One of the most powerful tools available to a trustee in bankruptcy is Article 42 of the Bankruptcy Act (Fw): the pauliana. Under circumstances, the trustee can destroy (reverse) unobligatory legal acts of the subsequent bankrupt if they are detrimental to the creditors of that bankrupt.
A common question is how far back the trustee looks when investigating possible fraudulent misconduct. It is often shouted that this is only up to one year before the bankruptcy date. In reality, the trustee may also focus his magnifying glass on legal acts performed earlier than one year before bankruptcy. Paula Röttjers explains in this article which look-back period applies.
Art. 47 Fw also deals with the pauliana, but there it concerns compulsory legal act. That will be the subject of a subsequent article.
Article 42 Bankruptcy Code in a nutshell
Article 42 Fw is better known as the bankruptcy pauliana. It aims to prevent or reverse (deliberate) favoritism of certain creditors at the expense of other creditors.
This goal is achieved by granting the trustee the power to annul certain unobligatory legal acts if they have the effect of favoring selectively certain creditors. An unobligatory legal act is one that is not mandated by law or contract. Consider the purchase of a new company car vs. paying sales tax (law) or payment of a lease contract (agreement).
What is destruction?
Annulment means that legally the act never took place and its consequences must be reversed. For example, a payment destroyed by the trustee must be repaid to the bankruptcy estate by the recipient of that payment.
When may a trustee destroy one?
The trustee can use this power only if the following three requirements are met:
- there must be an uncompulsory legal act;
- Resulting in prejudice to creditors ; and
- while the debtor knew or should have known of that prejudice. When it comes to legal acts with consideration (other than for no consideration), the latter requirement also applies to the other party.
Back in time
One year?
In bankruptcy pauliana, it is stated with some frequency that the trustee only looks back at legal acts performed up to a maximum of one year before the bankruptcy date.
However, Article 42 Fw. does not mention anything about such a term. Nor does case law insist on a one-year term. Indeed, in several judgments, legal acts are annulled through the bankruptcy pauliana of two, three or sometimes even six years ago."[1]
Legal presumption
This erroneous assumption is probably due to the legal presumptions arising from article 43 Fw. and article 45 Fw. In short, these articles provide that if the prejudicial legal act was performed within one year before the bankruptcy date, knowledge of this prejudicial act is presumed to be present (on both sides) under the circumstances specified in those articles.
This presumption helps the trustee prove knowledge of prejudice, because then it is suddenly up to the other party to provide rebuttal evidence. For this counter-evidence to be provided, it is sufficient that the presumption of proof is negated. This means that sufficient doubt must be sown so that the court no longer suspects that the trustee's assertion regarding the alleged knowledge of prejudice is correct. Thus, in many cases, the trustee will not have enough with just the presumption of proof, but it can give him a strong advantage.
What does the case law say?
In a decision of the Arnhem-Leeuwarden Court of Appeal, the court ruled that there are no leads in the text of article 42 Fw to apply the one-year term of article 43 Fw to article 42 Fw.[2] In this decision, the court emphasized that numerous facts and circumstances - which may be unrelated to the fraudulent act - may determine how much time lies between a fraudulent act and the eventual bankruptcy. The fact that a legal act was more than a year ago does not mean that it cannot be paulian.
Limitation of bankruptcy pauliana
Thus, the period in which the trustee can look back to destroy unobligated legal acts does not depend on a fixed deadline. Its limitation puts it in the third requirement of Article 42 Fw: knowledge of prejudice.
When is there knowledge of disadvantage?
Knowledge of prejudice within the meaning of art. 42 Fw exists if at the time of the legal act the bankruptcy and a shortage therein could be foreseen with a reasonable degree of probability for the debtor. If it concerns a legal act with consideration (other than free of charge), this also applies to the counterparty with or against whom the debtor performed the legal act."[3]
Evidence for science
For this, if the legal act took place within a year before the bankruptcy, the legal presumption of Art. 43 Fw. can be used.
If the legal act was done longer ago, then without that legal presumption, the trustee will have to substantiate and prove why there was knowledge of prejudice to the parties involved.
Time lapse is not decisive
It is worth mentioning here that the more time there is between the legal act and the bankruptcy, the harder it will normally be for the trustee to prove that there was already knowledge of disadvantage at the time. But the passage of time alone is therefore not decisive!
Conclusion
Thus, the time machine of Article 42 Fw. goes back further than one year before the date of the bankruptcy. From the law and case law, there is no time limit that limits the trustee when applying the bankruptcy pauliana. Instead, the limitation is determined by being able to prove the requirement of knowledge of prejudice.
The trustee must show that bankruptcy and a shortfall therein were foreseeable to the debtor - and in the case of legal acts with consideration (other than for no consideration), also to the other party - with a reasonable degree of probability at the time of the legal act.
[1] Rechtbank Gelderland 28 June 2023, ECLI:NL:RBGEL:2023:3494, Gerechtshof Arnhem-Leeuwarden 21 December 2021, ECLI:NL:GHARL:2021:11659 and Rechtbank Overijssel 21 August 2019, ECLI:NL:RBOVE:2019:3753(Vesteda/Megahome c.s.).
[2] Arnhem-Leeuwarden Court of Appeal December 21, 2021, ECLI:NL:GHARL:2021:11659.
[3] HR December 22, 2009, ECLI:NL:HR:2009:BI8493, NJ 2010/273(ABN AMRO Bank/Van Dooren q.q).
