The application of the creditor's right of avoidance in the case of the debtor's disposal of property at a low price

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Brief facts of the case

In April 2019, Liu borrowed 600,000 yuan from Wang Moujia, and Liu died in November of the same year. In December 2021, Wang Mou A filed a lawsuit against Liu's wife Wang Mou B over the aforesaid loan, and the court ordered Wang Mou B to repay the debt to Wang Mou A within the actual scope of the inheritance. After receiving the complaint in December 2021, Wang Mouyi submitted a notarization application to the notary office where the house jointly owned by him and Liu was located to inherit the common share of the house, and settled the loan of the house in a lump sum in the same month. When Wang Moujia applied to the court for compulsory enforcement, he found that Wang MouB transferred the house to Li at a price of 600,000 yuan in January 2022, and the tax benchmark price of the house was 1.04 million yuan, so Wang Moujia believed that Wang MouB made a disposition at an obviously unreasonable low price, and requested the court to revoke the real estate sales contract between Wang MouB and Li. Li argued that the sale of the immovable property was a paid act in which the two parties agreed to the consideration, and that he had ownership of the house as a bona fide transferee who had paid the consideration.

Heard by the courts

After trial, the court held that the case was a dispute over the creditor's right of revocation. According to Article 539 of the Civil Code of the People's Republic of China and its judicial interpretations, if the debtor transfers property at an obviously unreasonable low price and affects the realization of the creditor's claim, and the debtor's counterparty knows or should know about the situation, the creditor may request the people's court to revoke the debtor's act. Among them, the people's court shall determine "obviously unreasonable" in accordance with the judgment of the general business operator in the place of transaction and with reference to the market transaction price or the price guide price of the price department at the time of the transaction, and if the transfer price does not reach 70% of the market transaction price or guide price of the transaction place at the time of the transaction, it can generally be found to be "obviously unreasonable low price". Article 1161 of the Civil Code of the People's Republic of China stipulates that, unless inheritance is renounced, the heir shall pay off the taxes and debts payable by the decedent according to law only to the extent of the actual value of the inheritance obtained.

Specifically, in this case, Wang Mouyi only needed to pay off Liu's debts with 50% of the value of the house involved, and after the Zhoucun District Court sent a letter to the tax department to inquire about the price, the tax benchmark price of the house in the city was 1.04 million yuan. However, Wang Mouyi inherited Liu's estate on the premise of knowing that Liu had a loan dispute during his lifetime, and sold the house involved in the case with a tax benchmark price of 1.04 million yuan to Li at a price of 600,000 yuan in a short period of time, which did not reach 70% of the guide price or market transaction price of the transaction place at that time, which should be regarded as an obviously unreasonable low price, with the subjective intention of transferring assets and evading debts, which objectively affected the realization of Wang Moujia's creditor's rights. At the same time, during the same period when Li purchased the house involved in the case, there were other houses sold at the market transaction price in the same community of the house, and Li should have clearly known that the purchase of the house for 600,000 yuan was significantly lower than the market price, and he did not provide evidence to prove that he had fulfilled his duty of care for the reason for the unreasonable consideration or that the debtor had provided him with reasonable and justifiable reasons.

In summary, Wang Mou A's litigation request to revoke the "Real Estate Sales Contract" between Wang Mou B and Li was supported.

What the judge said

When the debtor's act of disposing of its property at an unreasonably low price harms the realization of the creditor's claim, the law protects the creditor and authorizes it to file a lawsuit against the debtor's improper property disposal and request revocation. The following conditions must be met at the same time for the establishment of the creditor's right of revocation in the act of disposing of the creditor's right for compensation at a low price: (1) the debtor disposes of the property at an obviously unreasonable low price after the creditor's right is established; (2) the debtor's conduct affects the realization of the creditor's creditor's rights; (3) The debtor has the intention to evade the debt; (4) When the debtor and the counterparty have a legal act for compensation, the counterparty knows or should know that the act is harmful to the creditor's creditor's rights.

The Interpretation of the Supreme People's Court on <中华人民共和国民法典>Several Issues Concerning the Application of the General Principles of Contract Codification still continues the provisions of the Judicial Interpretation (II) of the Contract Law, that is, the people's court shall make a determination in accordance with the judgment of the general business operator in the place of the transaction, and with reference to the market transaction price of the place of transaction or the price guide price of the price department at the time of the transaction. There should be two aspects:

First, the time and space are limited to the place where the transaction takes place. There are economic differences between different cities and different regions of the same city, and a comprehensive determination should be made based on the nature and type of property.

Second, reference should be made to the price department guidance price or market transaction price of the place of transaction at the time of transaction. Real estate and other general property may be 70% of the guide price or market transaction price, but this standard is not mandatory and should be considered comprehensively according to the facts of the case.

When examining the establishment of the creditor's right of avoidance, the court will focus on whether the debtor has other property sufficient to pay off the creditor's debt, and the scope of the exercise of the creditor's right of avoidance should be limited to the preservation of the creditor's right, and the realization of the creditor's right will only be affected if it is not.

For the determination that the counterparty knew or should have known, it is sufficient for the creditor to provide evidence to prove that the counterparty recognized that the act was detrimental to the realization of the creditor's claim when acquiring the property at a low price, regardless of whether the counterparty maliciously colluded with the debtor or had the intention of intentionally harming the creditor.

Links to legal provisions

Article 539 of the Civil Code of the People's Republic of China Where a debtor transfers property at a clearly unreasonably low price, accepts another person's property at an obviously unreasonably high price, or provides security for the debts of others, affecting the realization of the creditor's claim, and the debtor's counterparty knows or should know about the situation, the creditor may request the people's court to revoke the debtor's act.

Article 540 of the Civil Code of the People's Republic of China The scope of exercise of the right of avoidance shall be limited to the creditor's claim. The necessary expenses for the creditor to exercise the right of avoidance shall be borne by the debtor.

Article 541 of the Civil Code of the People's Republic of China The right of avoidance shall be exercised within one year from the date on which the creditor knows or should know the reasons for revocation. If the right of avoidance is not exercised within five years from the date of the debtor's act, the right of avoidance shall be extinguished.

Article 542 of the Civil Code of the People's Republic of China Where the debtor's act affecting the realization of the creditor's claim is revoked, it shall not be legally binding from the beginning.

Article 1161 of the Civil Code of the People's Republic of China The heirs shall pay off the taxes and debts payable by the decedent according to law to the extent of the actual value of the inheritance obtained. The part exceeding the actual value of the estate shall not be subject to voluntary repayment by the heirs.

If the heir renounces the inheritance, he may not be liable for the taxes and debts that the decedent should pay in accordance with the law.

Article 42 of the Interpretation of the Supreme People's Court on Several Issues Concerning the Application of the General Principles of Contract Codification of the Civil Code of the People's Republic of China Article 42 The people's court shall determine the "obviously unreasonable" low or high price as provided for in Article 539 of the Civil Code in accordance with the judgment of the general business operator in the place of the transaction, and with reference to the market transaction price of the place of transaction or the price department's guidance price at the time of the transaction.

If the transfer price does not reach 70% of the market transaction price or the guide price at the place of transaction at the time of the transaction, it can generally be determined to be an "obviously unreasonable low price"; If the transfer price is 30% higher than the market transaction price or guide price of the place of transaction at the time of the transaction, it can generally be determined to be an "obviously unreasonably high price".

Where the debtor and the counterpart have a family relationship or related relationship, they are not subject to the 70 percent or 30 percent restrictions provided for in the preceding paragraph.

Source: Zhoucun Court, Shandong High Court