Disposition made with intent to defraud a creditor is deemed to have been made fraudulently and may be set aside by a court order
The court can set aside disposition of property made fraudulently by a debtor with the intention of defrauding a creditor in order to delay or deprive them of collecting the debt due. Such a disposition is usually made by gift and transfer of property from parent to child, one spouse to another or between siblings, without consideration.
Even if there is consideration, if the transferee has knowledge that such transfer is made to defraud a creditor, it may be set aside. If transfer is made by way of a gift, both transferor and transferee are prevented from claiming afterwards that there was a consideration by their declaration made before the land registry. No cadastral fees are paid on the donation and they are deemed to have defrauded the state to avoid paying the relevant fees.
The relevant provisions are 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.
When an office copy of the court’s order is delivered to the proper officer of the district land’s office, they shall make all necessary entries in the land registers to comply with the order, ie 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 December 5, 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 as a gift. This transfer was set aside by an order of the court on the application of the 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 institution terminated the operation of the principal debtor’s debit accounts by letter to her and her guarantors.
The transferor and transferee claimed the transfer was bona fide and that, although it was stated that it was a donation, it was in fact a transfer by way of consideration. The transferee paid off an existing problematic bank debt of the transferor and provided evidence that there was a credit on the transferor’s account and that the bank had released the mortgage on the property. They said there had been a consideration and 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 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 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. It would also amount to encouraging the misappropriation of public revenues and allowing wrongdoers to profit from their illegality.
George Coucounis is a lawyer practicing in Larnaca and founder of George Coucounis LLC, Advocates & Legal Consultants, [email protected]