In practice, it is common for a debtor to transfer real property to a relative, give away a vehicle or sell an asset far below its value in order to keep it out of a creditor's reach. In such cases, the Enforcement and Bankruptcy Law (No. 2004) gives the creditor the action for annulment of fraudulent disposition, which renders the transaction ineffective against that creditor.
Requirements for the action
- The creditor must have final enforcement proceedings and a definitive or provisional certificate of insolvency obtained against the debtor. An attachment report stating that no attachable assets were found serves as a provisional certificate of insolvency.
- The disposition to be annulled must have been made after the debt that is the subject of the proceedings arose.
- The action must be filed within five years of the date of the disposition. This is a peremptory deadline that cannot be extended.
Dispositions subject to annulment
The law provides for three groups of transactions. Gratuitous dispositions, meaning gifts and transactions treated as gifts, are annulled if they were made within the two years before attachment or bankruptcy. Dispositions made while insolvent are transactions such as granting security or paying a debt not yet due at a time when the debtor was unable to pay existing debts. Dispositions made with intent to harm cover all transactions the debtor made with the aim of harming creditors where the other party knew or should have known of that aim. For transactions with a spouse, children and close relatives, such knowledge is presumed.
Outcome of the action
If the action succeeds, the disposition is not annulled. It is only deemed ineffective against the creditor. The creditor can have the asset attached and sold even if it is in the hands of a third party, and collects the claim from the sale proceeds. If the asset has already been disposed of, the third party is ordered to pay compensation equal to its value. The judgment does not affect other creditors who were not parties to the action.
Practice note
The most critical step in actions for annulment of fraudulent disposition is to examine the land registry and vehicle registration records as soon as the enforcement proceedings become final and to identify suspicious transfers before the deadline expires. For corporate creditors, this review is part of the asset investigation our firm conducts when it accepts a file.