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THE ASPECTS OF THE DEBTOR AND THE THIRD PARTY ACTING IN BAD FAITH - APPLICATION OF ACTIO PAULIANA IN LAW VARIOUS COUNTRIES
Irena Dirgeliene
Master of Law Kazimieras Simonavicius University
ABSTRACT
The institution of Actio Pauliana has been established both in the states of continental and common law. The legal regulation of the institution differs: in Lithuania it has been established in the Civil Code and court practice, in France - the Civil Code, in the United States of America - the Bankruptcy Code; however the concept of the institute of actio Pauliana in all of the countries mentioned is almost the same. In Lithuania the application of the institute of actio Pauliana is regulated in a much greater detail than in France. In France it is enough for a contract to be concluded by deception (in bad faith) and violate the rights of the creditor. In Lithuania proving the debtor's dishonesty is not enough - it is necessary to prove the dishonesty of the third party as well. The conditions of the application of the institute of actio Pauliana in Lithuania and the United States of America are very similar, although one of these countries is regarded as a country of continental law and the other - as a country of the common law.
Key words. Actio Pauliana, debtor, third party, the principle of good faith.
Introduction
In court practice the principle of good faith is often mentioned with application of the creditor's defence measure - the institute of actio Pauliana. Based on the article 6.66 of the Civil Code of the Republic of Lithuania, when a creditor challenges the payable transaction concluded by their debtor, it is important to determine the debtor's honesty. The transfer of the debtor's property to the third parties does not invalidate the transaction. It does not give the creditor the right to challenge the transaction based on the institute of actio Pauliana. The transaction may be challenged only in cases when the debtor dishonestly sought to avoid the obligations to the creditor. In order to challenge the transaction concluded between the debtor and the third party, it is necessary to prove the dishonesty of the third person, whom the transaction was concluded with.
This research is relevant, because academic works lack more detailed information on the comparative analysis of the application of the institute of actio Pauliana in different legal systems.
Novelty. There was no detailed analysis of the application of the institute of actio Pauliana in the countries of common and continental law before. The legal doctrine acknowledges that the onus of proof hinders the creditor's possibilities to make the dishonest debtor to fulfil their obligations, but there are no suggestions on how the situation could be improved. This article contains not only conclusions, but also suggestions on how to protect the creditor from the actions of dishonest debtors and third parties.
Research goal - to analyse the advantages and differences of application of the institute of actio Pauliana in various countries and its effect on contractual relationships.
Research object - the application of the actio Pauliana in Lithuanian, French and US law.
Research methods: the research was made using logical, descriptive and theoretical generalisation methods, which enable full disclosure of the essence of the institute of actio Pauliana in Lithuanian, French and US law. Individual court
decisions were analysed in the context of legal practice by introducing a systematic legal approach. The linguistic-legal explanation method was also used, which manifests itself in the literal analysis of judicial decisions.
1. The institute of actio Pauliana in the Roman law
The origins of actio Pauliana were already visible in the Roman law: in Digests it was mentioned as a personal civil claim for the recovery of assets. In ancient Rome, when serious punishments, such as the capital punishment, selling the debtor to slavery or house arrest, were abolished, a threat occurred that the debtor, not scared to lose one's freedom or even life any more, would intentionally reduce one's property thus deceiving creditors. In order to avoid such deception, the praetor created another punitive complaint for dealing with such crimes. In Rome the crime when a debtor intentionally created or increased one's inability to settle with the creditor was referred to as fraus creditorum. The name of actio Pauliana comes from the name of Paul, a lawyer in ancient Byzantium. In ancient Rome a claim for actio Pauliana could be used to demand to punish a debtor and the third parties, however the right to punish was not absolute: punishment could be applied only with respect to the size of the damage caused, also, the debtor had to have intentionally reduced one's assets to the level that they would not be able to satisfy the creditor's demand, while the third parties had to be aware of the fact that they harm the creditor [13].
The institute of actio Pauliana originated from the Roman law can be found in the legal acts of all of the European countries of continental law. For example, in the Netherlands and France the institute of actio Pauliana is governed by the Civil Code. In Austria and Germany actio Pauliana is mentioned in separate laws. The countries of common law have an institute similar to the actio Pauliana too [14]. It should be noted that the conditions of the application for actio Pauliana, the entirety of which is necessary for the application of the institute of actio Pauliana, did not change from the very first articles that defined it.
2. The conditions of application of actio Pauliana in various countries
Country The conditions of application of actio Pauliana
Lithuania Established in the article 6.66 of the Civil Code and the practice of the Supreme Court of Lithuania. Supreme Court of Lithuania: 1. The creditor must have an undoubted and valid right to claim; 2. The disputed transaction must violate the rights of the creditor; 3. The one-year limitation period of the claim has not yet expired; 4. The debtor was not obliged to conclude the disputed transaction; 5. The debtor was dishonest, because they knew or had to know that the transaction concluded will violate the rights of the creditor; 6. The third party, having concluded the payable bilateral transaction, was dishonest; 7. The creditor's demand is directed to the assets (or their value) transferred according to the disputed transaction only to the extent necessary to satisfy this claim (The decision in the civil case No. 3K-3-587/2008).
United States of America The Bankruptcy Code of the United States of America: 1. The aim of the transaction was to prevent, postpone or deceive any entity to which the debtor was or became indebted at the time of the conclusion of the transaction or after the conclusion of such transaction; 2. The debtor received less than reasonably adequate compensation for the transfer of assets; 3. The debtor was insolvent at the time of the transaction or became insolvent as a result of such transaction; 4. The debtor engaged or was intending to engage in activity or transactions, due to which the assets remaining with the debtor become of unreasonably low value; 5. The debtor was intending or it can be assumed that the debtor was intending to assume obligations, which exceed their possibilities to settle at the end of the term, etc (US Code of Bankruptcy).
France The Civil Code of France (Art. 1167): The creditor can challenge the actions of the debtor in their own name, which: 1. Were concluded using deception; 2. Violate their rights (Code civil des Français).
In conclusion to the data provided in the table, it could be said that the institute of actio Pauliana was established in the countries of both continental and common law. The legal regulation of the institute is different: in one country it is established not only in the Civil Code, but also in the court practice, in another - in the Civil Code, while in the third one - the Code of Bankruptcy; however the concept of the institute of actio Pauliana itself is almost the same in all three countries mentioned. In Lithuania the application of the institute of actio Pauliana is regulated in a much greater detail than in France. In France it is enough for a contract to be concluded by deception (in bad faith) and violate the rights of the creditor. In Lithuania proving the debtor's dishonesty is not enough - it is necessary to prove the dishonesty of the third party as well. The conditions of the application of the institute of actio Pauliana in Lithuania and the United States of America are very similar, although one of these countries is regarded as a country of continental law and the other - as a country of the common law.
3. The appliction of the institute of actio Pauliana in Lithuanian legal system
In Lithuania the creditor's right to challenge transactions concluded by the debtor was established in the Law on disputing acts harmful to creditors (The law on disputing acts.. .1931, No 367) already back in 1931. The law indicated the creditor's right of action against transactions concluded by the debtor and the third parties if those persons were aware of the fact that the
debtor's aim was to undermine the creditors. The application of the institute of actio Pauliana required to prove the dishonesty of the debtor and the third party regarding the creditor already then. Based on such claim and having acknowledged such an act to be void, assets could have been recovered from the third party and in case it was not possible to do that, then the value needed to satisfy the demands of the creditor.
Unlike now, in the Interwar Lithuania the creditor's right of demand had to be recognized by the decision of the court - only then the creditor could make a claim of actio Pauliana.
The article 57 of the Civil Code (The Civil Code of the Republic of Lithuania 1964), which came into force in 1964, defined the institute of actio Pauliana. Later the Civil Code was amended by the law of the 11 June 1998 [7] (Valstybes zinios 1998, No57-1582). According to D. Augaite, «the provision of the law was defined insufficiently and creditors rarely used the institute of actio Pauliana, while the court practice was not common.» [16].
The Chapter 4 of the Book Six of the Civil Code that came into force as of 1 July 2001 [7] (Valstybes zinios 2000, No74-2262), among other ways of defending the special rights of creditors, established the institute of actio Pauliana too. The Art. 571 of the Civil Code defined the basis of contract nullity. In the Civil Code that is valid today, the institute of actio Pauliana is highlighted in a separate chapter on defending the interests of creditors.
According to the author, the fact that the institute of actio Pauliana was dedicated a separate chapter was determined by its countervailability: the aim of the institute is to defend creditors from dishonest debtors, who take action in order to reduce their solvency, and at the same time - the creditor's possibility to achieve complete satisfaction of their demands. The aim of a claim is to restore the solvency of the debtor and return the assets fraudulently transferred to other individuals to the debtor. Restored solvency of the debtor increases the possibility that they will fully or at least partially fulfil their obligation to the creditor.
There is an increasing tendency of debtors seeking to avoid their obligations to creditors by taking unfair action, such as transferring their assets to third parties and thus protecting themselves against the creditor's possibility to direct the recovery to the assets of the debtor. Seeking to protect themselves from dishonest actions of the debtors, creditors have a right to use the claim of actio Pauliana to challenge the transactions made by the debtor. Before making a claim it is necessary to make sure that all conditions needed for the claim are present:
1. The creditor has an undoubted and valid right to claim.
2. The disputed transaction violates the rights of the creditor.
3. The one-year limitation period of the claim has not yet expired.
4. The debtor was not obliged to conclude the disputed transaction.
5. The debtor was dishonest, because they knew or had to know that the transaction concluded will violate the rights of the creditor, while the third party, having entered into a payable bilateral transaction, was dishonest.
6. The creditor's demand is directed to the assets (or their value) transferred according to the disputed transaction only to the extent necessary to satisfy this claim.
As we can see, there are numerous conditions for the application of actio Pauliana, but we will examine only the aspects of the bad faith of the debtor and the third person. As it was already mentioned, the practice of the Supreme Court of Lithuania often mentions the principle of good faith in application of the institute of actio Pauliana. The creditor, seeking to dispute the payable transaction concluded with a debtor must prove the debtor's dishonesty. The transfer of the debtor's property to the third parties does not invalidate the transaction. This fact alone does not give the creditor the right to challenge the transaction based on the institute of actio Pauliana. The contract may be challenged only in cases when the debtor dishonestly sought to avoid the obligations to the creditor. In order to challenge the transaction concluded between the debtor and the third party, it is necessary to prove the dishonesty of the third person, with whom the transaction was concluded.
In the case No. 3K-3-339/2009 [8] the Supreme Court of Lithuania established dishonesty of the debtor and the third person as a condition for the application of actio Pauliana. This case indicates that the debtor, as well as the third party, are regarded as dishonest only in cases, when there is a basis to claim that they knew or had to know that conclusion of such contract will violate the rights of the creditor.
Talking about the good faith of a third person, it should be noted that an honest acquirer can be regarded thus only if they have made an inquiry by means available, whether the person intending to enter into a transaction does not have any creditors, or if the transaction will not violate their interests." Such data can be acquired during an interview with a person selling their assets or their representative, as well as registers and other official or private sources. Defending creditors' interests according to the institute of actio Pauliana includes not only cases, when the debtor's rights in rem are restricted, but also in cases when the debtor has a creditor and the debtor's rights in rem are not restricted. It is important to evaluate, whether the conclusion of a transaction will not objectively violate the rights of the creditor.
Based on the practice of the Supreme Court of Lithuania [9], in each transaction the acquirer of the assets is interested in not having any difficulties regarding the assets acquired and seeks to protect themselves from any recoveries. This means that the acquirer of the assets is also interested in the stability of the civil legal relations. Thus, before entering into such transactions, this person should prudently inquire, whether the other party of the transaction is trustworthy and if their actions are fair. It is reasonable to demand for explanation and other data from the future party of the transaction, which would show whether the party has creditors, whose interests could be violated by concluding the transaction.
In another case (No. 3K-3-17/2006), the Supreme Court of Lithuania has expressed its support regarding the duty to determine the bad faith of the third party entering into the transaction with the debtor as the condition of application of actio Pauliana. «The bad faith of the third person, compared to the bad faith of the debtor, could be not as pronounced and it is not required that their knowledge would be focused on a certain creditor. It is enough for the third person to now that such transaction would cause or increase the insolvency of the debtor» [10].
In the practice of the Supreme Court of Lithuania (case No. 3K-3-485/2010) it is indicated that «actio Pauliana cannot be interpreted in a way that could create preconditions to challenge transactions, which were not prohibited at the time of their conclusion and met the conditions of common business practice, despite the fact that during the time of their conclusion the debtor had obligations for other creditors and later was declared bankrupt. Such interpretation and application of the law would cause legal uncertainty, distrust in the debtor with financial problems and would unreasonably restrict their possibilities to carry out their activity, seek for settlement with all creditors and avoid bankruptcy. Meanwhile, the bankruptcy administrator would be given unfounded assumptions to dispute any transactions concluded before the bankruptcy proceedings without exception, thus abusing their rights [11].
Speaking on the honest acquirer's rights in rulings adopted by cassation procedure, the Supreme Court of Lithuania has concluded that «the civil law involves the application of the general principle of good faith (CC, Art. 1.5), which, among else, means that each person is regarded as honest if not proven otherwise. Regarding proof, each person does not have to prove one's good faith if the law does not presume a certain
entity as dishonest or guilty (for example, a debtor is presumed as dishonest in case of actio Pauliana according to the cases provided in the article 6.67 of the Civil Code, while the guilt of the debtor in application of civil liability - according to the Art. 6.248 of the Civil Code). If a person is the manager of the property, then their management of the property is regarded as occurred in good faith, until proven otherwise (CC Art. 4.26, pt. 2). If it is a subject of the proceedings, a person intending to terminate the management or having other demands for the manager of the property, must prove the fact that the management is dishonest. Honesty can be proven wrong, since that is a disputable presumption. An honest acquirer can be regarded thus only if he/she has made an inquiry by means available, whether the person intending to enter into a contract does not have any creditors and if the contract will not violate their interests" [12].
In conclusion, it should be noted that the institute of actio Pauliana, established in the legal system of Lithuania facilitates the work of creditors seeking to defend their rights. The opinion of D. Vanhara, stating that «the current legal regulation creates relatively difficult conditions for creditors to challenge dishonest transactions of their debtors» is very true. If a creditor encounters dishonest actions of the debtor, which do not fall under the scope of the presumption of bad faith, covered by the Art. 6.67 of the Civil Code, then the creditor may encounter a lot of difficulties in trying to prove the bad faith of the parties that have violated the interests of such creditor.»[15]. According to D. Vanhara, the violated rights of the creditor also remain undefended in cases when the debtor's dishonesty in concluding a transaction is proved, but the dishonesty of the third person could not be proved [15].
It follows that the burden of proof complicates the creditor's possibilities to ensure that the dishonest debtor fulfils their obligations and thus the legislator should think about shifting a part of the burden of proof on the debtor and the third person. In order to defend the rights and legal interests of the creditor, violated by the bad faith of the debtor and the third party, it would be beneficial to consider the application of sanctions for dishonest debtors and third parties. It is likely that the application of sanctions would reduce the number of dishonest transactions between debtors and third parties that result in the debtor's insolvency.
Conclusions
1. The institute of actio Pauliana originated from the Roman law and can be found in the legal acts of all of the European countries of continental law. For example, in the Netherlands and France the institute of actio Pauliana is governed by the Civil Code. In Austria and Germany actio Pauliana is mentioned in separate laws. The countries of common law have an institute similar to the actio Pauliana too. It should be noted that the conditions of making a claim for actio Pauliana, the entirety of which is necessary for the application of the institute of actio Pauliana, did not change from the very first articles defining this institute.
2. The institute of Actio Pauliana has been established both in the states of continental and common law. The legal regulation of the institute differs: in Lithuania it has been established in the Civil Code and court practice, in France - the Civil Code, in the United States of America - the Bankruptcy
Code; however the concept of the institute of actio Pauliana in all of the countries mentioned is almost the same. In Lithuania the application of the institute of actio Pauliana is regulated in a much greater detail than in France. The conditions of the application of the institute of actio Pauliana in Lithuania and the United States of America are very similar, although one of these countries is regarded as a country of continental law and the other - as a country of the common law.
3. Upon making an actio Pauliana claim, the burden of proof complicates the creditor's possibilities to ensure that the dishonest debtor fulfils their obligations and thus the legislator should think about shifting a part of the burden of proof on the debtor and the third person. In order to defend the rights and legal interests of the creditor, violated by the bad faith of the debtor and the third party, it would be beneficial to consider the application of sanctions for dishonest debtors and third parties. It is likely that the application of sanctions would reduce the number of dishonest transactions between debtors and third parties that result in the debtor's insolvency.
References
Legal acts
1. Constitution of the Republic of Lithuania.
2. The Civil Code of the Republic of Lithuania.
3.US Code of Bankruptcy. Access on the internet: https:// www.law.cornell.edu/uscode/text/11/548
4. Code civil des Français. Access on the internet: http:// codes.droit.org/cod/civil.pdf
5. The law on the amendment of the articles 84, 318, 472 (1) of the Civil Code of the Republic of Lithuania and the supplement with the article 57(1). 6. The law on disputing acts harmful to creditors. 7. "Valstybés zinios".
Court practice
7. The decision in the civil case No. 3K-3-587/2008, made on 28 January 2008 by the Division of Civil Cases of Lithuanian Supreme Court.
8. The decision in the civil case No. 3K-3-339/2009, made on 31 July 2009 by the Division of Civil Cases of Lithuanian Supreme Court.
9. The decision in the civil case No. 3K-3-168/2007, made on 19 April 2007 by the Division of Civil Cases of Lithuanian Supreme Court.
10. The decision in the civil case No. 3K-3-17/2006, made on 11 January 2006 by the Division of Civil Cases of Lithuanian Supreme Court.
11. The decision in the civil case No. 3K-3-485/2006, made on 11 January 2006, by the Division of Civil Cases of Lithuanian Supreme Court.
12. The decision in the civil case No. 3K-3-535/2007, made on 3 December 2007, by the Division of Civil Cases of Lithuanian Supreme Court.
Special literature
13. Girard. P. F. Roménq teisé. 1932. T. 2. P. 50 - 58.
14. Voskuil C. C. A. Law and reality - essays on national and international procedural law. Martinus Nijhoff Publishers. 1992. P. 90
15. Vanhara D. Kreditoriaus teisés gincyti skolininko sudarytus sandorius (Actio Pauliana) probleminiai aspektai,
Juristas (2009. Nr.9).
16. Augaite D. Actio Pauliana. Jurisprudencija. 2004. t. 55 (47) P. 5-18.
THE PRINCIPLE OF GOOD FAITH IN DIFFERENT LEGAL SYSTEMS: COMPARATIVE
ASPECTS OF THE APPLICATION
Irena Dirgeliene
Master of Law Kazimieras Simonavicius University
ABSTRACT
The principle of good faith is not officially recognized in all countries, but its impact on contract law is undisputed. The principle of good faith is particularly important in continental law countries, which directly establish the provisions of this principle in statutebooks. Moreover it is also the basis of all institutes of civil law, while the obligation of good faith is acknowledged in all stages of contract law. The principle of good faith in the countries of common law is treated somewhat differently - its provisions apply only during the stage of the implementation of the agreement.
Keywords: legal principles, the principle of good faith, contract law, contractual relationship.
Introduction
What makes the principle of good faith significant on the international level is that it was included into the list of UNIDROIT principles. Article 1.7 of the UNIDROIT principles declares each country's obligation to act in good faith. Other international and national documents demand the obligation of acting in good faith too, although the agreement itself does not provide that. Although the contract does not oblige to refrain from any dishonest actions, those that could hinder the proper execution of the agreement are bound by the principle of good faith. One party of the agreement cannot use dishonest actions to reduce the contractual benefit of the other party. By fulfilling their obligations the parties must not explain the provisions of the agreement distorting contractual objectives. The application of the principle of good faith allows to terminate the contract only in cases when particularly relevant provisions of the agreement are infringed.
In Europe the principle of good faith has been established by the PECL formulated by the Commission of the Professor O. Lando.
This research is relevant, because academic works lack more detailed information on the comparative analysis of the application of the principle of good faith in different legal systems.
Novelty. The principle of good faith has recently been introduced to Canadian courts. France is also looking forward to changes in Civil Code, related to the application of the principle of good faith in contract law. These changes may influence not only contractual relationships between businessmen of these countries, but international contracts as well.
Research goal - to analyse the advantages and differences of application of the principle of good faith in various countries and its effect on contractual relationships.
Research object - the application of the principle of good faith in Lithuanian, English, French, Canadian and US law.
Research methods: the research was made using logical, descriptive and theoretical generalisation methods, which enable full disclosure of the essence of the principle of good faith in Lithuanian, French, English, Canadian and US law. The linguistic-legal explanation method was also used, which manifests itself in the literal analysis of judicial decisions.
1. The Concept and Meaning of the Principle of Good Faith
Many countries regard the principle of good faith as one of the major principles in contract law and some countries regard it as one of the major principles in the entire private law as well. J. Gernhuber states that good faith is regarded more like a specific concept, full of various political, religious or philosophical aspects rather than a human or legal category. He claims that good faith is a moral standard and a legal-ethical principle [15, 106]. Other authors of the legal doctrine emphasize that good faith should be regarded as the gate, through which moral values reach the law [11, 472].
What makes the principle of good faith significant on the international level is that it was included into the list of UNIDROIT principles [3]. Article 1.7 of the UNIDROIT principles declares each country's obligation to act in good faith. Other international and national documents demand the obligation of acting in good faith too, although the agreement itself does not provide that. Although the contract does not oblige to refrain from any dishonest actions, those that could hinder the proper execution of the agreement are bound by the principle of good faith. One party of the agreement cannot use dishonest actions to reduce the contractual benefit of the other party. By fulfilling their obligations the parties must not explain the provisions of the agreement distorting contractual objectives. The application of the principle of good faith allows to terminate the contract only in cases when particularly relevant provisions of the agreement are infringed.
In Europe the principle of good faith has been established by the PECL formulated by the Commission of the Professor O. Lando [4].
Contemporary law explains good principle as a measure of value and moral category. It is regarded as honesty, ethics, openness, morality and loyalty [14, 713]. The requirement for good faith obliges market participants to refrain from improper use of the methods of exercising rights conferred by contract law. It „...provides an opportunity to interpret, supplement and amend contracts and thus monitor the parties exercising their autonomy [21, 32]."
In her article The Principle of Good Faith in Contract Law, S. Muleviciute [22, 179] makes a conclusion that "the doctrine
