Disposal of property to defraud a creditor

Disposal of property to defraud a creditor

by George Coucounis

“The disposition of movable or immovable property made with intent to defraud a creditor is deemed to have been made fraudulently and may be set aside by a Court order”

The legal protection of a creditor extends to set aside by a Court order the disposition of movable or immovable property made fraudulently by a debtor with the intention to defraud the creditor in order to delay or deprive him of the possibility of collecting the debt due by judgment. Such a disposition is usually made by gift and transfer of property from parent to child or from one spouse to another or between siblings, without consideration and with the fraudulent intent to prevent the creditor from collecting the debt. Even if there is consideration, if the transferee has knowledge that such transfer is made by the transferor with intent to delay or defraud his creditor, it may be set aside. In case of a disposition by transfer of property by way of a gift, both the transferor and the transferee are prevented by their declaration made before the Land Registry from claiming afterwards that there was a consideration. No cadastral fees are paid on the donation and they are deemed to have acted with the intention of defrauding the State in order to avoid paying the relevant fees.

The relevant provisions for setting aside of fraudulent transfers are found in the Fraudulent Transfers Avoidance Law, Cap. 62, which provides for the setting aside of a transfer made before or after the commencement of an action or other proceeding wherein the right to recover the debt has been established. This can be accomplished on the application of any judgment creditor made in such action or other proceeding and to the Court before which such action or other proceeding has been heard or is pending. Upon delivery to the proper officer of District Land’s Office of an office copy of the Court’s order made under the provisions of the aforesaid law, he shall make all necessary entries in the land registers to comply with the order, i.e. re-registration of the property with the transferor. In this way, the judgment creditor will register the judgment as a memo upon the immovable property in order to secure the repayment of the judgment debt of the principal debtor or guarantor.

The Supreme Court considered the above issue in its judgement issued in Civil Appeal 253/2014 dated 5.12.2022, in an appeal of a guarantor against whom a default judgement was issued in a lawsuit served on her by a credit institution. She transferred the property to her mother by a declaration of transfer to the Land Registry that it was made by virtue of a gift. This transfer was set aside by an order of the Court on the application of a credit institution that the transfer had been made in bad faith, without consideration and with fraudulent intent to prevent it from collecting the debt. In fact, the transfer was made on the same day that the credit institution terminated the operation of the principal debtor’s debit accounts by letter to her and her guarantors.

The version of the transferor and the transferee at first instance, by means of an affidavit, was that the transfer was bona fide and that, although it was stated in the Land Registry that it was a donation, it was in fact a transfer by way of consideration. This consisted in the fact that the transferee paid off an existing problematic bank debt of the transferor and provided evidence to this effect that there was a credit on the transferor’s account and that the bank had released the mortgage on the property. They claimed that there had been a consideration and that the transfer had been made by way of a gift in order to avoid the transfer fees, and the transferee was not aware that the transferor had guaranteed the principal debtor company, of which she was a director.

The Supreme Court upheld the decision of the trial Court that the appellants, the transferor and the transferee, were prevented from making allegations contrary to what they had stated in the Land Registry, namely that the transfer was made by virtue of a gift to avoid the transfer fees. It also rejected their testimony and stated that the transfer was not genuine and was aimed at unlawfully preventing the judgment creditor from securing the judgement debt. The Supreme Court also considered correct the approach of the trial Court to be based on the reasoning of the authority of Orphanidou v. Orphanides, applied more topically to other cases involving the possibility of misappropriation of public revenues, which reflects the prevailing legal order.

It was held that the Courts have a duty to safeguard public policy and using the testimony at issue would be equivalent to granting immunity to illegality, a course that it opposes the safeguarding of the Rule of Law. It would also amount to encouraging the misappropriation of public revenues and allowing wrongdoers to profit from their illegality.