Where a debtor enters into fraudulent transactions in respect of his assets with the aim of rendering his creditor’s rights ineffective, the matter goes beyond the limits of the private-law relationship between the parties and comes to concern public order as well. The damage caused by conduct of this kind, which obstructs the collection of a claim, is not confined to the legal order; it also undermines the reliability of economic relations.
For that reason the legislator has treated certain dispositions made by a debtor with the aim of harming his creditor as an offence under Article 331 of the Enforcement and Bankruptcy Act No. 2004 and has made them subject to criminal sanction. In practice the conduct forming the core of this offence generally takes the form of the concealment of assets, simulated transfers and the making of untrue declarations.
In this briefing note we address in detail the elements of the offence under Art. 331 of the Enforcement and Bankruptcy Act No. 2004, its material and mental structure, the sanctions prescribed, the complaint and trial procedure, and the other legal instruments available to the creditor.
The Definition of the Offence and Its Statutory Basis
Fraudulent transactions entered into by a debtor with the aim of obstructing the collection of a claim have been made subject to criminal sanction because the debt relationship requires protection not only in private law but also from the standpoint of public order. Article 331 of the Enforcement and Bankruptcy Act No. 2004 accordingly treats dispositions by a debtor aimed at harming the creditor as an offence and prescribes specific penalties for those acts.
The Elements of the Offence Under Art. 331 of the Enforcement and Bankruptcy Act No. 2004
The wording of the provision is as follows:
Enforcement and Bankruptcy Act No. 2004, Art. 331
“Where a debtor, with the intent to infringe the rights of his creditor, conceals or spirits away his assets, enters into simulated transactions, or untruthfully holds himself out as owing nothing or as owing less, a penalty shall be imposed on the debtor who performs those acts.”
Under the provision, three elements must be present together for the offence to be made out: a fraudulent disposition in the nature of an untrue declaration as to the debt, a simulated transfer, concealment or the spiriting away of assets; the making of that disposition with an intent directed at harming the creditor; and the commission of the act by a person having the status of debtor.
The offence is subject to complaint; an investigation may therefore be commenced only upon the complaint of the creditor.
The Material and Mental Elements
Perpetrator and victim:
Only the debtor may be the perpetrator of the offence. The perpetrator must be a natural person; in the case of legal persons, liability arises only in respect of the director or representative who performed the act. The victim is the person having the status of creditor by reason of the debt relationship.
Intent and fraud:
The mental element required by the article is direct intent. The perpetrator must have carried out his act with the aim of harming the creditor. There must be a fraudulent will behind conduct such as holding oneself out as owing nothing, transferring an asset to another person or spiriting assets away. A reduction in assets or an inability to pay the debt is therefore not sufficient in itself; it is required that the collection of the claim be obstructed knowingly and wilfully.
The condition that damage be sustained:
It is not a condition of the offence that the creditor should actually have sustained damage. According to the case law of the Court of Cassation, acts giving rise to the possibility of damage are sufficient. That danger must nevertheless amount to a concrete and realistic risk. Indeed, where a simulated transfer has been made but the debtor has retained his capacity to pay in terms of his assets, whether the elements are made out will be assessed within the circumstances of the particular case.
The Fraudulent Conduct Constituting the Offence
Fraudulent transactions carried out by a debtor with the intent to harm the creditor constitute an offence under Art. 331 of the Enforcement and Bankruptcy Act No. 2004. What unites this conduct is the aim of rendering assets ineffective or concealing them, or of escaping existing or imminent enforcement proceedings. In practice that aim is put into effect by various methods.
Spiriting Assets Away
The spiriting away of assets covers every form of conduct directed at removing the debtor’s active assets from being capable of attachment or enforcement. The transfer of movable investments to other names and accounts, the transfer of immovable property to another person in the land registry and the transfer of movable goods to third parties are assessed within this scope.
In the practice of the Court of Cassation, the concealment of his assets by the debtor or their removal elsewhere is regarded as sufficient for the offence to be made out. What is decisive is that such conduct is of a nature to eliminate the creditor’s possibility of collection.
Deception Through Simulated Transactions
Simulation (a sham transaction) is where the parties, while apparently entering into a valid transaction, in reality reach a hidden agreement directed at a different purpose. For the purposes of this offence, the debtor creating the appearance that a debt relationship exists with persons to whom he owes nothing — as by drawing up a false promissory note — transferring ownership to persons he trusts or to his relatives by sham transactions, and transferring his property to third parties without any genuine intention to sell all fall within this scope.
In simulated transactions, the debtor and the third party must have acted with a unity of will, that is to say, in concert. Where the transaction has been carried out unilaterally — for example, where the transfer was brought about by fraud — the act may therefore fall outside the scope of the offence.
Gratuitous Transfers and Similar Dispositions
A transfer of property by the debtor without receiving any consideration may likewise constitute an offence under Art. 331 of the Enforcement and Bankruptcy Act No. 2004. Where forms of transaction that are distinctive in that they will clearly cause damage to the creditor are involved, and where the debtor carries out transactions in the nature of a sale without consideration, a gift or a donation, the offence is accepted to be made out.
The case law of the Court of Cassation emphasises that gratuitous transactions constitute a strong presumption as to the element of intent, particularly where they are carried out after the date on which the enforcement proceedings were commenced or the debt arose.
The Complaint and Investigation Procedure
Since the offence under Art. 331 of the Enforcement and Bankruptcy Act No. 2004 is subject to complaint, for an investigation to begin the creditor must apply to the competent authorities within the period allowed. The right of complaint is attached to the person of the creditor; save in certain special situations it cannot be assigned, but it may be waived.
The Period for Lodging a Complaint
Under Art. 347 of the Enforcement and Bankruptcy Act No. 2004, the period for lodging a complaint in respect of the criminal provisions laid down in that Act is 3 months from becoming aware of the matter, and in any event a complaint must be lodged within 1 year.
- The three-month period: It begins to run on the date on which the creditor becomes aware of the act constituting the offence and of the perpetrator.
- The one-year maximum period: It runs from the date on which the act was committed and applies irrespective of whether the perpetrator has become known.
These periods are preclusive in nature. A creditor who does not exercise his right of complaint within the period allowed cannot subsequently secure the bringing of a criminal action.
Application to the Enforcement Criminal Court
The complaint is submitted to the Enforcement Criminal Court with jurisdiction in the place where the enforcement proceedings are being conducted. The complaint must set out the date of the events and the evidence relied upon, the manner in which the fraudulent disposition caused damage, the nature of the disposition carried out by the debtor and the claim relationship between the parties.
So far as possible, documents evidencing the source of the claim (such as a contract, a promissory note or a judgment) and records establishing the transaction carried out by the debtor (such as documents relating to the simulated sale, bank receipts or land registry transfer records) should be attached to the complaint.
The Consequences of Withdrawing the Complaint
If the complaint is withdrawn, the criminal action abates and this is embodied in a judgment of the court. Since withdrawal is in the nature of a declaration of waiver, it is final and cannot be retracted.
Where there is more than one person injured by the offence, that is to say where there are several creditors, all of them must withdraw for the action to abate; otherwise the proceedings continue.
The Sanction and the Court Proceedings
The Penalty Prescribed
Where a debtor acts with the intent to harm the creditor and enters into fraudulent dispositions, a criminal sanction arises under Art. 331 of the Enforcement and Bankruptcy Act No. 2004. General intent is not regarded as sufficient for the offence to be made out; it is required that the debtor acted with the aim of harming the creditor, that is to say, specific intent is required.
Under the provision the sanction is as follows:
- imprisonment from 6 months to 3 years
- and in addition a judicial fine of up to one thousand days
The amount of the penalty is assessed by the judge having regard to the features of the case. In that assessment, the consequences faced by the creditor, the intensity of the debtor’s intent, the gravity of the danger of damage and the degree of the fraud are taken into account.
Limitation Periods
Two separate limitation periods must be borne in mind in relation to this offence:
- Limitation for prosecution: 8 years (by analogy with Art. 66 of the Turkish Penal Code No. 5237)
- Limitation for the sentence (limitation for execution): 10 years (Art. 68 of the Turkish Penal Code No. 5237)
As to the period for lodging a complaint, the following two limits apply within the framework of Art. 345 of the Enforcement and Bankruptcy Act No. 2004: the creditor must lodge a complaint within 3 months beginning from the date on which he became aware of the act and of the perpetrator, and in any event must exercise that right within 1 year at the latest from the date on which the act was committed.
In addition, the grounds interrupting or suspending limitation laid down in Art. 67 of the Turkish Penal Code No. 5237 apply to this offence as well. If, for example, enforcement proceedings were pending at the time the offence was committed, those proceedings, being among the elements of the offence, constitute the starting point of the legal process.
Note: For the offence to be regarded as made out, enforcement proceedings must as a rule have been commenced against the debtor. Otherwise the danger of damage may not be capable of being demonstrated in concrete terms.
The Courts with Subject-Matter and Territorial Jurisdiction
This offence falls within the remit of the Enforcement Criminal Courts. As to territorial jurisdiction, the enforcement criminal court situated within the judicial district of the enforcement office where the proceedings were commenced has jurisdiction.
The creditor may submit his complaint to the enforcement criminal court with jurisdiction in writing or may convey it orally.
The Other Avenues Available to the Creditor
For a creditor who has suffered damage because of a debtor’s fraudulent transactions, not only criminal law but also the instruments of private law come into play. Since the bringing of a criminal action does not of itself secure the collection of the claim, it is of great importance that the avenues of legal protection be pursued in parallel.
The Action for the Annulment of the Disposition
Fraudulent transactions carried out by a debtor with the intent to place assets beyond the reach of the creditor may be made the subject of an action for the annulment of the disposition under Article 277 and the following provisions of the Enforcement and Bankruptcy Act No. 2004.
By means of this action the creditor may request that attachment be levied on the elements of the debtor’s assets transferred to third parties and, where necessary, that those assets be sold in order to meet the claim.
The bringing of the action depends on two conditions:
- Enforcement proceedings must have been commenced against the debtor and have become final.
- The disposition whose annulment is sought must have been made within the two-year period preceding the commencement of the enforcement proceedings. (In some cases this period may extend to as much as five years.)
Where the debtor has eliminated the possibility of collection by transferring his assets to third parties through fraudulent transactions, this action is a private-law avenue of protection that may produce a faster and more effective result than criminal proceedings.
Preliminary Attachment and Other Interim Protection
A creditor concerned that the debtor will destroy his capacity to pay through simulated transactions, concealment or the spiriting away of assets may have recourse to avenues of interim legal protection even though collection has not yet taken place. The most widespread and effective of these instruments is preliminary attachment.
Preliminary attachment
Under Art. 257 and the following provisions of the Enforcement and Bankruptcy Act No. 2004, a creditor who has a monetary claim that has fallen due and who wishes to commence enforcement proceedings without a judgment may request an order for preliminary attachment from the court against the danger that the debtor will place his assets beyond reach.
For such an order to be granted, the existence of the claim must be clearly demonstrated and it must be proved in concrete terms that the collection of that claim by way of attachment is seriously imperilled.
In most cases the courts order preliminary attachment on condition that security be deposited, having regard to the possibility that the measure may turn out to be unjustified. Enforcement proceedings must be commenced within 10 days of the order being obtained (Art. 261 of the Enforcement and Bankruptcy Act No. 2004).
Where the debtor has transferred, concealed or spirited away his assets in bad faith, preliminary attachment affords a powerful safeguard that can be applied swiftly and independently of the criminal investigation.
Interim injunction
Under Art. 389 and the following provisions of the Code of Civil Procedure No. 6100, where there is a risk that damage impossible to prevent will arise unless the right of one of the parties is protected immediately, or where an existing right is seriously imperilled, an interim injunction may be sought from the court.
For an injunction to be granted, it is required that the interest to be protected be capable of being secured by a provisional intervention, that the legal relationship on which the right is based be clearly demonstrated, and that there be a danger of damage that is difficult or impossible to make good. The party making the request must prove these conditions by documents or by strong evidence.
The scope of the injunction:
An injunction may cover the provisional suspension of obligations arising from a contract, the entry of an annotation on the land registry, and the suspension of transfer and assignment transactions relating to movable or immovable property. The provisional suspension or prohibition of specified transactions is likewise possible within this framework.
When granting an injunction the court will for the most part also require security to be deposited. The security serves to make good the losses that the other party may suffer as a result of an unjustified injunction.
How the injunction operates:
An action must be brought within two weeks of service of the order, or, if an action has already been brought, the court must be notified of that fact (Art. 397 of the Code of Civil Procedure No. 6100). Otherwise the injunction automatically ceases to have effect.
Injunctions are capable of immediate implementation through the relevant enforcement office and constitute an effective instrument for the protection of the creditor’s legal interests.
The Independent Legal Assessment
A complaint under Art. 331 of the Enforcement and Bankruptcy Act No. 2004 is not, on its own, an instrument that secures collection of the claim. The function of the criminal proceedings is to bring the pressure of sanction to bear on the debtor; the recovery of the assets is achieved through the action for the annulment of the disposition and through interim legal protection. The soundest approach in practice is therefore to pursue the criminal complaint and the private-law avenues in parallel.
A significant proportion of files come to nothing not on the merits but because the applicable periods have been missed. When the three-month period from becoming aware begins to run is most often determined by reference to the date on which the land registry or bank records were examined; the dating of those enquiries is therefore important in itself.
In a concrete case the following headings should be given prominence:
- Ensuring that enforcement proceedings have been commenced against the debtor before the complaint is lodged
- Establishing the date of the fraudulent disposition by comparison with the date on which the debt arose
- Evidencing the unity of will between the debtor and the third party where simulation is asserted
- Calculating and documenting the three-month and one-year complaint periods by reference to the moment of becoming aware
- Assessing the options of an action for the annulment of the disposition and of preliminary attachment at the same time as the criminal complaint
- Planning applications for interim protection in financial terms, bearing in mind that an obligation to provide security may arise
Independent Legal provides process management and litigation services in disputes arising from enforcement and bankruptcy law, from the preparation of criminal complaints to the conduct of actions for the annulment of dispositions.