A creditor’s primary concern is primarily the financial state of his debtors. For how is the creditor to satisfy his claims if his debtor is insolvent or if his solvency is not enough to entertain his claims? After all, the control and management of the financial affairs of the debtor will always remain in the hands of such debtor.

Time and again, creditors have faced circumstances wherein their debtors intentionally and fraudulently shrunk their patrimony to tatters – this by opting to alienate their assets.

Once a debtor’s asset is transferred unto third parties, then the creditor can no longer lay his hands on it − this, unless the creditor succeeds in instituting the actio pauliana against his debtor.

This institute is provided for in article 1144(1) of the Civil Code which merely provides that any creditor may in his own name impeach any act made by his debtor in fraud of his claims. It is an action against the fraudulent activity of the debtor and, if successful, it would extinguish the debtor’s fraudulent act.

In turn, the debtor may plead the benefit of discussion that is set up in articles 795 to 801 of the Code of Organisation and Civil Procedure.

This plea antidotes the actio pauliana, for it perceives the ability of the debtor to set off his debts against the creditor’s claims.

The actio pauliana was recently resorted to by a creditor bank who sought to rescind an act – a lease agreement – that was contracted by his debtors and unrelated third parties. The judgment bears the names of ‘Bank of Valletta plc v Joecar Limited et’, that was delivered by the Court of Appeal on March 27.

The facts concerned the defendants – two limited liability companies who had been declared debtors of the creditor bank. Initially, the said companies had obtained a loan facility from the bank and, as security, they hypothecated their immovable property.

The companies fell in default of their obligations and the bank sought to recover its credit. Hence it proceeded to institute the sale by judicial auction against the immovable property that had been initially hypothecated.

The property in question was bought animo compensandi (the amount was offset against the existing debt owed) by the creditor bank.

Meanwhile, it transpired that such property was not freehold – in fact, it was being occupied by the lessees under a lease agreement.

This lease was granted by the debtor companies in favour of the lessees who happened to be the directors of such companies. This agreement occurred right after the creditor bank obtained a judgment against the said companies.

The creditor must essentially prove that the third party was involved in the fraudulent act

Naturally, the bank perceived such actions as fraudulent made with the sole intention of prejudicing its claims. After all, the bank had ended up acquiring a property that was being occupied by third parties under the title of lease.

Consequently, the bank sought to institute the actio pauliana against his debtors and the lessees in order to impeach the lease agreement.

The court discussed in detail the cumulative elements of the actio pauliana, which are mainly four.

The plaintiff must necessarily be ‘a creditor’ – this essentially means that the creditor had to be someone who has a claim. A creditor does not need to be someone who is owed money – a creditor of a debt that is certain, liquid and due − it may be anyone who pretends a right. Indeed, the court deemed that the bank fulfilled such criteria.

The second element is known as the eventus damni.

Simply put, this element requires proof that the debtor’s action (in this case, the lease agreement) had rendered its patrimony insolvent or barely solvent – that is that the claims in question cannot be satisfactorily entertained.

The creditor may never recover its claims if the debtor is in  a state of insolvency. Interestingly, when it comes to this element, the burden of proof shifts unto the defendant (the debtor) – as it is he who must prove that he is solvent. The court deemed that the element of eventus damni was satisfied as the debtors failed to prove that they owned other assets that could satisfy the bank’s claims.

Third comes the element of the consilium fraudis – the knowledge of the debtor that his act was diminishing his assets to the prejudice of his creditors.

The court considered that the shareholder of the debtor companies, who was someone very well versed into the commercial transactions, knew very well that the lease agreement would shrink further the companies’ assets to the prejudice of the bank, who had just won a judgment against the said companies.

The court also noted that the property leased was of significant value, and that it had been leased for a long term in consideration of a low rent.

Moreover, the lessees happened to be the directors of the debtor companies – hence this element was deemed as satisfied.

The last element is only required if the act is of an onerous nature (in terms of article 1144(2) of the Civil Code) – the partecipatio fraudis – the most challenging of the requisites.

Here the creditor must essentially prove that the third party was involved in the fraudulent act. One does not need to prove the intention to defraud the creditor (the animus nocendi) for it is enough to prove that the third party was very much aware that the debtor’s act was in fraud of his creditor’s claim.

Here, the court noted that the lessees, who happened to be the directors of the debtor companies, were very much aware that the bank was a creditor of their companies.

Indeed, they had empowered the shareholder to appear on contractual deeds on behalf of the company which deeds stood in connection to the credit that was owed to the bank in question. Hence the court deemed that the third-party lessees had indeed participated to defraud the bank.

Consequently, the court rejected the appellants’ appeal and confirmed the first judgment wherein the lease agreement was rescinded and consequently confirmed the eviction of the lessees.

Mary Rose Micallef is junior associate at Azzopardi, Borg & Abela Advocates.