ECJ RULED - WHEN CAN YOU SUE THE BENEFICIARY OF AN ASSET CONCEALMENT IN YOUR HOME COUNTRY?

24 October 2018

Has your debtor just gone bankrupt? Has he alienated his assets to a foreign company before that? When can you sue the latter in your home country for concealment of assets to avoid an expensive foreign litigation? In its judgment in the Feniks case the Court of Justice of the European Union, answers the above question, which we summarise in our article.

What does concealment of assets mean?

It is common that winning a lawsuit does not mean that you can consider your claim recovered.

It is a common phenomenon that the owners „drain” the indebted companies and it became a catchphrase among entrepreneurs that „on paper, there are no assets under my name”

In legal terminology, contracts and acts done to deprive the basis for satisfying the creditor’s claim by transferring the assets of the debtor to a third person (eg. acquaintances, affiliated legal entity) are referred to as concealment of assets. As a result, the creditor will be unable to enforce his legitimate claim against the debtor.

The claim by which such acts done to the detriment of creditors can be declared ineffective in respect of the creditor, if the debtor knowingly acted to the detriment of the creditor was already known under Roman law, as "Actio pauliana".

Thus, the creditor can enforce the claim against the beneficiary, who acquired the alienated assets as if it was still the debtor's property.

International asset concealment

But what if the debtor transferred his assets to a foreign beneficiary? To which court should the injured creditor file his claim in such cases?

As the main principle, under EU law, a lawsuit must be initiated in the Member State in which the defendant has address or registered seat. It mean that in case the beneficiary of the asset alienation is residing in another Member State, the court of that Member State will be entitled to hear the case.

So, if you see on Facebook that the Portuguese nephew of a construction contractor who owes you millions is posing with the same Ferrari that your debtor drove half a year ago, you could initiate a lawsuit against the nephew for concealment of assets in Portugal.

In certain situations, the legislator considered it necessary that the defendant to be sued not only in the Member State in which he resides but also in the country where the contract was performed.

Keeping the last example, if a Portuguese company builds your house in Hungary, you can sue the company in Hungary, you do not have to travel to Portugal if something is not built according to the plans.

But can you sue the Portuguese nephew in Hungary, to have it established that the “sale” by which he acquired the Ferrari from the Portuguese construction company was a concealment of assets? This question was answered by the Luxembourg court in the Feniks case.

The Feniks case

In the case of the EU Court, the bankrupted main contractor of a construction project in Poland called ‘Colisseum’ attempted to circumvent the investor called ‘Feniks’ by transferring the company’s assets to a Spanish company ‘Azteca’.

It is well illustrated, that the act was done to the detriment of the creditor by the fact that the managing director of the bankrupted Coliseum was also a representative of Azteca's sole owner.

The Polish Feniks wanted to sue the Spanish Azteca in Poland for concealment of assets, based on the fact that the place of performance was in Poland in the construction contract. Azteca disputed the jurisdiction of the Polish courts and argued that the construction contract between Fenkis-Coliseum and the sales contract between Coliseum-Azteca are two separate contracts.

The decision of the Court

The EU court had to rule on the question of whether the place of performance of the contract made to the detriment of the creditor concluded between Coliseum-Azteca was the same as in the construction contract between Feniks and Coliseum?

The court having regard to the principles of legal certainty and predictability and the ancillary nature of the asset alienating transaction, allowed the initiation of a lawsuit in the member state where the underlying relationship -which was injured by the asset alienation transaction- was performed.

Therefore, the Court considered the asset alienating contract between Coliseum and Azteca to fall within the scope of the legal relationship between Feniks and Coliseum, as the former contract aimed to circumvent the obligations arising from the latter relationship.

The EU Court has also underlined that the opposite interpretation would lead to the fact that, in the case of several asset alienations, the injured creditor would have to prosecute several debtors in several EU countries, with no relation with the underlying legal relationship.

Conclusion

The significance of the judgment in Feniks case is that, in the event of international asset concealement within the EU, more favorable rules apply to the injured creditor.

Thus, if the debtor alienates his assets, the creditor may sue the beneficiary of the alienating transaction in the EU Member State where the underlying contract between the creditor and the debtor had to be performed.