Transfer of the Debtor's Sole or Major Secured Property and the Acquirer's Liability towards the Lenders (Article 479 of the Civil Code)

legal insight

July 2023

Anta Tsogia, LL.M. (mult.)

Abstract: It is often found in transactional practice that a debtor attempts to become insolvent to the detriment of its creditors by "disappearing" its existing property or business by transferring it to a third party/third parties, who may be aware of the intention to harm the creditors. In such a case, the question arises, under the conditions of Article 479 of the Civil Code, as to whether or not the third-party transferee is liable to the transferor's creditors. In this paper we will be particularly concerned with the issue of the transfer by the debtor to a third party of his sole or most important asset (e.g. real estate), on which, at the time of the transfer, there is already a registered charge (e.g. mortgage lien).    

1. Conditions for the application of Article 479 of the Civil Code

According to Article 479 of the Civil Code: "If property or a business is transferred by contract, the transferee is liable to the creditor up to the value of the assets transferred for debts belonging to the property or business. The liability of the transferor shall continue to exist. In other words, the conditions for the application of this legislative provision are as follows:

a) A definitive contract between the debtor and a third party for the transfer of property or a business. The reason for the transfer is irrelevant to the validity of the contract, i.e. it may be onerous (e.g. sale) or gratuitous (e.g. donation). Property is defined as the sum of rights that can be valued in money (property assets), i.e. what remains after the deduction of liabilities, while an enterprise is defined as an economic unit organised on the basis of assets, whether tangible or intangible (e.g. labour, customers, reputation), for the purpose of developing an activity in order to achieve an economic benefit. This transfer may be effected by one or more transactions, either simultaneously or in succession. In the latter case, the individual transactions must form a unity between them, i.e. they must have a close temporal and economic relationship. 

b) Debts belonging to the property or business (being transferred) which already existed at the time of the transfer. It should be noted that debts may be of any nature (whether arising from a contract or a tort), with the exception of debts of a personal nature, even debts subject to a time limit or condition, and those arising from a change or extension of the obligation (Supreme's Court decision no. 909/1010, Supreme's Court decision no. 829/2003). It is sufficient that the cause of the debt existed at the time of the transfer. For the transferee's liability to arise, it is not required that the transferee knew of the existence of the debts in question at the time of the transfer, nor is it required that the debts in question had by that time been judicially recognised in proceedings between the transferor debtor and the creditor.

c) The transferee must have known, at the time of the transfer, that all or a substantial part of the debtor's property was transferred to him. Such knowledge is also deemed to exist when, in view of the circumstances under which the transfer took place, the transferee was aware of the general financial situation of the transferor and could have understood that the property transferred to him constituted all or the most significant percentage of the transferred property (Supreme's Court decision no.1151/2014). It is noted that if the property or business of the original debtor is transferred by several acts to more than one person, in order to obtain the legal consequences, those persons must know that the specified several Where individual items are transferred, they must constitute all or a major proportion of the assets of the estate. 

2. Legal consequence

In case the above mentioned conditions for the application of the provision of Article 479 of the Civil Code, a compulsory statutory cumulative succession of debts within the meaning of article 477 of the Civil Code is established and a joint and several liability is created between the transferor and the transferee. According to Article 477 of the Civil Code: 'If a person in a contract concluded with a creditor promises the fulfilment of a foreign debt, the debtor is not discharged but an additional obligation of the one who promised is created, unless it is clearly evident to the contrary'. Consequently, both the transferor and the transferee will be liable, but to a different extent: the transferor will be liable indefinitely (with all his assets) and the transferee will be liable to a limited extent, namely up to the value of the assets transferred at the time of the transfer. 

3. The special case of the transfer of encumbered real estate

The acquirer of the property with debts is entitled to refuse to pay the debts, objecting to this on the grounds that the assets of the property are not sufficient for this purpose (Supreme's Court decision no. 702/2003). In particular, he may claim (a) that the specific claim for the satisfaction of which he is claiming from the creditor in question is greater than the value of the property he has acquired following the above transfer or (b) that there are also claims by other creditors for debts of the same property, provided, however, that the claims in question are secured by security in rem  (e.g. a mortgage), since otherwise, if the assets are not sufficient to satisfy all creditors, the transferee is obliged to satisfy the creditor who preceded him in time until the value of the assets transferred to him is covered. 

Furthermore, the non-existence of the acquirer's liability as defined above is accepted (i.e. the non-application of the provision of Article 479 of the Civil Code) in the case where transferred property, despite the fact that it is the most important or even the only element of the debtor's property, is nevertheless encumbered for an amount in excess of its value. The fact that the value of the property transferred is affected by any registered charge on it is a justification. Indeed, where, for example, there is a mortgage on a property, the market value of the property is reduced by the amount for which the charge has been registered. This is because, by purchasing the property in question, the transferee assumes the risk of bearing the consequences of any insolvency of the debtor-transferee, that is to say, the risk of seizure and auction of the property in question by the creditor who has registered the relevant charge in satisfaction of his claim. The other creditors who are not secured by the mortgage on the property in question cannot expect to be satisfied, even partially, by the auction which may be held and the distribution of the relevant proceeds, since the creditor who has registered the mortgage and, moreover, for an amount in excess of the value of the property, will be satisfied first and foremost. Consequently, for the other creditors, the property in question is, in practice, not part of the debtor's estate. 

In the context of the above, as regards the calculation of the value of the property under Article 479 of the Civil Code, the value of any existing encumbrances shall not be taken into account. It should be noted that if, at the relevant time of the transfer, there is a registered lien on the property transferred, but the debt, which is secured by the lien, has been partially repaid, then only the part of the debt that was not repaid at the relevant time of the transfer will be taken into account in calculating the value of the encumbrance. 

4. Illustrative Case Law - Relevant Case Law

Supreme's Court decision no. 228/2014: a company had entered into a credit agreement with an open mutual account, which was terminated by the lending bank, showing a debit balance of EUR 400,117.76. Before the termination, and while there was already a debit balance on the above-mentioned current account, the company transferred to a third party two properties with a total value of EUR 43 091,76, with partial payment of the price by the buyer. At the time of the transfer, the transferred properties were encumbered with mortgage liens in favour of the lending bank for a total amount of more than EUR 500 000, which exceeded their value. The Supreme Court, quoting the relevant judgments of the Court of Appeal, accepted the following: "[...] Furthermore, the transferred properties, which were encumbered beyond their value, did not constitute property within the meaning of Art. 479 CC and therefore the acquiring defendant is not liable to the plaintiff up to the value of the real estate transferred by the latter [...] The surplus assumption does not, however, affect the correctness of the operative part of the judgment of the Court of Appeal and is therefore unfounded... In the same sense, the further assumption in the judgment of the Court of Appeal that the second of the appellants acquired the above properties subject to mortgage liens in favour of the Commercial Bank to secure its corresponding claims is also redundant, since that assumption, which the Court of Appeal reached after assessing all the evidence adduced by the parties, reduces the value of the property acquired by the appellant and accordingly excludes his liability under Article 4(1)(b) of the Law of the European Union. 479 of the Civil Code, but any such liability is already excluded by his lack of knowledge, as stated above, that those properties constituted all or most of the first respondent's property at the time of the transfer to him'.

Decision of the Appeal Court of Piraeus no. 261/2015: A company manufacturing electronic machines and pumping systems issued a payment order against another company for a debt of EUR 88,820 under a supply contract concluded between them. By virtue of the said payment order, it attempted to register a lien on the debtor's sole property and found that it had already been transferred by sale to the wife of the company's legal representative for a price of EUR 42,686.28, corresponding to its objective value. The property in question, with a commercial value of EUR 100 000, was, at the time of the transfer, encumbered with a mortgage lien of EUR 100 000 to secure a claim of the Bank of Greece. On this point, the Court of Appeal makes the following judgment: "[...] In view of the above, since, as has been shown, at the time of the transfer to the second defendant of the above property, which was the most important asset of the purchasing company [...], the transfer of the property to the second defendant was carried out on the basis of the following criteria ], the burden on it was equal to its commercial (real) value, there can be no question of a transfer of property within the meaning of Article 479 of the Civil Code, since, as stated in the legal reasoning in paragraph III of this judgment, property, within the meaning of the above provision, means only its assets, i.e. what remains after the deduction of liabilities. Consequently, the above action, under the first alternative basis of Article 479 of the of the Civil Code, which concerns the second defendant, is essentially unfounded [...]'.

In addition, it is noteworthy the relevant hint in the reasoning of the decision of the Thessaloniki Trial Court of Appeal 1287/2017, which in the context of justifying the failure to prove knowledge of the acquired properties that constituted the entire property of the transferor and, therefore, the absence of a case of application of Article 479 of the Civil Code, it makes a reference in passing to the fact that the value of the transferred property is determined by the amount of the mortgage note (burden) registered on it. In particular it states: "[...] The first property (A2) had a mortgage lien of 186 registered at the time of its transfer on the basis of the 224/2008 decision of the Single Judge of the Court of First Instance of Kos. 000 in favour of Emporiki Bank [...] The amount of that mortgage, which was charged on the above property, was taken into account in determining the price actually payable by the second and third defendants in cash, from which it was deducted, since the mortgage was still in existence at the time of the sale and the seller had not paid the debts secured by it. The above-mentioned lien was removed after the transfer of the land [...]'. However, the value of the property transferred, as stated above, also determines the extent of the acquirer's liability for debts of the property or business transferred to him.

5. Instead of a postscript

In summary, if the debtor transfers to a third party his sole (or most important) property, on which, at the time of the transfer, there is already a registered charge exceeding the market value of the transferred property, there can be no question of a transfer of property, pursuant to Article 479 of the Civil Code and therefore the transferee is not liable with his property for the debts of the transferor.