What is an Action for Annulment of Disposition?
An action for annulment of disposition is a lawsuit in which the debtor requests the cancellation of dispositions made in bad faith towards third parties. The first paragraph of Article 277 of the Enforcement and Bankruptcy Law refers to the annulment lawsuit:
The purpose of the annulment lawsuit is to rule the nullity of the dispositions specified in Articles 278, 279, and 280.
Nullity is a type of invalidity established by the legal system for the sake of public interest. Contracts affected by nullity do not produce any legal effect or result from the moment they are made.
The titles of the relevant articles are as follows:
Article 278 – Nullity of gratuitous dispositions
Article 279 – Nullity due to insolvency
Article 280 – Annulment due to intent to harm
Nullity of Gratuitous Dispositions (Enforcement and Bankruptcy Law, Article 278)
Except for customary gifts, all donations and gratuitous (i.e., without compensation) dispositions made retroactively within a period not exceeding two years prior to attachment, insolvency, or bankruptcy shall be subject to annulment. The law specifies which dispositions are considered as donations:
- Dispositions with consideration made between the adopter and the adopted,
- Contracts in which, at the time of the agreement, the debtor accepted a price significantly lower than the value of what they gave as consideration,
- Contracts in which the debtor establishes a life-term usufruct or income right for themselves or for the benefit of a third party, and contracts for care until death.
Nullity Due to Insolvency
Transactions made within one year prior to attachment, insolvency due to lack of assets, or the opening of bankruptcy are void. These transactions are specified in the law:
- Except for cases where the debtor has previously committed to providing security, pledges made by the debtor to secure an existing debt;
- Payments made by means other than money or customary payment methods;
- Payments made for debts not yet due;
- Annotations made in the land registry to strengthen personal rights.
However, if the person benefiting from these dispositions proves that they were unaware of the debtor’s situation, the annulment lawsuit will not be accepted.
Annulment Due to Intent to Harm
All transactions made by a debtor whose assets are insufficient to cover their debts, with the intent to harm their creditors, may be annulled. However, it is necessary that the other party to the transaction knew or should have known about the debtor’s financial situation and intent to harm, as evidenced by clear signs.
Additionally, within five years from the date of the transaction, enforcement or bankruptcy proceedings must have been initiated against the debtor.
If the third party is the debtor’s spouse, relatives by blood or marriage up to the third degree, adopter, or adopted child, it is presumed that they knew the debtor’s situation.
A person who takes over or sells all or a significant part of the commercial goods of a commercial enterprise is also presumed to know the debtor’s financial condition.
The Competent and Authorized Court in an Action for Annulment of Disposition
Because actions for annulment of disposition relate to property rights, the competent court according to the Code of Civil Procedure (HMK) is the civil court of first instance. Since it is a type of lawsuit based on personal rights, the general jurisdiction rules apply. In other words, the case can be filed at the defendant’s place of residence.
“…The case concerns a request for annulment of disposition filed pursuant to Articles 277 and following of the Enforcement and Bankruptcy Law (İİK). Since there is no special regulation in the law for annulment lawsuits, the case must be filed at the court of the defendant’s place of residence at the time the case is filed, according to Article 6 of the HMK. According to Article 7/1 of the same law, if there is more than one defendant, the case may be filed in the court of residence of any one of them. Because annulment lawsuits are based on personal rights rather than real rights, even if the subject matter is immovable property, Article 12 of the HMK does not apply. Pursuant to Article 282 of the İİK, there is compulsory joinder of parties between the defendant debtor and third parties who directly or indirectly transact with the debtor, and since these compulsory parties must carry out procedural acts together, it is legally required that objections to jurisdiction be raised jointly by the defendants. An objection to jurisdiction raised by only one defendant has no legal effect.” (5th Civil Chamber, 2022/11188 E., 2022/14428 K.)
Procedure in Annulment of Disposition Lawsuits
Article 281 of the Enforcement and Bankruptcy Law (İİK) addresses the procedure in annulment lawsuits. The court handles annulment cases through a simplified procedure. Upon the creditor’s request, the judge may issue a precautionary attachment order on the assets subject to annulment. If any of the defendants pay the plaintiff’s claim, the lawsuit is dismissed.
Who Can the Action for Annulment of Disposal Be Filed Against?
Annulment actions are filed against the debtor, those who have conducted legal transactions with the debtor, or those who have received payments from the debtor, as well as their heirs. Additionally, annulment actions can be brought against third parties acting in bad faith. However, an annulment action does not violate the rights of third parties acting in good faith.
Consequences of the Annulment Lawsuit
If the annulment lawsuit is confirmed (won), the plaintiff obtains the authority to collect their right (claim) through compulsory enforcement over the disputed property as if that property were still part of the debtor’s estate (ownership). The disputed property does not return to the debtor’s ownership (estate) by the “annulment decision.” The third party continues to be the “owner.” This situation is a result of the annulment lawsuit being a personal claim rather than a real right lawsuit.
Statute of Limitation (Preclusive Period)
The right to file an annulment lawsuit expires five years after the date the void transaction occurred. This period is not a statute of limitations but a preclusive period.
Relevant Supreme Court Decisions
“The plaintiff’s attorney claimed that the defendant debtor … Ltd. Co. transferred the vehicle with license plate … subject to the case to the other defendant …, who is a close relative of the company partner, with the intent to hide assets from creditors, and requested the annulment of the transaction between the defendants.
The defendant … Ltd. Co.’s attorney filed a negative declaratory lawsuit seeking a determination that their client was not indebted to the plaintiff company, and the court ruled to join the cases on the grounds that there was a connection between them.
According to the evidence collected, the court found that the defendant … Ltd. Co. owed 3,551.90 TL to the plaintiff company, accepted the plaintiff’s annulment lawsuit, and granted authority to request attachment and sale limited to this amount; the judgment was appealed by the plaintiff … Ltd. Co.’s attorney.
The case relates to the annulment request filed under Articles 277 and following of the Enforcement and Bankruptcy Law (İİK), and the negative declaratory request filed as a separate case.”
Annulment lawsuits are subject to the simple procedure, whereas negative declaratory lawsuits are subject to the written procedure. Additionally, since the appellate review venues for annulment lawsuits and negative declaratory lawsuits differ, the consolidation of a separately filed negative declaratory lawsuit with the annulment lawsuit was erroneous.
After the negative declaratory lawsuit is separated and registered as an independent matter, if it is understood that the other prerequisites for the annulment lawsuit have been met, the existence of a genuine debt relationship affects the annulment lawsuit and should be treated as a preliminary issue to be resolved accordingly. However, deciding as stated in the written judgment is contrary to procedural rules and law.” (17th Civil Chamber, Case No. 2015/9004 E., Decision No. 2017/10474 K.)
“The plaintiff’s attorney claimed that the defendant …, due to a tax debt owed to the client, sold his immovable property to the other defendant …, his sister-in-law, during the enforcement proceedings initiated against him to prevent the collection of public receivables, and requested the annulment of this transaction.”
The defendants requested the dismissal of the case.
The court, considering that the defendants are close relatives, accepted the case and ruled for the annulment of the transaction between the defendants; the judgment was appealed by the plaintiff’s attorney.
The case concerns a request for annulment filed pursuant to Articles 24 and following of Law No. 6183. Although the court accepted the case and ruled for the annulment of the transaction between the defendants, the investigation and examination conducted were found insufficient to justify the judgment. In the complaint, the plaintiff administration claimed a receivable of 96,062.55 TL from the defendant …, and requested the annulment of the transaction related to the sale of the immovable property between both defendants limited to this amount. The court only ruled for the annulment of the transaction, without specifying the amount of the receivable to which the annulment relates, resulting in a judgment that causes uncertainty in enforcement.
In this case, to determine the actual receivable amount as of the date the annulment is requested, if necessary, an expert committee consisting of specialists should be appointed to examine the parties’ records and prepare a report. Afterwards, the case should be accepted limited to the principal debt and its accessories determined as of the transaction date and not exceeding the claim. Therefore, the decision given as stated in the written judgment due to insufficient investigation and examination is incorrect.” ((Closed) 17th Civil Chamber, Case No. 2011/2002 E., Decision No. 2011/10232 K.)
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