A pauliańska complaint is an institution regulated by the Civil Code (art. 527 – art. 534) that serves to protect the interests of creditors. If, as a result of a legal action by a debtor carried out to the detriment of creditors, a third party has obtained a material benefit, each of the creditors may demand that this action be declared ineffective in relation to him, if the debtor acted with the awareness of harming creditors and the third party knew about it or could have found out about it by exercising due diligence.
The prerequisites for the application of the so-called pauliacal complaint are:
- the existence of a creditor’s interest deserving protection in the form of his claim,
- the (valid) legal act performed by the debtor with a third party,
- harm to the creditor as a result of the act,
- awareness of the debtor on acting to the detriment of the creditor,
- third party gaining a financial advantage as a result of the act,
- third party acting in bad faith.
In order to fulfil the prerequisites of a paulina complaint, it is not required that there is always positive knowledge on the part of the third party, as sometimes the lack of knowledge is equated in the consequences of its possession, as long as there were grounds to accuse the third party of failing to exercise due diligence.
Dispositive and obligatory legal acts, both gratuitous and pecuniary, as well as equivalent ones, are subject to the rigour of a paupillary action. The creditor is also aggrieved by the fact that the debtor’s assets are impaired, rendered impossible or delayed in satisfying the creditor.
Are actions taken to the detriment of creditors invalid?
Performing a transfer of property to a third party to the detriment of a creditor gives the creditor the possibility of raising a pauliacal complaint with which to challenge such an action of the debtor and to declare it ineffective against the creditor’s person. Such action by the debtor does not, however, invalidate the act of adoption itself. It has effect as long as one of the creditors does not challenge it and the court does not declare it ineffective by a constitutive judgment.
Wronging of creditors – what does it consist in?
In the case of a pauliańska complaint, the fulfilment of the objective prerequisite for its application is connected with the insolvency of the debtor, which is caused or aggravated by a suspicious act from which a third party benefits, thus limiting the possibility of satisfying creditors (Article 527 § 2 of the Civil Code). The harm may consist not only in the permanent exclusion of the possibility of satisfying the creditor, but also in the hindering or delaying of such possibility.
In addition, there must be a causal link between the debtor’s insolvency and the fraudulent action taken by the debtor. The action taken by the debtor must be one of the factors leading to the insolvency.
The causal link is assessed when the creditor files a pauliacal complaint. The debtor’s insolvency must exist both at that moment and at the moment when the court decides on the creditor’s demand to declare the debtor’s action ineffective (judgment of the Supreme Court – Civil Chamber of 26 April 2023, ref. II CSKP 1375/22).
When does a debtor become insolvent?
The term “insolvency” under Article 527 of the Civil Code also refers to cases where the satisfaction of creditors is significantly impeded or delayed. For the applicability of the protection provided for in Article 527 of the Civil Code, it is not necessary to prove that the debtor has been declared bankrupt. Insolvency may be the basis for a pauliai complaint not only in situations where the debtor’s debt exceeds his assets, but also in cases where it is not possible to actually satisfy the creditor’s entire claim (impediment to satisfaction).
For example, it is argued in court case law that:
- the debtor becomes insolvent also when, although the creditor can obtain satisfaction of his claim, but with an additional, significant outlay of costs, time and risk (judgment of the Court of Appeal in Katowice – I Civil Division of 28 December 2017, ref. no. I ACa 761/17);
- the fact that the debtor voluntarily pays even the greater part of its obligations is not relevant for the assessment of the debtor’s state of insolvency if there are no components in the debtor’s assets that would enable compulsory satisfaction of the debt (judgment of the Court of Appeal in Łódź – I Civil Division of 30 July 2013, ref. no. I ACa 260/13).
It is worth remembering that not every legal action that leads to the reduction of a debtor’s assets may be deemed harmful to creditors. This is not the case if the debtor has received an equivalent for his actions and this equivalent will still be in his assets or will be used to satisfy his creditors (decision of the Supreme Court – Civil Chamber of 7 December 1999, ref. no. I CKN 287/98).
On the other hand, not every “equivalent” makes the pauliańska complaint inapplicable. This may apply to situations in which the debtor formally receives something in return, but such a good received has little practical value. An example that often appears in case law is the conclusion of a contract for the sale of any debt.
If a debtor, who does not have the cash to pay his debt, enters into an agreement with a creditor to transfer his receivables, resulting in the extinguishment of the debt, this is not a mere performance but a modification of the original performance. If this action results in the removal of assets from the debtor’s estate in the form of receivables and prevents other creditors from satisfying them, it may be subject to a pauliacariac complaint (Judgment of the Court of Appeal in Poznań – First Civil Division of 17 December 2015, ref. no. I ACa 623/15).
What if the debtor would have become insolvent anyway?
The debtor’s action, his insolvency and the worsening of his creditors must be linked by a causal link. The point is that the implementation of the legal act by the debtor is a necessary condition for the emergence or worsening of his insolvency. If the insolvency would also have arisen without the implementation of the contested act, the pauliańska complaint has no legitimate grounds.
Payment inlieu of bankruptcyas a ground for application in the event ofa gratuitous act
The qualification of a gratuitous act according to Article 528 of the Civil Code should be based on a material criterion rather than a formal one. According to this approach, a gratuitous act in the material sense is one in which there is some gratuity, but there is a gross disproportion between the benefits of the parties.
An example of an act that justifies the application of Article 528 of the Civil Code is the transfer of ownership of real estate with the simultaneous encumbrance of a personal easement in favour of the debtor who sells it. This view is confirmed in the judgment of the Court of Appeal in Krakow of 24 March 2023, ref. no. I ACa 595/22.
An action that causes harm to creditors is evident when the debtor gives away his assets for free or sells them for a symbolic zloty. Article 528 of the Civil Code also applies to transactions of a pecuniary nature in which the value of the benefits of both parties is grossly unequal. In specific circumstances, the other party may be deemed to actually receive the benefit without adequate compensation, i.e. practically for free or at least for a symbolic price.