Creditors may set aside guarantors’ transactions that are detrimental to the creditor’s interest

The legal theory and jurisprudence have not given so far consistent interpretation regarding the following issues related to so-called “Actio Pauliana” (action to set aside), namely:

  • Can an action “Actio Pauliana” be also brought against the guarantor besides the principal debtor?
  • Can an action “Actio Pauliana” be also brought against the parties to the subsequent detrimental transactions, besides the parties to the first detrimental transaction?

General Assembly of the Commercial Division and the Civil Division of the Supreme Court of Cassation has pronounced in these matters by Interpretative Decision № 2/2017 from 09.07.2019 issued under Interpretative case № 2/2017 and has given a positive answer to both questions. This interpretation of the law shall be observed by all courts in Bulgaria.

 

What actually represents “Аctio Pauliana”?

This is a special order to protect creditors against debtors who knowingly deteriorate their financial state in order to harm the interests of their creditors. Reducing the debtor’s property gives rise to reducing the chance of the creditor to have its claims settled in the course of enforcement proceedings. The damage may consist of either a free transfer (in return for no consideration) of property rights (property, receivables, etc.), or a transaction with a third party acting in bad faith (i.e. one who was aware of the purpose of the detrimental transaction). When the claim is upheld by the court, the contract is declared to be relatively null and void with respect to the creditor (i.e. the contract retains its existence, however, the property is considered to have never left the debtor’s property sphere), and the creditor can benefit (including through enforcement) from the transferred property rights (property, receivables, etc.).

 

What is a surety?

A surety is a kind of personal securing the receivables whereby a person commits to the creditor of the principal debtor to be responsible for fulfilling the obligations of the principal debtor assumed towards the creditor.

 

What is the practical meaning of the Interpretative Decision?

The following case can serve as example: managing director guarantees the repayment of a bank loan borrowed by the company he/she represents. The company ceases the repayment of the loan to the bank. In the meantime, the managing director is donating his property to his son to prevent the bank from proceeding to enforcement against the property. The son sells the property to third party, who donates it to his/her close person respectively.

There exist no longer doubts that the bank can dispute the entire chain of transactions involving the transfers of the property of the managing director, and the bank shall establish that these have been carried out in order to be impaired its interests as a creditor of the borrowing company.

 

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