The Supreme Court has recently addressed the legal issue of what the consequences are of a transfer of a bond that is in conflict with the agreement between the debtor and the creditor. At its core, the decision upholds the need to reflect the understanding among the parties participating in the transfer, and their intentions.
Author: Aneta Phanová, paralegal
In a recent judgment (27 ICdo 30/2022 of 27 April 2023), the Supreme Court addressed a legal question for which there exists no case law, concerning the consequences of a transfer of bonds in violation of the agreement between debtor (obligor) and creditor (obligee) whereby those two parties wished to rule out such transfer (as per Sec. 1881 (1) of the Civil Code). The issue – on which legal theory has no unified opinion – was raised by the dispute before the lower courts, in which a bond had been transferred even though the requisite conditions for such transfer were not met.
At its core, the Supreme Court decision finds that the understanding between the parties to the transfer, and their intentions, must be taken into account. The court stressed that it was of fundamental importance whether or not the acquirer knows of the limitations to transfer agreed between debtor and creditor. To the extent that the acquirer did know about them, one could consider the assignment of the claim as provisionally ineffective, thus protecting the interests of the debtor. By contrast, the Supreme Court does not believe that such transactions should be absolutely invalid; in this respect, it argued that one must not jump to the a priori conclusion that the debtor would never accept the assignment (even though it deviates from the debtor’s original agreement with the creditor).
In its judgment, the Supreme Court looked at the various conceivable scenarios and their possible consequences. If the transfer of the claim is in conflict with the agreement between debtor and creditor but leads under certain circumstances to a valid and effective passage of rights, then this could jeopardize the debtor’s interest. In this respect, the court noted that it was inadmissible for the interests of a bad-faith assignee to take precedence over those of the debtor.
On the other hand, the court argued against the absolute invalidity of such transfer (as noted above), as it would call into question the whole purpose and rationale behind Sec. 1881 (1) of the Civil Code because the debtor would be deprived of the opportunity to approve the transfer after the fact. The court went on to examine the notion of relative invalidity but found that its application would mean that the debtor bears the consequences of excessive action on the part of assignor and assignee (unless they invoke the invalidity of the transfer). The Supreme Court found that such an interpretation is unlikely to afford adequate protection for the debtor’s interests.
Taking all this into account, the court proposes as the ideal solution that the transfer should be considered provisionally ineffective if it is in conflict with the agreement between debtor and creditor and if the assignee knows of this conflict. This provisional ineffectiveness should last unless and until the debtor agrees with the transfer, but the legal relationship which is created by the transfer agreement would continue to be in existence even before then.
This solution nicely dovetails with the approach which the lawmaker took in the case of registered shares (whose transfer presupposes approval / consent by the statutory body of the company). In analogy to this scenario, the Supreme Court proposes to apply the same concept also to notes and bonds, with the limitations set out in the terms of issue.
The practical consequences of this decision are rather substantial. It strengthens the legal position of the debtor, whose interests are being put front and center. The debtor thus attains a greater degree of control over their financial liabilities. By contrast, creditors are forced to make sure that the acquirors (assignees) of claims receive comprehensive instruction on any limitations to the transferability of notes and bonds. In short, the parties to the transfer of bonds are held to a higher standard, which reduces the likelihood that a breach of the transfer agreement results in conflict. In this regard, the Supreme Court accentuates the general rule that all legal transactions must observe the principle of probity.
Supreme Court resolution 27 ICdo 30/2022 of 27 April 2023