RECOGNITION OF INVALIDITY OF THE DONATION AGREEMENT CONCLUDED FOR THE PURPOSE OF AVOIDING THE APPLICATION FOR RECOVERY OF PROPERTY

In family and property disputes, situations often arise when one spouse or a debtor attempts to withdraw property from possible collection or division.

One of the common ways is to conclude a donation agreement in favor of close relatives or related parties.

Formally, such an agreement is a legal way of disposing of property, as a donation involves the gratuitous transfer of property to another person.

However, in practice, it is sometimes used not for a real alienation, but to complicate or make impossible the enforcement of a court decision, the seizure of property, or its division between the parties to the dispute.

In such cases, the question arises as to the possibility of declaring the donation agreement invalid as a transaction made with the aim of avoiding the fulfillment of obligations.

When does a donation agreement raise doubts?

Not every donation of property by a debtor is a violation of the law. A person has the right to dispose of their property.

But if such alienation occurs after the debt arises or during a period when the person is already aware of possible collection, the court may assess their actions from the perspective of good faith.

Suspicion is usually raised by situations when the debtor donates property:

• after filing a lawsuit in court;
• after the adoption of a court decision;
• after the initiation of enforcement proceedings;
• after receiving a demand for debt payment;
• during a period when a real threat of property seizure already exists.

Cases where property is donated to close relatives, and the debtor themselves continues to actually use it afterwards, appear particularly risky.

Why can such an agreement be challenged?

Civil legislation is based on the premise that participants in legal relations must act in good faith. If a person uses their rights not for the lawful protection of their own interests, but to harm the creditor or make the execution of a decision impossible, such behavior may be regarded as an abuse of right.

In a dispute concerning the invalidation of a donation agreement, the main issue is not just whether the parties had the right to sign the agreement. The court ascertains the real purpose for which it was done.

If the transaction was concluded to withdraw property from seizure, it may be declared invalid. That is, the decisive factor is not the name of the agreement itself, but its actual focus and consequences for the creditor.

What signs may indicate bad faith?

In each case, the court assesses the circumstances separately, but in practice, the following points are most often important:

1. the existence of a debt at the time of concluding the agreement;
2. the gratuitous nature of the alienation;
3. the transfer of property to a close relative or related party;
4. the absence of other property of the debtor from which the obligation can be fulfilled;
5. the conclusion of the agreement soon after the dispute or debt arose;
6. the retention of actual control over the property by the debtor;
7. a sharp deterioration in the debtor's financial condition after the donation.

Separately, each of these circumstances does not yet mean the automatic invalidity of the agreement. But their totality may convince the court that the donation was used as a tool to evade responsibility.

What exactly must the plaintiff prove?

In such cases, it is not enough to simply refer to the unfairness of the debtor's conduct. It is necessary to prove specific circumstances that indicate a violation of the creditor's rights.

It is usually important to confirm:

• that the debt or other obligation already existed at the time of the agreement's conclusion;
• that the debtor knew or should have known about the risk of seizure;
• that as a result of the donation, the creditor actually lost the opportunity to receive performance;
• that the property was transferred gratuitously and this significantly affected the debtor's solvency;
• that the transaction violates the plaintiff's property interest.

For this purpose, contracts, receipts, court decisions, enforcement documents, executor's resolutions, information from state registers, documents on the composition of the debtor's property, as well as other written evidence are used.

Who is usually involved in the case?

In disputes of this category, the parties to the donation agreement, i.e., the donor and the donee, most often act as defendants.

If registration actions were carried out after the conclusion of the agreement, questions regarding the cancellation of entries in the register or the application of the consequences of the transaction's invalidity may also arise in the case.

Therefore, before filing a lawsuit, it is important to correctly determine the composition of the case participants and the legal structure of the claims. An error at this stage can complicate the protection of the creditor's rights.

What might be the outcome of the case?

If the court concludes that the donation agreement was concluded precisely to avoid the seizure of property, it may recognize such an agreement as invalid.

In this case, grounds appear for the return of the property to the debtor's property sphere and its subsequent seizure.

In other words, the purpose of such a lawsuit is not just the formal cancellation of the agreement, but the restoration of a real possibility to enforce the court's decision or satisfy the creditor's claims.

That is why it is very important to correctly formulate the claims. In some cases, a claim for invalidation of the agreement is sufficient, in others, additional claims regarding the registration of the right, the application of the consequences of the transaction's invalidity, or the recognition of certain actions as illegal are also required.

Why should one not delay?

In cases related to the withdrawal of property, time is of great importance.

While the creditor delays, the property may be re-alienated, encumbered, or re-registered to other persons. This makes the dispute more complex, and the legal framework for protection more cumbersome.

That is why, upon discovering a suspicious donation agreement, it is important to immediately assess the situation, gather evidence, and determine which method of protection will be most effective in the specific case.

Judicial Practice of the Supreme Court

In disputes concerning the invalidation of a donation agreement concluded to avoid the seizure of property, courts are guided by the approaches of the Supreme Court regarding fraudulent transactions and evaluate the real purpose and consequences of the transaction for the creditor.

In particular, the Grand Chamber of the Supreme Court in the resolution of 03.07.2019 in case No. 369/11268/16-c (proceedings No. 14-260цс19) confirmed the right of the creditor to challenge the debtor's transactions, if they are made to the detriment of the creditor's property interest and are aimed at complicating or making impossible the fulfillment of the obligation, and the assessment of the transaction is carried out through the principle of good faith and the prohibition of abuse of right.

Also, the Grand Chamber of the Supreme Court in the resolution of 07.09.2022 in case No. 910/16579/20 emphasized that civil rights cannot be used as a tool to withdraw assets from possible collection, and the court must verify the true focus of the transaction.

In practice, courts consider a set of signs: the moment of concluding the donation (after the debt arose, filing a lawsuit, adopting a decision, or initiating enforcement proceedings), the gratuitousness of the alienation, the relatedness of the parties, the absence of other property of the debtor for fulfillment, and the actual complication of satisfying the creditor's claims.

The regulatory basis for such conclusions is Articles 3, 13, 203, 215, 216, 717 of the Civil Code of Ukraine.

Lawyer's assistance in such disputes

Cases concerning the invalidation of a donation agreement concluded with the aim of avoiding the seizure of property require not only an emotional assessment of the situation but, first and foremost, a precise legal position.

Here it is important to prove the moment the debt arose, the bad faith of the debtor's conduct, the connection between the donation and the violation of the creditor's rights, and also to correctly choose the method of judicial protection.

A lawyer will help analyze the documents, assess the prospects of the dispute, formulate proper claims, and represent interests in court.