Protecting the interests of creditors against dishonest actions by debtors | In Principle

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Protecting the interests of creditors against dishonest actions by debtors


A creditor affected by asset-stripping by a debtor doesn’t have to remain a passive victim of dishonesty.

Creditors have probably had trouble since time immemorial with dishonest debtors—ones who deliberately and unlawfully attempt to escape from their obligations. Thanks to globalisation, today’s world may be shrinking, but with the increased cross-border flow of persons and capital, the relative ease of creating various types of legal entities (companies, foundations, trusts and so on), and the multiplicity of available financial instruments, it can be particularly difficult for creditors to protect against asset-stripping by debtors. It is also objectively difficult to locate assets and secure them in due time so that the creditors can be satisfied. The economic crisis, or a weak rebound, contributes further to creditors’ problems.

The commonly known methods of leaving creditors high and dry are numerous. If that weren’t enough, “consultants” appear on the internet bluntly offering to “help you escape from your creditors.”

As a result, in the media and in private, businesspeople trade stories of clever debtors who managed to avoid paying anybody anything. Some of them set up new companies—in the name of friends or relatives—and transferred their assets there. Others encumbered their assets to make them unsalable because of the gross reduction in their economic value or the price they could obtain at auction. Yet others sold off their assets in deals far removed from any sound business principles, rendering the debtor insolvent and leaving the creditors with nothing. All too often in such stores one detects a note of admiration for the “inventiveness” or “virtuosity” of the debtors, and barely concealed irony about the creditors who were so easily led down the garden path.

Nonetheless, creditors who encounter asset-stripping by debtors should not give in to defeatism. This is precisely what dishonest debtors are seeking to achieve, waging a psychological war to wear down and discourage their creditors.

The truth is that a dishonest debtor is an economic sociopath, chopping away at the foundations of the society. They should not be hailed as geniuses or virtuosos, but labelled for what they are: frauds. Such people are not tolerated. That is how their actions are viewed by the legal system, which can and should be used to protect the rightful interests of creditors.

Creditors injured by the dishonest actions of debtors should remember that there are a whole series of investigative and legal instruments that can reverse the effects of asset-stripping.

As we know from detective fiction, there is no such thing as the perfect crime. We should also remember that there is no dishonest act that leaves no trace or evidence of its unlawful purpose. Fictitious contracts, collusive transactions, draining of funds or creation of artificial entities is not that hard to recognise.

The legal system provides cures for all such acts, offering appropriate legal instruments that can at least limit the negative consequences of such acts for creditors.

First it is typically necessary to locate and secure, as quickly as possible, the evidence demonstrating the true nature and purpose of the acts of a dishonest debtor. To this end, we use auxiliary (investigative) instruments for combating dishonest debt practices:

  • Economic intelligence, at home and abroad (particularly involving asset investigation)
  • Forensics—gathering and examining evidence through investigation of accounting and IT
  • Analysis by experts in finance, business, and asset valuation
  • Review of economic events from the point of view of tax law and regulatory restrictions under public law, including initiation and monitoring of administrative proceedings to identify the true content and course of economic events.

It is not always necessary to deploy all of these instruments fully in every case, but it should be borne in mind that they are available.

In turn, the principal (legal) instruments in Poland for protection of creditors against dishonest actions by debtors include:

  • Civil-law instruments for protection of creditors—a claim to invalidate an agreement to the detriment of creditors, a fraudulent conveyance action, a claim to hold an agreement to be ineffective, and securing and executing on claims when there is a threat of asset-stripping
  • Criminal-law instruments for protection of creditors—initiating, conducting or monitoring of criminal proceedings involving commercial offences; pursuing and enforcing redress of injury in criminal cases
  • Insolvency instruments—initiating and conducting bankruptcy proceedings or seeking a ban on serving as a board member or conducting business activity
  • Foreign instruments—fundamental instruments related to the foregoing or serving a similar function, which may be applied in other jurisdictions in connection with protection of creditors against unlawful or dishonest actions by debtors.

In practice, the principal legal instruments and the auxiliary instruments should be applied in conjunction with one another. It is also very important to coordinate investigative and legal measures.

It should also be added that the ability to obtain essential information or recover a debtor’s assets located abroad often depends on the ability to effectively ascribe offences against creditors to the debtor. This is particularly true for territories famed for offshore activity or specific foundations frankly aimed at hiding debtors’ assets. Thus criminal-law instruments for protection of creditors—contrary to popular opinion—should be regarded as among the most effective, but they require close professional cooperation with law enforcement authorities at home and abroad.

All is not lost for injured debtors. They have numerous opportunities for effective action, but they must be aware of them. This is the topic which this edition of the Litigation Portal is devoted to.

Adam Studziński, Difficult Receivables Recovery Practice, Wardyński & Partners