Any transfer of an immovable property by a debtor made with the purpose of avoiding payment of debt owed to a creditor, cannot be tolerated by the court and upon application by the judgment creditor, may be set aside.

Such is the case of a debtor parent, who may also be a guarantor, who transfers immovable property by gift to their child, so that they do not have any immovable property in their name in order to avoid repayment of their debt. This act is done without monetary or other valuable consideration and is presumed to be a fraudulent act with the intention of defrauding the creditor.

A condition necessary for submitting an application for the issuance of an order setting aside the transfer of the immovable property is the existence of a judgment debt, as well as an act of fraud on the judgment creditor, regardless of whether the act occurred before or after the filing of the lawsuit.

Fraudulent acts

Acts of fraud on a judgment creditor are considered to be a gift, transfer, encumbrance or alienation for the benefit of a third party of any asset of the judgment debtor, with the aim of preventing or delaying the satisfaction of the judgment debt of the debtor.

The intention of the debtor is the determining factor that will determine whether the transfer or disposition will be considered fraudulent. Whether or not such intention exists is decided by the court, after taking into account all the facts of each case.

According to the Fraudulent Transfers Avoidance Law, Cap.62, it is presumed until the contrary is proven that a gift, transfer or encumbrance of property was made with the intention of defrauding the judgment creditor.

The burden in such cases is on the debtor to prove that the transfer or disposition was made in good faith and for reasonable consideration. The same burden of proof also lies on the person acquiring the property that they acted in good faith for reasonable consideration and were unaware of the intentions and actions of the debtor.

Purpose of legislative provisions

The relevant legislative provisions aim to secure the property of the judgment debtor, so that it remains available for the execution of the court decision and the satisfaction of the judgment debt.

In addition to the annulment of the fraudulent transfer, Law 134(I)/1999 makes it an offence for the judgment debtor to defraud the judgment creditor, punishable by imprisonment.

Even a person who accepts a gift, sale, transfer, delivery or safekeeping of any asset from a debtor and knows that this act is done with the aim of defrauding the creditor, commits an offence punishable by imprisonment.

Appeals Court decision

The Court of Appeal, in its decision in C.A. E48/2020, dated May 15, examined the complaints of a guarantor of credit facilities granted by a bank to his company. He said the court of first instance incorrectly decided fraud had occurred and set aside the transfer of his immovable properties to his four children by virtue of a donation.

The complainant alleged that the bank did not first turn to the collateral, that the court did not take into account that he was a guarantor and that the bank should have first turned against the primary debtor and then him, and that he was treated unjustly, as a judgment was issued against him for a larger amount and interest rate than the judgment issued against the primary debtor.

The Court of Appeal did not agree with his allegations and upheld the first-instance decision. The relevant legislation, it stated, does not obstruct the annulment of the transfer in the event that the sale of the mortgages does not proceed. The relevant case law does not set any binding principle, but simply stated that “It is right and fair and just for creditors to turn first against the primary debtor.”

It stressed that property transferred with intent to defraud (section 3(1) of Cap.62) or under the circumstances of section 3(2), is subject to annulment, even if the real collateral has not been sold, or the debtor has other property that can be sold to satisfy their debt, or if the creditor has not first turned against the guarantor. The first decision was issued by consent, following negotiation, while the second in his absence and the procedure before the Court of Appeal did not allow for questioning the validity of the decisions.