Lt

On the protection of the rights of the creditor

Case No. 17/01

 

 

THE CONSTITUTIONAL COURT OF THE REPUBLIC OF LITHUANIA

 

RULING

ON THE COMPLIANCE OF PARAGRAPHS 3 AND 4 OF ARTICLE 571 OF THE CIVIL CODE OF THE REPUBLIC OF LITHUANIA (WORDING OF 11 JUNE 1998) WITH THE CONSTITUTION OF THE REPUBLIC OF LITHUANIA

 

9 April 2003

Vilnius

 

The Constitutional Court of the Republic of Lithuania, composed of the Justices of the Constitutional Court: Armanas Abramavičius, Egidijus Jarašiūnas, Egidijus Kūris, Kęstutis Lapinskas, Zenonas Namavičius, Augustinas Normantas, Jonas Prapiestis, Vytautas Sinkevičius, and Stasys Stačiokas

The court reporter—Daiva Pitrėnaitė

Daina Petrauskaitė, a senior consultant to the Legal Department of the Office of the Seimas, acting as the representative of the Seimas of the Republic of Lithuania, the party concerned, who was

The Constitutional Court of the Republic of Lithuania, pursuant to Articles 102 and 105 of the Constitution of the Republic of Lithuania and Article 1 of the Law on the Constitutional Court of the Republic of Lithuania, on 26 March 2003, in its public hearing, considered case No. 17/01 subsequent to the petition of the Mažeikiai District Local Court requesting an investigation into whether Paragraphs 3 and 4 of Article 571 of the Civil Code of the Republic of Lithuania (wording of 11 June 1998) were not in conflict with Articles 23 and 29 of the Constitution of the Republic of Lithuania.

The Constitutional Court

has established:

I

On 11 June 1998, by Article 1 of the Law on the Supplement of the Civil Code of the Republic of Lithuania with Article 571 and Amendment of Articles 84, 318, and 4721 Thereof (Official Gazette Valstybės žinios, 1998, No. 57-1582), the Seimas supplemented the Civil Code (hereinafter also referred to as the CC) with Article 571.

The petitioner, the Mažeikiai District Local Court, requests an investigation into whether Paragraphs 3 and 4 of Article 571 of the CC (wording of 11 June 1998) are not in conflict with Articles 23 and 29 of the Constitution.

II

The petition of the petitioner is based on the following arguments.

1. Article 571 of the CC (wording of 11 June 1998) grants the right to the creditor to challenge transactions concluded by the debtor, which the latter was prohibited to conclude, if this transaction violates the rights of the creditor, while the debtor was aware or had to be aware of that. The petitioner has doubts whether the provision “the exaction according to the claim of the creditor to the debtor shall be directed at the property transferred under the transaction or, in case this is impossible, at the value of the property according to the market price insofar as it is necessary to fulfil the claim of the creditor” of Paragraph 3 and the provision “a person, who has concluded a transaction with the debtor, in case the transaction is recognised as null and void, must return not only what he obtained under such a transaction, but also the earnings which he gained before the recognition of the transaction as null and void insofar as they exceed the expenses for the maintenance of the property” of Paragraph 4 of Article 571 of the CC (wording of 11 June 1998) are not in conflict with Article 29 of the Constitution which establishes the principle of equality of persons before the law, the court, and other state institutions and their officials.

According to the petitioner, by the impugned provisions, advantages are granted to the creditor. Due to such legal regulation negative legal effects may occur to the third party, which concludes the transaction with the debtor, regardless of the fact whether he was honest or dishonest, i.e. whether he was aware or had to be aware that the transaction violated the rights of the creditor: he must return not only what he obtained under such a transaction, but also the earnings which he gained before the recognition of the transaction as null and void.

2. In the opinion of the petitioner, the provisions of Paragraphs 3 and 4 of Article 571 of the CC (wording of 11 June 1998) are also in conflict with Article 23 of the Constitution, which establishes the protection of the rights of ownership, because the impugned provisions of Article 571 of the CC (wording of 11 June 1998) do not sufficiently protect the rights of ownership of an honest third party.

3. The petitioner also notes that Paragraph 2 of Article 6.66 of the Civil Code of the Republic of Lithuania confirmed by law No. VIII-1864 of 18 July 2000, providing for the right of the creditor to challenge transactions concluded by the debtor (actio Pauliana), establishes that a bilateral transaction may be recognised as null and void under the grounds provided by Paragraph 1 of this article only if the third party was dishonest in concluding the transaction with the debtor, i.e. the former was aware or had to be aware of the fact that the transaction violated the rights of the creditor, while Paragraph 5 of the said article stipulates that the recognition of the transaction as null and void has no effect on the rights of an honest third party to the property, which had been the object of the transaction that was recognised as null and void.

III

In the course of the preparation of the case for the judicial consideration, written explanations were received from the representative of the party concerned D. Petrauskaitė.

1. The representative of the party concerned maintains that by amending the CC by Article 571 (wording of 11 June 1998), one attempted to create the ground for the recognition of the transactions on transfer of the debtor’s property to other persons, by which it was attempted to evade the exaction directed at this property as null and void.

According to D. Petrauskaitė, after analysing the provisions of Article 571 of the CC (wording of 11 June 1998) on the right of the creditor to demand that the transaction be recognised as null and void by means of which the debtor, attempting to evade the fulfilment of the liability to the creditor, transfers his property to other persons, the conclusion can be drawn that if the creditor wishes to contest such a transaction made by the debtor, the creditor must prove that his interests have been violated by such a transaction, e.g., the value of the debtor’s property diminished, at which the exaction could be directed at the demand of the creditor, and also, that the debtor was dishonest, i.e. he was aware or had to be aware that the transaction violated the rights of the creditor.

The representative of the party concerned asserts that Article 571 of the CC (wording of 11 June 1998) does not contain any provisions under which the creditor must prove the dishonesty of the third party to which the creditor has transferred the property, i.e. that, acquiring the property, the third party was aware or had to be aware that the transaction violated the rights of the creditor of the debtor. However, the Civil Code is an integral legal act and its norms must be interpreted while taking account of its structure and compatibility of individual chapters of the CC. According to D. Petrauskaitė, while investigating cases related to recognition of transactions as null and void, it is important to establish the relation between liability law and material law. One of the effects of the transaction being null and void, as well as one of the ways of the violated liability right, is restitution (Paragraph 2 of Article 47 of the CC). However, restitution may and must be applied while taking into consideration the provision of material law, since the person who has acquired an item under a transaction also becomes its owner. Thus, restitution is exaction of an item from one person and its transfer to another person. According to the representative of the party concerned, this means that restitution is possible in the cases permitted by material law. Such cases are provided for in Paragraphs 1 and 3 of Article 143 of the CC.

The representative of the party concerned is of the opinion that if the transaction is recognised as null and void, under Article 571 of the CC (wording of 11 June 1998) there appear effects of invalidity of the transaction indicated in Paragraphs 3 and 4 of the same article, which in respect to the person who has acquired the property are similar to those indicated in Paragraph 2 of Article 47 of the CC. After the transaction is recognised as null and void subsequent to the demand by the creditor, the exaction following the demand of the creditor from the debtor is directed at the property transferred by the said transaction, i.e. the property acquired under the transaction is seized from the acquirer (new owner). According to D. Petrauskaitė, the right of ownership is one of tangible rights and its protection is regulated by norms of material but not liability law, therefore, the property may be exacted from the acquirer only in the cases established in Article 143 of the CC. While analysing the norms of the CC in a systematic manner, which are related to recognition of transactions as null and void as well as to exaction of property from the acquirer, the conclusion should be drawn that in the cases indicated in Paragraph 1 of Article 571 of the CC (wording of 11 June 1998) when the transaction is recognised as null and void, the rights of a third party ought to be defended by means of protection of violated rights established in material law, while Article 571 of the CC (wording of 11 June 1998) ought to be construed and applied together with the norms of material law (Article 143 of the CC).

D. Petrauskaitė maintains that the norms of the CC create an opportunity to protect the violated rights for the creditor (Article 571 of the CC (wording of 11 June 1998)) as well as for third party to whose property the exaction is directed (Article 143 of the CC), therefore, the norms of the CC do not violate the principle of equality of all persons before the law, the court and other state institutions or officials.

The representative of the party concerned also maintains that the impugned provisions of the CC are not in conflict with Paragraph 2 of Article 29 of the Constitution, as Paragraphs of 3 and 4 of Article 571 of the CC (wording of 11 June 1998) do not contain any norms that would deny or restrict the rights of the person (creditor, debtor or a third party) on the grounds of gender, race, nationality, language, origin, social status, beliefs, convictions, or views.

2. D. Petrauskaitė notes that the norms of Article 23 of the Constitution do not provide with any grounds to assert that the Constitution establishes absolute protection of ownership. If one has made the rights of ownership absolute, there might emerge preconditions for violating the property interests of other persons. The Civil Code protects the rights of honest persons, however, in cases when persons are dishonest, i.e. if they have acquired some property from a person, and they were aware or had to be aware that the latter did not have the right to transfer the said property, and that by the transfer of the property damage had been inflicted to other persons (insolvency of the debtor virtually means loss of the property of the creditor), they must compensate for the damage that has occurred.

D. Petrauskaitė asserts that the provisions of Paragraphs 3 and 4 of Article 571 of the CC (wording of 11 June 1998), when they are construed and applied together with the norms of material law of the CC regulating the ways of protection of violated rights, do not violate the rights of ownership of an honest third party and are not in conflict with Article 23 of the Constitution.

IV

In the course of the preparation of the case for the Constitutional Court hearing, written explanations were received from P. Koverovas, State Secretary of the Ministry of Justice of the Republic of Lithuania.

V

At the Constitutional Court hearing the representative of the party concerned D. Petrauskaitė virtually reiterated the arguments set forth in her written explanations.

The Constitutional Court

holds that:

1. On 11 June 1998, the Seimas adopted the Law on the Supplement of the Civil Code of the Republic of Lithuania with Article 571 and Amendment of Articles 84, 318, and 4721 Thereof by Article 1 whereof the CC was supplemented with Article 571 titled “The Recognition of the Transaction Violating the Rights of the Creditor as Null and Void”. It is established therein:

A transaction concluded by the debtor may be recognised as null and void under judicial procedure subsequent to the claim by the creditor, if the transaction violates the rights of the creditor, while the debtor was aware or had to be aware about it. Any complimentary transaction violating the rights of the creditor, save transactions whereby ordinary items of low value and small sums of money are given as presents, shall be recognised as null and void subsequent to the creditor’s claim.

The creditor shall have the right to present his claim upon the ground provided for in the First Paragraph of this Article within the one-year statutory limitation for the term of claim, which shall be counted from the day when the creditor learned or had to learn about the transaction which violated his rights.

If the transaction concluded by the debtor and a third party is recognised as null and void subsequent to the demand by the creditor, the exaction according to the demand of the creditor to the debtor shall be directed at the property transferred under the transaction or, in case this is impossible, at the value of the property according to the market price insofar as it is necessary to fulfil the claim of the creditor.

A person, who has concluded a transaction with the debtor, in case the transaction is recognised as null and void, must return not only what he obtained under such a transaction, but also the earnings which he gained before the recognition of the transaction as null and void insofar as they exceed the expenses for the maintenance of the property.

If the court recognises a payable transaction as null and void subsequent to the demand by the creditor, then the person who concluded the transaction with the debtor may demand that the latter return what the said person has paid or given to him.”

2. Article 571 of the CC (wording of 11 June 1998) provides for the right of the creditor to contest the transaction concluded with a third party, if these transactions violate the rights of the creditor. This article establishes the institution actio Pauliana, which was known as far back as Roman law.

The institution actio Pauliana is meant to protect the rights of the creditor from the dishonest debtor who, having transferred his property to a third party, becomes insolvent, therefore, he is no longer able to fulfil his liability to the creditor and thus violates the rights of the creditor. Actio Pauliana thus is a demand by the creditor that the transaction made by the debtor on the transfer of the property to a third party be recognised as null and void. The effect of actio Pauliana is restitutio in integrum. By means of actio Pauliana, one attempts to ensure that, after the restitution is carried out, the debtor might again be able to fulfil his liability to the creditor.

3. By means of borrowing Roman law, actio Pauliana as one of the institutions protecting the rights of the creditor has become widespread in various countries. In various legal systems this institution has certain peculiarities.

This institution has been known in Lithuania as well. For instance, the 1931 Law on Making Claims Against the Acts of Debtors Which are Damaging to Creditors used to provide that the creditor may file a claim on the invalidity of the agreements or other acts made by the debtor with other persons if the said persons were aware that thereby the debtor was willing to inflict damage on his creditors. After such an act was recognised as void (i.e. invalid) subsequent to the claim by the creditor, the property or, if it was impossible to do so, the value thereof used to be exacted from the third party insofar as it was necessary to satisfy the demand of the creditor. In case of the complimentary transaction, the third party had to return what he had received together with the earnings that had been received from the said property.

4. During the occupation period in Lithuania there was not such a legal institution as actio Pauliana.

Upon restoration of the independent State of Lithuania, the institution actio Pauliana was reinstated into Lithuanian law: this was done when the CC was supplemented with Article 571 on 11 June 1998.

By the 18 June 2000 Republic of Lithuania’s Law on the Confirmation, Entry into Force and Implementation of the Civil Code, the Seimas confirmed a new Civil Code of the Republic of Lithuania, in Article 6.66 whereof titled “The Right of the Creditor to Contest Transactions Concluded by the Debtor (Actio Pauliana)” the institution actio Pauliana was consolidated expressis verbis. Upon entry into force of the new CC (save its individual articles) on 1 July 2001, Article 571 of the CC (wording of 11 June 1998) became no longer valid.

5. The petitioner, the Mažeikiai District Local Court, had doubts whether Paragraphs 3 and 4 of Article 571 of the CC (wording of 11 June 1998) were not in conflict with Articles 23 and 29 of the Constitution.

Although the petitioner requests an investigation into the compliance of entire Paragraph 3 and that of entire Paragraph 4 of Article 571 of the CC (wording of 11 June 1998) with Articles 23 and 29 of the Constitution, however, from the arguments set forth in the petition it is clear that the petitioner doubts whether Paragraph 3 of Article 571 of the CC (wording of 11 June 1998) is not in conflict with the aforementioned articles of the Constitution to the extent that it provides that if the payable transaction concluded by the debtor and a third party is recognised as null and void subsequent to the demand by the creditor, the exaction according to the demand of the creditor to the debtor shall be directed at the property transferred under the payable transaction or, in case this is impossible, at the value of the property according to the market price insofar as it is necessary to fulfil the claim of the creditor, and Paragraph 4 of the same article to the extent that it provides that a person, who has concluded a payable transaction with the debtor, in case this payable transaction is recognised as null and void, must return not only what he obtained under such a payable transaction, but also the earnings which he gained before the recognition of the payable transaction as null and void insofar as they exceed the expenses for the maintenance of the property.

6. Article 23 of the Constitution provides:

Property shall be inviolable.

The rights of ownership shall be protected by law.

Property may only be seized for the needs of society in accordance with the procedure established by law and shall be justly compensated for.”

7. Article 29 of the Constitution provides:

All persons shall be equal before the law, the court, and other State institutions and officials.

The human being may not have his rights restricted, nor may he be granted any privileges on the grounds of gender, race, nationality, language, origin, social status, beliefs, convictions, or views.”

8. While investigating the compliance of the impugned provisions of Paragraphs 3 and 4 of Article 571 of the CC (wording of 11 June 1998) with the Constitution, one has to take account of the provision “a transaction concluded by the debtor may be recognised as null and void under judicial procedure subsequent to the claim by the creditor, if the transaction violates the rights of the creditor, while the debtor was aware or had to be aware about it” of Paragraph 1 of the same article.

8.1. It is clear from the provision of Paragraph 1 of Article 571 of the CC (wording of 11 June 1998) that the following conditions are necessary in order to recognise the transaction concluded by the debtor with a third party as null and void: the rights of the creditor have been violated by such a transaction; the debtor should not have concluded such a transaction; the debtor, in concluding the transaction with the third party, was aware or had to be aware that thereby the rights of the creditor were violated, i.e. the debtor was dishonest.

8.2. The formula “may be” employed in the said provision of Paragraph 1 of Article 571 of the CC (wording of 11 June 1998) means that under the law the court does not have a duty to recognise such transactions as null and void but has the right to decide in every particular case whether or not to recognise the transaction as null and void. While deciding this, the court must follow the law. It must assess all the circumstances of the case. Thus, the court must also assess whether the third party, when concluding the transaction with the debtor, was honest or dishonest.

8.3. Article 571 of the CC (wording of 11 June 1998) does not mention expressis verbis honesty or dishonesty of a third party.

Civil laws constitute an indivisible whole, one must construe their provisions not taking them as isolated ones, but together with other provisions of civil laws. It needs to be noted that Paragraph 7 of Article 11 of the Code of Civil Procedure of the Republic of Lithuania (wording of 8 November 1994; hereinafter also referred to as the CCP) prescribes that in case the law or an agreement of the parties to the dispute provides for settlement of certain issues by court, the court must decide these issues on the grounds of the criteria of justice and reasonableness.

Thus, the court must also follow these criteria, when deciding whether a third party, while concluding the transaction with the debtor, was honest or dishonest. The court must defend not only the interests of the creditor, but those of an honest third party as well.

9. It has been held in this Ruling of the Constitutional Court that the formula “may be” employed in the provision “a transaction concluded by the debtor may be recognised as null and void under judicial procedure subsequent to the claim by the creditor, if the transaction violates the rights of the creditor, while the debtor was aware or had to be aware about it” of Paragraph 1 of Article 571 of the CC (wording of 11 June 1998) that under the law the court does not have a duty to recognise such transactions as null and void but has the right to decide in every particular case whether or not to recognise the transaction as null and void. While doing this, the court must assess all the circumstances of the case; it must follow the criteria of justice and reasonableness (Paragraph 7 of Article 11 of the CCP (wording of 8 November 1994)).

If one interprets the provision “a transaction concluded by the debtor may be recognised as null and void under judicial procedure subsequent to the claim by the creditor, if the transaction violates the rights of the creditor, while the debtor was aware or had to be aware about it” of Paragraph 1 of Article 571 of the CC (wording of 11 June 1998) in the context of Paragraph 7 of Article 11 of the CCP (wording of 8 November 1994), then there are not any grounds for maintaining that it did not permit defending the rights of ownership of an honest third party.

10. In the context of the case at issue, one is also to note that, under Paragraph 5 of Article 571 of the CC (wording of 11 June 1998), if the court recognises a payable transaction as null and void subsequent to the demand by the creditor, then the person who concluded the transaction with the debtor may demand that the latter return what he has paid or given to him.

11. Having held that there are no grounds to maintain that the provision “a transaction concluded by the debtor may be recognised as null and void under judicial procedure subsequent to the claim by the creditor, if the transaction violates the rights of the creditor, while the debtor was aware or had to be aware about it” of Paragraph 1 of Article 571 of the CC (wording of 11 June 1998) does not permit defending the rights of ownership of an honest third party, and while taking account of the legal regulation established in Paragraph 5 of the same article, one is also to hold that there are no grounds to maintain that Paragraph 3 of Article 571 of the CC (wording of 11 June 1998) to the extent that it provides that if the payable transaction concluded by the debtor and the third party is recognised as null and void subsequent to the demand by the creditor, the exaction according to the demand of the creditor to the debtor shall be directed at the property transferred under the payable transaction or, in case this is impossible, at the value of the property according to the market price insofar as it is necessary to fulfil the claim of the creditor and Paragraph 4 of the same article to the extent that it provides that a person, who has concluded a payable transaction with the debtor, in case the transaction is recognised as null and void, must return not only what he obtained under such a payable transaction, but also the earnings which he gained before recognition of the payable transaction as null and void insofar as they exceed the expenses for the maintenance of the property, violated the rights of ownership of an honest third party.

Thus, Paragraphs 3 and 4 of Article 571 of the CC (wording of 11 June 1998) to the aforesaid extent were not in conflict with Article 23 of the Constitution.

12. Having held that Paragraph 3 of Article 571 of the CC (wording of 11 June 1998) to the extent that it provides that if the payable transaction concluded by the debtor and the third party is recognised as null and void subsequent to the demand by the creditor, the exaction according to the demand of the creditor to the debtor shall be directed at the property transferred under the payable transaction or, in case this is impossible, at the value of the property according to the market price insofar as it is necessary to fulfil the claim of the creditor and Paragraph 4 of the same article to the extent that it provides that a person, who has concluded a payable transaction with the debtor, in case the transaction is recognised as null and void, must return not only what he obtained under such a payable transaction, but also the earnings which he gained before the recognition of the payable transaction as null and void insofar as they exceed the expenses for the maintenance of the property were not in conflict with Article 23 of the Constitution, one is also to hold that Paragraphs 3 and 4 of Article 571 of the CC (wording of 11 June 1998) to the aforesaid extent were not in conflict with Article 29 of the Constitution, either.

Conforming to Articles 102 and 105 of the Constitution of the Republic of Lithuania and Articles 1, 53, 54, 55 and 56 of the Law on the Constitutional Court of the Republic of Lithuania, the Constitutional Court of the Republic of Lithuania gives the following

ruling:

To recognise that Paragraph 3 of Article 571 of the Civil Code of the Republic of Lithuania (wording of 11 June 1998) to the extent that it provides that if the payable transaction concluded by the debtor and the third party is recognised as null and void subsequent to the demand by the creditor, the exaction according to the demand of the creditor to the debtor shall be directed at the property transferred under the payable transaction or, in case this is impossible, at the value of the property according to the market price insofar as it is necessary to fulfil the claim of the creditor and Paragraph 4 of the same article to the extent that it provides that a person, who has concluded a payable transaction with the debtor, in case the transaction is recognised as null and void, must return not only what he obtained under such a payable transaction, but also the earnings which he gained before the recognition of the payable transaction as null and void insofar as they exceed the expenses for the maintenance of the property were not in conflict with the Constitution of the Republic of Lithuania.

This ruling of the Constitutional Court is final and not subject to appeal.

The ruling is pronounced in the name of the Republic of Lithuania.

Justices of the Constitutional Court:                                                  Armanas Abramavičius

Egidijus Jarašiūnas

Egidijus Kūris

Kęstutis Lapinskas

Zenonas Namavičius

Augustinas Normantas

Jonas Prapiestis

Vytautas Sinkevičius

Stasys Stačiokas