1.What does the term mean in the first place?

With this term, we mean the behavior of a debtor who, in order to harm the interests of their creditors and to frustrate their satisfaction from what they would normally receive from him, transfers the owed provision to a third party. This is done so that when the time comes for the provision to the creditors to become due and they will forcibly execute their claim against the debtor, he will no longer have the owed object in his possession, and therefore the creditors would be left ‘unprotected’ if there were no action for subversion.

And this is because in such a case, they would not be able to seek the owed provision neither from the debtor, since it would no longer be in his possession, nor from the third party to whom the provision was transferred, because supposedly he would have acquired ownership of the thing. However, in order to prevent such cunning behaviors in practice, the legislator grants the creditor seeking to secure his claim against the debtor, the action for subversion, so that (the creditor) can achieve the cancellation of the transfer of the thing from the debtor to the third party as subversive (as we say in legal terms), and thus the thing ‘returns’ to the hands of the debtor, from whom the creditor will claim it and eventually recover it.

2.What are the requirements of the law?

For the action for subversion to be defined, it must contain the following elements:

• It must be exercised by a creditor of the debtor.
• The debtor must make a transfer/alteration/encumbrance of his property rights.
• The above must be done with the intention of harming the creditors (it is irrelevant if the debtor pursues other purposes).
• The third party to whom the provision is transferred must be aware of the debtor’s intention to harm his creditors.
• The remaining property of the debtor must be insufficient to satisfy his creditors.

3.Are there exceptions?

When we talk about alienation, we mean any transfer/alteration/encumbrance of a property right that the debtor undertakes in order to harm his creditors. Therefore, based on the above, it is not subject to subversion:

• When the debtor renounces any inheritance/bequest.
• When the debtor fails to accept a donation from another.
• When the debtor enters into promissory contracts = simply stating that he will fulfill the provision to someone else, without actually delivering the thing.

In the above cases, the legislator’s intention is clear: no one can be ‘punished’ by the law because they failed to receive a benefit, as such an action would unduly restrict their freedom. What matters is that the debtor does not continuously dissipate his property while having obligations to creditors, which he must fulfill.

4.How can I protect myself?

In case the creditor has reasonable suspicions that the debtor will not fulfil the provision to him because he is acting in bad faith, he can file the so-called ‘subversion lawsuit’ or ‘paulian action’. This lawsuit precisely requests the annulment of the transfer of a debtor’s asset to a third party because this transfer was made to harm the creditor’s interests.

However, for the lawsuit to be defined, the creditor must:

• know who the third party is and name them in his lawsuit
• clearly describe the legal relationship that connects him to the debtor, from which arises the claim for provision against him

For example: A lent money to B, and to secure himself from the possible non-repayment of the loan, he took a mortgage on B’s property. If B does not repay the loan to A and the latter accelerates the foreclosure on the property, there is a possibility that until the end of the judicial process, B has transferred the property to C, a third party. Thus, A, who now wishes to liquidate the property to be satisfied from the foreclosure, can file a subversion lawsuit against B and C, and describe in detail the loan agreement he made with B, and the mortgage on his property, from which he now has the right to be satisfied.

5.Is it also a criminal offense?

According to Article 397 of the Criminal Code, subversion of creditors:

• Constitutes a criminal offense, specifically a misdemeanor.
• Is punishable by imprisonment for up to 2 years or a fine.
• The case where the debtor transfers an asset for a very low consideration based on the rules of logic is also punishable.
• If the damage caused to the creditor is particularly large (about over 10,000 euros), then the perpetrator is punished with imprisonment of at least 2 years along with a fine.
• Similar punishment is provided for a third party who colludes with the debtor knowing that the transfer harms the creditors.

6.When does the claim prescribe?

The creditor’s claim to file an action for subversion, in order to request the annulment of the transfer between the debtor and the third party, prescribes after 5 years from the date of the transfer (alienation). Therefore:

• The start of prescription begins from a fixed point in time (the completion of the transfer).
• It does not matter when the creditor learned about the alienation.
• If there are multiple creditors of the debtor, the prescription runs for all of them from the same point in time.
• The criminal claim for subversion also has the same prescription period (5 years). Therefore, there is no differentiation, and both claims will prescribe on the same day.

7.When is the knowledge of the third party not required?

The rule for a subversion action to be accepted is that the creditor must prove that the third party knew the debtor’s intention to harm the creditors by transferring the asset to them. If this is not proven, the action will be dismissed as unfounded. However, there is an exception to this rule, as the knowledge of the third party about the intention to harm the creditors is presumed if the third party is:

• The spouse of the debtor
• A relative of the debtor in a direct line (i.e., father/mother and similarly grandfather/grandmother of the debtor)
• A relative of the debtor in a collateral line up to the 3rd degree (i.e., brother/sister, nephew/niece of the debtor, up to the third cousins)
• A relative of the debtor by marriage up to the 2nd degree (i.e., up to the nephew/niece of the spouse)
• If the third party received the asset from the debtor without consideration/free of charge, they do not need to know the intention to harm.

For the above, the law considers it a given that they knew the intention to harm the creditors pursued by the debtor by transferring the asset to them. Therefore, the creditor will not need to prove the intention of harm in their action, but, on the contrary, these individuals will need to prove that they were unaware of the debtor’s intention to harm at the time of the transfer. However, it is crucial to note that this presumption ceases to apply if the subversion action is not filed within one year from the date of the transfer.

8.What are the consequences of subversion?

The main consequence of a successful subversion action by the creditor is that the third party must transfer back to the debtor the item of provision they received from the debtor, essentially restoring the situation to its previous state, which depends on the specific case.

For example, if the debtor had transferred a property on which a mortgage in favor of the bank was registered to a cousin, then with the court’s acceptance of the subversion action, the cousin would be obliged to transfer the property back to the debtor, meaning to draft a notarial document and transfer the new contract to the relevant mortgage registry/land registry. The expenses incurred by the cousin cannot be claimed from the creditor who succeeded in the subversion action, especially if the cousin was aware of the debtor’s intention to cause harm.

It is crucial to note that subversion achieved through the acceptance of the action only benefits the creditor who initiated it and not any other creditors. For instance, if three banks had registered mortgages on the above-mentioned property, only for the first bank whose action was accepted will the debtor be considered the owner of the property. The other banks, on the contrary, would have to file separate actions to achieve the subversion of the transfer of the property to the third party.

9.What if the third party transfers the provision to another person?

In this case, when the third party to whom the debtor transferred the provision also transfers it to another person (4th party), for the creditor to act against the 4th party and annul the relevant transfer, the following is required:

• The 4th party must have known that the third party also intended to harm the original creditor when transferring the provision.
• If the 4th party is connected to the debtor through any of the relationships mentioned in question 7, then their knowledge is presumed, and thus, it does not need to be proven.
• It is also required that one year has not passed between the transfer of the provision and the filing of the subversion action.
• It is important to note that if the third party transfers the provision to the 4th party without consideration, then the 4th party is not required to know the intention to harm and thus, it does not need to be proven.

10.How is the third party who acquired the provision for free without knowledge held accountable?

It is not uncommon in practice for a debtor to transfer the provision to a third party gratuitously or out of charitable reasons. This usually happens in order for the transfer to be considered a donation and thus remain valid, disregarding the provisions of the law regarding the defrauding of creditors. In such a case, we should distinguish:

• As a rule, when the debtor transfers the provision gratuitously to a third party, the law does not require the third party to be aware of the debtor’s malicious intent.
• If the third party was aware of the debtor’s malicious intent at the time of the transfer, then the transfer will be voided, and the third party will be obliged to return the provision to the debtor.
• If the third party was not aware of the debtor’s malicious intent (i.e., acted in good faith), then they are only liable under the provisions regarding unjust enrichment, meaning that the benefit from the provision must remain in their hands during the time the creditor turns against them legally.
• The above applies also in the case where the third party transfers the provision to a fourth party, and so on. The same rules apply to the fourth, fifth parties without differentiation.

It is important to note that the law has devised solutions for addressing many problems that arise in practice. Even the cleverest behaviors on a daily basis cannot be tolerated by society as a whole; otherwise, it would be as if we were rewarding the debtor who is evasive and avoids fulfilling their obligations in every possible way. In any case, the action of recourse is a useful tool for the creditor, who participates in commercial life and would not want to find themselves “trapped” in collusion between the debtor and third parties.

 

 

The above-mentioned does not constitute legal advice, and no responsibility is assumed for it. For more information, please contact us.