Fraud Fever

Abstract. At present, fraudulent transactions are one of the ‘hottest’ topics of discussion in academic circles. Owing to their distinctive nature, fraudulent transactions in Ukraine are becoming a universal means of achieving a set objective, which, in one instance, may consist of restoring and protecting a violated right, whilst in another may involve an unlawful encroachment on another’s property for one’s own selfish motives. This article aims to elucidate the essence and characteristics of fraudulent transactions, and to formulate proposals regarding their legal regulation and the procedure for their consideration in court through an analysis of case law, including that of the Supreme Court, and foreign legislation. The article emphasises that the legal concept of a fraudulent transaction was historically designed to protect creditors’ rights in situations where a debtor deliberately disposes of their assets with the aim of evading the fulfilment of financial obligations. It is noted that the legal construct of a fraudulent transaction, in general terms, consists of two key elements: firstly, an existing and unfulfilled monetary obligation; and secondly, a transaction involving the disposal of the debtor’s property. Both elements are inextricably linked by the debtor’s intent to avoid fulfilling the monetary obligation to the creditor. It is emphasised that the concept of fraudulent conveyance quickly gained popularity in judicial practice. To challenge a particular transaction which did not formally fall within the grounds for invalidity set out in civil legislation, it became sufficient merely to refer to the term ‘fraudulent conveyance’, relying solely on the general — one might say ‘rubber’ — provisions of Articles 3 and 13 of the Civil Code of Ukraine. The article argues that the excessively broad interpretation of the concept of ‘fraudulent intent’ by the courts and parties to proceedings indicates that a veritable ‘fraudulent intent fever’ has taken hold in the domestic legal environment. An inevitable consequence of this could be instability in civil transactions, which could quite naturally escalate into a deep economic crisis. It is argued that, in non-contentious challenges to property-related acts or omissions on the grounds of fraudulency, where such acts or omissions are committed within the context of court proceedings, an explicit provision of law is required, rather than the court applying legal analogy or statutory analogy. t is argued that a fraudulent transaction, the purpose of which is to evade a monetary obligation and thereby cause harm to creditors, is a legal construct which, to achieve its unlawful objective, may incorporate elements of some other constructs relating to classic defects in legal transactions, in particular fictitious or sham transactions, and so on. It is argued that the concept of a fraudulent transaction, developed by case law on the basis of legal analogy, cannot take precedence over fundamental legal concepts that are directly based on the law and the Constitution of Ukraine (in particular, Article 41). Such legal constructs include the acquisition and possession of property in good faith, which may only be deprived on grounds expressly provided for by law. It turns out that, for fraudulent transactions, a completely different procedure for satisfying the creditor’s claims was established at the time. It was based not on the return of the debtor’s property through restitution or vindication, but on the property remaining with the new possessor (purchaser), with the monetary obligation subsequently being discharged at the expense of that property. It is proposed that this legal consequence be termed ‘non-opposability’. Its essential nature lies in preserving the validity of the transaction for all parties except the creditor who has successfully challenged it. Consequently, the acquirer of the property is not entitled to rely against such a creditor on the transaction based on which the property was disposed of by the original debtor. The article points out that the elements of the legal concept of fraudulent conveyance are historically and structurally linked to similar institutions within bankruptcy proceedings and share a common ‘genetic origin’, as they are based on a single historical foundation — the actio Pauliana, which is an institution of Roman insolvency law. It is proposed that, with a view to achieving effectiveness in the application of the law, fraudulent transactions (out-of-bankruptcy challenges) should be regulated exclusively by the provisions of the Code of Ukraine on Insolvency Proceedings. Such an approach will allow for the full utilisation of the conceptual framework of the Code, developed over decades (in particular, the clear definition of a monetary obligation, the institution of interested parties, etc.) and to effectively extend the institution of non-insolvency-related fraud not only to creditors under private law but also to entities under public law, in particular enforcement authorities, thereby protecting the state’s interests against unscrupulous taxpayers. This will benefit market relations and Ukraine’s process of European integration. It is argued that non-insolvency and insolvency fraud should not be subject to different subject-matter jurisdictions, but rather to a single one — that of the insolvency court, within whose jurisdiction current legislation places the hearing of cases concerning bankruptcy (insolvency) and preventive restructuring.