The worst nightmare of every creditor after a successful litigation is to find out that the debt cannot be recovered, because the debtor has no assets. However it might be that the case is not lost: in case that the court establishes that the contract is fraudulent, it has no legal effect in respect of the creditor. In our short summary, we address the question, when the contract shall be regarded us fraudulent under Hungarian case-law.
What is a fraudulent contract?
The fraudulent contract is an agreement between the debtor and a third party (beneficiary), which is concluded in order to circumvent the creditor and deprive the basis for satisfying the creditor's claim.
Who is the beneficiary?
In case of a fraudulent contract, there is legal relationship between three parties: the debtor concludes a contract with the beneficiary in order to circumvent the creditor and to conceal the debtor's assets.
Based on the New Civil Code the definition of the beneficiary shall be interpreted broadly: a contract can also be fraudulent if the advantage occurs not directly at the contracting party, but at another person.
The question of timing
When examining the fraudulent character of a the contract, special attention must be paid to the fact, when the contract has been concluded.
Based on the case-law, the contract can only be fraudulent if the particular claim of the creditor against the debtor existed when the debtor and the beneficiary concluded the contract, which aims to circumvent the creditor's claim.
Hence, if the claim against the debtor has occurred after the transfer of the debtor's assets to a third party, it cannot be considered as a fraudulent concealment of assets.
According to the case-law, the subsequent change of the circumstances cannot be the basis of finding a contract fraudulent. That is the case if the asset, which has been transferred by the debtor with good faith could be the basis for satisfying the creditor's claim which incurred later, but by the time of the enforcement of the claim the debtor is not the owner of the asset any more.
Concealment of assets
In order to establish that the contract fraudulent, it is also necessary, that the contract deprives the the creditor from the satisfaction of its claim.
In practice it means that a contract can only be considered as fraudulent if the debtor has no other assets which could cover the claim of the creditor. For example if the debtor sells his real property, but he has other valuable assets (eg. car, company shares) which cover the claim of the creditor, the sale of the real property will not be considered as fraudulent contract.
Bad faith or gratuitousness
A contract can only be considered as fraudulent if the beneficiary has known, or should have known that he helps to circumvent the creditor, or the beneficiary had a gratuitous advantage originating from the contract.
For example, if the debtor donates its family apartment to his child right after he has lost the court case in first instance, we have reasonable grounds to suspect that the debtor has not been (only) driven by the love towards his child, but the reason of the contract was to hinder the enforcement of the claim against the real property.
In the following cases the bad faith and the gratuitousness shall be presumed:
- if the debtor concludes the contract with his relatives,
- if the debtor concludes a contract with a company, in which he has 50% + share,
- if the company (debtor) concludes the contract with its member, CEO or the relatives of the before mentioned,
- if contract is concluded between companies controlled by the same person.
In case of the above mention cases the burden of proof changes: the debtor and the beneficiary shall prove that they have not acted in bad faith or that transfer was onerous.
If the court finds that a contract is fraudulent, it results that the contract cannot produce any legal effects towards the creditor.
In practice it means that the beneficiary cannot raise objection if the creditor starts court enforcement against the asset in question. If in the meanwhile the beneficiary alienated asset in bad faith, or lost that, he shall be held liable for up to the value of the acquired asset towards the creditor.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.