You have a claim against someone and have started enforcement proceedings, but no assets are registered in the debtor’s name. You then discover that the debtor transferred their house, land, vehicle or another asset to a relative or a third party.
Does this mean you have lost every opportunity to recover your claim?
No. Certain transactions undertaken by a debtor to put assets beyond creditors’ reach may be challenged through an action to set aside a disposition. Regulated by Articles 277 et seq. of the Enforcement and Bankruptcy Law (İİK), this action aims to protect the creditor’s ability to recover the debt.
What does an action to set aside a disposition achieve?
The purpose is not to transfer ownership of the property or vehicle to the creditor.
If the action succeeds, for example in relation to a property transferred by the debtor to a third party, the title does not have to be registered in the creditor’s name. The creditor gains the ability to seek attachment and sale of that asset, limited to their claim and its ancillary amounts.
A simple example:
A debtor may transfer their home to another person in anticipation of enforcement proceedings. If the statutory conditions are met, an action to set aside the disposition may allow the creditor to pursue compulsory enforcement against the property as though the transfer had not taken place.
Can every asset transfer be set aside?
No. The fact that a person owes money does not automatically invalidate every sale or transfer they make.
Important conditions for such an action include a genuine claim, finalisation of enforcement proceedings, a disposition occurring after the debt arose and, where required, a definitive or provisional certificate of insolvency. The statutory time limit must also be observed.
The transfer date, the date the debt arose and the status of the enforcement file must therefore be assessed together in each case.
Transfers to relatives are particularly relevant
A frequently encountered situation is the transfer of a property or another asset to the debtor’s spouse, child, parents or other relatives.
The law attaches particular consequences to certain dispositions between persons with close relationships. The current version of Article 278 of the İİK referred to in the report is described as containing special provisions concerning certain dispositions between descendants and ascendants, blood relatives and relatives by marriage within specified degrees, spouses, adoptive parents and adopted children, and persons living in the same household.
Court of Cassation practice has also considered circumstances such as the transfer of a property to the debtor’s daughter together with the other features of the particular case.
The assumption that “if I transfer my assets to a family member, a creditor can no longer reach them” is therefore not a legally safe approach.
A sale far below market value may also create a risk
Recording a sale at the land registry does not in itself protect the transaction against an action to set aside a disposition.
A substantial difference between the property’s true value and the declared sale price may be relevant. The decisions referred to in the report show that a significant discrepancy between the sale price and market value was considered when assessing whether to set aside the transaction.
For example, a court may examine the transfer to a relative, for a very low price, of a property worth millions of Turkish lira, together with the other circumstances.
What if the asset is sold again?
The person who acquired the property from the debtor may subsequently have sold it to another person.
This does not necessarily extinguish the creditor’s rights. Where the third party has disposed of the asset and the subsequent acquirer’s bad faith cannot be proved, the action may, under certain conditions, become a monetary compensation claim based on the value replacing the asset. Liability may arise by reference to the asset’s true value at the time of disposal, without exceeding the amount of the claim.
An asset changing hands several times therefore does not, by itself, mean that the creditor’s legal remedies have ended.
Observe the five-year period
One of the most important issues in these actions is the statutory forfeiture period.
Under Article 284 of the İİK, the right to bring the action expires five years after the disposition in question. The Court of Cassation also states that this is a forfeiture period which the court must consider of its own motion.
It is therefore important not to wait for an extended period after discovering a suspicious asset transfer.
Can the asset be sold again while the case is pending?
A creditor may seek provisional attachment to prevent further transfers from making recovery more difficult while the action is pending.
Under Article 281(2) of the İİK, where the necessary conditions exist, the judge may order provisional attachment of the assets subject to the challenged disposition at the creditor’s request.
It is therefore important to consider not only bringing the action, but also the interim measures available to protect the claim during the proceedings.
An action to set aside a disposition is different from an action based on simulation
These two actions are often confused in practice.
According to the decision of the General Assembly of Civil Chambers of the Court of Cassation referred to in the report, an action based on simulation does not require prior enforcement proceedings or a certificate of insolvency. An action under the İİK, however, is subject to different procedural conditions and a five-year forfeiture period.
It is therefore important to determine correctly whether the circumstances should be assessed as simulation or as a disposition subject to avoidance.
If recovery is unsuccessful, earlier transfers should be investigated
Finding no assets registered in the debtor’s name in the enforcement file does not always mean that recovery is no longer possible.
Particularly where, after the debt arose:
- a property was transferred;
- a vehicle was transferred to a third party;
- an asset was sold far below its true value;
- the debtor continued to use the transferred property;
- the debtor and the acquirer had a close personal or business relationship;
the transactions may require separate legal examination. In one of the Court of Cassation decisions examined in the report, circumstances such as the acquirer being the debtor company’s finance manager and the debtor continuing to use the property were considered in assessing the third party’s knowledge of the debtor’s position.
Conclusion
A debtor’s transfer of assets to third parties does not mean that the claim can no longer be recovered. Where the statutory conditions are met, an action to set aside a disposition is an important remedy enabling compulsory enforcement against the transferred asset.
The date the debt arose, transfer date, enforcement status, certificate of insolvency, the acquirer’s relationship with the debtor, the sale price and particularly the five-year forfeiture period must nevertheless be assessed separately in every file.
If you suspect that a debtor has transferred property or a vehicle to put it beyond creditors’ reach, examining the legal nature of the transfers and the conditions for bringing an action in the specific circumstances is important to avoid a loss of rights.