If a bankruptcy has been declared, the bankruptcy trustee will investigate remarkable legal acts performed in the run-up to the bankruptcy.
Equality of creditors
One of the basic principles of bankruptcy law is that creditors are treated equally. This is usually referred to by the Latin term “paritas creditorum”: equality of creditors. The only exception to this is that the law assigns a different ranking to creditors when paying out the proceeds of the bankruptcy. The trustee will investigate notable transactions prior to the bankruptcy order. If the legal conditions are met, the bankruptcy trustee can reverse these transactions.
The power of the trustee in bankruptcy to reverse dubious transactions in order to restore the equality of creditors is referred to by the Latin term “Actio Pauliana”. Transactions that can be reversed are also referred to as “paulous acts”. These fraudulent acts involve the debtor who is later declared bankrupt, but of course there is also a counterparty, who is favored over other creditors.
The legal requirements
The law states that the questionable transaction can be reversed if:
- there was no obligation to execute the transaction
- one or more creditors have been injured
- both parties to the transaction knew or should have known that other creditors would be affected.
Can’t you decide for yourself who pays you?
Yes, you can – usually. Both an entrepreneur and a private person may determine the order in which claims are paid. If the curator wants to successfully reverse a pauliana, there must be more to it. In this way it should already be clear that bankruptcy is imminent. This must also be clear to both the party who has declared bankruptcy and to his counterparty who has received payment just before a bankruptcy.
The burden of proof of the pauliana lies with the trustee and sometimes it is very difficult for the trustee to prove that the transaction is fraudulent. In that case, the recipient does not have to pay back. But there are also specific cases where the law assumes a “presumption” that a transaction is fraudulent. This applies, for example, if the transaction is carried out between a company that has subsequently been declared bankrupt and the director/shareholder. A situation that banks may have to deal with is the situation that security is provided for a non-payable item (for example, a mortgage is given for a bank loan). Yet another case is the situation where there is a notable difference in value between the performances delivered.
Examples of Pauline Acting
- a debt of €30,000 is paid by delivery of a car worth about €30,000, while the debt had to be paid in cash.
- a debt that is not yet due and payable is paid
- the creditor receives more than the value of his own performance
- a due and payable debt is paid while the creditor knows that the bankruptcy has been filed.
Procedures and third parties
If the bankruptcy trustee takes action because he wants to reverse a dubious transaction, this often leads to proceedings against third parties, with the intention that these third parties transfer the amount received to the estate. In this way, the equality of creditors is restored. These third parties are often also creditors of the bankrupt. Procedures about a Pauliana can be very complex. You could say that certain types of creditors have to deal with a Pauliana more often than others. These are money lenders such as banks, who want extra security if things are already going bad. Also persons from the circle of acquaintances of the bankrupt may have to deal with the Pauliana. An almost bankrupt person or company can adopt a different attitude towards these people than towards an anonymous supplier that you never have contact with. However, the advantage is contrary to the principle of equality of creditors.
If the trustee suspects a Pauliana, he will always want to know about the bankruptcy. If he does not provide any information, the bankruptcy trustee can summon him for a bankruptcy hearing through the court to find out more.