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Creditors often face a debtor deliberately disposing of assets to avoid repayment. A Paulian action is a legal tool for declaring certain transactions ineffective against the creditor. Rooted in Roman law and used for centuries in different legal systems, it is now regulated by Poland's Civil Code and protects creditors against dishonest debtor practices.
What is a Paulian action?
A Paulian action is a civil-law institution allowing creditors to pursue claims despite a debtor's attempt to hide assets. Creditors can seek to have transactions harming them declared ineffective, such as gifting property to a relative or selling valuable assets below market value. They must show that the debtor was aware of harming the creditor and that the beneficiary knew, or with due care could have known, of that intention. If a close associate or a business regularly cooperating with the debtor benefited, the law presumes their awareness.
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When can you bring a Paulian action?
It can be brought when a debtor takes legal actions deliberately or negligently worsening their financial position, making recovery harder. The debtor must be aware that their action diminishes assets, while the benefiting third party knew or could have known of this intention. For example, if a debtor owing PLN 40,000 gives away an expensive item worth PLN 550,000, the act may harm the creditor.
How does it work in practice?
Imagine a creditor owed PLN 40,000. The debtor gives a musical instrument worth PLN 650,000 to someone close, significantly reducing the assets available to pay the debt. The creditor can bring a Paulian action to have the gift declared ineffective against them, enabling seizure of the instrument and enforcement through a bailiff. Appropriate documents and proof of the debtor's intention to diminish assets at the creditor's expense are crucial.
How do you bring a Paulian action?
The action requires care and is best pursued with a lawyer. The creditor should bring a lawsuit in the court competent for the debtor's residence or registered office. State the debtor's obligations and legal basis, such as a loan agreement; identify the disputed transaction, such as a gift or sale; and explain the harm. Crucial evidence must show that the debtor knew they were harming creditors and the third-party beneficiary knew of a possible infringement. The court examines documents and may hear witnesses before ruling on the action.
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Summary
Correct use of a Paulian action and accurate recording of business transactions are fundamental to protecting creditors and optimising family foundations' finances. Consult an experienced legal adviser to interpret the rules and implement the best solutions. Ongoing monitoring of company finances also matters: an experienced CFO can be invaluable for stability and future planning. Professional advice helps avoid unnecessary risks and secure your company's future.
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