The Court of Magistrates (Gozo) in its Superior Jurisdiction, presided over by Magistrate Joanne Vella Cuschieri, in the case ‘Spouses Martin and Marthese Cutajar v spouses Roy and Rosemary Fleming and Benjamin Rizzo on behalf of Saint Leonard Limited’, held, among other things, that the elements of the actio pauliana were satisfied and ordered the cancellation of a contract of sale.

On April 12, 1991, Martin and Marthese Cutajar acquired a plot of land from St Leonard Ltd, whereby Roy and Rosemary Fleming, as directors of the company, agreed to give the Cutajars “the right of first refusal to acquire the property at the back of the property being sold.”

A year later the Flemings acquired personally a property adjacent to the Cutajars’ property from St Leonard Ltd. In view of this, the Cutajars filed legal proceedings against St Leonard Ltd and the Flemings as third party buyers, claiming that the transfer made in 1992 prejudiced their rights since they were never informed that the property was to be sold and, consequently, they were denied the right of first refusal.

The defendants, however, claimed that the right of the plaintiffs was never prejudiced because the Cutajars were well aware of the transfer.

In their action, the Cutajars requested the court:

• to determine which plot of land they had the right of first refusal over;

• to establish the price of the land over which they had the right of first refusal;

• to declare null and without effect the legal transfer of the plot of land over which they had the right of first refusal;

• and to condemn the defendants to sell the property to the plaintiffs for the price determined by the court.

In reply the defendants argued:

• that the land over which the Cutajars were given the right of first refusal was already defined in the contract itself;

• that the Cutajars’ request to declare null and without affect the contract of sale was unsustainable;

• that in any case the court was not empowered to determine the price of the portion of land demanded by the plaintiffs, or to condemn the defendants to sell the property.

The Court of Magistrates observed that on October 5, 2010, the first court had decided against the Cutajars. However, on May 30, 2014, the Court of Appeal overturned the decision and sent the case back to the Court of Magistrates.

The Court of Magistrates noted that the Court of Appeal concluded that the action instituted by the Cutajars was the actio pauliana, through which they requested the court to declare a contract of sale null and without effect.

The actio pauliana is an action available to any creditor seeking to challenge a contract validly entered into between his debtor and third parties, on the basis that the act constituted in the said contract causes him prejudice.

The Court of Appeal extended the definition of ‘creditor’ to cover a situation where anyone who pretends a right can institute the actio pauliana. It concluded that in the present case there was a creditor-debtor relationship, with the ‘debt’ being the right of first refusal.

Therefore, the Court of Appeal ruled that the actio pauliana was available to the Cutajars.

The Court of Magistrates noted that the effect of the actio pauliana is to have a contract annulled and ensure that the object alienated is returned back to the patrimony of the debtor so that the debtor would be able to satisfy his obligations

It observed that, for the actio pauliana to be successful, two important elements must be satisfied: (1) the consilium fraudis and (2) the eventus damni.

Consilium fraudis is the fraudulent intention behind the act.

The Court of Appeal noted that the requirement of fraud under the actio pauliana does not necessitate dolus or an intention to cause harm (animus nocendi). What is required is simply that one was aware of the existence of an obligation on his part and that his actions prejudiced his creditors’ rights.

The Court of Appeal concluded that there was consilium fraudis, that is, fraud on the part of the debtor.

Article 1,144 (2) of Chapter 16 of the Laws of Malta, states that “where such acts are under onerous title the creditor must prove that there was fraud on the part of both contracting parties”. In the present case, there was in fact partecipatio fraudis (fraud of the third parties) because the Flemings knew that the sale of the property was intended to defraud the Cutajars.

The second constitutive element of the actio pauliana is the eventus damni, that is, the cause of the harm or prejudice. In the present case the eventus damni was the contract of sale.

On the basis of the above, the Court of Appeal concluded that all the elements of the actio pauliana were satisfied as per article 1,144 of chapter 16 of the Laws of Malta.

In light of the Court of Appeals’ decision, the Court of Magistrates concluded that the land in question was that which was found exactly behind plot No 7.

Moreover, the Court of Magistrates noted that the effect of the actio pauliana is to have a contract annulled and ensure that the object alienated is returned back to the patrimony of the debtor so that the debtor would be able to satisfy his obligations.

The court further observed that, although valid, a contract may still be attacked on the basis that the act constituted in that contract is detrimental to the creditor.

In view of this, the Court of Magistrates declared without effect the contract of sale dated August 27, 1992, entered into between St Leonard Ltd and the Flemings, and ordered the property to revert back to St Leonard.

The Court of Magistrates, however, further concluded that it was not empowered to determine the value of the portion of land demanded by the Cutajars or to force the defendants to sell the property to the Cutajars.

Rachel Genovese is a trainee advocate at Ganado Advocates.