Civil Transactions Law (16): Action for the Ineffectiveness of the Debtor's Dispositions

The Civil Transactions Law provides certain safeguards to ensure that the debtor fulfills their obligations. Among these is the action for declaring the debtor’s dispositions ineffective, which is one of the legal remedies aimed at protecting what is known as the general guarantee of creditors, meaning that all of the debtor’s assets constitute security for the satisfaction of their obligations, and all creditors are treated equally in this guarantee.

By virtue of this action, the debtor is prevented from disposing of their assets in a manner that harms creditors.

Article 183 of the Civil Transactions Law provides the following:

1. If the debtor undertakes a disposition that results in an increase of their liabilities over their assets, any creditor whose debt is due and who is harmed by the disposition may seek to have the disposition declared ineffective in respect to them, if:
   • The disposition was gratuitous (e.g., a gift), or
   • The disposition was onerous (involving consideration), and both the debtor and the counterparty were aware of the debtor’s financial distress at the time of the transaction.
2. If the debtor performs a disposition intended solely to favor one creditor over others without legal justification, such preferential treatment shall be nullified.
3. If the debtor makes payment to one of the creditors before the debt becomes due, other creditors may request that such payment be deemed ineffective in their regard. However, if the payment is made after the debt has become due, other creditors may only challenge the payment if it was made in collusion between the debtor and the favored creditor.
4. If a court rules that the debtor’s disposition, made while their liabilities exceeded their assets, is ineffective, all creditors harmed by that disposition shall benefit from the judgment.

Limitation Periods

• The action for declaring the disposition ineffective shall not be heard after one year from the date the creditor became aware of the grounds for ineffectiveness.
• In all cases, the action shall be barred after ten years from the date of the disposition.

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