Actio pauliana—from the general to the specific (part I)
What is an actio pauliana?
The photograph of a chameleon accompanying this article is no coincidence. In legal circles, the actio pauliana is associated with a chameleon thanks to Advocate General Michal Bobek’s Opinion in Feniks v Azteca[1]. He observed that it changes colour depending on the type of legal act it seeks to challenge. It is difficult to disagree.
So what is an actio pauliana?
It is a creditor protection instrument originating in Roman law, enabling a creditor to seek a declaration that a debtor’s legal act prejudicing the creditor is ineffective against that creditor (Article 527 of the Civil Code).
Regulated in only a few Civil Code provisions, it appears unassuming but is a powerful instrument. It combines substantive and procedural law, and effective use requires not only knowledge of the rules but analytical skills and a properly prepared litigation strategy.
Why is an actio pauliana so powerful?
An example is the easiest way to explain.
Jan Kowalski is a sole trader running a successful construction business. The nature of his activity, particularly deferred payments dependent on acceptance of successive works stages, means he uses a bank overdraft. He has been a customer for years and has always met his obligations on time.
In 2020, the pandemic breaks out. Some projects are suspended, as are payments from customers. Jan’s liabilities begin to grow, and the bank demands timely repayment. As late as July 2020, Jan assures it that he will settle the entire debt.
In September 2020, the bank terminates the loan agreement, then sues for payment and starts enforcement in July 2021. Enforcement proves unsuccessful.
Why?
A month after the pandemic began, Jan realised his financial situation was deteriorating rapidly. To protect his assets from creditors, including the bank, he transferred valuable assets to his partner, Anna Nowak.
One method debtors use to frustrate enforcement is disposing of valuable assets to others. They are often sold or donated to relatives, business associates or entities that are buyers only formally.
This does not leave the creditor helpless. In specified circumstances, it may bring an actio pauliana.
This action allows the creditor to demand that a legal act be declared ineffective against it. What does that mean in practice?
After obtaining a favourable judgment, the creditor can seek satisfaction from the asset covered by the challenged act even though it now belongs to a third party that is not its debtor. Crucially, enforcement does not extend to all of that third party’s assets. It concerns the asset that left the debtor’s estate, or failed to enter it, as a result of the challenged act.
This demonstrates the instrument’s strength: creditor protection affects the legal position of a third party with whom the creditor previously had no legal relationship.
Let us develop the example.
When the bank sues Jan for payment, he tells Anna. Fearing an actio pauliana, they jointly decide that Anna will sell the property she acquired to her sister, Sara Gołąb.
Does this further transaction definitively prevent the bank from acting?
No. The law allows a claim against a subsequent acquirer, although the conditions are more demanding.
Under Article 531 § 2 of the Civil Code, if the third party disposes of the benefit obtained, the creditor may proceed directly against the subsequent acquirer if that person knew of the circumstances justifying a declaration that the debtor’s act was ineffective, or if the further disposal was gratuitous.
In our example, Sara and Anna have different surnames, so their connection may not be obvious at first sight. Based only on publicly available information, the transaction may look like an ordinary property sale to an unrelated buyer.
This does not mean it cannot be successfully challenged. It may, however, create substantially greater evidential difficulties for the creditor, particularly in proving the subsequent acquirer’s knowledge of the circumstances justifying ineffectiveness of the earlier act.
Advantages and disadvantages of an actio pauliana
The principal advantage is improving the creditor’s chances of actually recovering its claim. The extent of possible recovery depends in practice on factors including the claim amount and the value of the asset affected by the challenged act.
The difficulties primarily concern preparing the case and subsequently conducting proceedings.
First, the creditor must establish which assets were transferred out of the debtor’s estate and to whom. The subject of the challenged act should already be properly identified when the action is brought. More complex cases may require business intelligence or private investigation services.
Second, it may be necessary to determine the transferred assets’ value, analyse connections between the debtor and third party, and gather documents and other evidence reconstructing the transaction’s actual course. Valuers or other specialists may also be needed.
Third, the facts established before proceedings may look entirely different after evidence is taken. A seemingly obvious case may become complicated when new documents, connections or circumstances emerge. The creditor and its lawyer must respond flexibly and sometimes change their original litigation strategy.
Finally, the length of proceedings must be considered. An actio pauliana dispute may last several years.
Even this brief outline shows that obtaining a favourable judgment is not always straightforward. It requires proper preparation, identifying the assets affected, gathering evidence and planning proceedings appropriately.
Despite these difficulties, litigation may be entirely justified, particularly when the transferred asset is the only one from which the creditor has a realistic prospect of recovery.
[1] Opinion of Advocate General Michal Bobek delivered on 21 June 2018, Case C-337/17, Feniks sp. z o.o. v Azteca Products & Services SL.
