The First Hall of the Civil Court, presided over by Madame Justice Lorraine Schembri Orland, on October 15, 2013, in the case “HSBC Bank Malta plc v Carmelo and Maria Dolores Sammut and Dorianne Marie Sammut” held, among other things, that a debtor had to show there were other assets to satisfy his creditor’s claims. A debtor had to provide proof that he was solvent, while a creditor was not obliged to prove that his debtor was insolvent.
The facts in this case were as follows.
HSBC Bank Malta plc (previously called Mid-Med Bank) granted banking facilities to the company Testing Ltd, pursuant to five notarial deeds. Carmelo and his wife Maria Dolores Sammut guaranteed the company’s debts on a joint and several basis.
On June 3, 1994, the Commercial Court declared that Testing Ltd and Mr and Mrs Sammut as guarantors were liable to pay the bank Lm206,625, with legal interests. This decision had become res judicata (definitive).
The bank seized the Sammuts’ immoveable property and sold it by court auction. Mr and Mrs Sammut’s matrimonial home was sold to their son and the proceeds were passed to the bank for Lm33,900.
Subsequently, on January 27, 1998, Mrs Sammut donated to their daughter a property which she had acquired from an inheritance, in the acts of notary Nicholas Vella. The bank claimed that the donation was void in terms of article 1144 of the Civil Code (actio pauliana), which provides that:
“(1) It shall also be competent to any creditor in his own name to impeach any act made by the debtor in fraud of his claims, subject to the right of the defendant to plead the benefit of discussion under the provisions of articles 795 to 801 of the Code of Organisation and Civil Procedure.
(2) Where such acts are under an onerous title, the creditor must prove that there was fraud on the part of both contracting parties.
(3) Where such acts are under a gratuitous title, it shall be sufficient for the creditor to prove fraud on the part of the debtor.
(4) The action competent to the creditors under this article cannot be exercised against minors, except to the extent of any benefit which they may have derived, saving any other right of action competent to the creditors against any tutor who may have taken part in the fraud.”
Faced with this situation, the bank filed legal proceedings against Carmelo and Maria Dolores Sammut and their daughter, requesting the court to declare null and void the contract of donation of January 27, 1998, and to appoint the time, day and place for the contract of rescission as well as curators to represent the parties, who were contumacious.
In reply, Mr Sammut and his wife denied donating the property to cheat the bank. Allegedly the property was donated to their daughter to have a fair distribution.
It resulted that at the time of donation, Mr Sammut and his wife were aware that the debt with the bank had not been settled. They were also aware that this donation was prejudicial to the bank’s interests.
The court maintained that a creditor had the right to file the actio pauliana if his debtor’s act prejudiced his rights. A creditor need not exhaust all his remedies against his debtor before filing the actio pauliana. It was the debtor who had to show that there were other assets to satisfy his creditor’s claims. The debtor had to provide proof that he was solvent. A creditor was not obliged to prove that his debtor was insolvent.
In Anna Bellia v Victor Grech et (AC dated October 6, 1999) it was held that two essential requisites had to concur in order to exercise the actio pauliana: the element of fraud and damages from the alleged act.
The Court of Appeal explained that ‘fraud’ could manifest itself in different aspects. A claimant had to prove ‘fraud’ because this could not be presumed. The damage could be actual and certain but it could also result from the lack of credit guarantees. In E. Calleja v C. Grima et (appeal) dated January 10, 1995 (Vol. XXXVIII / XXXIX-1-24), it was held that the actio pauliana was intended to attack fraudulent acts which were prejudicial to the rights of creditors. The claimant had to be a creditor; re (Giorgi Vol. 4 para 263).
For an actio pauliana to succeed two elements had to exist: the eventus damni and the consilium fraudis of the debtor. In case of onerous contracts the court had to consider the complicity of the third party.
Normally the debt had to exist before the impugned act, but this rule was not absolute because it was also possible to defraud future creditors.
Eventus damni: re: Gio Maria Chircop v Rosario Mifsud (PA dated January 25, 1954, Vol. XXXVIII-II-424). As a result of the impugned act, the debtor became insolvent or worsened his financial position, thereby causing damage to the creditor. The prejudice to the creditor had to result from the act of the debtor. If the alleged act made the debtor’s financial position more precarious, this element was proven.
The debtor had to show that he was solvent. The creditor was not obliged to prove that his debtor was insolvent. The law gave the debtor the right to plead beneficium escussionis. He had to show that there were assets available to the creditor in satisfaction of the debt. If it resulted that there were sufficient assets available, there was no eventus damni, which was one of the elements in the actio pauliana.
Consilium fraudis: For a debtor, consilium fraudis meant that he was aware that he was becoming insolvent as a result of the alleged act. The consilium fraudis of a third party was required if the contract was ‘onerous’, re: Vol. XXXIX-III-851. This did not mean that animus nocendi was a requirement. It was sufficient that a person was aware that an act was harmful to a creditor: E. Calleja v C.Grima et dated January 10, 1995.
In B. Vella v R. Vella et, the court held that if a person was aware of the effect of an act and wanted to perform such act, it followed that he also wanted to accomplish its effect.
A claimant has to prove ‘fraud’ because this cannot be presumed
Solazzi writes “la reppresentazione dell’ effetto della propria azione costituisce il contenuto della volontà... La frode pauliana differisce notevolmente dal dolo, nel senso che non suppone come questo l’uso di manovre sleali. Non è nemmeno necessario che il debitore abbia agito coll’intenzione di nuocere ai suoi creditori; basta che abbia avuto conoscenza del pregudizio che cagionava loro”.
As the Court of Appeal held in Camilleri v Agius dated November 23, 1934, the consilium fraudis was different from dolo. It was not necessary to do dishonest acts, nor the intention to harm creditors. It was enough if a debtor was aware of the damage which could be caused to his creditors.
In Pace v Portanier dated March 29, 1957, it was held that the fraudulent intention of a debtor was presumed when he did an act which was harmful to his creditor, and in the knowledge that he was insolvent or would become insolvent by such act. This knowledge could easily be proven – it was unlikely that a person was not aware of his affairs.
In this case, since the act was a donation, there was no need to show the partecipatio fraudis on the part of defendants’ daughter.
Although the debt with the bank had not been paid in full, Mrs Sammut had had no direct intention to cheat the bank, noted the court. But the intention to defraud (the animus nocendi) was not necessary in the context of the actio pauliana. It was enough if the debtor was aware that the act would harm his creditor(s).
Mrs Sammut and her husband as guarantors were liable for the debt with all their assets, even with property deriving from an inheritance. Mrs Sammut had also been aware that the debt was substantial and had not yet been settled.
It was not credible for her to believe that the bank was not owed anything simply because the bank had not been chasing them.
In addition, the court pointed out that as Mr Sammut and his wife did not show that they had sufficient assets to repay their debt, the donation of the property to their daughter was harmful to the bank.
The First Hall of the Civil Court gave judgment by declaring null and void the contract of donation of January 27, 1998, published in the acts of notary Vella.
The court appointed a notary to publish the act of rescission as well as curators in case the defendants failed to appear for this deed.
Dr Grech Orr is a partner at Ganado & Associates.