Challenging fraudulent agreements as a debt collection tool

Everyone who is engaged in business has at least once encountered a situation when an unscrupulous debtor begins to alienate his property in order to avoid paying the debt.

This can happen in advance – even before the debt as such arises (property alienation occurs for no apparent reason and in the absence of obvious necessity) – the potential debtor, so to speak, prepares for non-payment of the debt so that the alienation of property is not an obvious reason for evasion of performance obligation, as well as immediately after the debt has arisen (delay in the fulfillment of the obligation) – the debtor did not plan to evade the fulfillment of his obligations in advance, but decided to do so after the due date for such performance or immediately before the due date.

This often happens at the stage of enforcement of court decisions, when there is already a court decision in favor of the creditor on the collection of funds, and the debtor in this way tries to avoid its real implementation, including during enforcement proceedings.

In both cases, the alienation of property can take place in various ways, in particular: by concluding deeds of sale, gift, donation, assignment of rights, transfer of assets to the authorized capital of other legal entities, re-registration of property to family members.

In practice, there are also more complex constructions, for example, the formation of an artificial debt to another (self-created) creditor with the subsequent initiation by such a creditor of a legal process with the recognition of a claim, which results in the formation of a sequence of debtors, the transfer of property as collateral for an artificially created debt, refusal of obtaining a property right in favor of another person while continuing control over assets, etc.

With the help of such mechanisms, unscrupulous debtors try to avoid debt collection.

Acts that are aimed at the detriment of the creditor are called fraudulent.

Under modern conditions, fraudulent agreements are widespread and are often used by unscrupulous debtors, which is due to their ambiguous nature and the difficulty of distinguishing the intentions of the parties to the corresponding contract or other deal, aimed at avoiding the fulfillment of obligations, from those concluded with an unrelated intention with the desire to harm the counterparty.

It is known from the general canons of civil law that any deal must comply, in particular, with the provisions of civil legislation, as well as the interests of the state and society (Article 203 of the Civil Code of Ukraine).

The general principles of civil legislation traditionally include such postulates as the inadmissibility of deprivation of property rights (with established exceptions); freedom of legal entrepreneurial activity; justice, good faith and reasonableness (Article 3 of the Civil Code of Ukraine).

These are some kind of guidelines, based on which it is possible to assert the presence or absence of contradictions of the concluded deed with the above-mentioned provision of Part 1 of Article 203 of the Civil Code of Ukraine.

What does it give?

The fact is that failure to comply with the above-mentioned provisions of Part 1 of Article 203 of the Civil Code of Ukraine is one of the grounds for declaring any deed invalid.

Therefore, a deed committed by an unscrupulous debtor for the purpose of evading the fulfillment of an obligation (avoiding debt collection to the detriment of the creditor), i.e. a fraudulent deed, may be declared invalid.

However, according to the provisions of part 2, 3 of article 215 of the Civil Code of Ukraine, a deed is automatically declared invalid if it is expressly established by law (a so-called void deed). A separate additional recognition of such a deed as invalid in court is not required.

However, if the invalidity of a certain deed is not directly defined in the law, and a party or other interested person disputes its validity, such a deed may be declared invalid in a court of law.

In cases involving fraudulent transactions, the difficulty lies in the fact that, on the surface, these are quite legitimate constructions, seemingly provided for by law. Indeed, purchase and sale, donation, exchange, assignment of rights, etc. – such contracts are concluded every day and are not prohibited by law in themselves.

However, the context (factual grounds and conditions) under which such contracts are concluded may indicate the presence of signs of their fraud.

The specified categories are to a certain extent evaluative and are revealed by research and comparison of a complex of various factors accompanying the conclusion of the specified transactions.

In this regard, the law does not directly establish the invalidity of such transactions, but provided that their real nature (valid purpose) is proven, they can be declared invalid based on a court decision.

In turn, the recognition of such deals as invalid actually returns the parties to their previous state. That is, the property, which the unscrupulous debtor alienated in favor of another person, after the agreement on such alienation is declared invalid, is returned to the ownership of such a debtor, after which his legal creditor will be able to foreclose on this property and obtain the fulfillment of the obligation at his expense.

This is based on the provisions of Article 216 of the Civil Code of Ukraine, according to which, in the event of invalidity of the deed, the parties must return to each other in kind all that they received under such a deed (property, money, other assets, etc.).

In addition, it is also allowed to compensate any person who suffered them in connection with the conclusion of such a transaction, which is later recognized as invalid (in the absence of special rules or conditions regarding certain transactions).

At the same time, depending on the composition of the participants in such a fraudulent deal, it can be contested both in the order of economic proceedings (if its parties are subjects of entrepreneurial activity (business entities)) and in the order of civil proceedings (if one of the parties is the subject of an entrepreneurial activity (business entity), and the other is a natural person (without the status of an entrepreneur).

Therefore, in order to protect their violated rights, bona fide creditors can be recommended to use such a method of protection as judicially invalidating fraudulent deals (committed by debtors with the aim of evading the fulfillment of obligations) with the application of the consequences of their invalidity, which is an effective tool in the fight against unscrupulous by the debtor, by subsequent collection of the debt from such a debtor at the expense of the returned property.