Dishonest debtors are increasingly daring to use court proceedings to fictitiously dispose of funds to pay their debts. They believe that if they obtain a final judgment that orders them, for example, to pay an amount to a third party, the creditor will not be able to contest the payment. But is the creditor completely defenceless? With this article, we are kicking off a series on what to pay attention to and how to react when a debtor initiates court proceedings that may render the debtor insolvent.
If the debtor divests itself of assets to avoid paying a debt, we can challenge that action. The fraudulent transfer claim against a third party serves this purpose. But this instrument of creditor protection cannot be used against a court ruling.
Dishonest debtors and their allies are obviously aware of this. Thus they abuse the right to access the courts, to later argue that they transferred their assets or rights to third parties based on a legal relationship formed or confirmed by a final court ruling, and thus creditors cannot challenge it.
The problem is not new, and has already been noted by Polish courts and commentators.
An obvious legal loophole
For decades, a peculiar type of trial has stood out among sham trials—collusive litigation brought by sham claimants, only for the defendant to lose the case against them and, by executing the judgment, transfer substantial assets to the claimant. These proceedings are designed to prevent the satisfaction of actual creditors. Indeed, if the debtor transferred its assets to substituted creditors without a court ruling, the actual creditors could successfully challenge the debtor’s dispositive acts via a fraudulent transfer claim against a third party (see K. Knoppek, “Introduction to the study of a sham civil trial,” in Civil trial: Science, codification, practice (Warsaw 2012), pp. 198–199 and the literature cited therein).
The Supreme Court of Poland has long recognised (e.g. in the judgment of 24 May 1994, case no. I CRN 50/94) that sham court proceedings to the detriment of creditors are becoming more and more common, especially regarding the establishment of separate marital property and in cases regarding the division of personal assets (marital assets, inheritance, etc). Even more important, the Supreme Court has pointed out that in this regard there is an unintentional loophole in the Polish system of creditor protection (Supreme Court resolution of 8 October 2015, case no. III CZP 56/15, and more recently, the judgment of 5 October 2022, case no. II CSKP 552/22). This loophole consists primarily in the fact that the Polish provisions on fraudulent transfer claims do not unequivocally allow for the possibility of pursuing this legal remedy against procedural acts taken before a state court by dishonest debtors to the detriment of their creditors. The Supreme Court noted that in the Polish legal system, creditors generally have a big problem preventing sham proceedings and eliminating their consequences (including final judgments) from legal circulation.
Nevertheless, the loophole continues to exist. As a result, all too often one hears that since an asset was removed from the debtor’s property, or did not enter it, as a result of a transaction approved or ordered with legal finality by a court, such a transaction can in no way be effectively set aside as fraudulent against creditors. It cannot go on like this!
Supreme Court rulings do not necessarily indicate a trend
As we wrote in the article about the fraudulent transfer claim against a third party, it is possible to successfully challenge with such a complaint procedural actions also causing substantive legal effects, such as a court-approved settlement or waiver or acknowledgment of a claim. But such a possibility is not expressly provided for in Polish law. Rather, it was opened up only by decisions from the Supreme Court, trying to some extent to close the aforementioned loophole exploited by dishonest debtors (e.g. Supreme Court judgments of 15 October 1999, case no. III CKN 388/98, 14 November 2011, case no. V CSK 163/08, and 6 May 2009, case no. II CSK 670/08, and Supreme Court resolution of 8 October 2015, case no. III CZP 56/15).
Poland is ruled by the system of statutory law, not precedent. Therefore, there is no guarantee that in any later case the lower courts will be inclined to follow this interpretation and apply the provisions on fraudulent transfer claims against a third party as the Supreme Court did in the rulings cited above. This is well illustrated by a relatively recent judgment of the Warsaw Court of Appeal (of 6 November 2019, case no. V ACa 127/19). It is apparent from the stated grounds for the judgment that the panel of judges deciding the case on appeal were aware of the Supreme Court holdings under which a fraudulent transfer claim can also be brought against procedural actions, but the panel disagreed with this view and refused to apply it (which, we should add, it was fully entitled to do in the Polish system). Therefore, the intervention of the Supreme Court was necessary again, and in its judgment of 5 October 2022, case no. II CSKP 552/22, it set aside the judgment of the Warsaw Court of Appeal (more on this intriguing case here). But we should not kid ourselves that these rulings will prevent the dismissal of creditors’ fraudulent transfer claims against collusive third parties in the future.
Time to amend the law
The problem is all the more serious, as the lack of an express provision for voiding procedural deeds undertaken to knowingly harm creditors is not the only gap in the Polish system of creditor protection. This is compounded by the lack of legal instruments explicitly giving creditors:
- A real guarantee that they will be notified of court proceedings (contentious or non-contentious) whose outcome may cause (or aggravate) the insolvency of their debtors
- Full independence from the party to proceedings which the creditor has joined, as secondary intervenors in contentious proceedings
- Independent legal standing to pursue extraordinary remedies in a case where the final judgment was entered as a result of collusion by the parties with the purpose of harming creditors (at the same time, we should consider extending the grounds for reopening civil proceedings).
In this regard, creditors in Poland should loudly advocate for an appropriate amendment to the law, as soon as possible.
But it is also not the case that creditors have no legal remedies whatsoever to reduce the risk of negative consequences of legal proceedings initiated and conducted with the aim of harming them. Although inherently burdened with certain imperfections, such instruments already exist, and creditors should get to know them and learn to use them. We will provide details in future articles.
Jan Ciećwierz, adwokat, Adam Studziński, adwokat, Aleksandra Cygan, Dispute Resolution & Arbitration practice, Wardyński & Partners