“Permanent economic relations” between the parties to a transaction detrimental to a creditor
A fraudulent transfer claim against a third party protects participants in commerce and helps combat reprehensible actions by debtors aimed at avoiding payment of their debts. Under a fraudulent transfer claim against a third party, a creditor affected by the debtor’s fraudulent behaviour may enforce a claim against assets that the debtor transferred to a third party.
The third party’s knowledge and related presumptions
To win a fraudulent transfer claim against a third party under Polish law, a creditor must demonstrate to the court that, among other things, the third party knew, or by exercising due diligence could have known, that the transaction with the debtor was detrimental to its creditors.
The parliament, aware of how difficult it can be to prove that the third party was aware of the detriment to creditors, has strengthened the creditor’s procedural posture in certain situations. To assist creditors challenging fraudulent transfers, the law establishes two important legal presumptions (evidentiary shortcuts) concerning the third party’s knowledge that the debtor acted to the detriment of its creditors.
The first presumption involves a “close relationship” between the third party and the debtor (Civil Code Art. 527 §3), as we discussed in a separate article along with a summary of the nature of legal presumptions.
Here we will take a closer look at the second presumption, arising from “permanent economic relations” between the debtor and the third party.
The presumption arising out of “permanent economic relations”
This presumption is stated in Civil Code Art. 527 §4, which reads: “If, as a result of the debtor’s legal act performed to the creditors’ detriment, a financial gain is obtained by a business entity in permanent economic relations with the debtor, it is presumed that the business entity was aware that the debtor was knowingly acting to the creditors’ detriment.”
The drafters evidently determined that the existence of ongoing economic relations, characterised by the duration and intensity of economic cooperation, provides a basis for assuming that the businesses in such relations know (or should know) of the asset position of the counterparty and what consequences a transaction with the counterparty could have for other economic actors.
We may illustrate this with an example. A business operator who is an natural person finds himself in a difficult financial situation. For several months, he has been indebted to several creditors and is unable to pay his obligations in full as they come due.
In this situation, the debtor enters into an assignment for security to a third party, a freight forwarder (shipper of fruits) with which the debtor has longstanding cooperation, and which the debtor regards as a trusted counterparty. The agreement concerns one of the debtor’s few remaining assets, namely a truck. This way, the freight forwarder obtains full security for its monetary claim against the debtor, and after seizing the truck from the debtor can use the truck to support its fruit delivery service. Therefore, there is no doubt that the arrangement benefits the freight forwarder. But as a result of the assignment for security, the debtor’s other creditors suffer harm because they can no longer satisfy themselves by executing on the debtor’s assets.
In this case, the creditors may seek to rely on the presumption in Civil Code Art. 527 §4 to show that due to the longstanding economic relations between the debtor and the freight forwarder, the freight forwarder must have been aware that its permanent counterparty was acting to the detriment of other creditors when it entered into the assignment for security.
Not only long-term agreements
The concept of “permanent economic relations” is not defined in the Civil Code. Thus, to properly understand this concept it is necessary to read the case law from the courts on this issue.
There we learn that the permanence of a business entity’s relations with the debtor is evidenced not only by the duration of these relations (repetitive actions or a long-term agreement), but also by the nature and extent of their dealings. The factual elements demonstrated by the creditor, such as duration, nature and extent of economic relations, may give rise to the assumption that the third party (also a business entity) had knowledge of the debtor’s financial condition at the time of their transaction.
To consider economic relations “permanent,” it is necessary to take into account whether they are unvarying and repeated over a long period. By contrast, the sheer size of their economic cooperation is secondary. Businesses can change the value of orders and payments back and forth without breaking off regular contacts, as long as they are convinced of the need to continue further cooperation, which translates into further orders. A decline in the value of orders placed by the debtor with a third party cannot be deemed to be breaking off of “permanent economic relations.”
It can be found that the parties had “permanent economic relations” not only when they had concluded long-term agreements. The intention on both sides to maintain long-term economic cooperation is the decisive factor.
It is sufficient that a third party could have been informed of the debtor’s intent
As the Supreme Court of Poland has held (judgment of 29 March 2017, case no. I CSK 369/16), for these presumptions to apply, it is not necessary for a third party to have full insight into the debtor’s financial situation and adequate professional training to assess it. It is sufficient that the third party has such a relationship with the debtor that the third party could have been informed (not “must have been informed”) of the implications of its asset transfers. The court stressed that this is why the intensity and permanence of agreements are crucial: They affect the level of trust and intimacy, and on this basis it can be presumed that the third party has extensive knowledge of the debtor’s financial situation.
Overlapping presumptions under Civil Code Art. 527 §3 and §4
The relationship of “closeness” referred to in Art. 527 §3 may also result from sporadic economic contacts between the debtor and a third party, accompanied by other types of relations, financial or otherwise (e.g. Supreme Court of Poland judgment of 9 March 2007, case no. V CSK 473/06, OSNC 2008 no. 2 item 27). In the case law, there is an apparent tendency to find relations of closeness under Art. 527 §3 also between collective entities (e.g. companies), due to close commercial relations between them, longstanding cooperation, or personal ties.
On the other hand, as discussed, the presumption under Civil Code Art. 527 §4 is based on the notion that the third party has the status of a business entity and maintains permanent economic relations with the debtor. However, if the debtor also has other relations with that business entity that qualify them as persons “in a close relationship,” according to the commentators it is also possible to apply the presumption under Civil Code Art. 527 §3.
This leads us to conclude that the presumptions arising under Art. 527 §3 and §4 are not mutually exclusive, but may complement each other. Courts have even taken the view that the notion of “permanent economic relations” falls within the concept of “close relations” referred to in Art. 527 §3 (Łódź Court of Appeal judgment of 28 March 2017, case no. I ACa 1141/16). Here, without attempting to resolve the question of whether one of these presumptions actually encompasses the other within it, this is always worth bearing in mind when drafting a fraudulent transfer claim against a third party. Under the facts of the particular case, while being aware of the difficulty of proving the existence of “permanent economic relations” between a third-party business entity and the debtor, it is also worth considering demonstrating that there are “close relations” between the parties to the transaction detrimental to the creditor.
Aleksandra Cygan, adwokat, Adam Studziński, adwokat, Dispute Resolution & Arbitration practice, Wardyński & Partners
