Legal defence against the removal of debtor's assets

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Author of the article: ​ARROWS (Mgr. Miroslav Sajdl, office@arws.cz, +420 245 007 740)

You have no doubt encountered a situation where a debtor has started to avoid meeting a debt by "dumping" assets on a third party - typically a family member. Subsequently, the debtor claimed to the creditor his or her indigence and inability to pay. At the same time, the debtor himself did everything he could to "get rid" of his assets. To illustrate, consider the following situation.

Creditor V lent debtor D a sum of CZK 500,000. After an agreed period of time, debtor D was to return the money. However, debtor D did not repay the debt and transferred his property to his son S. When creditor V demanded that the debt be repaid, debtor D told him that he no longer owned any property and did not respond to creditor V's calls. Creditor V therefore brought an action.

The legislator took this situation into account when drafting the legislation. Section 589[1] et seq. of Act No. 89/2019 Coll., Civil Code, as amended, gives the creditor the right to invoke the so-called relative ineffectiveness (ineffectiveness) of a legal act. The essence of relative ineffectiveness is to claim, by virtue of a court decision , the right to satisfaction from what has been lost from the debtor's property or monetary compensation [2].

Relative ineffectiveness may be invoked by a creditor whose claim is enforceable (see below) and whose satisfaction has been impaired by the debtor's legal conduct. The defendant in the proceedings will not be the debtor but a third party. Typically, it will be a person who has directly benefited from the legal act. In our example, the defendant will be the son of S.

Subordination of satisfaction to a third party

Counterclaim law is typically subsidiary in nature. In practice, this principle, which is not expressly provided for by law, is manifested by the priority of performance by the debtor. The condition for invoking the relative ineffectiveness of a legal act is that the creditor V cannot be satisfied on the debtor D, even by means of an alternative (pecuniary) remedy. Only then is the condition of the creditor's deprivation fulfilled. If the court declares the legal act relatively ineffective, the right of creditor V to satisfy himself against his son S and to claim payment from him arises.

Circumstances in which the ineffectiveness of a legal act may be invoked

The law[3] further specifies in other provisions several situations to which the relative ineffectiveness rules directly apply. For our case, we will demonstrate how creditor V can invoke relative ineffectiveness against son S, in the simplest possible way. In this respect, we can refer to the provisions of Article 590(1)(c) of the Civil Code.

• 590(1)(c)

A creditor may invoke the ineffectiveness of a legal act by which the creditor has been defrauded and which has taken place within the last two years between the debtor and a person close to him or which the debtor has done for the benefit of such a person, unless the other party was not and need not have been aware of the debtor's intention to defraud the creditor at the time when the legal act took place.

If the conditions in the above paragraph are met, the reverse burden of proof rule will apply in relation to S's son. Son S will thus have the burden of proving in the court proceedings that he was not and need not have been aware of the debtor D's intention to defraud his creditors.

Enforceability of the claim and the creditor's reservation

The provision also sets a time limit of two years, which is the latest point at which a creditor can invoke relative ineffectiveness. The example shows that the two-year period runs without further delay even if the claim is not enforceable. With reference to Section 589 of the Civil Code, however, we find that the enforceability of the claim is a prerequisite for invoking relative ineffectiveness[4].

The situation described above demonstrates that even if creditor V seeks to enforce the debt against debtor D through the courts, this does not automatically create a right to invoke the ineffectiveness of the legal act. In our case, the obstacle to enforceability is the pending court proceedings between creditor V and debtor D. Creditor V is in a precarious position because the enforceability of the claim against debtor D can only take place after the expiry of the two-year period laid down in Article 590(1)(c).

In order to avoid the risk of missing the statutory time limit, creditor V is given the option of reserving the right to invoke relative ineffectiveness,[5] by notifying the person against whom he wishes to invoke the ineffectiveness of the legal act through a notary, bailiff or court. As a consequence, the time limit for invoking the ineffectiveness of the legal act is suspended until the claim becomes enforceable.

Conclusion

If creditor V suspects that debtor D has acted fraudulently, it should act as quickly as possible and consult a professional about its potential right to invoke the ineffectiveness of the legal act. There is no exception to the principle that the right belongs to those who are alert.