists, is current and is protected by the legal order. A claim created by way of simulation, or one that does not in substance exist, cannot be made the basis of a request for annulment of a disposition.
The Proceedings Must Have Become Final
It is required that the enforcement proceedings pursued against the debtor have become final; this action cannot be brought on the basis of proceedings that have not yet become final. That is because this route, regulated in Art. 277 of the Enforcement and Bankruptcy Act No. 2004, is an instrument for the protection of creditors tied to the compulsory enforcement process. In this connection, our study entitled Objection to Enforcement Proceedings Without a Judgment may also be of assistance.
The Disposition Must Have Been Made After the Debt Arose
The transaction whose annulment is sought must have been made on a date subsequent to the moment at which the debt subject to the proceedings arose. Dispositions carried out before the debt arose do not, as a rule, form the subject matter of this action.
The Existence of a Certificate of Insolvency (As a Rule)
That the creditor holds a certificate of insolvency, whether definitive or provisional, is as a rule a condition required for the action to be brought. This document establishes that the debtor’s assets are insufficient to meet the debt and constitutes the essential element showing that the creditor has suffered loss (Art. 277 of the Enforcement and Bankruptcy Act No. 2004).
That said, in the practice of the Court of Cassation it is accepted that where the debtor’s insolvency can be clearly established, the action may in certain exceptional cases be heard even without a certificate of insolvency.
Is a Certificate of Insolvency a Procedural Requirement?
Art. 277 of the Enforcement and Bankruptcy Act No. 2004 provides that, as a rule, an action for annulment of a disposition may be brought by a creditor holding a definitive or provisional certificate of insolvency. For that reason the certificate of insolvency is counted among the principal preconditions of the action.
The document in question is the one issued by the enforcement office, showing the unpaid balance, to a creditor who has been unable to recover the claim in full after the attached property has been converted into money.
The basis of the definitive certificate of insolvency is Art. 143 of the Enforcement and Bankruptcy Act No. 2004, and that of the provisional certificate is Art. 105. Where it has been established by the attachment record that the debtor has no attachable property, under Art. 105 that record has the effect of a provisional certificate of insolvency and may be used as evidence in an action for annulment of a disposition.
That the document has the character of a precondition does not necessarily require it to have been obtained before the action is brought. The practice of the Court of Cassation permits the certificate of insolvency to be procured and submitted to the file after the action has been brought, and indeed at stages following an appeal on points of law or a quashing judgment. What is decisive is that it can be established that, as at the date of the action, the debtor was insolvent as regards paying their debts.
There are, moreover, situations in which a state of actual insolvency is accepted even though it has not been evidenced by a certificate. Where the debtor cannot be located at their address, or where searches conducted at their known addresses reveal no attachable assets, the case law concludes that a state of insolvency has arisen.
Grounds of Annulment (Arts. 278-280 of the Enforcement and Bankruptcy Act)
Not every transaction made by the debtor is open to annulment. The dispositions that may be annulled are enumerated exhaustively in Articles 278, 279 and 280 of the Enforcement and Bankruptcy Act No. 2004. The common purpose of these provisions is to render ineffective transactions concluded with the motive of concealing assets.
Gratuitous Dispositions (Art. 278 of the Enforcement and Bankruptcy Act)
Benefits conferred by the debtor without receiving any consideration, gifts and gratuitous transactions that diminish the debtor’s assets are subject to annulment. The legislature has not regarded the transfer of assets to third parties without consideration as worthy of protection against the creditor. In practice, gifts, transfers made well below true value and gratuitous benefits conferred in favour of close relatives frequently constitute grounds of annulment under this heading.
Transactions Made During a Period of Insolvency (Art. 279 of the Enforcement and Bankruptcy Act)
Certain dispositions carried out by the debtor during a period in which they were in payment difficulties also fall within the scope of annulment. The creation of a pledge after the event in order to secure an existing debt, payment of a debt not yet due, and transactions creating inequality among creditors are the principal examples. The purpose of the provision is to prevent the debtor from favouring particular creditors.
Dispositions Made with Intent to Cause Loss (Art. 280 of the Enforcement and Bankruptcy Act)
The dispositions of a debtor acting with the intent of causing loss to their creditors may be annulled. Here, in addition to the debtor’s bad faith, it is also required that the third party knew of that state of affairs or was in a position to know of it. Simulated sales, transfers made for the purpose of concealing assets, and transactions that appear genuine from the outside but are in substance directed at diminishing the debtor’s assets are dealt with within the framework of this article.
For detail on the criminal aspect of the matter, our article entitled The Offence of Causing Loss to a Creditor and Its Penalty may be consulted.
Transfers to Close Relatives and Statutory Presumptions
As regards dispositions made by the debtor in favour of their spouse, children, close relatives or persons with whom they act in concert, both the legislation and the practice of the Court of Cassation have adopted a number of presumptions. In transfers of this kind the third party may be presumed to have been aware of the debtor’s financial position and of the purpose of causing loss to the creditor. Indeed, transfers to close relatives constitute in practice the group of dispositions that is most frequently annulled.
Sales Below Value (Practice of the Court of Cassation)
Where an item of property is transferred at a price so low as to be irreconcilable with its true value, the conclusion may be drawn that the transaction was simulated or carried the intent of causing loss to the creditor. The Court of Cassation treats sales that fall manifestly below market value as a ground of annulment. Where it is established that the price was not in fact paid, or that the transaction is in substance in the nature of a gift, the disposition may be annulled.
Types of Transaction That May Be Annulled
Not every legal transaction of the debtor is annulled in this action; dispositions that diminish the debtor’s assets and make recovery by the creditor more difficult may, however, be assessed within the scope of Articles 278, 279 and 280 of the Enforcement and Bankruptcy Act No. 2004. The principal types of transaction encountered in practice are the following:
- Gifts and gratuitous benefits. Transfers made by the debtor without receiving any consideration are subject to annulment by operation of law; gifts, gratuitous transfers of immovable property and transactions that are in reality without consideration are not protected as against the creditor.
- Transfers to family members and close relatives. Transfers of property made by the debtor to their spouse, children or close relatives most often bring with them a suspicion of asset concealment; the legislation and the case law accept presumptions to the effect that the third party knew of the debtor’s financial position.
- Simulated and undervalued sales. The disposal of property well below its true value may be regarded as an indication of simulation or of a purpose of causing loss. That the price was never paid, or that the transaction reflects an intention to make a gift, makes annulment easier.
- Transactions serving the purpose of concealing assets. Dispositions concluded with the intent of causing loss to creditors are open to annulment; ostensible sales, simulated transfers and situations in which the property in fact remains in the debtor’s hands fall within this group.
- Transfers of company shares and business assets. The debtor’s transfer of their business, company shares or items of business property may also be made the subject of an action. Where shares are transferred at a low price or to persons closely connected with the debtor, the transaction may be taken to carry the purpose of causing loss to the creditor.
Time Limits and Their Preclusive Character
The action must be brought within the period laid down in the legislation. Since these periods are preclusive, if they are missed the possibility of bringing an action is lost altogether. The court takes the condition as to time into account of its own motion, without any need for the parties to raise a plea.
The Five-Year Period
Pursuant to Article 284 of the Enforcement and Bankruptcy Act No. 2004, the action must be brought within 5 years of the date on which the disposition whose annulment is sought was made. This period, being preclusive in character, is neither interrupted nor suspended.
Calculating the Period
The five-year period begins to run from the moment at which the disposition was carried out. In transfers effected at the land registry the date of registration is taken as the reference point, and in transfers of movables the date on which the disposition was actually made. The legislature has tied the starting point not to the moment at which the action became capable of being brought but directly to the date on which the disposition was carried out.
Difference from the Statute of Limitations
Unlike the statute of limitations, a preclusive period does not depend on being raised by the parties but is taken into account by the court of its own motion. Where a limitation period expires the debt nonetheless continues to exist; only the ability to claim it by way of an action comes to an end. By contrast, on the expiry of a preclusive period the right to bring an action for annulment of a disposition is lost entirely and cannot subsequently be exercised.
Against Whom Is the Action Brought?
A request for annulment of a disposition is not a claim advanced against the debtor alone. The action is directed against the parties to the disposition and, in certain circumstances, against those who subsequently acquired the property. Directing the action against the right persons is decisive both for its success and for recovery of the claim.
The Debtor
The debtor is a necessary party to the action. The transaction whose annulment is sought was made by them, and the action rests on that disposition, which diminished their assets.
The Third Party to the Transaction
The person who acquired the property from the debtor must also be named as a respondent. Since the judgment will grant the creditor the power to request attachment and sale of the property subject to the disposition, that person is obliged to submit to the consequences of the annulment.
Subsequent Acquirers in Bad Faith
If the property has subsequently been transferred to another person and that subsequent acquirer knows, or ought to know, of the debtor’s purpose of concealing assets, the action may be brought against them as well. A subsequent acquirer in bad faith likewise submits to the consequences of the annulment.
The Position of a Third Party in Good Faith
Annulment is not possible as against a third party in good faith who was unaware of the debtor’s purpose of concealing assets and could not be expected to have been aware of it; within the scheme of the Enforcement and Bankruptcy Act No. 2004, good faith is protected. In such a case the creditor’s claim is directed not to the property itself but, where the conditions are met, to its value, against the person who made the disposition or against acquirers in bad faith.
For that reason, determining whether the persons in the chain of transfers acted in good faith or in bad faith is a critical matter that directly affects the outcome of the action.
The Regime of Proof and Evidence
In these actions proof most often rests not on a direct document but on presumptions, the ordinary course of life and circumstantial evidence. Simulation and the intent to conceal assets are, as a rule, established not by a clear document but by the conclusions drawn from the facts as a whole.
Establishing Simulation and the Intent to Conceal Assets
In determining that the debtor acted with the purpose of concealing assets, the date of the disposition, the debtor’s financial position at that time, the relationship between the parties and the consistency of the transaction with economic reality are considered together. Transfers made after the debt arose, the debtor’s being in payment difficulties, and the reduction in the debtor’s assets following the disposition are important indicators of that intent.
Land Registry, Bank and Other Official Records
Among the documents that stand out as evidence are land registry records, contracts of sale, bank movements, payment documents and the contents of the enforcement file. The court examines with particular care whether the sale price was in fact paid, whether the payment is consistent with economic reality, and the dates of the transactions.
Close Relationships and Ordinary Life Experience
In transactions concluded by the debtor with their spouse, children, relatives or close circle, the case law accepts a number of presumptions. In transfers made in favour of persons closely connected with the debtor, the third party may be presumed to have known of the debtor’s financial position. Sales effected well below market value, non-payment of the price, or the property remaining in fact in the debtor’s use also give rise to a presumption of simulation.
The Approach of the Court of Cassation
According to the case law of the Court of Cassation, proof in these actions is not confined to conclusive and direct evidence. The course of events, economic reality, the relationship between the parties and the timing of the disposition are assessed as a whole. Sales below value, transfers to close relatives and transactions carried out after the debt arose constitute presumptions of an intent to conceal assets.
Accordingly, the outcome in actions of this kind depends not on a single document but on an overall assessment of the evidence.
Bringing the Action: Steps to Follow
The action is subject to specific procedural rules, and bringing it with the right strategy directly affects the outcome. In outline, the process proceeds as follows.
Content of the Statement of Claim
The statement of claim must clearly set out the particulars of the parties, the basis of the claim, the details of the enforcement proceedings, the disposition whose annulment is sought, an explanation of how that transaction caused loss to the creditor, and the evidence. In addition, the legal ground on which the request rests (Art. 278, 279 or 280 of the Enforcement and Bankruptcy Act No. 2004) and the subject matter of the action must be set out concretely.
Court Fees and Costs of the Proceedings
The action is subject to a proportional court fee, calculated over the amount of the claim. Alongside this, the costs of the proceedings — such as service costs, court-appointed expert fees and the expenses of an on-site examination — must be met in advance by the claimant.
Preliminary Attachment and Interim Injunction
A preliminary attachment or an interim injunction may be requested in order to secure the claim, either when the action is brought or while the trial is under way. These protective measures serve an important function in practice in preventing the property subject to the disposition from changing hands again and in forestalling the judgment being rendered ineffective.
Jurisdiction of the Court
In actions for annulment of a disposition, subject-matter jurisdiction lies with the Civil Court of First Instance.
Since no special provision is laid down as regards territorial jurisdiction, the general rules of jurisdiction in the Code of Civil Procedure No. 6100 come into play. Accordingly, the action is as a rule heard in the court of the respondents’ place of residence. Since the action is directed both against the debtor and against the third party in whose favour the disposition was made, the court of the place of residence of any one of the respondents has territorial jurisdiction (Arts. 6 and 7 of the Code of Civil Procedure No. 6100).
Where the respondents have no common place of residence, the action may be brought in the court of the place of residence of one of the respondents.
Consequences of the Judgment
Success of the request does not render the transaction made by the debtor wholly invalid; the transaction merely ceases to produce effect as regards the creditor. The action operates as a special protective instrument affording the creditor the possibility of recovery through compulsory enforcement.
Not Invalidity, but Ineffectiveness Against the Creditor
A judgment of annulment does not extinguish the disposition. The transaction continues to be valid as between its parties; it becomes ineffective only as regards the successful creditor. For that reason the effect produced by the judgment is not one in rem but is relative (personal) in character.
The Power to Attach and to Sell
Once the action succeeds, the creditor may have the property subject to the disposition attached directly and may request its sale. In the case of immovable property, attachment and sale may be carried out without any need to annul the land registry record standing in the third party’s name.
Liability of the Third Party
The third party who acquired the property is obliged to submit to the consequences of the annulment. If the property is still in their hands, they cannot obstruct the attachment and sale. If they have disposed of it, their liability may, where the conditions are met, arise in respect of its value.
Recovery Over the Value
Where attachment of the property subject to the disposition in specie is not possible — for instance where the property has been disposed of or consumed — the creditor may take advantage of the possibility of recovery over the value of the property. In that event the respondent third party may be held liable to the extent of the value of the property.
General Assessment
The action for annulment of a disposition is one of the most effective protective routes in enforcement law so far as recovery of a claim is concerned. Where the debtor seeks to conceal assets from the creditor by transferring them to third parties, it affords the creditor a strong legal basis and sets a blocked compulsory enforcement process in motion once again.
By rendering dispositions that are valid on their face ineffective as regards the creditor, recovery may be made by way of attachment and sale over the property subject to the disposition. In this respect the action is a strategic protective mechanism that averts the loss the creditor would otherwise suffer.
Timing carries particular weight in this action. Once it becomes known that the debtor has transferred assets, it is necessary to act before the preclusive periods expire and before the evidence weakens. In particular, bringing the action without delay once the proceedings have become final and the debtor’s insolvency has become apparent is among the factors that determine the outcome.
Independent Legal Assessment
Actions for annulment of a disposition are disputes that call for the framing of the file as much as for technical knowledge. The outcome of the action is most often determined, before any argument on the merits, by whether it has been directed against the right persons and whether the preconditions have been evidenced. In files where there is more than one link in the chain of transfers, the good faith of each acquirer must be dealt with individually.
Another critical point is that the framing of the evidence should not be tied to a single document. Analysis of economic reality, tracing the payment flows through bank records and the timing of the disposition make up the overall picture that is decisive in most files.
In a concrete dispute the following matters should be addressed as a priority:
- Establishing on the file that the proceedings have become final and that the claim is genuine
- Calculating the five-year preclusive period by reference to the date of registration or of the actual transfer
- Evidencing the state of insolvency by a certificate or by the attachment record and, where that is not possible, compiling the facts of actual insolvency
- Clarifying at the outset which ground of annulment (Art. 278, 279 or 280 of the Enforcement and Bankruptcy Act No. 2004) the request will be based on
- Directing the action against the debtor, the first acquirer and all subsequent acquirers, if any
- Preventing a further transfer of the property by requesting a preliminary attachment or an interim injunction when the action is brought
Independent Legal provides advisory services and conducts litigation in the preparation and pursuit of actions for annulment of dispositions within enforcement processes directed at the recovery of claims.