Transactions Prejudicing Creditors in Insolvency

Where a debtor transfers assets and makes it harder for creditors to obtain satisfaction, the transaction may be open to challenge. In insolvency, the general protection under Article 135 of the Obligations and Contracts Act (ZZD) must be distinguished from the special grounds under the Commerce Act (TZ). Concluding a transaction after the initial date of insolvency does not by itself make it automatically ineffective.

Prejudice to a creditor under Article 135 ZZD

Prejudice may arise where a disposal of assets amenable to enforcement reduces the ability to collect the debt or otherwise hinders the creditor. The debtor’s possession of other assets does not by itself exclude prejudice. However, all the requirements of the particular legal ground must be established for the claim to succeed.

For an act occurring after the claim arose, Article 135(1) ZZD requires examination of the claimant’s status as creditor, the prejudicial act and the debtor’s knowledge of the prejudice. If the transaction is for consideration, the other contracting party must generally also have known. Article 135(2) establishes a rebuttable presumption of knowledge for the debtor’s relatives listed there.

The debtor’s knowledge concerns awareness that a creditor exists and that the act hinders satisfaction of that creditor’s claim. In a transaction for consideration, it is also necessary to examine whether the transferee knew of the prejudicial effect, using the specific relationships, documents and conduct. A general assertion that the seller had debts is not sufficient on its own. If the act predates the claim, Article 135(3) requires that the debtor and the other contracting party intended it to prejudice the creditor.

Special insolvency rules

Articles 646 and 647 TZ provide separate grounds for challenging payments, security interests and transactions, including gratuitous disposals, certain transactions with related parties and transactions for consideration involving a substantial disparity between the parties’ performances. Each ground has its own requirements and relevant period. The initial date of insolvency, the filing of the petition and the opening of proceedings have different significance.

Consequently, a sale of a vehicle after the initial date cannot be regarded as prejudicial solely because of its date. The price and payment, the vehicle’s value, the parties, their relationships and the particular legal ground must be examined. Article 649 TZ regulates who may bring the relevant claims and the time limits. Those limits must be checked promptly against the applicable version of the law and the proceedings.

What is the result of a challenge?

Relative ineffectiveness protects the creditor concerned or, for the special insolvency claims, the insolvency creditors. It is not equivalent to automatic nullity of the transaction against everyone. Subsequent transfers, registration of the claim and third-party protection also matter.

For a consultation, prepare the documents relating to the debt, the transaction and payments, asset searches and the insolvency decisions. Tomovi Law Firm can assess the appropriate claim, the evidence required and the time limits.

Sources: ZZD, Article 135; TZ, Articles 646–649; Supreme Court of Cassation Interpretative Decision No. 2/2017 of 9 July 2019, Joint General Assembly of the Civil and Commercial Colleges.