15 January 2020

You can hear a lot of stories where the debtor “escaped with the money”, the construction contractor “disappeared” or the debtor company’s assets have been hidden. Essentially, failure to pay is a breach of contract, which is subject to civil action, eg. litigation. However, if a transaction is suspected to be a scam, criminal proceedings may be brought against the defaulting debtor, for example, for fraud, which we examine in this article.

1. Difference between civil law claim and criminal liability

In the public mind, civil law and criminal law often get mixed up, and the creditors want to see their debtors in prison. In principle, the non-performance of a loan or business contract is basically a civil law matter, and the claimant may demand performance or compensation through a civil action (such as litigation).

However, intentional damage to others’ assets or grossly negligent attitudes are undesirable behaviours for society that are also subject to criminal law. The Criminal Code [1]punishes a number of misconducts where damage is caused to other property in a civil law relationship (eg a contract). When it comes to scams, mostly fraud can be established

2. When is non-payment considered as fraud?

According to the Criminal Code, fraud shall mean when a person

uses deceit, deception, or trickery for unlawful financial gain, and thereby causes damage.

In practice, it is common to threaten the debtor with criminal prosecution for fraud, based on that he knew in advance that he would not be able to pay, so he deceived the creditor during the business. Such accusations are wrong in many cases, since further elements are required to establish fraud.Fraud is not the taking away of another's property: the mistaken party, as a result of the mistake, transfers the property or provides the service himself. However, the compensation therefor will not be provided, which will result in a damage at the injured party. (eg. leaving a taxi without paying for the journey).

Intent and unlawful purpose

It is important that fraud can only be committed intentionally for the purpose of gaining an unlawful profit. The intent and purpose must exist at the time of the deception or trickery, ie the debtor must be aware at the time of the conclusion of the contract that he will not pay or that there is no realistic chance of fulfilling the contract.

Accordingly, the court found the transaction fraudulent, when an insolvent company, despite its bad financial position, entered into a high-value contract as main contractor, then used the proceeds to settle its debts and completely failed to pay the subcontractors. In that case, since the beginning, there was no realistic [2]chance of fulfilling.

The situation is more complex when, due to an event occurring during the contractual relationship, the debtor who originally intended to perform ultimately fails. It is necessary to examine what it constitutes if the debtor conceals its changed monetary circumstances.

It is important to note that insolvency (unable to pay) is not equivalent to a lack of willingness to pay (not willing to pay). The crime can be established only in the latter case, if there is an intent to gain unlawful profit.[3]

It is not lifelike for a business to inform its partners or terminate its contracts if there are liquidity problems that can affect later performance. After all, if the debtor intends to pay, the outcome of the case can be either a late payment, a payment agreement or even a bankruptcy procedure.

Thus, fraud cannot be established solely on the basis that the debtor could have recognized the uncertainty of the performance of the contract before the deadline for performance.

The situation is different if the debtor, concealing the changed circumstances, extends the service (eg a real estate lease) without realistic chance of performance, or requests a deferral of payment only to delay the enforcement of the claim against him. In the above cases, the debtor deceives the creditor by making a false promise, so fraud can be established if the act was intentional and for unlawful purpose.

The mistake

It is important that in the absence of deceit or misrepresentation we cannot speak of fraud. For example, if someone voluntarily enters into an unprofitable or risky business or deviates from the market price without the other party disclosing misleading information or concealing important facts.[4]

A further condition is that there must be a causal link between the deception and the damage, so, the damage shall happen due to the deceptive behavior and not to anything else.

3. Conclusion

In this article we explained that in addition to civil litigation, it may also have criminal consequences if the debtor fails to pay according to the contract. In order to establish fraud, intentional misconduct and unlawful purpose must be proved, failure to pay due to insolvency does not in itself constitute a criminal offense.

For this reason, we recommend that you always assess the financial situation of the other party before entering into legal transactions, for which you can find data in the public company register amongst other sources.

In addition, if you want to minimize risks, you may require your partner to provide a guarantee or bank guarantee to ensure performance. A legal expert can help you to reduce the risks of your legal transactions.



[1] 2012. évi C. törvény

[2] BH 2011.3.58

[3] BH 2011.6.160

[4] BH 1983.392