Actio Pauliana

The actio pauliana is the power to annul a legal act that has prejudiced creditors in their ability to recover. It exists both inside bankruptcy, where the trustee invokes it, and outside, where an individual creditor can use it.

Legal basis

Article 3:45 of the Dutch Civil Code contains the ordinary pauliana; Article 42 of the Bankruptcy Act the bankruptcy pauliana for voluntary acts. The requirements are a voluntary legal act, prejudice to creditors, and knowledge of that prejudice on the part of the debtor and, for acts other than gifts, of the counterparty as well. Article 43 of the Bankruptcy Act contains presumptions: for certain acts performed within a year before the bankruptcy that knowledge is presumed, among others for transactions with a substantial difference in value and for acts with group companies or close relatives. Article 47 deals with acts the debtor was obliged to perform, such as paying a due debt; those can only be attacked where there was collusion to prefer, or where the recipient knew a petition had been filed.

How it works in practice

Trustees routinely examine the last few years before bankruptcy: sale of assets to a related party, waiver of claims, granting security for an old debt, or a restart in which too little was paid. A sound valuation and an arm’s length price are the best defence. Where a restart is contemplated, it is wise to keep the process demonstrably open to several interested parties.

Where it goes wrong

Entrepreneurs move assets into a new company shortly before bankruptcy, assuming a purchase price is enough; if that price is too low or goes unpaid, annulment follows. A second error is granting security to a financier or to the owner-director after the event. Third, counterparties underestimate that annulment means returning the asset and being left with a claim in the estate.