Lending is a contractual relationship based on the granting of a loan or banking facility by a banking institution to an interested borrower for a specific use. It requires an application from the interested borrower, who must disclose his personal and property details, as well as those of his guarantors, so that the bank can form a correct and complete picture of his ability to repay the loan. The bank takes into account the risk it runs in the event the borrower becomes insolvent or is unable to meet the repayment of the loan. The borrower shall safeguard the assets and shall not dispose of them by transfer, gift or assignment, unless there is monetary or good consideration and provided that such transfer or assignment is made in good faith and was not made with the intention of avoiding or delaying the bank as creditor to collect the outstanding loan. If the debtor acts with intent to defraud, the transfer will be deemed fraudulent and the transfer may be set aside by order of Court.
Relevant is the provision of article 3 (1) of the Fraudulent Transfers (Cancellation) Law, which provides that every gift, sale, pledge, mortgage or other transfer or disposal of any movable or immovable property made by any person with intent to hinder or delay his creditors or any of them in recovering from him shall be deemed to be fraudulent, and shall be invalid as against such creditor or creditors; and, notwithstanding any such transfer or disposal, the property purported to be transferred or otherwise dealt with may be seized and sold in satisfaction of any judgment debt.
Moreover, article 4 of the Law, provides that any transfer or disposal of any movable or immovable property deemed to be fraudulent under the provisions of section 3, may be set aside by an order of Court, to be obtained 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.
A guarantor was found to have fraudulently transferred certain immovable properties to his daughter and was ordered to re-register them in his name to enable the bank to recover the debt for which a judgement was issued. The bank sent a 31-day warning letter to the borrower and his guarantor to comply with their contractual obligations, otherwise it informed them that it would proceed with taking legal measures against them. After the above letter, the guarantor transferred and registered in the name of his daughter immovable property by donation, which he repeated a month later.
The bank filed an action because there was no compliance and secured a relevant judgement. Following an investigation at the Land Registry, the bank identified the transfers and submitted an application to annul the transfer of the properties, since the transfer was fraudulent and was made with the intention of preventing it from executing the judgement. The Court held that the transfers of the properties were fraudulent and ordered that they be annulled and that the properties be re-registered in his name to enable the bank to enforce the judgment.
The Supreme Court, following an appeal by the guarantor, in its decision this month deemed the decision of the District Court to be correct. It noted that the status of a judgment creditor must exist at the time of filing of the application for the annulment of a fraudulent transfer. However, the transfer of the property, the subject of an application based on this Law, may have taken place even before a lawsuit was filed, as appears from the wording of the said legislative provision.
The sending of the letter by the bank to the guarantor, as mentioned by the Supreme Court, put him responsible for the delays in the repayment of the loan. At the time the letter was sent there were outstanding amounts which, if not paid, would result in the taking of the necessary legal measures. The loan agreement had not been terminated, however, since there were amounts owed, which the bank had the right to claim through a lawsuit, even if the agreement had not been terminated. The Supreme Court concluded that the facts of the case were such that fraud could be established anyway and therefore dismissed the appeal.
George Coucounis is a lawyer practicing in Larnaca, [email protected]