The Paulian action (“action paulienne”) under French law allows a creditor to act against a debtor who, by fraudulent behavior, tries to escape from his obligations1. If the creditor succeeds in presenting an admissible claim, he may benefit from the effects of the action and ignore the act concluded in disregard of his claim. This text was modified by order of February 10, 2016 and codified in article 1341-2 of the Civil Code, clarifying and considering the evolution of case law, regarding the sanction related to unenforceability.
This action differs from the “action oblique” (derivative action) of the former article 1166 of the Civil Code, which allows a creditor whose claim is certain, liquid, and due, to exercise in the name of his debtor, the rights and actions of the latter, when the debtor, to the prejudice of the creditor, refuses to exercise them.
The law firm HAROCHE AVOCATS, in defense of the interests of a franchisor, has initiated a paulian action to have the fraudulent acts of a former franchisee declared unenforceable to escape its obligations towards the franchisor. The franchisor won the case by Judgment of December 1, 2020, rendered by the Lille first instance Court2 (Tribunal judiciaire de Lille).
In this case, a franchise agreement was terminated by an international arbitral award dated April 12, 2013, which became enforceable by order of the Paris first instance court on June 5, 2013, confirmed on appeal on March 10, 2015, and ordered the franchisee to pay franchise fees and advertising costs.
The franchisor and the former franchisee have been involved in several proceedings, including before the enforcement judge in Lille, with a view to liquidating the penalty payment also imposed in the award.
The franchisee benefited from an initial over-indebtedness procedure in Lille, and then settled his personal debts by selling his real estate asset. Following this sale, the former franchisee obtained a balance to cover the professional debts owed to its former franchisor. He refrained from doing so, choosing to hand over the totality of this remainder to his son.
The franchisor invoked before the Lille first instance Court the manifestly fraudulent nature of this payment, having impoverished, and rendered the former franchisee insolvent.
To characterize the fraudulent character, the judges of the merits must seek if the operations carried out constitute factors of reduction of the value of the pledge of the creditors and impoverishment of the debtors3.
It was held that “Paulian fraud does not necessarily imply the intention to harm; it results from the mere knowledge that the debtor and his co-contractor for valuable consideration have of the prejudice caused to the creditor by the disputed act4”. January 2021
In principle, any act of impoverishment may be considered as having been performed in fraud of the creditor’s right, if it would compromise payment. It emerges from case law practice that most of these acts are gratuitous acts5, i.e., direct, indirect, or disguised donations6.
In a decision of principle of May 11, 1995, the French Supreme Court defined the act of misappropriation as “any act of voluntary disposal carried out on an element of the debtor’s patrimony after the cessation of payments in fraud of the creditor’s rights” and thus deprived of its pledge7.
As regards proof of the fraudulent nature of the act, it can be established by any means since fraud is a legal fact. This is done through presumptions such as the anteriority of the claim in relation to the contested act8.
In a decision of December 12, 2000, the French Supreme Court confirmed that “paulian fraud results from the mere knowledge that the debtor has of the prejudice caused to his creditor”9.
Moreover, a gratuitous act such as a donation presumes a fraudulent act. Thus, the French Supreme Court ruled on October 13, 2015. The Court acknowledge the paulian fraud of a mother with “numerous professional debts for several years”, and unable to ignore the state of her finances and accounts, who had donated to her two daughters, whereas she “could only be aware that she was not in a position […] to meet her debts”10.
In our case, the Lille Court, by judgment of December 1, 202011, recalled the two cumulative conditions for the success of the paulian action: on the one hand, the plaintiff must have a claim that is certain in principle at the time of the disputed act. On the other hand, the creditor must demonstrate the existence of an act of his debtor done in fraud of his rights, the effect of which is to create or aggravate his insolvency.
The Court followed the reasoning of HAROCHE AVOCATS on behalf of the franchisor: the transfer from the former franchisee to his son was analyzed as a gratuitous act that impoverished the former and generated his insolvency. The franchisor may therefore ignore the transfer of funds realized and proceed to enforcement measures, to recover his claim.