Pursuing claims for the tort of selective payment of creditors as an alternative method of securing the interests of creditors overlooked by the debtor | In Principle

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Pursuing claims for the tort of selective payment of creditors as an alternative method of securing the interests of creditors overlooked by the debtor

In its judgment of 10 February 2021 (case no. I CSKP 33/21), the Supreme Court of Poland considered a cassation appeal by a claimant seeking to prove that it was wronged as a creditor in a fraudulent transfer claim against a third party (governed by Art. 527 and following of the Civil Code). The Supreme Court raised important issues in this debatable decision from the point of view of the safety of participants in commerce, including creditors. Among other things, the court pointed out that the assessment of whether a creditor was harmed within the meaning of Art. 527 §2 is affected by whether the consideration obtained by the debtor was used to satisfy other creditors.

In this judgment, the Supreme Court once again (see e.g. Supreme Court judgment of 3 March 2017, case no. I CSK 157/16) answered the question whether a debtor has complete discretion in determining the order of satisfying creditors. The court held that the debtor is free to choose which creditor to satisfy first. The court pointed out that the applicable provisions, except for special proceedings, do not introduce any rules for satisfying creditors in a situation where the debtor is unable to satisfy all of them. The consequence of this view is significant for creditors, as the Supreme Court negated the possibility of upholding a fraudulent transfer claim against a third party when the debtor fulfils a due performance corresponding strictly to the obligation in terms of the type and method of performance. In other words, if as a result of the challenged transaction, the debtor obtained an equivalent consideration that was used entirely to satisfy the due and payable claims of one or more creditors (but not all!), then, according to the Supreme Court, there are no reasonable grounds to find that such disposition justifies a fraudulent transfer claim against the third party by the remaining creditors.

Here the Supreme Court seems to advocate granting the debtor the freedom to choose which creditor to satisfy, i.e., it recognises a certain discretion in the debtor’s decision, stressing in particular that there is no basis for requiring the debtor to satisfy creditors pro rata in every situation. This view of the Supreme Court has practical implications for creditors, as satisfaction of one creditor may be the basis for bringing a fraudulent transfer claim against the third party who received payment only in exceptional situations, e.g. if the debtor:

  • Provided the third party a benefit other than one arising from an existing obligation, or
  • Paid an unmatured debt to one creditor while leaving matured debts unpaid.

This view may be considered debatable and does not meet the needs of commercial transactions, but its existence should be taken into account when creditors plan actions aimed at satisfying their claims.

In light of the ruling of the Supreme Court discussed above (indicating that selective payment of creditors may not in itself suffice for the court to find that the transaction was intended to harm other creditors), where can creditors seek protection of their interests, and from whom can they seek compensation? While everything depends on the factual and legal realities of the given case, it seems that the regulation on liability for damages for tort, which in the Polish legal system is set forth in Art. 302 §1 of the Criminal Code, comes to the rescue: “Anyone who, while under a threat of insolvency or bankruptcy and unable to satisfy all his or her creditors, pays or satisfies only one of them, thereby acting to the detriment of others, shall be liable to a fine, community sentence, or imprisonment for a minimum of two years.” It should be borne in mind that to prove that such a tort has been committed, the creditor is required to prove a number of prerequisites, while the presumptions included in the regulations on fraudulent transfer claims against a third party (e.g. awareness of injury to creditors) in principle do not apply in this respect. Such claims can be difficult, but that does not make them impossible.

From the beginning, it should be noted that the offence specifically described in Art. 302 §1 of the Criminal Code is not committed, and the perpetrator is not liable, if the debtor favours some creditors but has assets to pay the others (at that time, the debtor is not acting to their detriment). At the same time, a debtor who is a perpetrator of the offence specified in Art. 302 §1 of the Criminal Code must be aware that they are in a situation where they are at risk of insolvency or bankruptcy and at the same time cannot satisfy all of their creditors, or at least may be in such a situation. The tort defined in Art. 302 §1 of the Criminal Code is intentional in nature. Thus, the claimant will have to demonstrate wilfulness on the part of the debtor selectively paying creditors while acting at the same time to the detriment of others. Here, the wilfulness can occur in either form, i.e. specific intent or recklessness. This means that an insolvent debtor must be aware that their conduct consisting of paying or securing only some creditors may threaten injury to other creditors, and intend this result or at least condone it.

The scope of persons against whom a creditor who has suffered injury will be able to address a claim is broad, as, pursuant to Art. 308 of the Criminal Code, not only the debtor but also a person who manages the financial affairs of another legal person, a natural person, a group of persons, or an entity without legal personality may be held liable for an offence under, among other things, Art. 302 §1 of the Criminal Code. (In other words, an individual serving on the management board of a dishonest company may be liable.) In a specific way, Art. 308 of the Criminal Code expands the group of persons who may incur compensatory liability for selective payment of creditors.

It should be emphasised that a claimant seeking to prove in civil proceedings the occurrence of a wrongful act, including for example the offence defined in Art. 302 §1 or 308 of the Criminal Code, does not need to hold a criminal judgment establishing that the debtor committed this offence (we have written more extensively about the independence of civil and criminal proceedings in this context in an earlier article).

Often only a claim against an extended group of persons responsible for a wrongful act (pursuant to Civil Code Art. 422) offers a real chance to obtain compensation for injury. Commonly, it may not be possible to obtain effective redress of injuries caused by a wrongful act from the direct perpetrator. Thus, damages for selective payment of creditors can also be sought against persons referred to in Art. 422 of the Civil Code: “Liability for injury is borne not only by the direct perpetrator but also by any person who incites or aids another to cause injury and a person who knowingly benefits from injury caused to another person.” Each of the listed persons (instigator, aider or abettor, or person benefiting from the injury) commits a separate prohibited act, and their liability for the injury is independent of the perpetrator’s liability. However, to hold an instigator or aider liable, it is necessary to prove a causal link between their conduct and the injury caused by the perpetrator, while a beneficiary of injury is liable despite the absence of such a link. An instigator and an aider are only liable for actions taken with intentional fault (specific intent or recklessness).

On the other hand, according to the position established in the jurisprudence of the Supreme Court, for those who knowingly benefit from injury to another, the perpetrator’s fault is not a condition for liability. The awareness on the part of a person benefiting from someone else’s injury means knowledge that a prohibited act has been committed and that the benefit that this person obtains comes from someone else’s tort (e.g. Supreme Court resolution of 21 December 2017, case no. III CZP 89/17; Supreme Court judgment of 22 March 2019, case no. IV CSK 443/17). This imposes on a claimant under Civil Code Art. 422 a higher evidence requirements than when adopting the concept of liability for damages for a culpable lack of knowledge of the origin of benefits from a prohibited act.

Another practical aspect that must be taken into account by a creditor considering asserting their rights in the manner described above is the amount of damages they may claim. As a practical matter, the limit here is the amount of the benefit actually gained by the person who knowingly benefited from the injury caused to the creditor (this is a controversial approach, but nevertheless not infrequently encountered in court decisions). Additionally, a creditor’s claim for damages is limited by the amount they would have obtained from the debtor if the debtor had paid all its creditors fairly (which in some cases may make it pointless to pursue such a claim, because if the debtor had many creditors, the amount each would have received pro rata could be very low).

Finally, one more point: pursuing a civil action for damages against a person who knowingly profited from an injury caused to another should always be considered as one method for optimising the legal measures for recovery of losses. This is why creditors affected by selective payment by debtors should bear in mind that it is potentially possible to seek satisfaction of their claims by pursuing damages from the widest possible set of persons, including those who knowingly benefited from the debtor’s wrongful act.

Adam Studziński, adwokat, Aleksandra Cygan, Dispute Resolution & Arbitration practice, Wardyński & Partners