A debtor disposes of assets before the debt falls due: Can the creditor pursue a fraudulent transfer claim against a third party?
An investor and a contractor sign a construction contract. Before the contractor begins work, the investor disposes of valuable assets, from which the contractor could satisfy its claim for the fee, but the fee will not be due until completion of the work. In that situation, can the contractor take advantage of the broad protection of a fraudulent transfer claim against a third party?
In previous articles, we discussed the fraudulent transfer claim against a third party, which in Poland is the primary instrument for legal protection of creditors against dishonest debtors. We also explained that the debtor’s early disposal of its assets, before the debt arises, does not completely preclude the creditor’s chances of benefiting from a fraudulent transfer claim against a third party. Now we would like to explain how, under Civil Code Art. 527–534, a “creditor” differs from “future creditor.” Indeed, the distinction between these terms is of momentous practical importance when seeking protection from dishonest debtors and their allies.
Under Civil Code Art. 530, the form of a fraudulent transfer claim against a third party concerning “future creditors” has a narrower scope of protection, as it applies only in cases where the debtor had the intention to harm the creditor. If the act harming the creditor was made for consideration, pursuant to Art. 530 it must also be shown that the third party was aware that the counterparty knowingly acted to the detriment of future creditors. In other words, the claimant filing a fraudulent transfer claim against a third party pursuant to Art. 530 must prove by evidence that when performing a particular act concerning the debtor’s assets, the debtor at least knew that by this act it would bring about harm to a future creditor, and the third party knew about it, but they proceeded with the transaction regardless.
Pursuant to Civil Code Art. 527–529, a classic fraudulent transfer claim against a third party related to “creditors” has a broader scope of protection. It is enough to prove that the debtor was aware of the possibility of harming the creditor (at least, the debtor should have known that by its action it could harm its creditor, even if that was not the debtor’s realised purpose). As for the third party, in this case it is sufficient to demonstrate that it should have been aware that the counterparty was acting to the detriment of creditors.
It is better to be a “creditor” than a “future creditor”
It follows that a person interested in pursuing a fraudulent transfer claim against a third party should put maximum effort into proving that at the time of commission of the fraudulent act (resulting in at least hindering enforcement of its monetary claim), the person was already a “creditor” and not just a “future creditor.” Proving intentional harm to a “future creditor” by a debtor, as well as awareness of this fact on the part of the third party, may be very difficult in practice.
To benefit from the broader protection of a fraudulent transfer claim against a third party, one can draw support from the position presented in the legal literature and the case law, according to which the concept of “future creditor” should be narrowly understood on the basis of Civil Code Art. 527–530.
According to this legal view, if at the time of commission of the act challenged by a fraudulent transfer claim against a third party, the debtor depleting its assets was already in a relationship of obligation with a creditor affected by a fraudulent transfer claim against a third party, and in particular had already entered into the contract with the creditor which is the source of the obligation, and maturity of the obligation does not depend on the free will of the debtor, then Art. 530 no longer applies. This is because in that situation, the debtor is already under a duty of contractual loyalty and should take into account the obligation to satisfy the creditor, even if the maturity of the obligation depends on additional prerequisites (e.g. a future and uncertain event). Then the creditor deserves stronger protection, because, among other things, having tied itself in a knot of obligation with the debtor, it is entitled to count on the debtor’s performance of the obligation (also when the maturity of the obligation depends on the creditor itself), and at the same time, the creditor can no longer make the knot conditional on the debtor’s financial situation.
There is a contract, there is a creditor
According to this legal view, the contractor mentioned at the beginning will be a “creditor” (and not just a “future creditor”). The contractor entered into a contract for construction works, but before proceeding to implementation of the work (upon completion of which the claim for a fee under the contract would mature and become due and payable), the contractor was harmed by the investor’s fraudulent actions.
The recent judgment of the Supreme Court of Poland of 11 August 2021 (case no. II CSKP 87/21) is an example of this approach to the issue.
Based on the above, we can formulate more general assertions on the meaning of the terms “creditor” and “future creditor” in the context of a fraudulent transfer claim against a third party. One who has entered into a valid agreement with a debtor, which is the source of a monetary claim, even if at the time of commission of the fraudulent act the claim is not yet due, and its maturity depends on a future and uncertain event, is already a “creditor” within the meaning of Civil Code Art. 527–529 and enjoys the extended protection of a fraudulent transfer claim against a third party. Within the meaning of Art. 530, benefiting from the narrower protection of a fraudulent transfer claim against a third party, a “future creditor” is one who, at the time of commission of the fraudulent act by the debtor, was not yet bound to the debtor by an agreement providing for creation of the monetary claim whose enforcement is prevented by the transaction.
Thus, it is necessary to recognise the view that mere conclusion of the agreement which is the source of the protected claim, before commission of the fraudulent act, makes it an existing (and not a future) claim.
However, it should be remembered at all times that the protection of the fraudulent transfer claim against a third party can only be granted to a current creditor. In other words, at the time of ruling on the basis of Art. 527–530 on the demand to declare the transaction ineffective, the protected claim must already exist and be precisely identified in terms of the parties and the subject matter (see Supreme Court judgments of 6 March 2009, case no. II CSK 592/08, and 28 November 2014, case no. I CSK 33/14). And it is essential to accurately and adequately specify the claim in the statement of the relief sought in the fraudulent transfer claim against a third party.
Jan Ciećwierz, adwokat, Adam Studziński, adwokat, Dispute Resolution & Arbitration practice, Wardyński & Partners